In August last year, France became the first country to introduce mandatory climate change-related reporting for institutional investors.
The relevant law has been hailed as “groundbreaking”, with potentially far-reaching implications.
Many investors, in the meantime, have their work cut out for them.
The reporting obligations are set out under Article 173 of France’s law on “energy transition for green growth”, with an implementing decree setting out the requirements in greater detail.
Effective since the beginning of January, the decree applies to a wide range of investors, including asset managers, insurance companies, Caisse des Dépôts et Consignations and pension and social security funds.
They are being required to report not only on how they integrate environmental, social and governance (ESG) factors in general into their investment policies – and, where applicable, risk management – but also specifically on how climate change considerations are incorporated.
The law makes France the first country to introduce mandatory carbon reporting by investors, according to Trucost.
Although several large asset owners already disclose their carbon footprint and/or report on their responsible investment strategy, this is either of their own volition or as part of a wider initiative or code.
The Swedish government has threatened to pass legislation to force the country’s commercial pensions and investment sector to report carbon footprints, but no decision has been made on this.
Also, the focus of this particular push in Sweden appears to be different from the French initiative, being pitched in terms of transparency for customers rather than as part of a high-level public policy drive to cap climate warming.
The French requirement, according to the European Sustainable Investment Forum (Eurosif), is “a groundbreaking measure for the investment community” and “very good news” for responsible investment.
Article 173 is ambitious on climate change, added Eurosif, being the first national regulation built around 2°C as the maximum tolerable global temperature increase. It also “mainstreams” ESG disclosure.
The 2° Investing Initiative also believes the law has far-reaching significance.
In an analysis published before the implementing decree was finalised, the association hailed the law as “a significant step forward for France and the global development on this topic”.
The impact of Article 173, it said, “will be felt beyond France and contribute to international demand for climate-related non-financial data of companies”.
It is also very much being felt on the ground among French institutional investors, according to Benoît Magnier, chief executive at Cedrus Asset Management in Paris.
He welcomed the law as a game-changer, saying it cemented climate change as a strategic matter for investors.
But meeting its requirements will not be easy, he said, and the asset manager has already received plenty of “panic calls”.
“The big insurers will have some work to do, but it’s not a real problem for them – it’s a challenge really for the medium-sized investors,” Magnier told IPE.
“They’re the ones who have to start from scratch, understand the issues and invest resources to come to grips with it.”
Philippe Desfossés, chief executive at ERAFP, the €23.5bn supplementary pension scheme for French civil servants, puts it somewhat more starkly.
In his view, the requirements are “a quantum leap” for most investors.
“We had been trying to convince the government to go for something more limited, to be able to move quickly,” he said.
“But [it] took a different path and went for something more comprehensive and ambitious. It’s good because this puts pressure on those institutions that weren’t paying attention to this area. But I have some doubts about this leap to fully fledged disclosure when so many investors have not even measured their carbon footprint.”
The nitty gritty
Specific requirements under Article 173 and the implementing decree include requiring investors to disclose how they address climate change-related risks, split into “physical” and “transition” risks, and to assess and report on their contribution to international efforts to cap global warming and to supporting France’s “energy transition”.
As part of these overarching requirements, investors should, inter alia, describe how they take into account aspects such as changes in the availability and price of natural resources, policy risk related to the implementation of international climate targets, and the soundness of capital expenditure for the development of fossil fuels.
These and other disclosures are not required of smaller investors, namely entities with a total balance sheet or belonging to a group with a total balance sheet of less than €500m.
These are only obliged to provide a general overview of how they integrate ESG factors.
Investors have until the end of June 2017 to deliver the information required by the law.
The government plans to review the implementation of the decree after two years of application, by the end of 2018.
FIR, the French responsible investment forum, believes the government struck the right balance between imposing new responsibilities but also allowing for flexibility, and welcomed what it said was a pragmatic approach.
Thierry Philipponnat, chairman at FIR, said there were two grounds for satisfaction.
“Firstly,” he said, “[it is] an ambitious and pioneering law on the fight against climate change, and one recognised as such by the international responsible investment community.
“Secondly, [it’s] an approach taken by the public authorities that allows for the development of good practice in a field where more work on methodology still needs to be done.”