By Caroline Fouvet
As of this month, institutional investors and asset managers in France must disclose how their business strategies cover climate change. The new obligation comes from article 173 of the 2015 French energy transition law which mandates institutional investors to publish their contribution to fighting climate change and the integration of climate-related risks in their annual report.
Who does article 173 target?
Institutional investors, such as insurance companies and pension funds with a balance sheet above €500 million, are required to report on their exposure to both physical climate impacts and to ‘transition risks’ – their exposure to the changes caused by the transition to a low-carbon economy. The ground-breaking component of the new legislation is its focus on climate impacts to the organisation’s activities and assets.
What should investors disclose?
The law provides guidance on risk exposure analysis and the portfolio’s contribution to a low-carbon economy transition. The reporting should cover the consequences of climate change and extreme weather events, changes in the availability and price of natural resources, and policy risks related to the implementation of national and international climate targets, amongst other things. Institutional investors are still given some leeway, as the law is built upon a comply-or-explain basis. This means that companies must provide an explanation should their organisation not comply with the law’s requirements.
Why is it important that investors disclose climate risks?
Climate change brings both opportunities for – development of new markets, reduction of operational costs thanks to energy efficient practices – as well as risks to the financial sector. In the near future, investors will be faced with transition and physical risks, which have serious implications for their portfolios. Transition risks are associated with new policies constraining investors’ actions (e.g. implementation of carbon-pricing mechanisms), litigationshould investors fail to abide by climate legislation, technology transitions disrupting the existing economic system, market variations (as demand and supply shift towards new products) and reputational risks to the companies. Physical risks encompass damages to assets, risks to employees and supply chain disruptions. Disclosing their climate risk exposure should allow investors to better prepare to meet the challenges posed by climate change.
What’s happened so far?
France is ranked 6th among the countries where institutional investors best take climate impacts into account, behind Scandinavia, New Zealand and Australia, according to the Asset Owners Disclosure Project (AODP). Asset manager Amundi, for example, highlights in its 2016 report that it is co-founder of the Portfolio Decarbonisation Coalition, an initiative aimed to reduce investors’ portfolios’ exposure to greenhouse gas emissions and align them with the climate economy of the future. Amundi also states that it decided to disengage from emitters who achieve more than 50% of their turnover through coal extraction.
It seems that “we are moving toward the disclosure of climate change risks and stress testing of investments by companies”, according to World Bank senior director of climate change John Roome.
During a Financial Times climate finance conference held in London on 23 May 2017, global investors urged companies to disclose the financial impacts and risks of climate change as well as to increase transparency. Concrete examples can already be found globally. The EU recently passed a law requiring pension funds to include climate change in their investment strategies. Last month, Exxon’s shareholders approved a climate resolution pushing for climate disclosure with 62% of the vote; highlighting the increasing commitment of investors towards the issue.
Beyond disclosure, action is the next key step for investors across all sectors to tackle climate change. This will require that institutional investors and asset managers assess and stress-test their investment portfolios against climate risks. It is incumbent on investors to work with companies to help them to understand the importance of climate risk, and push them to take action to increase their resilience.