Climate risks and risk management

BCF acknowledges in its double materiality assessment that climate change constitutes a significant financial risk, potentially affecting the quality of its assets, its operational continuity and its market position. The Bank is progressively incorporating climate risks into its global risk management framework as per FINMA requirements on taking account of climate and environmental risks and in compliance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Climate risk governance is part of the existing risk management structures, with involvement from the executive and oversight management bodies, i.e. the Executive Board and Board of Directors. Climate risks are considered as applying to different areas with a particular influence on credit, market, liquidity and operational risks.

BCF undertakes a risk analysis in line with the recommendations of FINMA Circular 2026/1 Nature-related financial risks and those of the TCFD and identifies the physical risks connected to the direct impacts of climate change, and transition risks stemming from regulatory, technological, economic and societal evolution towards a low-carbon economy. The analysis primarily addresses the liquidity risks and most significant exposures for the Bank, especially mortgage loans, business loans, market portfolios and internal operations. The management of these risks currently focuses on climate risks. The impact of the Bank on other environmental indicators is also the subject of an evaluation and these indicators are being progressively integrated in the management framework.

The risks are therefore distributed among different categories depending on their origin:

• Risks from mortgage loans;
• Risks from business loans;
• Risks from the market;
• Liquidity risks; and
• Operational risks.

Ultimately, BCF is aiming for complete management of climate risks and other environmental indicators. It currently manages those climate risks considered the most material on the basis of quantitative risk analysis and the implementation of measures to limit risks and their consequences.

The mortgage loan portfolio represents an essential part of BCF’s balance sheet assets. Physical climate risks can affect the value of financed property, notably due to the increase in the frequency and intensity of extreme weather events, such as floods, intense rainfall, landslides or heatwaves.

In the Canton of Fribourg, some properties can be located in areas exposed to natural hazards, which can entail material damage, a fall in the value of securities and, in the event of default, higher potential losses for the Bank.

The transition risks associated with mortgage loans mainly result from the evolution of regulatory requirements relating to energy efficiency, construction standards and the expectations of the property market. Buildings with a low energy performance or which do not meet future standards could undergo a devaluation or need significant investment in renovations.
These developments can affect borrower solvency and the value of mortgage collateral.

Risk analysis

In line with FINMA expectations, BCF evaluates the various physical risks annually, in particular natural dangers that can affect property in its mortgage credit portfolio. The following natural dangers were evaluated:

• Flooding: large quantities of rainfall can cause an overflow of water bodies, such as lakes, streams and rivers. In view of the density of buildings close to river banks, flooding can cause the most damage of all the hazards in Switzerland.
• Debris flows: a debris flow is a specific type of landslide in the form of a flow of water, earth or debris with a large water component.
• Landslide: landslides are movements of material on slopes, which start with less water than mudslides or debris flows. Unstable slopes can start to slide spontaneously or in a lasting and regular way over a protracted period.
• Falls: falls is the term for falling stones, rocks or boulders. Falling stones are isolated stones or large boulders, which unexpectedly become detached from the rock face. Falling stones and boulders are major rockslides, usually preceded by falling stones.
• Torrential flows: a mudslide or torrential flow is a flowing mixture of mud, water, stones, screes and wood. Torrential flows often take shape in existing stream beds. Torrential flows have great destructive force due to their high density and speed (up to 60 km/h).
• Avalanches: an avalanche is a rapid flow of snow down a slope. Avalanches can occur spontaneously or be triggered by external factors, for example people, animals or earthquakes. They mainly comprise fluid snow and air and they can swallow up and move ice, rocks and trees.
• Surface runoff: surface runoff is when rainwater, melt water or water from other sources cannot be absorbed into the ground quickly enough.
• Storm: a storm can exert considerable force on buildings wherever they are in Switzerland. Winter storms are particularly damaging to real estate.
• Hail: hail is a type of precipitation involving balls or blocks of ice. Hail can cause damage to buildings, especially to roofs, solar installations, blinds and facades.
• Earthquake: an earthquake is when the ground shakes due to the movement of tectonic plates. The five danger levels correspond to the seismic zones defined in the SIA 261:2020 Standard “Actions on structures”.
• Radon: radon is a colourless and odourless natural radioactive gas in the ground. Radon poses a risk to health in buildings where the floor tiles are not properly sealed. Exposure to radon is estimated on the basis of the probability (in %) by which the reference level of 300 becquerels by cubic metre (Bq/m3) is exceeded.

