Société Générale / Risk report 2021 - Pillar 3 2020

2 RISK FACTORS RISK FACTORS | SOCIETE GENERALE GROUP | PILLAR 3 - 2021 21 The operational risks specific to the Covid-19 pandemic are also described in the section 2.2.1.1 “The coronavirus (Covid-19) pandemic and its economic consequences could negatively affect the Group’s business and financial performance”. 2.2.4.3 Reputational damage could harm the Group’s competitive position, its activity and financial condition The Group’s reputation for financial strength and integrity is critical to its ability to foster loyalty and develop its relationships with customers and other counterparties in a highly competitive environment. Any reputational damage could result in loss of activity with its customers or a loss of confidence on the part of its investors, which could affect the Group’s competitive position, its business and its financial condition. As a result, negative comments regarding the Group, whether or not legitimate, and concerning events that may or may not be attributable to the Group, could deteriorate the Group’s reputation and affect its competitive position. The Group’s reputation could also be adversely affected by a weakness in its internal control measures aimed at monitoring and preventing operational, compliance, credit and market risks, particularly with respect to monitoring inappropriate conduct of its employees (such as corruption, fraud, market abuse and tax evasion). This risk may arise from the conduct itself as well as from administrative or criminal sanctions penalising an insufficiently effective control environment, such as the sanctions issued by the US and French authorities in 2018. Financing extended by the Bank that does not comply with regulations or its commitments could affect the Group’s reputation. Methods of distribution of products and services that do not provide sufficient information to customers, a lack of transparency in its communication (particularly financial communication) or internal management rules (including human resources management or relations with suppliers and service providers) that do not comply with regulatory obligations or the Bank’s commitments could affect the Group’s reputation. In addition, a corporate social responsibility strategy (in particular with regard to environmental issues) deemed insufficiently ambitious in relation to the expectations of external stakeholders or difficulties in implementing this strategy could also impact the Group’s reputation. The consequences of these events, which could potentially result in legal proceedings, may vary according to the extent of media coverage and the overall context and remain difficult to estimate. For more information about reputation risk please see Chapter 13 “Compliance risks, Litigations” of the present document and section 5.2.1 Satisfying clients by ensuring their protection of Chapter 5 Corporate Social Responsibility of the 2021 Universal Registration Document. 2.2.4.4 The Group’s inability to attract and retain qualified employees may adversely affect its performance. The Group employs more than 133,251 people (1) in 61 countries. The Group’s human resources are key assets of the Group, its business model and value proposition. Inadequate career or skills management (integration, career prospects and training, or in terms of compensation levels in line with market practice, etc.) could affect the performance of the Group’s banking and financial activities. The Group’s inability to attract and retain employees, a high rate of turnover or the departure of strategic employees could expose the Group to a loss in its know-how as well as a deterioration in the quality of service, at the expense of client satisfaction. Furthermore, the increased oversight of compensation policies to which the banking sector is subject, including rules on certain types of compensation (fixed, variable, performance conditions, deferred payments, etc.), may limit the Group’s ability to attract and retain talent. This is the case in particular of the CRD IV directive, which has applied since 2014 to banks in the European Economic Area and therefore to the Group, and of the CRD V directive applicable from January 2021. This directive includes a cap on the variable component of compensation compared to its fixed component for the relevant personnel, which could reduce the Group’s ability to attract and retain employees. 2.2.4.5 The models, in particular the Group’s internal models, used in strategic decision-making and in risk management systems could fail, face delays in deployment or prove to be inadequate and result in financial losses for the Group. Internal models used within the Group could prove to be deficient in terms of their conception, calibration, use or monitoring of performance over time in relation to operational risk and therefore could produce erroneous results, engendering more specifically financial consequences. In particular: the valuation of certain financial instruments that are not traded on p regulated markets or other trading platforms, such as OTC derivative contracts between banks, uses internal models that incorporate unobservable parameters. The unobservable nature of these parameters results in an additional degree of uncertainty as to the adequacy of the valuation of the positions. In the event that the relevant internal models prove unsuitable for changing market conditions, some of the instruments held by the Group could be misvalued and the Group could incur losses. For illustrative purposes, financial assets and liabilities measured at fair value on the balance sheet categorised within level 3 (for which the valuation is not based on observed data) represented EUR 12.6 billion and EUR 46 billion, respectively, at 31 December 2020 (see Note 3.4.1 and Note 3.4.2 of Chapter 6 of the consolidated financial statements included in the second amendment to the 2020 Universal Registration Document on financial assets and liabilities measured at fair value); the assessment of customer solvency and the Bank’s exposure to p credit and counterparty credit risk is generally based on historical assumptions and observations that may prove to be inappropriate in light of new economic conditions and is based on economic scenarios and projections that may not adequately anticipate unfavourable economic conditions or the occurrence of unprecedented events. This miscalculation could, among other things, result in an under-provisioning of risks and an incorrect assessment of capital requirements; hedging strategies used in market activities rely on models that p include assumptions about the evolution of market parameters and their correlation, partly inferred from historical data. These models could be inappropriate in certain market environments (in the event of strong movements in volatility resulting, for example, from a new Covid-19 pandemic wave, from the evolution of the trade war between the United States and China, or from Brexit), leading to an ineffective hedging strategy and causing unanticipated losses that could have a material adverse effect on the Group’s results and financial position; Number of employees at the end of 2019 excluding temporary staff. (1)