Amaury Mulliez: “AFD Is Going To More Effectively Assess the Financial Risks Related To Climate Change”

You have conducted a study on the exposure of AFD’s portfolio to physical climate risks. What does it consist of?

Since the Law of 17 August 2015 on the energy transition for green growth, banking institutions must analyze their exposure to risks related to climate change. It involves knowing whether the financial situation of their borrowers may be weakened by climate hazards such as cyclones, extreme rainfall events, water stress, heat stress or rising sea levels.

In 2018 we led a study on the risks related to these five hazards in our countries of operation. It consisted in geolocating the assets of our borrowers – companies, States, local authorities, financial institutions, investment funds – and assessing their exposure to each of the hazards: when one of the borrower’s activities ranked it among the 10% of the most exposed borrowers, it was assigned an attention point.

The exercise was conducted on a sample representing 20% of borrowers and 80% of outstanding loans, i.e. some EUR 25bn.

What are the findings?

It has confirmed to us that as an institution we were vulnerable to the physical climate risk. Indeed, 63% of the borrowers studied have at least one attention point, meaning that they are vulnerable to at least one of the five climate hazards analyzed. Six counterparties, representing 3.6% of the sample and 2.4% of outstanding loans, have 3 attention points.

Some of our borrowers have already been faced with physical climate risks. This is the case with Cape Town, in South Africa, which has experienced three consecutive years of drought, with major impacts on its income and expenses. It is also the case with EPM, an electricity company owned by the City of Medellin, in Colombia: in the spring of 2018, torrential rain caused a landslide which disrupted the construction of a dam. The construction site fell behind schedule whereas the company planned to generate a third of its electricity from this dam as of 2019. The size of the company and its sound financial management did, however, allow it to fulfil its commitments.
 

What impact will this work have on AFD’s activity? 

For a development bank like AFD, the idea is not to avoid the risk, which would be unrealistic, but to support the most exposed borrowers by offering them appropriate financing to improve their resilience to climate change. It will involve developing our assessment process to integrate the climate risk more closely.

Our work may also be used in the public policy dialogue with our banking partners. For example, as a complement to a loan, we could offer technical assistance to banks to help them take better account of the climate risk in their own loans.
We are still in the early stages. But the subject is clearly going to become increasingly important in the coming years.