Jean-Stéphane Mésonnier and Benoit Nguyen of Banque de France published a working paper aiming at assessing the impact of mandatory climate-related disclosure by financial institutions on their holdings in carbon-intensive industries. The research states: “Using a unique dataset of security-level portfolio holdings by each institutional sector in each euro area country, we compare the portfolio choices of French institutional investors with those of French banks and all financial institutions located in other EA countries. We find that investors subject to the new disclosure requirements curtailed their financing of fossil energy companies by some 40% compared to investors in the control group”. However, one can question the validity of the finding.

First, the authors assess the evolution of the exposure of selected French investors to carbon-intensive between 2013 and 2019. They note “a transition in the first year of enforcement of the new regulation” so in 2016, then that “the average impact on holdings of fossil energy securities remains roughly constant from 2017 onward, corresponding to a cut in invested amounts by some 40% on average in 2019 compared to the amount held in 2015”. Thus, the main change happens in 2016, while the law came into force in January 2016.

This is enough for the authors to claim that the decrease in the carbon-intensive holdings is the result of the law. Other investors, which didn’t have to comply with such climate disclosure requirement, didn’t face such a significant decrease in their holdings in carbon-intensive industries. However, one could argue that the fact that the decrease happened after the enforcement of the law is a coincidence, at best a correlation, and not a cause-and-effect relationship.

  • One could also argue that other reasons could be found in the fact that the COP21 was held in France and mobilized French investors more than others and that NGOs pressure pushed French investors to adopt coal and fossil fuel exclusion criteria.
  • While assessing the exposure of French investors to carbon-intensive industries, the authors note that the impact of this regulation is about twice larger for investments in companies exploiting mostly coal and unconventional fossil fuels instead of conventional oil and gas (such as artic drilling, shale gas, oil sands etc).
  • French investors started adopting coal exclusion policies in 2015 with AXA even becoming the biggest global investor divesting from companies generating more than 50% of their revenues from coal in May 2015. Similar measures was followed by CDC, CNP Assurances and many French asset managers in 2015, before the law came into force.

What is puzzling is that the authors mention two things that could have pushed them to look for other reasons to explain the reduction in the French investors’ exposure to carbon-intensive industries.

  • First, they mention that the French law let institutional investors free to decide on the methodologies and metrics to use to report on their exposure to climate-related risks and on how they intend to align their portfolio with climate mitigation goals (through a comply or explain approach).
  • Secondly, the authors mention the many studies led by CSOs, including the one by I4CE, and supervisory authorities (ACPR and AMF) since 2016 and that have agreed on the overall insufficiencies or even lack of compliance with some requirements of the mandatory disclosure.
  • However, instead of being pushed to look for another reason that could have explained the evolution of French investors’ exposure to carbon-intensive industries, the authors conclude that “a lesson from this experiment is therefore that even loosely defined carbon reporting standards may be enough to get a real effect on investment decisions”.

It seems as if the two authors wanted to make a point and wrote the paper in response to the NGOS and those that are asking for a stronger regulation of financial flows. Contrary to what the authors suggest in their introduction, RAN, Reclaim Finance and other NGOs behind the Banking on Climate Change Report are not opposed to climate disclosure. On the contrary, our report actually calls, page 76, on banks to strenghten their climate impact reporting and disclosure, while adopting fossil fuel exclusion policies. However, contrary to the authors of the working paper, we believe that disclosure is only a part of the toolbox, not a magic wand. Alone, disclosure will do little to decarbonize financial flows.

Read the Jean-Stéphane Mésonnier and Benoit Nguyen Banque de France working paper.

The methodology remains unclear.

• The working paper said to compare the holdings of institutional investors in France (treated) with those by banks in France and all financial sub-sectors in all other countries (control). This is puzzling. Banks, or credit institutions, do not held bonds and shares and their balance sheet can be exposed to carbon-intensive industries through loans only. However, their asset management arms, for example Amundi for Crédit Agricole, hold shares and bonds and are subject to the French law regarding climate disclosure.

• Even if it should not impact the finding, it must be noted that the research, which relies on Thomson Reuters’ Business Classification (TRBC) and Bloomberg’s Industry Classification system (BICS), does not cover the power sector. Consequently, the exposure to gas and coal power production is not assessed.