These risks are classed by order of importance from 1 to 5, i.e.:

1. no danger or zones located outside urbanised zones;
2. residual danger;
3. low danger;
4. moderate danger;
5. high danger.

Analysis of natural hazards applicable to property financed by the Bank shows a generally favourable situation. The hazard levels classed on an increasing scale from 1 to 5 allow for an evaluation of the portfolio’s exposure to the main natural dangers. The results are particularly pleasing, as the values measured are at the same level as or below the Swiss benchmark, depending on the natural hazard undergoing evaluation. This means that, compared with the national average, property financed by the Bank is usually outside the zones exposed to such natural phenomena as earthquakes, floods, hail and radon. This relative underexposure indicates a lower risk than the national average, although it does still need to be managed.

BCF evaluates transition risks stemming from the mortgage portfolio by quantifying the indices associated with the efficiency of the envelope, overall energy efficiency, direct CO₂ emissions of properties rated from A to G, as per the cantonal building energy certificate (GEAK). These indices are then measured against the mortgage values to define the value at risk.

Almost 62% of the buildings in the mortgage portfolio are currently rated A for direct CO₂ emissions. The category G, which is for buildings heated using fossil fuels, accounts for 28% of the mortgage portfolio.

Some of the real estate holding has an energy envelope rated F or G. These properties have improvement potential in terms of their energy efficiency and their value could evolve differently to those properties better aligned to future regulatory requirements or market expectations. This aspect is a relevant factor to include in the analysis of transition risks for the Bank.

Building insurance in the Canton of Fribourg is obligatory and currently covers damage caused by fire and natural events (e.g. floods). The default risk arising from these losses can thus be considered weak for the Bank’s mortgage portfolio. However, long-term climate projections indicate the likelihood of an increased frequency and intensity of these events. This may entail higher insurance premiums and deductibles, stricter coverage conditions or the limitation of certain types of loss with indirect effects on the financial situation of mortgage holders.

The risks for BCF thus stem mainly from a potential imbalance between the support offered by building insurers and the costs borne by customers in the event of a loss. This becomes especially critical for borrowers with a limited capacity for repayment and/or high mortgage sums.

Overall, the BCF mortgage portfolio currently has limited exposure to acute physical risks. The evaluation of the location of property, the portfolio’s geographical diversification, the requirement for adequate insurance cover and regular collateral monitoring are the main mitigation measures. The Bank is progressively developing tools to improve its calculation of physical climate risks when evaluating real estate.

To limit transition risks, BCF is progressively integrating criteria related to the energy performance of buildings in its credit analysis and raising awareness of climate-related issues among its advisors. It offers financing solutions designed to support energy renovations and sustainable construction. These measures help to mitigate transition risks and preserve the long-term value of the mortgage portfolio.

BCF’s corporate clients may be exposed to physical risks arising from climate change, especially in those sectors with greater exposure, such as agriculture, industry, tourism and energy. Extreme climate events, resource scarcity or supply chain disruptions can affect their activity, profitability and repayment capacity.

Transition risks affecting business loans stem from regulatory, technological or market changes arising from the transition to a low-carbon economy. Climate change-related regulatory changes can affect the repayment capacity of BCF customers, mainly due to the cost involved in adapting to meet the new regulatory requirements. These costs can weigh on borrower solvency, entail a higher default risk and, in some instances, a loss in the value of financed properties.

Moreover, climate change and the transition to a more sustainable economy can directly impact the financial situation of borrowers, not least due to lost income, changes in consumer behaviour, rising resource costs or tighter regulatory constraints on certain products and services.

Risk analysis

Physical risks are currently analysed qualitatively by sector of activity. Quantitative analysis would not just involve an evaluation of direct physical risks, as would be the case for mortgaged properties, but also a risk analysis of the value chain potentially leading, for example, to the inability to make repayments due to interrupted production. With this in mind and to take greater account of these aspects, work is ongoing to implement FINMA Circular 2026/1 Nature-related financial risks in order to incorporate these requirements into the risk analysis process in a progressive and coherent manner.

Transition risks are evaluated by combining loan amounts by business sector with an estimate of the carbon impact (in tonnes of CO₂ by million CHF of revenue) for the sector in question. This approach allows for the identification of those sectors in which loans granted generate the most CO₂ leading to increased transition risks.

Risk management

BCF is progressively incorporating transition risks into its credit risk evaluation, mainly through sectoral analyses. The Bank supports customers with their sustainability transition and promotes the financing of investments contributing to a more resilient and climate-friendly economy.

