Machine Translated by Google NOVEMBER 2018 SUSTAINABLE FINANCE: WHAT ROLE FOR THE REGULATOR? AMF ROADMAP amf-france.org Machine Translated by Google President's word The emergence of a financial model that better integrates sustainability issues is a necessity; it is indeed a vital issue both for the planet and for finance. The financing needs to ensure the transition to an economic model that safeguards our environment are immense. If the financial industry does not demonstrate that it is useful in ensuring this transition, it will lose an opportunity to reconcile with our fellow citizens. Fortunately, it is now a fundamental trend in the market, whether at the level of companies, financial intermediaries and investors. The European Commission's proposals offer Europe a chance to equip itself with an innovative and ambitious framework for sustainable finance, commensurate with the risks and challenges identified. They must make it possible to accelerate the transformation of the financial industry and lead to real changes among all players. The future European framework must capitalize on the efforts already made and the good practices identified without rigidifying a market which is evolving and progressing rapidly. French actors are ahead of practices abroad, which is the result of both the expertise that has been developed in Paris on these subjects for many years and the many initiatives taken, but also advances in the French legislative and regulatory framework. The regulator has an important role to play in supporting and encouraging this development, ensuring that the conditions of trust are preserved. The AMF's action in favor of sustainable finance is therefore a strong commitment that will be broken down into several areas: ÿ supporting and raising awareness among stakeholders to advance best practices; ÿ encouraging innovation for sustainable finance; ÿ supervision to ensure in particular the relevance of the information given; ÿ collaboration with other regulators and involvement in European and international; ÿ education vis-à-vis savers. Comments Comments can be sent to the following email address: directiondelacommunication@amf-france.org 2 Machine Translated by Google Legislators, governments, central bankers, managers and investors, companies have multiplied the announcements in recent months in favor of sustainable finance. Commitments have been made and concrete proposals have been made, in particular with the publication last March of the European Commission's action plan for financing sustainable growth. In France, the PACTE bill affirms the need for companies to take into consideration the social and environmental issues inherent in their activity and defines the concept of corporate social interest. The draft law also defines a specific mission for the AMF, responsible for ensuring the quality of the information provided by management companies on their strategy and risk management in the face of climate change. What about market regulators? At the beginning of 2018, the AMF made sustainable finance one of its eight priorities for the year 2018 and a structuring axis of its 5-year vision, #Supervision 2022. If the themes of socially responsible investment (SRI) and social responsibility social, societal and environmental (CSR) aspects of companies have already been the subject of work by the AMF, the approach is now intended to be broader, by "integrating the objectives of sustainable finance into all the missions and activities of the MFA ”. 2010 : 1 is AMF report on corporate social and environmental responsibility 2015 : 1 is AMF report on socially responsible investment th 2016: 3 AMF report on corporate social, societal and environmental responsibility th 2017: 2 AMF report on SRI 2017: The AMF is committed to sustainable finance on the occasion of Climate Finance Day 2018: Sustainable finance is identified as one of the AMF's eight action priorities for 2018 and a structuring axis of its 5-year strategic plan, #Supervision2022 1. Some background on the emergence of sustainable finance Sustainable finance is a global approach aimed at strengthening the social, economic and environmental performance of finance over time. This requires an objective of financial stability and better consideration of social and environmental externalities and long-term risks and opportunities. Sustainable finance also takes into consideration the contribution of the financial sector to a more sustainable economic development model. The political impetus in the field was marked by two major milestones at the end of 2015: on the one hand, the adoption by the United Nations of the 2030 Agenda accompanied by 17 Sustainable Development Goals (SDGs) and, on the other hand , the signing of the Paris Agreement for a transition to a low-carbon economy which refers, for the first time, to the role of financial services. Beyond these strong political initiatives, several developments in recent years have contributed to changing perceptions and practices within the financial sphere. Thereby, ÿ Climate risk, through physical, transition or liability risks, is now clearly identified as a risk for the financial sector and financial stability. At the same time, this risk still seems insufficiently taken into account by the markets and, although the proportion is increasing rapidly and varies by region, only a minority of institutional investors and managers currently consider it explicitly. ÿ In addition to climate risk, there is a growing consensus to recognize that environmental, social, societal and governance (ESG) factors influence the performance of investment portfolios, directly, through their impact on company results (links between extra-financial and financial performance, possible financial impact of ESG "incidents"), or indirectly, because of the risks they pose to growth and financial stability. 