At the end of October 2020, the French Prudential Supervision and Resolution Authority (Autorité de contrôle prudentiel et de résolution – ACPR) and the Financial Markets Regulator (Autorité des marchés financiers – AMF) published a first monitoring and evaluation report on the coal policies of the Paris financial centre. Many of their comments and recommendations are in line with NGOs’ recent analyses and requests on the matter.
1. Covering the entire coal sector, no less!
Regulators stress the importance of covering the entire value chain of thermal coal in policies adopted for the sector: coal mines, coal-fired power plants but also the sometimes forgotten coal infrastructure, which can be essential in opening up new deposits or trapping entire countries in harmful dependency. It is therefore also this whole value chain that must also be covered when calculating the exposure of financial actors to the sector, to measure the tangible impact of these policies. Regulators also point to the fact that only thermal coal is covered by the vast majority of policies, and not metallurgical coal.
The report clearly states that the absolute criteria for selecting coal companies are more reliable and relevant than the relative criteria: “The absolute criteria are used to capture diversified companies, where coal is a small part of their business model, but nevertheless remain major players in the industry. Absolute criteria also make it easier to obtain information, which is often more reliable than information relating to relative criteria.” The ACPR even uses the example of Glencore, one of the world’s largest coal producers, which, according to some data providers, derives only 6% of its revenues from this sector.
3. Choosing the right database: the Global Coal Exit List
The paramount importance of the databases used in the implementation of a coal policy by a financial actor is the subject of an entire section, with a table illustrating the great diversity of these data according to the different sources used. The report clearly states that “Policy implementation thus depends on the quality of available data, and requires clear and transparent data quality controls and processes to avoid the risk of cherry picking.” This is a high risk since the values obtained can vary from 1 to 5 for some companies, with the consequence that the same policy will exclude a very different number of companies depending on the database used.
Today, Reclaim Finance published a comparison between the Global Coal Exit List and Trucost data, which is very revealing. Regulators are therefore asking financial players to indicate their sources clearly and whether they are reworked internally before use. They have chosen to use the Global Coal Exit List for their estimates of the exposure of financial actors, a choice we strongly encourage as it is the most complete and reliable.
4. Covering all its activities
ACPR and the AMF also stress the importance of clearly indicating the coverage of the policies adopted, particularly regarding investors. The report states: “With regard to asset management, exemptions may apply to a significant proportion of the assets under management: mandates and dedicated funds, for which the investor’s approach and policies are crucial, index management, for which the manager is required to replicate an index, possibly exposed to coal, or investments in index derivatives, total return swaps (TRS) or baskets that can also be exposed to coal.” This is also the case for banks whose “policies typically cover investment and equity, as well as funding and refinancing, but may exclude other services offered such as hedging products, advice, trading, etc.”
Surprisingly on this point, the regulators’ report does not cover certain asset owners such as the Fonds de Réserve des Retraites or Ircantec, which are nonetheless important players in the Paris market.
Finally, the report of the financial regulators contains a familiar appeal: clarity! There are indeed many examples where the devil is hiding in the details and where the slightest ambiguity is used to widen the net and continue to let big fish that are the historical clients of certain financial players get away with it. The biggest loopholes mentioned in the report concern:
- Applying modalities of the policy to ensure its control and monitoring. The AMF reveals the case of an investor who was able to continue financing companies excluded by its new policy up to 10 months after it was adopted. Or another case of an investor that applied its policy only to its largest investments in the sector, and not to others.
- Preferring a shareholder engagement approach ad vitam eternam, without specifying the modalities of this intervention and the consequences, including the exclusion of companies, if this dialogue does not bear fruit.
- Taking into account of the existence of “credible” exit plans from thermal coal for companies in the sector. The report notes that the “These differences in the criteria used to consider a commitment sufficient may create cherry picking risk for choosing criteria to retain an issuer in the portfolio.” The report points to this a flagrant case: one financial player considered that a company had a credible exit plan while it was developing new coal production units.
The conditions for applying the exclusion criteria should, therefore, be simplified to make them less complex and more readable for everyone.
The reading of the ACPR and the AMF report is, therefore, necessary for the actors of the Paris financial centre who will have to improve their coal policies accordingly to quickly devote themselves to the adoption and application of policies for the other sectors that need to align themselves with the objectives of the Paris Agreement, starting with oil and gas.