FBF methodological note on data collection
Methodology for calculating the exposure of French banks to coal
Scope of application:
- Corporate clients of the bank that have coal-based electricity generation capacity and which market all or part of such production.
- Mining companies that are clients of the bank and have thermal coal mining capacities and which market all or part of such production.
- The scope does not, therefore, include integrated groups that have thermal coal production capacity and/or entities owning coal-fired power plants for their own account (i.e. whose thermal coal production and/or the electricity thus produced is not marketed by the company).
Reference List of Companies Exposed to Coal (Reference List):
- The list is supplied by the supplier retained, in this case Trucost, a subsidiary of Standard & Poor's, which will also provide, for each name listed, the percentage of the company's turnover derived from the sale of thermal coal and/or coal-fired electricity (known as % coal of turnover). This percentage is proprietary data belonging to Trucost, which will be used for calculation purposes by each bank and cannot be included in the list to be made public on the Observatory's website.
- Companies for which Trucost is not able to recover or estimate the % coal of the company's turnover will not appear on the list.
Reference dates for exposure calculations:
- At 31 December 2019, then at 31 December of each year thereafter when calculations are made
Total exposure to coal for each bank:
- This number is obtained as the sum of the coal exposures for each of the bank's clients falling within the scope described above and appearing on the Reference List.
- For each client, the calculation includes:
- The sum of dedicated lines of credit appearing on the bank's balance sheet at the reference date
- The sum of non-dedicated lines of credit appearing on the bank's balance sheet at the reference date multiplied by the % coal of company turnover, as provided by Trucost.
The types of financing taken into account and the amounts thereof are stipulated below.
Financing included in the calculation:
- Lines included:
- Dedicated financing such as project financing, export financing, etc.
- Non-dedicated (corporate) financing such as term loans, revolving credit facilities, working capital facilities, etc...
- Excluded lines:
- Financing dedicated to assets or activities unrelated to coal
- Off-balance sheet commitments
- Credit lines linked to hedging (interest rates, exchange rates, raw materials)
- Bond and equity securities issues
- The amounts described hereafter are based on those appearing on the bank's books at the time of calculation (at 31 December)
- For dedicated financing:
- 100% of the bank's exposure (i.e. drawn and undrawn)
- For export credits, 100% of the bank's gross exposure (i.e. without deducting collateral ratio).
- For non-dedicated (corporate) financing:
- For confirmed lines of credit: 100% of the bank's financing exposure
- For unconfirmed lines: the drawn portion only
- For each bank, this corresponds to the size of the bank's corporate customer loan portfolio determined using the values shown on the bank's balance sheet on the reference date.
- In order to ensure consistency of the Benchmark Portfolio calculation between banks, it was decided to refer to the FINREP 18 reporting defined by the ACPR (link below) and to take into account the sum of the figures reported by each bank for lines 120, 196 and 226, which relate to loans and advances to non-financial companies.
- This is also the reference retained by ACPR in the framework of its climate pilot exercise launched in mid-2020.
Deliverable furnished by each bank to the FBF:
- Banks' coal exposure, calculated at the reference date, based on the reference list supplied by Truecost and expressed in millions of euros
- The size of its Reference Portfolio
Publication on the Observatory's website:
The FBF will supply Finance for Tomorrow with the following data for publication on the Observatory's website:
- Total coal exposure calculated of the French banks participating in the exercise according to the methodology described here. The names of these banks will be indicated on the site.
- The total size of the Benchmark Portfolio as at 31 December, being the sum of the Benchmark Portfolios of each bank, calculated according to the methodology here described.
- The average % of coal exposure for the banks in question in relation to the Total Benchmark Portfolio. This figure will be obtained as the ratio of the 2 figures above.
This calculation will be made annually and published on the Observatory's website to illustrate French banks' phase-out of coal.
FAQ about this methodology
- Why take the exposures and not the amounts underwritten by each bank when arranging financing?
As the calculations are made at 31 December, the amounts subscribed for each bank for a given loan are no longer shown on the bank's balance sheet if the loan syndication took place before that date, which is generally the case. It is therefore the bank's own share that appears on its balance sheet at that date.
