Climate change: the Autorité des marchés financiers promises guidance

Climate change: the Autorité des marchés financiers promises guidance

According to a recent report published by theFinancial Markets Authoritythe majority of financial institutions have taken steps to consider climate change in their risk management.

This conclusion comes from the report entitled Risks related to climate change: update on the measures implemented by financial institutionsdated June 2022 and made public on July 7.

It presents an analysis of the responses submitted by 230 financial institutions regulated by the AMF as part of a survey conducted in the second half of 2021. The report also addresses issues related to governance and business processes.

The regulator wanted to assess their level of concern regarding the possible impacts of climate change-related risks on their institution and the measures put in place to adequately manage these risks.

In the conclusions, we note that the level of concern with regard to the risks related to climate change is rather low or medium according to the financial institutions.

“The risks associated with climate change pose a significant threat to the financial system”, underlines Louis Morisset, CEO of the Authority. The report paints a picture of the situation and will help the AMF to determine its next orientations in the matter, specifies Mr. Morisset.

According Patrick Derysuperintendent of the AMF’s solvency framework, these data will enable the regulator “to specify the support needed to mitigate the disparity observed in the ability of financial institutions to mitigate these risks”, in particular due to their size.

In the report, we note that financial institutions are also in favor of the AMF expressing its expectations in the form of principles. These must be aligned with international standards while being adapted to the Quebec market.

main points

Among the highlights of the report:

  • the institutions have already put in place management reports on these risks intended for their board of directors (75%) or policies (71%) as instruments of governance;
  • senior management and board members are well aware of climate risks and nearly half of financial institutions have appointed a senior officer accountable in this regard;
  • the level of investment in “green” or “ESG” type assets is increasingly high among financial institutions (67%). Checks on the legitimacy of these qualifications are being integrated into the practices of the institutions.

Some 187 insurers, including 117 in damages, and 43 deposit institutions took part in the AMF’s survey.

The questionnaire was developed on the basis of four distinct axes associated with climate change: the importance given, risk assessment, governance and business processes, management and disclosure of risks.

Worry

For the first axis on the importance given to climate-related risks, we note that damage insurers have deserted markets, such as those of coal-fired power plants, coal mines and oil sands.

As one would expect, since they are the most exposed to physical risks, it is these P&C insurers who display the highest level of concern (35%) about the possible impacts of climate-related risks on their activities. .

This insurance risk can be minimized by tightening underwriting rules, adjusting pricing, modifying the coverage offered and by reinsurance programs.

For their part, personal insurers say they have launched quantitative analyzes of the transition risks associated with their investment portfolios. They determined target percentages for so-called “green” investments. Only 7% of respondents among personal insurers show a high level of concern.

Evaluation

For the second axis on risk assessment, damage insurers aim to mitigate physical risks by modeling climate risk scenarios.

For their part, personal insurers point out that physical risks could generate a certain increase in death claims related to health problems. Heat waves, air quality and pandemics related to zoonoses increase the risk of morbidity and mortality among the most vulnerable populations.

Life and health insurers are exposed to transition risks, as their investment portfolios are vulnerable to increased volatility in asset values. We also note that changes to taxation or the addition of compliance costs related to new regulations could affect the risk rating and probability of default of their customers.

Governance

Among the main governance elements used by respondents to integrate climate change risks, 65% have produced risk management reports, 59% have adopted internal risk management and communication policies and 57% have determined strategic directions.

The appointment of a senior officer responsible for the management of risks related to climate change was made by 51% of damage insurers and by 31% of personal insurers.

Regarding business processes, for the property and casualty insurance sector, it should be noted that some of them now offer coverage for the risk of flooding, even if this is not available to all owners. real estate.

Some insurers agree to pay an additional sum when settling a claim so that the repairs are carried out with energy-efficient materials. Premium discounts are also offered to owners who use these materials in their building, as well as to owners of hybrid or electric vehicles.

Supervision and disclosure

Among all the possible measures for mitigating the risks linked to climate change, the financial institutions estimate, with a score of 3.7 on a scale of 5, that disclosure of information to the regulator that would specifically include climate risk constitutes the most more relevant to enable adequate oversight of this risk by regulators.

Some 45% of financial institutions report making public disclosure of their climate change risks, most of them in their annual report. These are mainly the larger companies (72% of the 105 in this category).

Natural disasters

According to financial institutions, natural disasters are likely to cause an increase in associated loss costs due to climate change. Respondents indicated this was the case for floods (90%), wildfires (89%), hurricanes (86%), shoreline erosion (85%), high winds (84%) , hail (81%), landslides (80%) and tornadoes (79%).

This vulnerability to natural disasters could particularly affect real estate (91% of respondents), municipal bonds (80%) and sovereign debt (71%).

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