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Article 173 Consultation
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Dear friends and members of the 2° Investing Initiative,
 
Predictably, much news before COP21! The French government today released the draft implementation guidelines for public consultation on Art. 173 of the French Energy Transition Law related to mandatory climate disclosure by investors (original version in French). It is exciting to see much of our vision for climate disclosure in financial markets reflected in the document - including a reference to alignment with climate goals; dynamic, forward-looking metrics and targets; as well as an incentive to innovate.
 
You can find a rough (and draft) translation of these guidelines here. If you are interested in contributing to this public consultation, please let us know and we would be happy to help coordinate a response. The consultation is open until December 7th, and the web page is available in French here.
 
The decree retains the four key pieces we identified in our report on Art. 173 published last month:

 

  • Reporting on investment policies: The decree references reporting requirements on integration of climate (and ESG) issues in investment practices, notably in terms of shareholder engagement policies (e.g. voting), tracking the impact of these policies over time, and engaging with beneficiaries / subscribers. Interesting here is also the reference to engagement with asset managers, and reporting on the use of (and potential membership in) initiatives, labels, charters, and codes to inform practices and reporting standards;
     
  • Reporting on the carbon footprint: The guidelines include carbon footprint reporting, but do not specify an approach, allowing investors to choose their carbon footprinting approach. In our view, the guidelines thus retain a level playing field for all data providers around the issue of carbon footprinting.
     
  • Reporting on alignment with climate goals: This element, which 2°ii first suggested in 2012, is left open for experimentation. The Ministry of Ecology and the Ministry of Economy will define indicative targets after 2 years. For the moment, investors are required to set targets and report on progress, but they can choose the nature of these targets, their progress towards achieving them, the use of the scenario linked to these targets, and the exact metrics underpinning them. Of note is the reference to targets directly linked to climate objectives, and the reference to forward-looking metrics.
     
  • Reporting on climate risk: The guidelines focus both on physical and transition risks, although these are not very clearly defined beyond these headline terms. Here too, practices will be open for experimentation.

 
Our take-away:

  • The guidelines prioritise experimentation and thus also potential innovation, with methodologies totally open. The good news is this avoids locking-in a second best option. A challenge however will obviously be creating comparability around different reporting and questions around potential audits. The definition of indicative targets in two years and a potential standardisation process over that time period will thus be key.
     
  • To move from this phase to the next steps thus will require a serious follow-up, potentially in the form of an experimentation platform to share experience, strong support in developing technical guidelines and monitoring.  This will likely require the development of government endorsed technical guidelines, scenarios, annual in-depth monitoring of compliance and analysis of results, as well as a potential sanctioning mechanism. Actions may also be linked to supporting the mobilisation of individual investors (awareness-raising, labelling) and the exploration of integrating these criteria into tax incentives on investment products.
     
  • Great news in our view is the reference to forward-looking climate alignment reporting, linked to the type of metrics currently being developed by the SEI Metrics Project, led by 2° Investing Initiative. These metrics will be IP-rights free and offered as a free service to investors. We are also looking forward to our work on energy transition risk and opportunity metrics, which we’re launching next year, to inform this debate (ET Risk Summary).

 
We look forward to continuing the conversation on this. Please reach out with any questions or comments.
 
Best,
Stan Duprė

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