3 Machine Translated by Google ÿ A growing number of studies show a positive link between the consideration of ESG factors and the risk- adjusted long-term performance of portfolios (“sustainability” premium), contrary to the idea that this would imply a “ drop in performance”. The available data also tends to show that divestment or exclusion strategies generally do not lead to a performance "penalty", despite the effects on portfolio diversification, even if deviations in terms of return or tracking errors can be observed in the short term. ÿ The diversity of the strategies implemented, however, makes it difficult to generalize: thus, the strategies for integrating ESG factors and responsible investment vary significantly from one player to another (application of ESG filters and "best-in" strategies -class” or “best-in-universe ”, exclusions, thematic funds, engagement strategies, “impact” investments, etc.). The approaches implemented and the means allocated also remain very varied depending on the players who may be aiming for very different objectives (risk management, alignment with ethical or social values, search for performance or defined objectives (social or environmental), but also reputational risk management). Philippe Soulas The AMF's SRI reports have made it possible to measure the progress made by Management of managers in recent years with regard to the information provided to clients, but also asset Management to identify certain areas where progress remains to be made. Our day-to-day work is also to support management companies that are developing more and more innovative responsible investment strategies. ÿ Institutional investors and managers face several obstacles to taking ESG factors into account in their asset allocation and risk management processes. These obstacles may be linked to a lack of expertise, reliable available data or analysis tools, or internal consensus on the materiality of risks and the link between ESG and performance among investors. ÿ Despite the difficulties encountered and the diversity of approaches, the trend is towards wider adoption of ESG factors by institutional investors; this is reflected in the increased emergence of ESG themes in discussions with analysts, presentations of results, general meetings and board meetings. Finally, there is a growing number of issuers publishing integrated reports that combine financial and extra-financial data and whose stated objective is to highlight the long-term vision and strategy of companies. A number of companies are also now publishing information on their contribution to the UN Sustainable Development Goals (SDGs). For listed companies, integrating the issue of sustainability requires awareness of their social, societal and environmental responsibility, expectations with regard to their extra-financial performance and the need to define a strategy - vis-à-vis structural trends and medium-term challenges such as climate change or changes in society. For asset managers, this implies a broader integration of social, environmental and governance criteria into their risk management and investment strategies, as well as the development of responsible or "impact" investment strategy offerings. ". This development also responds to growing expectations on the part of investors, both institutional and individual. It will make it possible to gradually put in place financial tools to meet the challenges of the future, first and foremost the response to climate risk and the financing of the energy transition. 4 Machine Translated by Google ÿ Climate reporting has been developing rapidly since the publication in June 2017 of the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) set up by the Financial Stability Board, and under pressure from investors: these recommendations include obligations introduced in France in 2015 by article 173 of the energy transition law and for green growth (LTECV), but go further, encouraging the use of scenarios (mainly limiting global warming to 2 degrees) to assess the resilience of strategies. A number of French issuers, investors and managers have already committed to implementing them. Article 173 of the Energy Transition and Green Growth Law The law of August 17, 2015 establishes information obligations for managers and institutional investors on their management of climate-related risks, and more broadly the integration of environmental parameters, and governance in their investment policy, without imposing a prescriptive method. Article 173 also broadens the obligations of companies