France is the first country in the world to introduce a carbon reporting obligation on financial institutions. It could pave the way for other countries with well-developed responsible investment movements such as Sweden to follow suit.
France’s lead will strengthen the drive among investors worldwide to consider the environmental impacts of their investments and the risks to their businesses of failing to do so. Carbon-intensive companies face severe challenges to their valuations and ability to repay loans as a result of carbon taxes, emissions trading schemes and other legislation. For many financial institutions, the first step on the road to understanding these risks is to commission a carbon footprint of their investment portfolios or loan books.
Many investors already recognize these risks and disclose how they are managing them on a voluntary basis. Almost 50 investors are signed up to the Montréal Pledge launched late last year which commits them to measuring and publicly disclosing the carbon footprint of their investment portfolios on an annual basis.
The new legal requirement is contained in Article 48 of the French Energy Transition Law which was recently passed by the French parliament and is due to be debated by the senate. The original text is here. An English translation provided by the 2° Investing Initiative is here.
The draft legislation requires institutional investors to disclose how they consider environmental, social and governance issues in decision-making processes. These issues include the risks of climate change associated with carbon-intensive assets and the opportunities to invest in low-carbon and renewable energy. Investors will also need to set targets to measure progress and explain if they are not achieved.
The text also obliges banks and credit providers to disclose the risks they face. The French government will publish a report on climate change risks by 31 December 2016, placing it alongside other risks such as credit risk, counterpart risk and excessive leverage.
Listed companies will also be required to report on the risks of climate change to their business and on the measures taken to mitigate them. Other countries such as the UK already require companies to disclose this information.
Alongside the French government’s announcement, Axa said it will divest €500m from companies most exposed to coal-related activities and triple its green investments to reach €3 billion by 2020. In other announcements, BNP Paribas said it would sign the Montréal Pledge.
The growing market for responsible investment in France is one reason why Trucost is to open an office in Paris in June. The new premises will enable Trucost to better serve its many existing French clients, including Montréal Pledge signatories ERAFP and FRR, as well as develop new business in the country.