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When France’s popular environment minister Nicolas Hulot unexpectedly quit a few weeks ago on a live radio show with the words “I can’t lie to myself anymore”, some questioned whether President Emmanuel Macron had lost credibility on the environment.
France is considered a global leader on sustainable finance and the environment: it hosted the 2015 Paris Climate Change Agreement and is the first country to mandate investors to report on ESG integration and greenhouse gas emissions. It has the third largest green bond market after China and the US.
Macron is also behind the One Planet Summit, a global high-level initiative to accelerate the Paris Agreement that is holding its second event in New York later this month.
Observers say the resignation of campaigner and TV presenter Hulot shows what happens when idealism meets the complex realities of making systemic change within a government – even one as progressive as France.
Last week, François de Rugy, a former Green lawmaker and career politician, replaced Hulot. Political outsider Hulot had been working with French presidents since Jacques Chirac in the 1990s to push the environmental agenda, but had always refused a role in government. This changed with Macron.
Philippe Zaouati, CEO of Mirova, the French sustainable fund manager, believes Hulot finally accepted a government role due to the urgency of the climate change crisis. “He wanted to affect a radical change in France and not do small things,” says Zaouati. “So he was very, very ambitious. That was the problem I think.”
Hulot, who was in the French government for 16 months after abandoning a presidential bid, had some successes, such as ending sales of new gas and diesel-powered cars by 2040 and making France carbon neutral by 2050. But it seems the political maverick was frustrated by how little he could achieve.
“This is not just a French problem,” says Zaouati. “In all countries when you are in government you have a lot of different ministers to deal with such as the energy minister or the agriculture minister.
“But the sustainable development issue is completely transverse so it leads to a situation where the minister of environment is always fighting with his colleagues.”
Hulot said he didn’t want his presence in government to be taken to mean France was doing enough to tackle climate change.
But, despite Hulot’s departure, France remains a world leader on the environment and sustainability.
For the French finance community, the strongest action has been 2015’s famous Article 173-6. A precursor to the EU’s sustainable finance work, it is a comply-or-explain requirement for investors to report on their portfolios’ ESG integration, greenhouse gas emissions risks and contribution to a low carbon economy. The law also includes measures close to the Taskforce on Climate-related Financial Disclosures (TCFD) and commits French authorities to assess climate-related risks in the banking sector.
France, compared with other countries, is very policy driven. “No-one moves if there is not a law, so Article 173 is typical of this philosophy,” says one observer. Though people close to the matter say the fact that some financial sector leaders had already taken action in this area was a catalyst.
Other countries, such as Spain, are looking at mimicking Article 173, and its creation follows a long history in France of action on sustainable finance.
Mandatory extra-financial reporting started under the 2001 NRE Act that requires listed companies to disclose the environmental and social impacts of their activities. And the 2010 Grenelle 2 Act compels some asset managers to report on how they approach ESG in their investment policies. Article 173 of the Law on Energy Transition and Green Growth widens this provision to all investors.
Article 173 is deliberately not prescriptive in how investors report, to encourage wide participation. A study by consulting firm INDEFI – published today – assessed 127 institutional investors and found the quality of ESG and climate-related disclosure has significantly improved.The Energy Transition law, of which Article 173 is part, also requires companies to report on GHG emissions in their supply chains or related to the use of their products. So-called Scope 3 usually makes up the bulk of a firm’s total emissions, but it is the least disclosed.
RI understands the government wants to make French and corresponding European regulation consistent with the TCFD recommendations. Also, a review of investor reporting required under Article 173 is underway.
And the Banque de France is working on climate risks analysis of the banking sector following a joint report with the Treasury last year.
France was the first nation to commit to issuing a green sovereign bond following COP21 in 2015. The French Treasury has tapped three times the initial €7bn issuance from January 2017, adding a further €3.8bn. It has identified €8bn of eligible spending for 2018. Overall, France has the largest green bond market in Europe and the third largest globally. It also demonstrates best practice issuance, according to the Climate Bonds Initiative, with over 95% of the bonds issued obtaining an external review. Cumulative issuance in the country is €37.bn.
“French expertise is really recognised in this field”
Many well-known French asset managers — BNP Paribas, Axa, Mirova and Amundi — have dedicated green bond funds.
