Article 173: Lessons learned from 2018 climate risk disclosures in France

Four Twenty Seven looks at how physical risk has been incorporated into the latest round of reports

The second year of reporting under Article 173 in France saw increased uptake of disclosures of physical risk. Our review of 2018 disclosures from 49 asset owners in France shows that almost half of the respondents conducted more substantial analysis of their exposure to physical impacts of climate change compared to last year. We find insurance companies Axa and Generali provided the most detailed analysis for property portfolios, while FRR and Comgest provided the most thorough assessment of physical climate risk in their investment portfolios and BPCE Group was the only bank with a complete analysis of physical risk.

Article 173: A Second Year of Mandated Climate Risk Reporting

2018 was the second reporting year under Article 173 of the French Law on Energy Transition and Green Growth, which was passed in August 2015. It requires major institutional investors and asset managers to explain how they take Environmental, Social and Governance (ESG) criteria, including climate change, into account in their risk management and investment policies.

Article 173 covers publicly-traded companies, banks and credit providers, asset managers and institutional investors (insurers, pension or mutual funds and sovereign wealth funds). In addition, asset managers managing funds above €500m and institutional investors with balance sheets above €500m are subject to extended climate change-related reporting obligations, including reporting on both physical impacts of climate change and the impact of the transition to a low-carbon economy.

We carried out a desktop analysis of the 2018 reports (applying to 2017 portfolios) to understand how financial institutions responded to the requirements laid out by Article 173 and how their reporting has evolved since last year. We reviewed 49 asset owners in France, including public pension funds, asset managers and insurance companies, with an aggregate €5.5trn under management. Our analysis included all public entities covered by Article 173, as well as private insurers with over €2bn in assets under management. Insurance companies play a particularly important role as asset owners in France, where individual savings are massively invested in life insurance savings products. French pension funds, on the other hand, are relatively small due to France’s pay-as-you-go retirement system.

Article 173 Reporting Trends in Year Two

Who Reported?

We were able to find Article 173 reports for 36 out of 49 organisations. It is possible that, in spite of our best efforts, we failed to locate reports. However, Article 173 has a ‘comply or explain’ provision, which also makes it acceptable for companies to not publish reports if they can justify that climate change is not a material risk, or to solely file their reports with the regulator rather than releasing them.

We found 25 Article 173 reports from insurance companies, five from pension funds, two from asset managers and four reports issued by banking institutions. We also found a press statement from HSBC that mentioned an Article 173 report, but we were unable to find the report itself and did not include it in the analysis.

Did Firms Change Their Disclosure Strategy?

Overall, 23 companies (47%) have made significant improvements in their disclosure since last year. These companies have either kept the same methodological framework and refined it, or have published substantially more comprehensive reports than last year. Among them, two firms, Groupe Macsf and Carac, have published a report for the first time. Only four companies (8%) have provided reports which were less complete than last year, including one company for which we found a report last year, but not this year. 45% of the firms published reports which were very similar to last year.

How Did Firms Report This Year?

