Based on a sample of 36 representative asset owners and managers in France (of large and medium size), we observe that Article 173 is already starting to have an impact on investors:
- most of these investors have started publishing reporting to comply with Article 173;
- ESG strategies and policies are becoming increasingly mainstream, and the sovereign asset class is referenced in 55% of ESG strategies in our sample;
- two thirds of the investors in our sample (24) have conducted a carbon footprint;
- more than 20% (8) already report on the carbon exposure of their sovereign assets;
- several investors are planning to extend their reporting based on internal analysis that they are already conducting and developing.
Communication of investment portfolio carbon footprint (left) and sovereign asset class (right)
Source: Beyond Ratings
The French Energy Transition law, Article 173 is the first piece of legislation to introduce mandatory climate reporting requirements for institutional investors. It is noteworthy as it strengthens the need for reporting across all asset classes, including sovereign bonds. At the same time, it corresponds to a broader context of growing expectations on carbon and climate disclosures from investors (see the TCFD Recommendations Report published in June or the work conducted by the HLEG at the EU level).
While several initiatives have recently emerged to analyse investors’ climate reporting, such as work from Novethic/PRI, the AODP (annual index), INDEFI, KPMG, or The Shift Project, few references are made to sovereign assets. We believe that climate reporting on sovereign debt is set to increase for at least three reasons. that the first is due to their size: sovereign assets often represent a very large share of assets owned or under management. Second, the current shift towards stronger reporting (Article 173, TCFD…) calls for more comprehensive approaches encompassing all the market’s main asset classes. Last but not least, we should bear in mind that, when it comes to climate change, a large part of the solution is in the hands of governments. Corporates have of course a big role to play (including private investors), but solving the climate challenge is largely a matter of what countries will agree to do and will actually implement following COP 21 and the decisions to come. Their contributions are essential.
Based on our study, it appears that the focus of carbon footprint assessments remains stronger on corporate assets and that these assessments are becoming increasingly mainstream. Two thirds of the investors in our sample have conducted a carbon footprint. However, we have observed a fast development of carbon footprint assessments applied to sovereign assets in the recent period. More than 20% of the investors in our sample have already started reporting on such analyses, and several of them have conducted at least internal assessments.
Sovereign carbon assessments are thus expected to continue growing, and the purpose of our note was also to formulate some recommendations on what we see as important in this context. This includes improving how the sovereign asset class is taken into account, such as selecting indicators that allow for aggregation or comparison with corporate data, developing further energy transition and physical climate risk indicators, coping with the need for multiple criteria analysis framework, or preparing for harmonisation of methodologies that could come in the future.
You can find more information on these elements in our short note, and we would be glad to discuss them further with you.
Guillaume Emin, Project Manager