2018 Registration document and annual fi nancial report - BNP PARIBAS526

7 A COMMITTED BANK: INFORMATION CONCERNING THE ECONOMIC, SOCIAL, CIVIC AND ENVIRONMENTAL RESPONSIBILITY OF BNP PARIBAS

7

Our economic responsibility: fi nancing the economy in an ethical manner

COMMITMENT 3: SYSTEMATIC INTEGRATION AND MANAGEMENT OF ENVIRONMENTAL, SOCIAL AND GOVERNANCE RISKS (ESG)

Financing and investing in industries with multiple Environmental, Social and Governance (ESG) issues, operating in countries whose legal and governance systems are not at the same level of maturity , BNP Paribas faces a wide variety of ethical challenges that require increased vigilance when making financing and investment decisions. The appropriate management of ESG risks is of prime importance as it contributes to managing the fi nancial risk of the Group s fi nancing and investments. Its ESG risk management system is part of an overall approach and is based on:

■ the development of fi nancing and investment policies framing the Group s activities in sectors with signifi cant ESG issues;

■ the respect of the Equator Principles for large industrial and infrastructure projects;

■ the implementation of a specifi c ESG risk assessment framework for its products and services;

■ the use of management and monitoring tools for these risks;

■ integration of the risk management (RISK) stream as the second line of defence.

The framework of environmental and social risks was expanded in 2018 to meet the French law on the d uty of care of parent companies and of companies using sub-contractors (See Duty of care and Declaration on modern slavery and human traffi cking, section 7.6).

FINANCE AND INVESTMENT POLICIES GOVERNING THE GROUP S ACTIVITY IN SECTORS WITH SIGNIFICANT ESG ISSUES

BNP Paribas strengthens its carbon risk management

Since 2011, BNP Paribas has made fighting climate change its top priority in terms of environmental commitment. Indeed, the Group s corporate fi nancing activities have an indirect impact on climate change. BNP Paribas supports the recommendations of the Task Force on Climate- related Financial Disclosure (TCFD) and tests tools and methodologies enabling it to best assess the exposure of its loans and investments to climate risks (transition and physical). As such, the Group:

■ joined the initiative in 2017 driven by UNEP FI, which brings together 16 international banks that have committed to developing a common methodology to implement the recommendations of the TCFD;

■ participates in Science Based Target Initiative (SBTI) working groups, a coalition that include the CDP, the United Nations Global Compact, the World Resources Institute (WRI) and the WWF, and supports companies willing to set environmental objectives that are in line with the Paris Agreement;

■ signed the Katowice Commitment in 2018 to contribute direct fi nancial fl ows towards a low carbon trajectory. The signatory banks commit

to develop tools that enable credit portfolios to be aligned with the objectives of the Paris Agreement. This approach will focus primarily on sectors that are signifi can t greenhouse gases emitters.

As such, in 2018, BNP Paribas tested the methodology developed by the 2 Degrees Investing Initiative think tank. This technology calculates the profi le of the credit portfolio at various maturity dates for 5 highly carbon-intensive sectors (fossil energy extraction, electricity generation, transportation, steel and cement). The fi rst tests showed that by using this methodology it could track a significant percentage of clients concerned (over 80%).

The method is adapted for each sector and the reference scenarios used are developed by independent organizations, such as the International Energy Agency. For electricity generation, fossil fuel extraction and automobiles, the approach is based on energy or technological mix. For aviation, cement and steel, carbon emission intensities are analysed. Lastly, for maritime transport, the methodology, which is currently based on a measure related to greenhouse gas emissions, is under review .

The results of this test give an overview of the client portfolio with a reference scenario at a given date and an estimation of what this same portfolio will be in 2023. The compatibility of the credit portfolio with a 2° C scenario will be achieved by dynamic portfolio management and exogenous technological developments.

Electricity and energy mixes fi nanced have less carbon than the world mix

In accordance with its commitment to fi nance the energy sector in line with the 2° C scenario of the International Energy Agency (IEA), BNP Paribas has signifi cantly reduced its support for fossil fuels: coal, unconventional oil and gas .

After making a commitment in 2016 to cease funding coal mining projects, coal-fi red power plants, and companies related to these sectors without a diversifi cation strategy, BNP Paribas stopped supporting companies and infrastructure projects whose principal activity is dedicated to the exploration, production and exportation of shale oil , shale gas, tar sands, oil and gas in the Arctic zone. These commitments apply to the Group s existing clients who, as a consequence in some cases, will no longer be supported. For example, 295 companies were placed on the exclusion and monitoring list in 2018 because of the Group s sector-specifi c energy policies.

These decisions are naturally refl ected in the electricity mix and the energy mix that the Group fi nances. In the context of measuring its indirect emissions (scope 3) BNP Paribas has since 2014 communicated the breakdown of primary energy mixes (fossil fuel extraction) and secondary energy mixes (electricity generation) financed and has committed to ensuring they evolve in line with the 2° C scenario of the IEA.