Jean-Marc Jancovici explains the risks banks face

If we take banking activities in the broadest sense, the climate can concern them in two ways. First, banks can finance activities that are at risk if the climate changes too much, for example if they finance infrastructure whose good health depends on a stable climate, if they finance agricultural activities whose good health depends on a stable climate, if they finance tourist activities activities, etc.

There may be a so-called physical risk of climate change, and the companies, the states they lend to, pmay face difficulties as a result of climate changee. This is a first risk for banks.

There is a second risk that we usually mention transition risk. It could be that the country decides to implement its climate revolution, regulations change dramatically and a certain number of economic activities find themselves on the wrong side of the fence.

Think of the risks

And if they do less good business, these activities, the banks that have lent to them, increase the risk that they will not be repaid. The European Central Bank believes that banks are not doing enough. In a world where the climate is stable, banks look every year at what happened the year before and calculate their risks and their interest rates.

In a world where the climate is changing rapidly, this is not enough. We must tell ourselves that what we have observed is not what will happen tomorrow. It should therefore be integrated into risk models, so that the financing of tomorrow’s activities does not necessarily depend on the conditions under which we financed yesterday.

If a bank takes more risks into account, it can lend to fewer people, because the riskier an activity is, the more a bank will be asked to invest a lot of its own money for others.

The more we ask banks to take risks into account the less they can borrow money with what we call their own money, that is, the money that is truly theirs.

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