by strengthening the transparency requirements on the risks and opportunities linked to climate change and the measures taken to implement a low carbon strategy. ÿ Even if progress can be observed, the quality of ESG data, their comparability and their verification are key issues, as are those of impact measurements. These data play an important role in risk management systems, portfolio selection and for the creation of indices (“low carbon”, “climate”, “governance”, etc.), according to various methodologies. Private standards are also developing rapidly, particularly in the field of climate reporting, green bonds, extra-financial information in general, or responsible investment, with possible questions on governance and the means available to entities behind the development of these standards. They are supplemented by “coalitions” of companies or financial players, charters or codes of good practice developed at the domestic or international level, with more or less high levels of requirement and commitment. ÿ The growing consensus on the need to evolve towards a sustainable finance model is reflected in the trends in terms of investment, the final challenge remaining a reallocation of financial flows in favor of a sustainable development model: for the sole climate issue, the European Commission assesses the investment needs to achieve the objectives set by the Paris Agreement at 170 billion euros annually. However, the absolute figures are still low and the exact amounts are difficult to assess, in particular because of the differences in definition: global emissions of green bonds have grown rapidly in recent years and are expected to reach, according to definitions, 200 billion dollars in 2018, with France ranking third in the world market, but representing less than 3% of the global bond market. “Green” funds are also growing rapidly in Europe (+50% in 2017, for a total of 32 billion euros) but remain marginal (less than 0.3% of assets under management)1 . Julien Laroche The key factor for the success of the green bond market is certainly the Issuers confidence of the various stakeholders. Directorate The information given to the investor on the use of the funds is essential. Although the regulations do not specifically address these issues, we seek to support the development of the market by contributing to the emergence of robust practices, which should make it possible to respond to the challenges of transparency while preserving sufficient agility for the launch of a operation. The proper functioning of this market under construction is the responsibility of all actors. ÿ SRI investments represent much larger amounts but cover, as underlined above, very different realities: a recent survey by the Association française pour la 1 Novethic, European green funds market, April 2018. 5 Machine Translated by Google financial management (AFG), in collaboration with the Forum for Responsible Investment (FIR), assesses the overall “responsible investment” (RI) outstanding in France at the end of 2017 at 1,081 billion euros (excluding investment strategies). exclusion alone), including 310 billion euros in SRI (mainly best-in-class) and 771 billion euros in other ESG approaches. Assets under management labeled SRI have also grown rapidly and exceed 2 today the 46 billion euros, divided between 170 funds and 36 management companies. Novethic also defines “conviction-based” SRI as “SRI funds marketed in France and accessible to retail clients offering the portfolios most impacted by the ESG assessment of issuers” (mainly thematic approaches and best-in-universe funds ), then valued at 38 billion euros at the end of June 2018. ÿ Beyond the rapid increase in “SRI” assets under management, there are signs showing a growing interest of retail investors for socially responsible investments. In France, the FIR3 figures indicate that 6 out of 10 French people declare that they give an important place to environmental and social impacts in their investment decisions. Public labels (SRI, TEEC, “Participatory financing for green growth”, among others) try to provide clarity to non-professional customers and facilitate the development of the offer. This is also the meaning of several proposals from the European Commission (taking into account customers' ESG preferences, development of labels). ÿ Financial innovation is also developing rapidly. It offers benefits in terms of differentiated responsible investment strategies, risk management or financing, but it can also entail risks – in particular marketing risks – related to complexity, transparency, or costs; certain schemes may also raise new issues (carbon neutrality, etc.). Furthermore, without addressing the areas of " greentech/ cleantech", " green " or "responsible" fintech is another emerging field, either through the application of fintech models to issues of sustainable finance (new methods of financing sustainable projects, integration of ESG criteria in automated advisory services, etc.) but also by allowing the development of new solutions (better traceability of investments and impacts through blockchain-based applications, use of intelligence tools artificial for the analysis of ESG