Physical risks can affect the value of financial assets held by BCF when issuers are exposed to extreme climate events or to deteriorating environmental conditions. Market transition risks result from the greater inclusion of climate-related factors in the valuation of financial assets. Rapid price adjustments can affect certain sectors or businesses exposed to economic models ill suited to the climate transition.

Risk analysis

An evaluation of greenhouse gas emissions from clients’ investment portfolios was conducted using generic data. This information allows for the identification of the portfolios with the highest carbon content, i.e. with the highest exposure to transition risks.

Risk management

The decision on whether to invest remains with the client and the Bank’s advisors can only point out these risks. Climate-impact based exclusion criteria are undergoing evaluation and may be applied to portfolios offered to those clients with the greatest exposure to climate-related issues. BCF is closely monitoring market and regulatory developments as well as changes in investors’ expectations. It is progressively adapting its investment strategies to limit physical and transition risks and exploit the opportunities arising from the transition to a sustainable economy.

Physical risks stemming from climate change can exert a growing influence on financing conditions and liquidity management. Certain weather events, such as unusual meteorological episodes or regional disruptions, may cause market tension from time to time or change how customers manage their deposit accounts. These situations require the ability to adapt in order to ensure operational continuity and, when necessary, adjust liquidity management strategies. They also offer the opportunity to include climate scenarios in medium-term forecasting and planning mechanisms.

In parallel, transition risks associated with regulatory developments and investor preferences regarding sustainability may change the structure of access conditions to financing. In an environment in which capital is primarily moving towards issuers with a robust ESG performance, actors with a non-financial profile deemed less favourable may experience a gradual increase in their refinancing costs. This dynamic may result in more stringent market conditions, most likely in the form of higher margins, shorter maturities and stricter eligibility criteria imposed by lenders. Over time, these changes may put additional pressure on liquidity management by increasing reliance on internal resources or increasing the complexity of financial planning over the medium and long term.

Risk analysis

Liquidity risk analysis is based on an ongoing evaluation of the Bank’s ability to honour its financial commitments under any circumstances, including in market environments subject to weather influences. The liquidity portfolio mainly consists of low risk-profile securities, such as securitised bonds and public sector instruments, which limits exposure to major climate-related value fluctuations. Physical or transition risks that may impact the financial markets – whether in terms of one-off changes in market rates, currencies or commodities – are considered to have a low likelihood of generating major liquidity tensions over the short or medium term. Diversification of financing sources and a balanced structure of maturities also contribute to maintaining a high level of resilience.

Risk management

Risk management systematically incorporates climate-related considerations, whether physical or transitional, into governance and oversight processes. The composition of the portfolio used for liquidity purposes – oriented towards high-quality instruments – allows for a reduction in exposure to valuations affected by changing weather conditions. The Bank also benefits from a diversified financing structure, which improves flexibility and reduces the potential impact of weather risks on refinancing capacity.

Physical risks can disrupt the Bank’s operations, especially extreme weather events impacting infrastructure, branches or IT systems. They are currently considered to be low.

Operational transition risks stem from changing regulatory requirements, particularly with regard to climate reporting, governance and transparency, as defined by the expectations of FINMA and TCFD recommendations.

BCF is aware of the potential for reputational risk as stakeholders’ sustainability expectations grow. Negative perceptions associated with some types of financing or investment, accusations of greenwashing (misleading information or statements that the Bank may issue in relation to sustainability principles) or a more general stigmatisation of the financial sector could affect the Bank’s image and credibility.

Risk analysis

Quantitative analysis of greenhouse gas emissions (“carbon footprint”) has been performed every year since 2009. This quantification highlights the main emission sources and serves as a basis for carrying out an action plan. It was thus demonstrated that operational emissions were reduced by 25% over 15 years. The action plan must allow for an additional 30% reduction in emissions by 2030, mainly through the replacement of gas heating by linking up to district heating.

Risk management

BCF is progressively consolidating its internal processes, information systems and competencies to ensure adequate weather risk management and reliable reporting. This helps to better incorporate weather-related issues into the Bank’s strategy and operations.

The Bank has confirmed its commitment to sustainable development consistent with its mission as a cantonal bank by incorporating sustainability goals in its corporate strategy, business model and planning processes. Sustainability is a crossover component of the Bank’s strategic goals and guides key business policy decisions.

Strategic approaches to climate goals notably influence the range of sustainable products and services on offer, investment decisions and exploration of new market segments. Systematic evaluation of these decisions on the basis of sustainability and climate compatibility criteria lies at the heart of the Bank’s strategy and business policy.