Article 29 - Energy and Climate Law: how to produce a second, more complete report?

For several years now, French investors have been required to publish reports on certain aspects of sustainability. This obligation was introduced by Article 173 of the French Law on Energy Transition for Green Growth (LTECV). This text was a precursor in Europe on certain transparency obligations. Since 2019 and the EU action plan for sustainable finance(European Green Deal), reporting obligations have multiplied in Europe, notably through SFDRs.

The first reports were produced in June 2022 in a streamlined format, but new obligations come into force with those to be published in 2023, notably on information linked to the European Taxonomy.

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What are the regulatory requirements?

Scope and timetable

The scope of the players concerned is very broad, but there is no change in scope compared with the first report published in 2022. As a reminder, certain information is required for funds and mandates > €500M AuM (sections 6, 7 and 8 to be included in the report appendices).

Publication must take place no later than six months after the end of each financial year. The obligation to publish the Article 29 report came into force in 2022, however not all sections were required by 2022, and will have to be published for the first time in 2023.

Report transmission

All players subject to Article 29 reporting obligations must :

• Publish it on their website;
• Send it to ADEME via the dedicated CTH platform;
• Send it to the supervisor.

An exhaustive list of article29 obligations can be found here.

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What lessons can we learn from the first publication and how can we improve the quality of our reporting?

An initial analysis of publications by ADEME

ADEME has carried out a statistical analysis of over 400 Article 29 LEC reports, filed on their CTH (Climate Transparency Hub) platform in 2022 and based on figures for the 2021 financial year. The initial findings concerning the publication of reports are mixed. Indeed, not all players have complied with their reporting obligations, since fewer than 500 entities have submitted this report on the CTH portal, out of a total of over 1,000 entities subject to Article 29 LEC obligations!

In addition, ADEME makes a number of specific observations on certain elements of the report. WeeFin offers methods for responding to two particularly closely watched sections.

1. Investment strategy aligned with greenhouse gas (GHG) mitigation objectives

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For more information on Alignement-Climat's strategy, you can read our dedicated newsletter here!

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2. The strategy of alignment with long-term biodiversity objectives

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For more information on existing solutions for taking biodiversity into account in the investment chain, please consult our study here!

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How to meet the new obligations?

Reporting 2022 for the 2021 financial year did not include all the requirements of the implementing decree. In fact, several elements were not included in this transitional report, to enable players to collect the necessary data and set up the appropriate processes. 3 new elements will have to be included in the report to be published this year:

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1. Aligning outstandings with Taxonomy and fossil fuel activities

Players will have to give the share of "sustainable" outstandings (aligned with the European Taxonomy) and outstandings in companies active in fossil fuels. By 2022, according to ADEME, less than 20% of players had communicated both their taxonomy and fossil fuel shares. Depending on the sector, the discrepancies are more or less significant (31% of insurance companies versus 9% of banks have communicated their taxonomic share).

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ADEME's initial findings on taxonomy:

• The European taxonomy was not the only source used by the players, who may have had recourse to internal sources or service providers (references from the Greenfin label, for example).
• The players were able to communicate this share in amount or percentage.

Our recommendations:

• Base calculations of the taxonomy-aligned share of investments (also referred to as the "green share" by some players) on the taxonomy repository as referred to in the decree.
• Prefer to communicate the taxonomic share as an amount or percentage, while specifying the associated perimeter and the size that this perimeter represents in the player's overall portfolio.

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ADEME's initial findings on exposure to fossil fuels :

• The approach used by players does not systematically comply with the requirements of the decree. In fact, some have applied a "transparency" principle: if a company generates X% of its sales from fossil fuel activities, then the player only takes into account X% of the investment as "fossil fuel".
• The players were also able to exclude companies in transition from their calculations.

Our recommendations:

• Calculate exposure to companies active in the fossil fuel sector (and not to fossil activities) and do not subtract from the fossil share companies considered to have a credible transition plan.

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2. Integrating ESG risks into investment decisions :

Part of this obligation already existed for the previous report. However, this year it has been made more specific, with the need to provide details of the methodology, an action plan to reduce the entity's exposure to the main ESG risks, and a quantitative estimate of the financial impact of the main risks (Climate VaR, Stress tests, etc.).

A number of players carried out this work last year, and ADEME has already been able to draw some initial conclusions.

ADEME's initial findings :

• Physical risks: financial players mainly use scores to measure the exposure of their portfolios to physical risks.
• Transition risks: A variety of metrics are used by stakeholders, either (i) forward-looking (scenario analysis and stress tests) or (ii) snapshot metrics (carbon intensity, green share, brown share, etc.).
• The action plans already published to reduce exposure to the main ESG risks (17% of players have provided such an action plan, according to ADEME) contain information on exclusions, commitment and rating methodology.
• Financial quantification of risks: the few players who have provided this information have used a "Climate VaR" and tested different scenarios or the impact of the carbon price.

Our recommendations:

• Distinguish between the 3 risk categories (physical, transition and liability)
• Covering all asset classes
• Use a forward-looking approach based on several analysis scenarios
• Precise description of the methodology used to quantify financial risks (underlying service provider, assumptions, difficulties and limitations of application, etc.).
• Estimate potential financial losses associated with physical risks

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To help you find your way around and get started quickly, we've put together a checklist for each theme! Find it right here !