Green Financing in France – best practice in innovation, regulation and reporting
| Green Financing in France – best practice in innovation, regulation and reporting | |
| Country: | France |
| Sector: | Finance |
| Prerequisites: | none |
| Classification | Institutional |
| Potential Impact: | High |
| Resource Impact: | Moderate |
| Timing Implications: | Short-term |
| Application in Armenia | It is a good lesson for Armenia that despite the relatively low adoption of the law in France, it still resulted in significant reductions in non-green financing. |
France’s lead in the field of green finance is based on its international commitments, its ground-breaking regulations and its innovative market stakeholders who are addressing climate issues. The French economic and regulatory context has been increasingly supportive towards green investments in recent years. France is considered a global leader on sustainable finance and the environment: it hosted the 2015 Paris Climate Change Agreement and is the first country to mandate investors to report on ESG integration and greenhouse gas emissions. It has the third largest green bond market after China and the US. Symbolically, the country is committed to end sales of new gas and diesel-powered cars by 2040 and make France carbon neutral by 2050.
Several factors have led to France’s leadership in green finance, but none is as important as strong regulation for a country historically centralized and highly regulated.
- Firstly, energy and CO2 prices increased after years of decline. Consumer prices of most fossil fuels increased in 2017 and 2018, interrupting the significant decline that began in 2012 with the fall in world oil and natural gas prices. Indeed, the introduction of a carbon component (CCE) in energy taxation sharpened the rebound in world prices. For households, the prices of petroleum products increased most significantly, while gas prices stabilized. For large industries, the price of CO2 on the European Union Emissions Trading Scheme (EU ETS) reached €20/tCO2 in 2018 for the first time in ten years. In general, higher energy prices fostered energy efficiency investments by households and companies or the switch to renewable energy sources.
- Secondly, unusually low interest rates have decreased the cost of borrowing. Interest rates have been historically low in several capital markets, particularly in the bond market. Since 2014, the European Central Bank has implemented monetary policy instruments leading to financing conditions that have favored government bodies, companies and households. These low interest rates reduced the cost of borrowing and the public debt burden, enabling public actors (central government, local authorities) to free up additional investment capacity.
- Thirdly, France has actively strengthened its regulatory framework, especially around COP21. The 2015 Energy Transition for Green Growth Act included provisions that allow or encourage climate investments – or that make their financing easier. Most of these regulations would not be sufficient to reach France’s ambitious goals under the Paris Agreement, but they have nevertheless contributed to increasing climate investments in several key sectors.
As a result of these factors, the growth of climate investment has accelerated in France. Climate investments from households, businesses and government bodies totaled EUR 45.7 billion in 2018. The growth was constant between 2014 and 2016 and increased in 2017 and 2018.
In 2018, France spent nearly EUR 20 billion in energy efficiency investments, EUR 7.5 billion in the renewable energy deployment, and EUR 11 billion for sustainable infrastructure construction in the transport and network sector. Investments in the redevelopment and extension of the nuclear fleet reached EUR 5 billion. Those in the forest and non-energy industrial processes totaled EUR 2 billion. Investments in energy efficiency have been steadily increasing since 2014. Those in the sustainable infrastructure and renewable energy have, in turn, been growing since 2016.
Public authorities have been increasingly involved in financing climate investments. They intervened through several channels to foster the financing of climate investments. Their intervention goes beyond public budgets to include the mobilization of private funding.
Their support occurred first and foremost through their direct investments as project developers. This included investments by the central government and local authorities in their own building stock and vehicles fleet, local authorities and infrastructure managers (RATP, SNCF Réseau) in the development and maintenance of rail and urban public transport networks, and public housing authorities for the construction and the retrofitting of public housing. Together, this totaled EUR 15 billion in 2018.
In addition, public authorities co-financed projects initiated by households and private companies. This co-financing came from the budgets of the central government and local authorities most often in the form of subsidies, and from public financial institutions (Caisse des Dépôts, BPI France, EIB) in the form of concessional loans. Together, co-financing operations totaled EUR 5.7 billion in 2018.
Finally, public authorities supported the redirection of private capital to low-carbon projects through mandatory mechanisms such as white certificates, or voluntary programs such as the interest-free eco-loan proposed by commercial banks.
In total, publicly driven financing reached EUR 22 billion in 2018. From 2011 to 2018, the annual contribution of public authorities to the financing of climate investments increased by EUR 6 billion. In 2018, for the first time since 2014, government co-finance in the form of grants decreased, with an increase in the use of concessional loans, redirection schemes and direct investments. Indeed, since 2015, there has been an increase in concessional loans, largely due to the activity of BPI France and the EIB in co-financing renewable energy producers.
Households invested EUR 17 billion in 2018 in green investments. The investments were concentrated in the construction and renovation of private dwellings, and in the transport sector with the acquisition of low-carbon passenger cars.