information, etc.). Investors' obligations and consideration of customer preferences: proposals under discussion at European level that go in the right direction The European Commission's proposals, similar to the provisions of Article 173 of the French Law for Energy Transition and Green Growth, provide for the obligation for market participants to publish their policy for integrating ESG risks into their process. of investment. This new obligation will make it possible to strengthen investor information and it should be applied broadly, and not only to players promoting “responsible” strategies, while taking into account the differences in strategy and size. The second part of the European Commission's proposals concerns the framework for investments investments (" sustainable investments "), with the particular objective of avoiding "green washing ". In addition to products highlighting the "contribution" of an investment with respect to ESG objectives, as the current proposals provide for, the new European framework must also make it possible to reinforce the readability of all "sustainable" strategies. offered to investors and should therefore apply, from the AMF's point of view, to the various products marketed as such. 2 SRI Label data at the end of October 2018. At the end of November 2018, 22 funds had also received the TEEC label (“Energy and Ecological Transition for the Climate”). 3 IFOP survey for Vigeo Eiris and the FIR, The French and responsible investment, September 2018. Despite this strong expectation, the survey underlines that SRI is still very little offered to individual clients. On the other hand, in the field of employee savings, AFG data at the end of 2017 show that the assets of SRI funds represent more than a quarter of employee savings (excluding employee shareholding), which undoubtedly reflects the obligation to present a solidarity fund in the range of funds offered to employees, often SRI. 6 Machine Translated by Google Finally, the consideration of customer preferences with regard to ESG factors envisaged by the European Commission is a novelty compared to the French framework. It poses operational difficulties, but it makes it possible to respond to perceptible changes in customer expectations and constitutes a means of developing the offer of “sustainable” financial products more rapidly. ÿ Within this rapidly changing general framework, the Paris financial centre, grouped around Finance for tomorrow, benefits from recognized assets: commitment from public authorities and authorities, expertise in the extra- financial field, major players (arrangers, managers , issuers, agencies and service providers, etc.), academic research, labels, etc. It also benefits from a legislative and regulatory framework that is more advanced than in the rest of Europe. 2. A role for the regulator From the point of view of market regulators, the subject of sustainable finance poses new challenges. In particular, the many environmental, social, societal and governance themes mobilize specific expertise and an understanding of global issues (energy transition, but also societal changes, for example). Despite calls from some , few regulators have yet invested in the field but are now beginning to mobilize at both European and international level. The AMF has made sustainable finance a structuring axis of its 5-year vision, thus recognizing the underlying trend at work in the industry as well as the expectations of a growing number of stakeholders. Work had already been published, giving rise to a number of recommendations from the regulator vis-à-vis listed companies and asset managers as well as issuers of green bonds. The main aim was to regulate the transparency of the information provided and to identify good practices. However, the expertise remained confined to a small number of people and the measurement of the issues and impacts was still limited. The guidelines for the AMF roadmap are based on the following observations: ÿ Sustainable finance is entering a pivotal moment in development, with considerable financial and non-financial challenges. It is also a strong axis of competitiveness for the Place de Paris which has recognized assets in the field. ÿ The regulator has an important role to play in this development, both to protect and support, and preserve the conditions of trust; this role must be clarified and highlighted. ÿ The regulator must itself evolve to integrate this new dimension into its practice of regulation and its apprehension of the market. ÿ At the same time, faced with the diversity of ESG issues (climate, biodiversity, water, pollution, human rights, working conditions, health, etc.), the regulator's field of competence and tools will by nature limit its intervention, for example with regard to the assessment of the "green" or "sustainable" character of an activity. 4 See the conclusions of the European High Level Expert Group (HLEG) on Sustainable Finance or the requests for some NGOs in particular. 