Published on 31 October 2018

SUSTAINABLE FINANCE

"173 shades of reporting": will there soon be a European version of article 173?

On 25 October, Novethic published "173 Shades of Reporting: Edition 2", an in-depth analysis of the climate risk and integration of environmental, social and governance criteria (ESG) reporting conducted by the top 100 French institutional investors. The results from the first two editions show the advantages and the limits of this type of regulation, which may prove useful in the event that such regulation extends across Europe.

Article 173 of French law on Energy Transition and Green Growth is a legal innovation that has enjoyed international fame.
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Article 173 of French law on Energy Transition and Green Growth is a legal innovation that has enjoyed international fame. The intention of legislators was to make large institutional investors aware of the risks that climate change poses to their portfolios, to better integrate ESG dimensions in how they manage assets and to be able to explain this strategy to their end customers.

The implementation decree requires that the government reviews progress from the first two fiscal years, before December 31, 2018, and then commits to a possible standardisation process. The first two editions of the reporting analysis show that such a process would be welcome. It is not only difficult to assess the exact scope of the commitments found in the so-called "173 reports”, but also to notice any significant increase in these topics amongst top French institutional investors.

The analysis conducted by Novethic, nevertheless, makes it possible to identify a group of 17 committed investors. These actors hold major weight, managing 54% of the €2,450 billion managed by the top 100 French institutional investors panel. This group has put in place relevant investment strategies, many of which are in line with the Paris Agreement's 2° C objective.

Another group referred to as "Established Forerunners" includes roughly 20 members. For the most part, they have reported on coal divestments and investments in relatively diversified green assets (green bonds, renewable energy infrastructure, green funds, sustainable real estate). Volumes remain modest since the study makes it possible to quantify 1.07% of outstanding amounts invested in the green economy, that is to say 0.02% progress between 2017 and 2018!

Little ripple effect

The ripple effect of this leading group, comprising just over a third of the panel, is small. Even if Novethic has identified 36 newcomers, this is only two more than in 2017, with some of these newcomers having only produced half a page and others content with reporting a gross carbon footprint with no impact on their investment policy. Absentees still represent more than a quarter of the 100 largest French institutional investors.

These results call into question the effectiveness of a "comply or explain" regulation incentive. Such is the approach adopted by the European Commission in its legislative package on sustainable finance. By creating ESG reporting requirements, the Commission hopes to get institutional investors to integrate responsible investing where it is still underdeveloped.

The example of Germany shows that reluctance is still very strong since the pension funds association has already taken a stand against anything that seems like forced integration of ESG criteria.

Fostering communication with household savers

One of the little known uses of Article 173 is to facilitate any kind of contributor information with consideration of climate risks and ESG dimensions in the various savings vehicles already in possession, starting with life insurance. On the reporting side, we are still far from accessible communication concerning these products.

Figures from Novethic's exclusive survey of 30 insurers show that the network diffusion of SRI (Socially Responsible Investment) account units remains modest. This represents less than 5% of the €347.4 billion invested by French savers in 2017. The visibility of labels promoted by the government (ISR and TEEC) is even more modest. Together they represent €5.46 billion of outstanding household savings.

Only 5% of UA volumes are managed under SRI, and only 1.9% dispose of a recognised label.

The great savings mobilisation in the service of green finance, called for by Bruno Le Maire at the Climate Finance Day in Paris in December 2017, is still to come but it is probably the course he will take during his introduction at Climate Finance 2018.  The summit will be organised by Finance for Tomorrow on 28 November, 2018.

Anne-Catherine Husson-Traore,  @AC_HT, CEO of Novethic


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