12 organisations (25%) only discussed their carbon footprint or their exposure to energy transition risk, without including physical risk disclosures. A small group of organisations (10%) mentioned physical risk as a topic they were exploring without being able to provide a complete analysis for the moment – many citing the lack of tools and models as a major impediment to reporting physical risks. 11 institutions (23%) used a thorough methodology to analyse their exposure to physical risks, compared to only seven companies last year. Several firms released noticeably improved disclosure this year. Out of those firms that did asses their exposure to physical climate risk, nine (19%) carried out a bottom-up analysis of physical risks by assessing the asset-level risk exposure of at least some of their portfolio. Two institutions (4%) performed a “top-down” analysis, carrying out a multi-asset class, sector-level analysis of physical climate risk.
Finally, eight firms (17%) were classified in the “work in progress” category. These companies studied physical climate risk at the company-level among many other criteria as part of a broader analysis of the sustainability of their portfolio. Many of these companies acknowledge that they have not yet been able to develop a complete methodology for assessing physical risks.Axa is one of France’s leading multinational insurance firms holding €905bn of assets. While Axa’s 2018 Article 173 disclosure is very similar to last year, with a bottom-up approach and an internal analysis, the study has increased in accuracy and scope. Like last year, the methodology considers European natural disasters, as well as the geographical location of individual assets and the destruction rate of building materials. In addition to the traditional report about Article 173, which lays out the principles and commitments of the firm regarding the ESG criteria, Axa released its first report aligning with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. Axa’s analysis covered $34bn worth of assets, compared to $15bn last year, encompassing commercial real estate debt, infrastructures debt, and property debt. Unlike last year, the assessment was not limited to the financial impact of windstorms but also included the potential impact of floods on the infrastructure in its portfolio. Like last year, the analysis considers 100% of the infrastructure portfolio but this year it also covers 88% of the real estate portfolio in 14 countries, compared to 41% last year. Axa used a value at risk methodology to assess the potential costs and revenues associated with climate change for each company in its equity and corporate bond portfolios, but this assessment largely focused on transition risks.
Generali France is a French insurance company with €521bn worth of assets. Generali also provided a more detailed evaluation of the potential impact of physical risks on its property assets than last year. It analysed 268 assets, compared to 112 last year. Unlike last year, the analysis was not limited to the Paris area, but was expanded to all real estate assets held by the company. 89% of the assets are located in Paris, 7% outside Paris and 4% in the overseas department. They carried out a broader analysis of physical risks by adding earthquakes and avalanches to the study, in addition to flood and drought. The assessment rates assets from “high” to “very low” risk, finding that 5.4% of assets or 18 sites are classified as “high risk” for flood, 2% of assets (11 buildings) are classified as “medium risk” to drought and four of these 11 buildings are concentrated in the same building zone near Paris.
Comgest is an international asset management group with €25.7bn worth of assets. The firm released physical risk disclosure reports for its three largest funds: global, European, and emerging market. Four Twenty Seven conducted the physical risk analysis for Comgest, splitting physical risks into three categories: operations risk, market risk, and supply chain risk. The analysis also included a comparison of portfolio risk scores to relevant benchmark indices to highlight the holdings’ relative risk exposure. This asset-level assessment included exposure to storm, drought, extreme rainfall, floods, sea level rise, and heat stress. The analysis resulted in an aggregate score reflecting the portfolio’s exposure to physical climate risks, based on the sectors in the portfolio and the geographic distribution of companies’ assets. Regionally, the portfolio companies in Asia are most exposed to physical climate risks. Half of the sites are located in Japan and China, which makes the portfolio vulnerable to cyclones and extreme rainfall. The rest of the portfolio is located in the United States and Europe, which have relatively low exposure to physical risks. The risk of rising sea level is relatively low for the portfolio, with only 15% of the sites being exposed.


Overall, 2018 showed an increase in the inclusion of physical climate risks assessment by French financial institutions. However, reporting on physical climate risk remains a challenging task for investors. Many organisations lack the tools, models and data to perform a comprehensive assessment of their portfolios, and for many firms, physical risks appear to still be a lower priority than transition risks. Those firms that are on the forefront of climate risk reporting disclose asset-level risk exposure and are beginning to explore how to assess value at risk and scenario analysis for physical climate risks. 2019 reporting is ongoing and has already brought some new high profile reporters, including the French Central Bank, Banque de France. The positive trends in 2018’s Article 173 reports, along with continued uptake of TCFD recommendations, ongoing pressure from central banks and regulators, and increasing losses from extreme weather events, suggest that we will see continued growth in physical climate risk disclosures during the third year of Article 173 reporting.

Natalie Ambrosio is Editor for Four Twenty Seven, while Roman Dhulst is a trainee Business Analyst. This article was edited by Nathalie Borgeaud, Director for Europe, and was first published on the Four Twenty Seven website, here