Jean-Jacques Barbéris, Co-Head of Institutional Clients Coverage at Amundi, says there’s a long history behind France’s green bond leadership. He worked under President Hollande as Advisor for Economic and Financial affairs from 2013-2016 just before when ‘Grenelle Environnement’, a conference that informed public policy on sustainable development, led to the environmental-focused Grenelle laws.
French public bodies were very early green bond issuers, says Barbéris. “Around that has been built an ecosystem of external providers who have the capacity to guarantee the credentials of green bonds.” French green bond issuance started in 2012 from local government entities Île-de-France, Provence-Alpes-Côte D’Azur and Hauts-de-France.
Also, good co-ordination between public and private investors and issuers has helped the market, bolstered by COP21, Article 173 and an innovative financial market approach, says Barbéris.
One recent example is the Amundi Planet Emerging Green One (EGO) fund, a partnership on an emerging market green bond fund with the IFC, that will take a ‘first loss’ position and provide technical assistance to issuers.
“French expertise is really recognised in this field,” says Barbéris. “We were selected in a competitive process, intermediated by Mercer, and they didn’t select the big US manager as expected but they selected us for our green credentials and good connection with European green bond investors.” As of March, EGO has raised €1.4bn — making it one of the world’s largest green bond funds.
France is ramping up the ambition of its carbon tax, with Macron in May saying France would increase the price of carbon emitted there to 84 euros per tonne in 2022 from 44 euros this year. At the same time he called on Europe to set a minimum price for carbon.
The country is also leading on creating ESG labels for financial products – now a central activity of the EU Action Plan on Sustainable Finance. There is the government-backed SRI for ESG funds and the Energy and Ecological Transition for Climate label that focuses on funds that finance the green economy.
Finance for Tomorrow
Finance for Tomorrow, a private sector-led initiative promoting Paris as an international centre for green and sustainable finance, has just celebrated its first birthday. The initiative is chaired by Mirova’s Zaouati and managed by former Head of Sustainable Finance at Paris Europlace Anne-Claire Roux. RI has done an analysis of its first year.
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It represents 56 members and six international observers and involves the French Treasury, Environment Ministry and Banque de France.
Zaouati says it is currently planning its second Climate Finance Day, set for Paris in November. It also plans to launch an initiative called “Fin Tech for Tomorrow” and work with universities on teaching sustainability. And it is working with the PRI, UNEPFI and Generation Foundation to publish a French roadmap for sustainable finance as part of the Fiduciary Duty in the 21st Century programme.
Finance for Tomorrow is also closely working with the French government on the Loi Pacte, a proposed law for corporates and SMEs that could see retail investors engaged more closely on sustainable finance.
Loi Pacte is a wide-ranging act akin to the UK Companies Act 2006 or the US Small Business Act. The Action Plan for Business Growth and Transformation was introduced by French finance minister Bruno Le Maire and seeks to grow businesses in order to create more jobs and redefine the role of companies in society to increase employee involvement.
Broadly, Loi Pacte is aimed at making it easier to do business in France, says Loic Dessaint, chief executive at Paris-based proxy advisor Proxinvest.
It will seek to introduce measures such as making it easier for smaller companies to share profits between shareholders and employees, already a common practice for firms on the blue-chip CAC 40 index.
Also, the law will seek to increase employees’ shareholdings. The Forum de l’Investissement Responsable (FrenchSIF) is seeking amendments to implement new rules to give employees the freedom to vote their shares as they want without the influence of management.
Another interesting measure seeks to increase the number of employees on boards.
Loi Pacte will also see changes to the French civil code – brought in by Napoleon in 1804. New rules will mandate companies to take into account environmental and social issues into their activities and strategy and consider their impact in this respect. The measure, says Dessaint, is primarily aimed at improving trust between people and big business.
“Many big French companies do not really welcome the change as they say they already consider environment and social impacts and they are concerned about fines or NGO pressure as a result of the change,” says Dessaint. But he says it could give investors confidence to challenge companies.
Also, as part of the change to the civil code, unchanged for 200 years, companies will be able to propose to shareholders to change their by-laws to include a ‘raison d’être’.
“This would be its ultimate purpose,” says Dessaint. “So for example, Jean-Dominique Senard, the President of Michelin, has said the ‘raison d’être’ of the company is about offering everyone a better way forward.”