If the final syndication of a particular loan has not been completed by 31 December of the year in question for a bank, then it is the amount subscribed to such financing that appears on its balance sheet and is taken into account.
- Are bilateral loans taken into account (unlike the League Tables, which exclude them)?
Yes, bilateral loans (i.e. loans solely between a bank and its client) appearing on the balance sheet of said bank as at 31 December of the year in question are indeed taken into account in the calculation.
- Why exclude off-balance sheet commitments?
These commitments are rarely drawn down and therefore customer exposure due to these off-balance sheet commitments is usually zero.
- Why not include hedging instruments (interest rate/exchange rate)?
The calculation of a bank's risk exposure vis à vis its client for these market instruments varies constantly. It was determined that it did not make sense to take them into account at 31 December, a period of very low market activity and therefore illiquidity, which could result in large variations in the calculation of exposure to these instruments that would not be representative of the bank's exposure to its client through these instruments over time.
- Why didn't you include bonds issued by banks for relevant clients?
Calculations are made as at 31 December of the year under consideration. Given that bond issues are placed with investors as quickly as possible, subject to market conditions, the likelihood that the amount subscribed by a bank for a customer's bond issue will appear on that bank's balance sheet on a given date is very low. This is even more true for 31 December, which corresponds to a very quiet period for banks' market activities. It is not in the banks' interest to keep this type of exposure on their books during a period of low market activity.
Once a bond has been placed by banks with investors, these banks generally no longer keep the securities on their books.
- Why not sum up the portfolios published individually by each bank?
The calculation of coal exposure varies from one bank to another, depending on underlying assumptions , in particular concerning the weighting to be taken into account for the coal portion of the company's business. Other parameters also come into play, such as the type of credit lines taken into account. We therefore felt it was important for all banks to use the same calculation rules and measure their exposure against the Reference List of companies exposed to coal, which will be made public in the interests of transparency.
- Why does the sum of this coal exposure sometimes differ from the coal exposures published by each bank in their own reporting?
Not all banks that contributed to the overall calculation necessarily publish their coal exposure, and those that do may adopt different rules from those agreed upon in the methodology.
In addition, some banks have different thresholds in their coal policies that may lead them to identify companies as part of their portfolio of coal companies, while this will not be the case for others.
In the methodology adopted, the choice was made to use a shared list, namely the Reference List, which has no threshold, and to use shared methods for calculating the Benchmark Portfolio of each bank.
Taking responsible management into account in the banking sector
The concept of responsible management is still mainly the purview of asset management businesses.
However, the major French banks have been pioneers in incorporating environmental and social criteria into their banking activities and continue to be at the vanguard of innovation on the subject, evidenced by their solid ratings from the leading extra-financial rating agencies, as shown in the following table
French banks are amongst the sector's best-rated institutions:
- 4 French banks are among the top 6 in their category (Vigeo Eiris)
- 4 are "Leaders" or "Outperformers" in their sector per Sustainalytics
In addition, French banks are leading the charge when it comes to taking climate risk into account.
- They are working with regulatory and public authorities on the subject. They have adopted a comprehensive and proactive approach alongside the ACPR, the EBA and the ECB, in the form of commissions, working groups, climate pilot exercises and responses to consultations.
- French banks contribute to the CDP, a benchmark initiative that promotes and manages the reporting of the main environmental risks, and all of them support the Task Force on Climate-Related Financial Disclosures (TCFD) and are committed to implementing its recommendations. In 2020, two banks have updated or published dedicated reports compiling the information to be disclosed in compliance with TCFD recommendations.
- Like the FBF, they are signatories of the Principles for Responsible Banking, sponsored by the United Nations Environment Programme's Financial Initiative, in which they commit to aligning their strategies to comply with the Paris Agreement.
- They are actively working to identify the best levers for achieving this. The methodology section of the Observatory's website bears witness to the strong momentum of French banks, with concrete examples of implementation and will be enriched over time.