Climate and investment: the Banque de France sets an example

Paris, 30 March 2023 : The Banque de France has announced it will exclude companies developing oil and gas extraction projects by the end of 2024, sending a strong signal to the finance sector. It shows that engagement and exclusions can work together, and that portfolio alignment tools must be complemented with immediate sectoral measures which can secure the necessary emission reductions. For this reason, despite certain methodological limitations (1), Reclaim Finance strongly welcomes the Banque de France’s new policy that now stands as an example to other central banks and investors. The NGO urges the Banque de France to extend the same ambition to European monetary policy.

The Banque de France has published its Investment Report 2022. This document summarizes the evolution of the bank’s non-monetary portfolios and records the increase in its climate ambition.

The Banque de France’s responsible investment policy now combines the use of sectoral exclusions with an overall objective of aligning portfolios with a 1.5°C trajectory, a voting policy, the orientation of investments towards “solutions”, and a desire to take climate and biodiversity risks into account (1).

Many investors oppose sectoral exclusions with financing the transition and aligning their portfolios, but the Banque de France’s new investment policy shows a synthesis is possible. While methodological limits persist, particularly for passively managed funds, this policy offers a consistent approach that recognizes the climate emergency.

Paul Schreiber, Regulation Campaigner at Reclaim Finance

The Banque de France is taking a decisive step in recognizing the climate emergency in its investments by announcing the exclusion of any company developing new oil and gas extraction projects by the end of 2024 (2). In addition, and as announced in 2021, the Banque will complete its exit from coal (3) and will apply additional exclusion thresholds for oil and gas by the same date (4).

These specific provisions for the fossil fuel sector aim to take into account the scientific need to put an end to the development of fossil fuels and to gradually reduce their consumption to limit global warming to 1.5°C (5). As such, they complement the overall ambition of aligning investment portfolios with 1.5°C, and partially compensate for the fact that this ambition does not cover scope 3 emissions (6).

The Banque de France has added weight to its engagement approach. For the last two years, it has voted against approving the accounts of companies developing new oil and gas projects, and now unless they change course, the Banque will exclude them by the end of 2024. TotalEnergies and other oil giants have been warned: respect the scientific imperative or there will be consequences!

Lucie Pinson, Reclaim Finance director

In recognition of the growing number of climate resolutions, the Banque de France has also updated its voting policy The Banque wants companies to publish non-financial information on their climate strategies and says it will analyse them “on a case-by-case basis”. It also supports shareholder resolutions aimed at reducing emissions and risks related to climate change.

Following in the footsteps of the AMF, the Bank of France says that Say On Climate is good governance practice that is useful for shareholders and investors. More broadly, shareholder resolutions have an important role to play in bringing companies up to speed with the climate emergency. I would mention a small caveat, the Bank of France does not yet allow us to see how its voting policy is being applied because it does not publish its votes, nor indicate the criteria it intends to use to determine whether climate plans are adequate.

Lucie Pinson, Reclaim Finance director

Reclaim Finance notes that the ambition of the Bank of France’s investment policy stands in contrast to the monetary policy measures taken at the European level. Companies developing new oil, gas or coal extraction projects are still accepted by the European Central Bank (ECB) within asset purchase programmes and as collateral (7), and are not treated as specifically risky (8). Moreover, the ECB is yet to take any measures to support the European transition (9).

Just as the Banque de France asserts itself as the leader of central banks in sustainable investment, it must become the locomotive of the Eurosystem on the greening of monetary policy. In concrete terms, fossil fuel developers must be excluded from Eurosystem asset purchases and collaterals, and central banksshould instead contribute to financing the transition, notably through lower interest rates for green activities.