Earlier in the year, Senard and Nicole Notat, CEO of Vigeo Eiris were asked by ministers including Le Maire and Hulot to write a report on “Enterprise and General Interest’. The report fed into the draft Loi Pacte, in particular the idea of a “raison d’être”.Shareholder rights
For investors, Dessaint says it is important to know that the Loi Pacte allows the government rights to more so-called ‘golden shares’ which, broadly, allows the holder to get special rights in specified circumstances – like a veto right for a divestment.
It is proposed for sectors connected to security, public health or defence. And the French state will have the right to fine foreign companies that do not uphold promises to create new jobs or not cut jobs after a takeover.
Loi Pacte is implementing big parts of the EU Shareholder Rights Directive. This will mean institutional investors will be obliged to define an engagement policy and issue a yearly report about their engagement activities. “It is very close to the Stewardship Code in the UK,” says Dessaint. But the draft Law Pacte fails to decrease the level of ownership required to file a shareholder proposal, a measure which was expected by many French responsible investors.
Dessaint says responsible investors in France are also concerned about changes the law could bring on remuneration votes. “At the moment there is a binding vote yearly on remuneration policy.
“One of the biggest risks is that the French government may want to change the frequency of the vote on remuneration policy to every four years. And some French companies are pushing for this, considering that shareholders have too many rights.”
Loi Pacte also adopts much of Europe’s directive around the regulation of proxy firms. “It is very close to the European text,” says Dessaint. “So proxy firms should be obliged to describe their methods, their voting guidelines, how they communicate and their dialogue with companies on a yearly basis but it will not go as far as prohibiting the sales of consulting services to the companies, the hottest issue in the voting advisory sector.”
Grégoire Cousté, director general at French SIF, is hoping for an amendment for retail investors to be offered a responsible product.
“This one is quite interesting a shift in terms of thinking about the retail investor role regarding sustainability,” he says.
The law is currently being debated by the French Assembly and is expected to be voted through by the end of the year.
A burgeoning area in France is impact investing. The ministry of environment and solidarity houses the French Impact initiative led by High Commissioner Christophe Itier, who is running to be the next mayor of Lille in two years time – which for some puts a question mark on his commitment to the role.
Cyrille Langendorff, managing director of international affairs at Credit Cooperatif, who chairs the French National Advisory Board on Impact Investing (NAB), says the French Impact initiative has two pillars – scaling up social businesses with a €50m seed fund and €1bn accelerator fund for social innovation and engaging different areas and local ecosystems in social innovation.
French NAB, which has representatives from BNP Paribas, Ecofi Investissements, Mirova and Aviva France, is itself working on a survey of the French impact investing market and engaging with a business school in France.
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The government’s French Impact initiative also has under its remit ‘contrats à impact social’, France’s version of social impact bonds.
Maha Keramane, who sits on the French NAB and is head of social entrepreneurship and microfinance for Europe at BNP Paribas, says it is a bit different to ‘anglo’ versions of the product. “In France we are testing the market to see if there is a response. There is the logic of having the room to finance things that are not traditionally financed. It’s meant to finance innovation.”
Organisations propose projects to government rather than government commissioning for projects such as in the UK. BNP Paribas has structured six contrats à impact social (CIS) and also invested in CIS that broadly allow private investors to support experimental new initiatives from social organisations with the guarantee that the French government will repay investments with the potential of a premium, but only if agreed measured social outcomes are met.
Again, France has a long history on impact-related products. In 2001, it launched ‘fonds solidaires’ – saving schemes where up to 10% of assets allocated to employee saving funds are invested in social projects. Langendorff says today the total amount of money in so-called 90/10 funds is €7.4bn.The future
In the past few weeks a lot of sustainability experts have left key roles. Along with Hulot, Jean Boissinot, one of the architects of Article 173, has left his role at the French Treasury for the Banque de France where his responsibilities include financial stability and green finance. And respected sustainability leader Philippe Desfossés may be axed from public pension giant and 100% SRI investor ERAFP.
There are whispers that France may be gently putting the brakes on sustainability, at least at a policy level. But outwardly France is still leading. Along with Macron’s upcoming One Planet Summit, key French financial institutions such as BNP Paribas and Mirova sit on the European Commission’s Technical Expert Group on Sustainable Finance. In general, France is well represented on the group of 35 and observers say it is a ‘very French thing’.
And at the top level of finance, France is continuing the trend of leading on climate change with the Banque de France acting as secretariat of the new Central Banks and Supervisors Network for Greening the Financial System (NGFS) aiming to help strengthen the process to the Paris climate accord.