Will France's corporate climate reporting model go global?
Experts from the London Stock Exchange suggest the European Union may be considering new legislation requiring investors to disclose environmental information.
Late last year, the French government passed into law the Energy Transition for Green Growth Bill — a sweeping piece of climate legislation that ecology minister Ségolène Royal described as the "most advanced and ambitious piece of environmental legislation in Europe."
While there may be some MPs in the U.K. who would brandish the Climate Change Act in dispute of this claim, the Energy Transitions law does impose new binding energy targets for transport, housing and renewable energy in France, alongside plans to raise the national carbon tax and tackle air pollution across the country.
But the Act also contains a particularly significant piece of legislation for the finance industry. Article 173 of the Energy Transitions law, which came into law in January, for the first time requires portfolio managers in France — whether asset owner or asset manager — to report on the environmental profile of their funds.
The reporting not only must cover environmental, social and governance issues, but also must provide information on carbon footprints and green revenues.
Although the reporting requirement is not mandatory, investors either must publish relevant disclosures by the end of 2017 or explain why they have chosen not to do so. It theoretically applies to more than 840 asset owners, including insurance companies, mutual funds, asset managers and provident institutions.
Denis Baupin, the French Green MP who led the inclusion of Article 173 in the law, has said his aim in requiring the disclosure was to "give economic interest to what it ecologically essential."
By forcing transparency on the carbon emissions and environmental performance of asset owners, Baupin said he hopes more investors will become aware of the issue of climate risk and have a greater understanding of how vulnerable their portfolios are.
It's a very simple piece of legislation that forces a lot of action.
Kevin Bourne, managing director of Database Services at FTSE Russell, agreed Article 173 will increase the transparency of climate risk in financial markets. "It introduces tremendous transparency to the market because consumers — not just the people in the marketplace, but the underlying consumers — will be able to see these three scores for these three funds," he told reporters in London last week.
The legislation is already making waves around the world. Bourne's FTSE Russell colleague Gordon Morrison, managing director of ESG services group, said global asset managers in Boston already have been approached by a large French pension fund to ask what work they are doing to comply with Article 173.
"So 3,500 miles away these Boston-based asset managers have suddenly got this request land on their desk, not really knowing what it means, how to do it or anything," Morrison said.
According to Bourne, this transatlantic data request is only the tip of the iceberg.
"We both believe that this flagship legislation in France is going to have far-reaching ramifications for the industry, because it's a very simple piece of legislation that forces a lot of action," he said.
Unsuprisingly, Baupin faced considerable opposition from financial lobby groups opposing the introduction of Article 173, which argued Paris' position as a financial center would be damaged by exclusively French legislation.
"The lobbying groups wanted to wait for European legislation, and even global legislation, which would have been a good way of pushing these issues further back," he recalled.
Asset managers would not be able to choose whether to report ... but would be required to do so in order to gain entry to the market.
But there are now signs supra-national legislation may come sooner than expected. According to Bourne, officials from the European Union are looking closely at implementing a version of Article 173 at a EU-wide level.
"We know that because they've actually been in to talk to us about it," he said. "The EU are looking at the French legislation Article 173, and we've got some views that what they look at doing might be stronger than what the French have done."
If the EU were to adopt something similar, both Bourne and Morrison believe it would be an even toothier version then the French law.
"What Europe looks as if it's going to do is take what they see as best practice in France, learning off the French experience, and then having that as not a principles-based legislation, but as mandatory legislation," Morrrison said.
Such a move would mean, in effect, that asset managers would not be able to choose whether to report, as they can in France, but would be required to do so in order to gain entry to the market.
"That would force all people operating, selling financial products into the EU to meet these minimum standards," Morrisson explained. "And if they don't meet those minimum standards, then they won't get their passporting; they won't get authorization."
So far in France around 15 large investors have taken proactive steps to comply with Article 173, according to analysis by Novoethics, with 11 financial institutions affected by Article 173 already having reported on their carbon footprint.
But as the publication of disclosures in France raises investor interest, and with the prospect of pan-EU legislation looming, the move could be just the start of a massive shift in how the financial world considers and engages with environmental issues.
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