France’s famed Article 173 meeting ‘passive resistance’ from investors amid confusion over metrics

France’s climate and ESG disclosure law Article 173 has been held up as a game-changer in environmental reporting by investors. 

Coming before the Task Force on Climate-related Financial Disclosures (TCFD) made its recommendations, the 2016 implementation decree of the article required – on a comply-or-explain basis – that institutional investors report on climate risk, low carbon strategies, ESG integration, and contribution to the energy and ecological transition. 

But after three years, how successful has Article 173 been?

“The gap is widening between the committed and the wait-and-see’ers” – Novethic

A recent report from Novethic, the sustainability group that is owned by state investor the Caisse des Dépôts Group, found “passive resistance”.

Its review of disclosure efforts in line with Article 173 found that more than a quarter of the 100 largest French institutional investors are “passively resisting” the required levels of reporting. 

As the paper – called 173 Shades of Reporting – puts it, “the gap is widening between the committed and the wait-and-see’ers”.

On top of that, the methodologies and metrics used by investors that are reporting are far from standardised.

When the government brought the regulation in, it gave the market two years to thrash out the best climate risk assessment methodologies. It did not want to favour carbon foot-printing specialists, and there was a lack of consensus around how to effectively capture climate risk and opportunity. 

The idea was for the market to come up with a common framework that could inform government recommendations on best practice. 

But, with a lack of sufficiently robust methodologies emerging, it has yet to issue any such guidelines. Indeed, a government review of Article 173 in July said that “progress needs to be made as regards the coherence and harmonisation of the indicators and methodologies used”. 

Disclosure options remain diverse, with indicators ranging from measuring avoided emissions to evaluating carbon reserves in a portfolio. 

That’s not to say progress isn’t being made with regards to sophistication of methodologies. Carbon foot-printing is increasingly regarded as a blunt instrument of limited use, often now usurped or complemented by a measurement of portfolio alignment with the 2-degree trajectory for global warming, as provided by the Paris Agreement. 

But even within the “portfolio trajectory” or “portfolio alignment”, there are diverse methodologies offered by data and analytics providers, often giving rise to divergent and incomparable results. 

According to the Novethic report, of the 32 investors who reported on the issue, 13 did so by publishing their “portfolio temperature”, 22 by comparing the energy mix of investee companies with International Energy Agency scenarios and 10 by applying a carbon budget rationale assigned by sector, with a further eight investors using this last methodology to publish an implicit portfolio temperature derived from their analysis.

 “We really need to work better together on the metrics…and move to some kind of convergence” – Sylvain Vanston

At an energy transition event in Paris last week, AXA Group’s Head of Climate and Environment, Sylvain Vanston, and Mirova Deputy CEO Anne-Laurence Roucher spoke about their respective approaches. 

AXA, for example, measures the MSCI World index as being in line with 3.7°C of warming; Mirova, meanwhile, reckons it’s more like 5°C. 

Similarly Vanston said AXA had tested its corporate portfolios with three or four providers, getting “very different” results each time. 

Vanston was clear that the metrics have their limitations: “They’re not easy to understand, they’re quite volatile. They’re a bit worrying, frankly. We clearly are faced with a situation where there’s a lot of divergence and volatility and probably a lot of databases missing. So when you present this to your CIO or CEO, it’s terrible.”

The will to work together with other investors is clearly there for some. 

Vanston told the event that AXA joined the Net-Zero Asset Owner Alliance because it was “tired of working alone” to reach 1.5°C by 2050. “We really need to work better together on the metrics…and move to some kind of convergence,” he said. 

The Novethic report reckons some convergence could be emerging around the use of the TCFD framework as a guideline for climate risk analysis, with around 20 of the most advanced French investors making use of the recommendations. 

And the PRI, of which 60% of French institutional investors are signatories, will require signatories to incorporate TCFD information. 

And the EU taxonomy will undoubtedly be of use in helping standardise what counts as “green”. The Novethic report says the flagship classification system is arriving at just the right time.

It explains: “There are almost as many methodologies and benchmarks used to assess the share of portfolio companies that derive a significant share of their revenue from eco-activities as there are investors who engage in the exercise.”

But as it stands, agreement about a meaningful minimum standard is still yet to emerge.

Philippe Desfossés, the then CEO of the €33bn ERAFP pension fund told RI back in 2016: “If anyone can report whatever they want, according to its own missions, then we will end up with a heap of data that can’t be analysed properly.” 

Three years later, his words seem prophetic. And with biodiversity and natural capital – the metrics for which are still in their infancy – set to be brought into Article 173 when it’s reviewed in the spring next year, it could be that the confusion is only just beginning.