Even though the world of finance has for quite some time already implemented benchmarks in the field of ethical and responsible management, these actions were until now fundamentally an approach based more on a communication strategy than a real decision taken in terms of investment methodology. In this regard, the generalization in international financing agreements, in particular clauses requiring respect of the "Equator Principles" illustrated this trend, as did the creation of investment funds or investments presented as socially responsible and featuring the abstruse "SRI" acronym.
After a period of free marketing now comes regulation. Thus wishing to replicate the success of the climate conference "COP 21", the Government intends regulating the practices deemed a little too free of “green finance”.
On the one hand, by order n°2016-10 and a decree of 8 January 2016, the government defined and regulated the use of the label "Socially Responsible Investment".'
On the other hand, and most notably, it has modified, at the same time as the Act on energy transition and green growth of 17 August 2015, the French Monetary and Financial Code by rendering it mandatory for institutional investors referred to in article L. 533-22-1 of said code to "mention in their annual report and make available to their subscribers information on how to include in their investment policy criteria relating to compliance with environmental and social objectives, and quality of governance and on the means implemented for contributing to the ecological and energy transition.. They clarify the nature of these criteria and the way in which they apply them, according to a standard presentation fixed by decree. They indicate how they exercise the voting rights attached to financial instruments resulting from these choices." Inspired by the unexpected success of the "COP 21," the Government published in the Official Journal of 29 December 2015 the application decree n° 2015-1850 of this innovative system, which is intended to enter into force after fiscal year end December 31, 2016.
Without entering into the details of this text, which will be codified in article D. 533-16-1 of the French Monetary and Financial Code, it should however be noted that it defines and structures with pinpoint clarity, the method and the information relating to social, environmental and quality of governance criteria that will need to be presented and explained by the institutional investors concerned.
In this regard, the following information must inter alia be included:
- Presentation of the general procedure as to how social, environmental and quality of governance criteria will be included in the investment and risk management policy;
- Description of internal procedures to identify the risks associated with social, environmental and quality of governance criteria and exposure of its activities to these risks;
- Description of the nature of the main criteria taken into account relating to social, environmental and quality of governance objectives;
- Information used for the analysis implemented on these criteria;
- Methodology and results of the analysis implemented on the criteria;
- Description of the manner in which the results of the analysis implemented on the criteria relating to social, environmental and quality of governance aspects are integrated in the investment policy;
- Description of changes made as a result of this analysis, with respect to disinvestment decisions and/or in the risk management processes;
- For the criteria relating to environmental objectives, it must be indicated whether they come under risks associated with climate change or risks of transition to a low-carbon economy;
- Assessment of the contribution with regard to the international target of limiting global warming and achievement of the energy transition objectives;
In addition to this fine example of sector based regulation which will undoubtedly enable France to maintain its international reputation in the field, the institutional investors concerned will have to pay particular attention to the risks of responsibility attached to this system which, as stated by the MP Arnaud Leroy, originator of this system, is intended to be a "more ambitious approach than that related to CSR reports produced by CAC 40 companies, it mustn’t just be about reporting".
On the one hand, article 3 of said decree specifies that "the competent authorities shall ensure (…) that the entities subject to their control comply with the provisions of the decree". If at this stage no specific sanction is provided for, there is no doubt that a simple reminder will not be sufficient and that the regulatory authority will take the opportunity to expand its control and its power of sanction.
Furthermore, and in addition to this control by the regulatory authority, the detail of the information to be provided and the analyses to be presented, will be of a nature that engages the civil or contractual liability of the entities concerned vis- à-vis third parties and/or their subscribers if the presentation in question proves to be a little too optimistic or benevolent…
Henceforth a major legal and financial risk can be added to the positive image provided by "green finance", which will be up to the institutional investors concerned to anticipate and apprehend the full extent thereof.