Companies invested EUR 13.6 billion in 2018. They were involved in all sectors and were responsible for almost the totality of investments in energy production, industry and agriculture.
Investments by public project developers, which include those of the central government, local authorities, public housing authorities and infrastructure managers, totaled 15.1 billion euros in 2018. Investments mainly occurred in the transport sector for the construction and maintenance of infrastructure.
The green bond market has grown exponentially since 2011 and continues to address its three core issues:
- structuring (taxonomy, principles and standards), to ensure its integrity with lower costs,
- growth (volume, liquidity, sectorial and geographic diversification),
- connection with the bank credit market by securitization.
Additionally, the number of green investment funds has been rising. Although there is strong demand for these products from institutional investors, few individual savers currently subscribe for them suggesting that a tailored offering needs to be built up. Suppliers of services and information such as ratings, analyses and indexes, have also developed specialized instruments but factoring in climate-related issues has not yet been fully mainstreamed and will require broad-based training across the financial sector.
France’s leading position with regard to green finance is also motivated by the widespread commitments from financial stakeholders. Major French institutional investors, including insurance companies and asset managers, took part in various climate finance coalitions. For example, although not required by law, all the leading French banks made commitments to limit their financing for fossil fuels, in particular coal, since 2015. Regulators have also incentivized and/or forced the banking sector to more actively take account of climate change-related risks (with notable work by Banque de France and the Prudential Supervision and Resolution Authority (ACPR).
In 2016, the French Development Agency’s (AFD) climate financing accounted for 52% of its activity. This figure was slightly above its 50% commitment for 2020 and far more than the average figure for multilateral development banks (19%). In 2017, AFD has undertaken to align all its activities with the Paris Agreement, meaning that it is leading the development bank pack in this field.
The French authorities have also taken a multifaceted and pioneer approach by introducing the reporting obligation on climate contribution binding on the majority of economic and financial stakeholders (Article 173 of the Energy Transition for Green Growth Act 5 of 17 August 2015 – see case study below).
France is ramping up the ambition of its carbon tax, with President Macron announcing France would increase the price of carbon emitted there to 84 euros per tonne in 2022 from 44 euros this year. At the same time, he called on Europe to set a minimum price for carbon.
France also took a leading role in the issuance of sovereign green bonds (first issue in January 2017, maturing in 2035, for EUR 7 billion). The French Treasury has tapped three times the initial EUR 7 billion issuance from January 2017, adding a further EUR 3.8 billion. It has identified €8bn of eligible spending for 2018. Overall, France has the largest green bond market in Europe and the third largest globally. It also demonstrates best practice issuance, according to the Climate Bonds Initiative, with over 95% of the bonds issued obtaining an external review. Cumulative issuance in the country is EUR 37 billion.
The additionality of the French green sovereign bond lies in the depth and liquidity it brings to the green bonds market and its contribution to the development of high reporting standards, specifically in the area of environmental impact evaluation. The bond provides investors with
- an annual report on allocation,
- an annual report on output indicators, and
- a regular report on environmental impact.
The Council overseeing the bond oversees evaluating the environmental impact of green eligible expenditures. In its commitment to transparency and independence the Council members are nine international experts of green finance and policy evaluation, including the chair who is the WWF Global Climate and Energy Practice Leader. Additionally, impact evaluation studies are reviewed by independent experts.
Many well-known French asset managers — BNP Paribas, Axa, Mirova and Amundi — have dedicated green bond funds. French public bodies were very early green bond issuers, building an ecosystem of external providers who have the capacity to guarantee the credentials of green bonds. French green bond issuance started in 2012 from local government entities Île-de-France, Provence-Alpes-Côte D’Azur and Hauts-de-France.
Also, good co-ordination between public and private investors and issuers has helped the market, bolstered by COP21, Article 173 and an innovative financial market approach. One recent example is the Amundi Planet Emerging Green One (EGO) fund, a partnership on an emerging market green bond USD 2 billion fund with the IFC, that takes a ‘first loss’ position and provides technical assistance to issuers.
The country is also leading on creating ESG labels for financial products – now a central activity of the EU Action Plan on Sustainable Finance. There is the government-backed SRI for ESG funds and the Energy and Ecological Transition for Climate label that focuses on funds that finance the green economy, and the TEEC6 for investment funds. This led to French financial players holding large market shares in products and services such as green bonds, and have an innovative green fund offering. The purpose of the introduction, in 2017, of the “Finance for Tomorrow” market initiative was to leverage and underpin France’s leading position in green and sustainable finance, which has become subject to competition between financial centers.
Finance for Tomorrow, a private sector-led initiative promoting Paris as an international center for green and sustainable finance, represents 56 members and six international observers and involves the French Treasury, Environment Ministry and Banque de France. Finance for Tomorrow is also closely working with the French government on the Loi Pacte, a proposed law for corporates and SMEs that could see retail investors engaged more closely on sustainable finance.
