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Mirova CEO Zaouati on implementing a demanding pan-European Article 173

Mirova CEO Zaouati on implementing a demanding pan-European Article 173

Members of HLEG share their thoughts on key topics under discussion

This article is one in a series of thought leadership pieces written for Responsible Investor by members of the European Commission’s High Level Expert Group on Sustainable Finance. To see other HLEG coverage, see here, or to comment, visit our discussion page.

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France’s now famous Article 173 of the Law on Energy Transition and Green Growth requires investors to disclose how they factor ESG criteria and carbon-related aspects into their investment policies. In July, the release of the TCFD final recommendations and of HLEG’s interim report, in addition to the US withdrawal from the Paris Agreement have opened the question of the implementation of such regulation for the financial sector at the European level. A pan-European Article 173 is seen by many as the ‘holy grail’ of climate finance policymaking and our fourth early recommendation in the interim report sets out the idea that “disclosure by firms and financial institutions of material information on sustainability issues should be further strengthened”. Article 173 is quoted in the report as the example to build upon for financial institutions.

The French example is a good start but has not demonstrated yet its real impact to enable better informed choices and pave the way to driving investments towards more sustainable patterns.

Is article 173 really a holy grail, though? With one year of experiment and the release in June of the first reporting by investors and asset managers, best practices are starting to emerge and first lessons can be learned from the French experiment. The answer depends on where you start, in the sense that ESG and climate disclosure is not the end of the road but rather the indispensable prerequisite for a new organisation of the financial system, and which real utility highly depends on the way it is implemented. The French example is a good start but has not demonstrated yet its real impact to enable better informed choices and pave the way to driving investments towards more sustainable patterns.

The devil hides in the details… of implementation. Not only do we need a pan-European article 173, but we need a demanding pan-European article 173, that will help release the useful information that investors need to follow a 2 degrees investment path, and that could therefore become a competitive advantage to the European financial industry and companies. The French experiment has enabled us to identify a few issues that we need to tackle if we want a European Article 173 to be successful.

First of all, the ambition and the objectives pursued. The necessity of climate disclosure for the financial sector encompasses different needs for information from various stakeholders dealing with various types of risks. The devil is in the detail… hence in methodologies. Opting for one disclosure methodology or another will give a different meaning and level of impact to the concept of decarbonisation.

A restrictive meaning – and impact – is to minimise the levels of induced carbon emissions of portfolios and help financial regulators to assess the risks of stranded assets to protect the stability of the financial system. Disclosure of Scope 1 and Scope 2 – direct and indirect emissions – will provide information on part of the climate transition and legal risks associated with an asset invested or financed by equity, bonds or loans. This will protect the financial system from the impact of the transition in the short term, but it will have no effect on earmarking capital flows towards climate-oriented opportunities and preventing the medium- and long-term risks associated with the physical damage of climate change – which may have a much higher impact on our economies and on the financial system than transition risks and stranded assets. Climate disclosure should therefore also help invest in assets that contribute to decarbonising our economies over the long term at a global level. This means assessing the impact of supply chains but also the carbon-efficiency of products and business models through Scope 3 and avoided emissions. This is the guarantee that such regulation will really contribute to provide the information necessary to the economic impulse towards a clean economy.

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