How are investors responding to France’s article 173 requirement on climate disclosure? 

Key points

• France requires institutional investors to report on ESG, climate change and energy transition 
• Reporting has been patchy and fewer than half mention climate change
• AG2R LM, AXA France and CNP Assurances are said to lead the pack but many resist the legislation

One of France’s biggest insurers, AG2R La Mondiale (AG2R LM), has announced a disturbing discovery. In a 2017 report, it said its current insurance investment portfolio would contribute to a 3.6°C increase in global warming – well above the 2°C maximum in the Paris Climate Agreement. That increase is consistent with a world doing nothing, meaning severe penalties for ecosystems, substantial species extinction, and climate turmoil. 

This figure might have been ignored but for the non-governmental agency, WWF, which applauds it in an assessment of the response to the pioneering French investment disclosure regulation, article 173. “[AG2R LM] is the only company to do this out of the top 16 insurers we studied. This top-line figure is very clear and easy to understand,” notes Jochen Krimphoff, deputy director for green finance at WWF France. The company pulled out the number from a climate risk assessment exercise required by the law and had not previously made the calculation.

For WWF and others poring over the first wave of article 173 reporting, there is plenty to pick over, and they note a promising start. The regulation, embedded within the 2015 green growth law, passed under former president François Hollande, requires asset managers and institutional investors to describe how they are incorporating ESG factors into their investment strategy. 

Companies with assets valued over €500m also have to report on how they are incorporating climate risk into fund management and contributing to the financing of the energy and environmental transition described in the law. All asset classes are included.

Few doubt it is a diligent endeavour. “We can see they have made a huge effort to understand the information. We can’t say they haven’t tried; the initiative requires a big mobilisation of resources,” comments Krimphoff. In its investigations, WWF rates AG2R LM, Axa France and CNP Assurances as the most encouraging performers – the latter for its brochure aimed at household investors, and Axa for the maturity of its discussions. 

Groupe d’Assurances du Crédit Mutuel (ACM), meanwhile, barely makes the grade with a one-page report. AG2R LM goes deeper than most, with an analysis of its portfolio showing renewable energy to account for 0.6% of investments, and fossil fuels 0.5%. Meanwhile, it discovers that 83% of carbon emitters in its portfolio have signed the Global Compact, the UN commitment to sustainability principles.

Notwithstanding these efforts, researchers find much of the data obscure, hard to follow, irrelevant or non-existent. A wide-ranging study identifies major failings and omissions. According to Indefi, a French financial market research company, only 41% of 136 institutional investors analysed mention climate, and only 20% publish the green share of turnover posted by carbon emitters in which they invest.

“We find the results disappointing,” comments Emmanuel Parmentier, the firm’s ESG partner. “A lot of the investors did nothing, but at least they are the smaller ones. They risk a penalty. The impact of the law has been minimal, but there’s a learning curve to go through.” 

Indefi’s research yielded other data. It found that, out of the 51 institutions publishing information about ESG considerations, 49% practised exclusion and 59% practised integration. In addition, 71% published a carbon footprint, which in most cases related to only their equity holdings.  A quarter published a description of a trajectory minimising their impacts to below 2°C, and 41% analysed climate risk – although both are legal requirements.

Still, they deserve credit for attaining this milestone, which is among the most complicated statutory requirements affecting the industry in Europe. Nevertheless, even the most assiduous data disclosure is unlikely to be accurate. Added to the complexity of analysing differing types of investments, as well as the contributions made to ESG impacts by four layers of investment intermediaries, are the wide array of metrics and methodologies, and superficial ESG inclusion criteria. Reaching through this elaborate lattice, the investor is unlikely to discover an authentic depiction of ESG impacts.

Unsurprisingly, many in France still resist the regulation, not least in the insurance sector, where voluntary reporting on ESG had started to emerge. Since 2010, Axa has defined its responsible investment strategy, and integrated ESG into its general accounts. In its latest annual report, it provides a detailed consideration of risks and opportunities relating to climate, as recommended by the Task Force for Climate-Related Financial Disclosure initiative. As result of article 173, the company has also assessed the physical risks incurred in part of its real asset portfolio.

Comments from industry observers confirm a resistance to the law, as Jelle van der Giessen, CIO of the Dutch insurer NN Group, reveals: “It is very complex. I wonder whether a reporting requirement would bring us further than we are already. From talking to managers dealing with this in France, I understand it is very difficult to report properly. The company plays a minor role in the French market but is lobbying on the potential replication of the regulation in the Netherlands and across the EU.”

“A lot of the investors did nothing, but at least they are the smaller ones. They risk a penalty. The impact of the law has been minimal, but there’s a learning curve to go through”

Emmanuel Parmentier

As van der Giessen indicates, other options could work and be less costly – such as the direct channel of shareholder pressure.  He says: “If I had to spend a euro on engagement or on reporting, I’d choose engagement and going beyond a policy of divestment. It’s not clear what is being added by obtaining reports or whether that is helping us.”  

Previous voluntary carbon intensity and climate risk assessments yielded results – such as the 2015 decision by Axa to divest about €500m of coal investments in its portfolio. As such, the additional effects of mandatory reporting on investment practices has yet to emerge, and its potential influence is unclear. 

Parmentier observes: “If you ask, ‘will the investors carry out more risk analysis as a result of this law?’, then I would say yes. But if you ask, ‘will they put money into more investment products with a green label?’, then I would say not necessarily.” With risk analysis at the core of its products, the insurance sector can benefit from improved intelligence.  

AG2R LM’s disclosure on climate change may be imprecise and its carbon footprint data may be flawed. But, as a first attempt to express the effects of its investments on climate, it strikes a chord. Such headline numbers are just symbolic, but could usher in a new era. As Parmentier concludes: “The more transparent you are, the more you are expected to improve the metric” and the more people ask questions. The task now, as indicated by WWF, is to broaden the audience, since it finds not a single insurer enlightens the end investor. Once this group is informed, some of the drivers behind green investment could alter.