Loi Pacte is a wide-ranging act seeking to grow businesses in order to create more jobs and redefine the role of companies in society to increase employee involvement. It seeks to introduce measures such as making it easier for smaller companies to share profits between shareholders and employees, already a common practice for firms on the blue-chip CAC 40 index. Also, the law will seek to increase employees’ shareholdings. The Forum de l’Investissement Responsable (FrenchSIF) is seeking amendments to implement new rules to give employees the freedom to vote with their shares as they want without the influence of management. Another sustainability aspect of the measure seeks to increase the number of employees on boards. Loi Pacte will also see changes to the French civil code, mandating companies to take into account environmental and social issues into their activities and strategy and consider their impact in this respect.
Lastly, a final burgeoning area of sustainable finance in France is impact investing. The ministry of environment and solidarity houses the French Impact initiative, which has under its remit ‘contrats à impact social’, France’s version of social impact bonds.
The Regulatory Backbone for French Green Financing
| Item | Action | Detail |
| Greener Regulation |
Greening non-financial reporting requirements such as the disclosure obligation of climate-related information (art. 173 of the Energy Transition Act) ————————————————————————————————————————————– Labels with transparent and rigorous criteria such as the SRI dedicated label, and a green label for investment funds ————————————————————————————————————————————– Making green finance accessible to all citizens as financial intermediaries committed to enable retail investors to “go green” within each of the main saving products |
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An Incentives Based Approach |
Public financial institutions committed to “align their balance sheets” with the 2°C goal.————————————————————————————————————————————– |
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International Commitments |
Participation in voluntary initiatives————————————————————————————————————————————–Active support of related EU regulation |
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| The French Sovereign Green Bond: the “Green OAT” |
Compliant with Green Bonds Principles and CBI Framework. |
Case Study on Energy Transition and Green Growth Law
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The Impact of Mandatory ESG Reporting in France Following calls for action to financial institutions at the Paris summit in December 2015 (COP21), coalitions for sustainable finance have urged investors to enhance their climate-related disclosure on a voluntary basis. Nevertheless, imposing mandatory disclosure standards to financial institutions has been proven to lead them to divest from carbon-intensive securities. France has tested this through the recent law (article 173-6 of the TECV law, for Transition Energétique et Croissance Verte, in English Energy Transition and Green Growth), which pioneered such regulation on climate-related disclosure. Passed in August 2015 in the run-up to the COP21, the law entered in January 2016. This new regulation went well beyond previous regulations on ESG reporting already applying to financial firms in France and in the world alike. French legislators aimed first at making institutional investors aware of the emissions induced by their investments and the resulting financial risks. By facilitating the access to more transparent information, they also wished to enable public authorities as well as NGOs and citizens to incentivize them to align their investments with the required transition to a low-carbon economy. The provisions of article 173-6 explicitly targeted two types of financial institutions: insurance companies and pension funds, and all other asset management firms and mutual investment funds, commonly dubbed “institutional investors”, but not banks. This allowed for quantitative analysis between the holdings of individual fossil energy securities by institutional investors in France with those by banks in France and all financial sub-sectors in all other countries. The decree required domestic institutional investors to report on three dimensions of their climate-related impact and responsibility:
The TECV law led to a sharp decrease in holdings of fossil energy securities in the portfolios of affected investors, as compared to holdings by non-affected investors. The effect of the mandatory climate-related disclosure on investments into these carbon intensive companies was very significant, both statistically and economically – in some studies up to a relative reduction in holdings by 39% on average in the portfolios of newly regulated investors. Considering the volume of outstanding investments into fossil energy by French institutional investors at the end of 2015 as a reference point, this suggests EUR 28 billion of funding have been redirected out of this industry by affected investors. While the list of required disclosures under TEC was comprehensive, firms were required to answer them on a “comply or explain” basis and could choose their preferred evaluation methodologies. By allowing respondents such degree of freedom, the government explicitly aimed to incentivize innovation and competition in new areas – the measurement of financial risks associated with climate change as well as of the contribution of financial institution to decarbonizing the real economy – where no clear benchmark had emerged at the time of the law’s implementation.Since 2016, several NGOs, think tanks and French public bodies have published assessments of how these new provisions on climate-related disclosure were implemented by the regulated financial firms. These reports have focused on the quality and accuracy of the information disseminated by the regulated institutions in their annual reports, ESG reports, specific publications dedicated to their compliance with article 173-6 of the 2015 law and their websites more generally. An official monitoring exercise conducted in 2019 jointly by the French ministries for Environment and Finance and related supervisory authorities found that only a half of the 48 largest institutions published at least some information on all required dimensions of the mandatory disclosure. Faced with the increased transparency requirements on the carbon intensity of their portfolios, financial institutions took advantage of the incentives to cut their holdings of the “brownest” securities, both to meet more rapidly climate-related compliance targets, whatever the metrics used, and to make their claimed climate commitments easier to communicate to the public (by publishing for instance plans of exiting out of coal) |