7 Machine Translated by Google Work within ESMA Of the 10 initiatives proposed by the European Commission in its Action Plan for Sustainable Finance, 8 have a direct impact on the functioning of the markets and the players regulated by the AMF. In this context, the Commission has mandated work within ESMA which focuses in particular on the integration of ESG criteria in investment decisions, risk management and advice. A technical opinion from ESMA is expected on these subjects by April 30, 2019, in coordination with EIOPA. Within ESMA's Corporate Reporting Standing Committee (CRSC) , the Narrative Disclosure Working Group deals with the subject of extra-financial information with the aim of developing common supervisory approaches in Europe. Other work mandated by the European Commission will focus on the consideration of ESG factors by rating agencies, low-carbon indices, extra-financial research and ESG rating, and the impact of portfolio rotations. 3. AMF roadmap The elements presented above underline the complex and cross-cutting nature of the subject of sustainable finance. The regulator's response must therefore be based on several pillars. Integrate the objectives of sustainable finance into the missions and activities of the regulator: five areas of action to facilitate transformations and preserve the conditions of trust: ÿ Support for actors and innovation ÿ Supervision and monitoring ÿ Participation in European work and collaboration with other regulators ÿ Education vis-à-vis savers ÿ Development of internal expertise and governance The AMF's action is coordinated cross-functionally by a Sustainable Finance Task Force responsible for implementing the roadmap. ÿ Support for actors and innovation Although the industry is quickly structuring itself, many players are still very little advanced in their ESG practices. The regulator's objective will be to support developments and raise awareness widely, through the organization of workshops, the sharing of best practices and the publication of guides or recommendations, without duplicating or preempting work that can be done by local associations or international forums. A first series of workshops organized at the end of October 2018 thus made it possible to discuss the reality of practices in terms of integrating ESG factors among managers and institutional investors, the difficulties encountered and the prospects for development. As the work progresses, the AMF will also have to explain its expectations vis-à-vis the players, as it was able to do in the past with the SRI and CSR reports and for issuers of green bonds, or, more recently, for the marketing of structured products indexed on ESG themes. Developments such as the consideration of clients' ESG preferences in advice and the integration of ESG factors will also have significant operational consequences for financial players. The AMF will need to support these changes to facilitate the transition. Actions in the field of training and professional certification, for example, could support the efforts of industry. A second component concerns support for innovation, in conjunction with the AMF's FinTech-Innovation Competitiveness team. As in the field of fintech, the objective is to facilitate the development of new solutions in terms of sustainable finance, to identify the issues raised and the possible risks, as well as any obstacles that could be removed or the guidelines to be set. . 8 Machine Translated by Google ÿ Supervision and monitoring Supervision is an important element of our action in favor of sustainable finance. It takes several forms: monitoring of listed companies and investment service providers, on-site control missions, monitoring of commercial campaigns and monitoring of marketing. In 2018, two main actions were carried out in the monitoring of listed companies : on the one hand, attention paid to the extra-financial information provided by listed companies during the annual review of the registration documents, on the other hand, an analysis of recent trends in the publication of integrated reports by issuers. 2018 is also a year of transition with the entry into force in France of the Directive on non-financial information. A new edition of the AMF's CSR report will update the findings that were made in 2016 based on the review of the new non-financial performance declarations (DPEF) drawn up by the companies. Thematic studies, for example on climate reporting , will be planned over time. Charles Descamps The AMF supports and guides issuers through the periodic review of Directorate of published information. Our goal: the production of information that is readable, transmitters comparable, and therefore usable by investors, highlighting the extra-financial issues in a relevant way. Two concerns: more integration of CSR issues in the presentation of the company's activities and strategy, and a balanced approach to the subjects. In the field of asset management, the AMF has taken a number of actions to follow up on the conclusions of the SRI report published at the end of 2017. This notably involved reminding management companies of their defined information requirements in particular by article 173 of the Law for energy transition and green growth, and ask them to provide the reports required by the texts. New elements collected have thus made it possible to update the information presented in the 2017 report and will be used in the evaluation