Paul Schreiber, Regulation Campaigner at Reclaim Finance

Contacts:

Lucie Pinson, Reclaim Finance director, lucie@reclaimfinance.org, +33679543715
Paul Schreiber, Campaign lead at Reclaim Finance, paul@reclaimfinance.org, +33 6 89 02 07 88
Sarah Bakaloglou, Press Relations France, sarah@reclaimfinance.org, +33661682510

Notes:

Several methodological limitations concerning sectoral policies can be quickly overcome:
- For the application of its sectoral policy on fossil fuels, the Banque de France relies on several data providers whose analysis does not always make it possible to target companies developing new fossil fuel projects. In order to ensure that all major developing firms are excluded, it should supplement this data with the Global Coal Exit List (GCEL) and Global Oil and Gas Exit List (GOGEL).
- A minority share of the Bank of France’s investments (7.6% of total outstanding shares and bonds) is made through external funds under passive management. The Banque indicates that these thirteen funds do not allow to apply its responsible investment filters and voting policy. Yet, the bank can ask managers to propose funds aligned with its own exclusion criteria. If no such funds are proposed, the management can be taken over by the subsidiary BDF gestion.
Beyond sectoral policy, several limitations must be noted, although they are more difficult to overcome in the very short term:
- The assessment of portfolio alignment is based solely on scope 1 and 2 issues and evaluated using an imperfect SBTi methodology. In order to overcome this problem, the Bank of France can rely on analyses carried out on the transition plans of companies financed, such as those of the CA100+ benchmark.
- The assessment of climate risks is generally recognized as very inadequate by financial regulators. In particular, it does not make it possible to take into account cases of extreme risks or scenarios exceeding climate tipping points.
Finally, the distribution of the Banque de France’s “green” funding – excluding sovereign bonds – is not clear and this qualification is notably based on investment in certain labels relying on inadequate criteria, such as the ISR label.
The Bank of France does not publish precise indicators on corporate shares of fossil fuel companies held. However, it calculates a “brown share” of its assets in order to identify its exposure to transition risk which corresponds to its exposure to fossil fuels. It indicates that “the average fossil fuel exposure of the equity segment of the equity portfolio is 0.45% of revenue, compared to 0.29% for the benchmark”, and that, “The average exposure to fossil fuels in the equity segment of the pension portfolio is 0.86%, compared to 0.90% for the benchmark”.
Since 2021, the exclusion threshold applied by the Bank of France for companies involved in the extraction and production of electricity from coal has been 2% of turnover. In 2024, this threshold will drop to 0%. This change will mark the Banque de France’s exit from the sector, in accordance with its 2021 announcements which included a commitment to push for the adoption of exit plans by coal companies in the portfolios. The Banque de France indicates that “As of November 30, 2022, the equity portfolio contains a single company involved in thermal coal and the pension portfolio is exposed to 0.3% of its outstanding equity portion.”
By the end of 2024, the Banque de France’s oil and gas exclusion thresholds will be the European “Paris Aligned Benchmark” (PAB), which is 10% of revenue for oil, and 50% for gas.
The Banque de France plans to “align the equity segment on a trajectory of 1.5°C with a horizon set for the end of 2023 for the equity portfolio and for European equities backed by retirement commitments, and for the end of 2025 for all equities backed by retirement commitments”.
The alignment of the Banque de France on a temperature trajectory is calculated on the basis of the data of the service provider S & P Global Sustainable1 which covers only the scope 1 and 2 emissions. Moreover, the service provider compares the companies’ emission trajectories with a theoretical “aligned” trajectory from SBTi methodologies that are based on scenarios that are not currently 1.5°C with little or no overshot.
The ECB’s climate strategy aims to align corporate asset purchases with European climate goals. However, the criteria used to align asset purchases – applied since October 2022 – do not exclude companies developing fossil fuel extraction projects. Above all, no such exclusion is envisaged for collateral, on which the ECB simply plans to integrate climate risks from 2024. These elements are explained in a Reclaim Finance briefing for journalists.
Today, prudential regulation does not take into account the risks associated with fossil fuel companies. The risks associated with holding fossil fuel sector-related assets are clearly established, as shown by the work of Finance Watch. In its report, the Banque de France chooses to use its exposure to companies in the sector as a proxy for its exposure to transition risks.
The ECB’s climate strategy does not include any measures to support the financing of the European transition. A coalition of NGOs – including Reclaim Finance – calls in particular on the ECB to introduce differential rates to promote energy efficient refurbishments.