report prepared by the General Directorate of the Treasury and the General Commissariat for Sustainable Development. A series of short thematic checks (“SPOT”) has also been launched on SRI management to assess the reality of the practices described by management companies, identify good and bad practices and thus feed into the 2019 SRI report. Finally, the supervision will focus on monitoring the marketing of green and responsible investment themes, using the AMF's monitoring tools (particularly advertising). Sophia Bennani Our controls on SRI management verify the consistency between the Directorate of system put in place by the management companies and the information controls provided to investors. Several areas are assessed: organization, investment process, data, procedures and commitment policies. This allows us to understand the diversity of approaches adopted and to identify good practices. 9 Machine Translated by Google ÿ Participation in European work and collaboration with other regulators The initiatives arising from the European Commission's Action Plan may introduce changes to numerous texts governing players regulated by the AMF (MIF, UCITS, AIFMD, Indices, Prospectus, PRIIPS, etc.). Whatever the outcome of the ongoing discussions, work will continue in 2019 in several areas that will require the involvement of the AMF (ESMA work), or, at the very least, follow-up (for example, the work carried out within European Corporate Lab set up by EFRAG or within the Technical Expert Group (TEG) created by the European Commission). Cooperation with other regulators is also an important area for sharing French experience, jointly reflecting on the role of the regulator, the appropriate regulatory framework and the approaches to innovation or in terms of supervision that can be developed. . In addition to exchanges with our counterparts in Europe, the AMF will take part in the informal network of regulators recently created at the international level within IOSCO. Finally, the work with the Banque de France and the ACPR is essential, whether within the framework of the AMF-ACPR Joint Unit for the protection of savers, but also for the actions carried out in the field of reporting . of the financial sector and future macro-prudential work (climate stress tests for example). ÿ Pedagogy vis-à-vis savers Sustainable finance presents a specific challenge for retail investors, both because of the development of a new product offering and the emergence of convictions on the part of at least some savers. Several questions arise from their point of view in order to understand the information received, choose their investments while being certain, if this is what is desired, of the impact and the real financing of a greening of the economy or sustainable activities and practices, and to understand the possible impacts in terms of performance or risks. Brochures on solidarity finance and SRI funds have already been produced in 2016/2017; a video for the general public on sustainable finance will also be broadcast on television at the end of the year in partnership with the National Consumer Institute. New specific content will be designed by the AMF, in collaboration, where appropriate, with its partners such as the Institute for Public Financial Education (IEFP), to facilitate the understanding of certain terms (impact investing, best-in-class, low- carbon funds, thematic funds, etc.). ÿ Development of internal expertise and governance Integrating the objectives of sustainable finance into the missions and activities of the AMF requires two commitments: on the one hand, training or acquiring the necessary skills and consolidating the cross-functional approach implemented within the AMF; on the other hand, involving the executive committee and the AMF Board in this issue for the future. Julie Ansidei A more sustainable financial model requires mobilizing Regulatory and International different levers and working together. The creation of a Affairs Department Strategy and Sustainable Finance unit within the AMF, responsible for coordinating the various initiatives and implementing implementation of the roadmap, is a sign of the regulator's commitment to sustainable finance. 10 Machine Translated by Google Several initiatives have already been taken in 2018 to raise awareness among all teams, ensure knowledge sharing and develop exchanges with external experts. These efforts will be continued and the organization is now formalized with the creation of a “Sustainable Strategy and Finance” unit and the launch of a Sustainable Finance Task Force responsible for implementing the AMF's roadmap. CSR or SRI profiles may be favored when recruiting so as to integrate “field” experience of ESG issues into the teams. In the AMF's advisory bodies (advisory committees, scientific council), it will be necessary in particular to consider the means of broadening the participation of representatives with relevant expertise in the field of sustainable finance and to ensure regular exchanges. Finally, the AMF's commitment translates into the involvement of its College and its Executive Committee in these matters. It will be accompanied by the formalization of the AMF's CSR policy. 11