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While the PACTE law is taking shape, Bruno Le Maire, French Minister for Economic Affairs and Finance, shares with us his vision of Finance with a Purpose, of the role of financial industry players as well as the State for the on-going paradigm shift to reach out to the greatest number of people. Explanations.

What is your understanding of the term “finance with a purpose”? For many people the idea of “finance with a purpose” represents an oxymoron. How can we ensure that finance serves retail investor, the environment and society as a whole? Is it possible for the financial industry and the population to bury the hatchet?

My answer will be very straightforward: finance that is useful, or purposeful, serves the common good. It contributes to achieving what society aspires to, notably in terms of quality of life. The excesses of market finance, which were observed during the crisis, carry heavy consequences for the real economy and for retail investors. But finance is mostly about a whole range of instruments available to fund forward-looking societal choices that are paramount for our companies to thrive and for our constituents to achieve their projects. Several undertakings are necessary if we are to avoid the pitfalls of the past and better align the interests of finance with those of society as a whole.

First, it is important to keep up with the in-depth reforms to the financial industry which were initiated in the wake of the 2008 crisis. These will ensure that the industry is more resilient, stable, transparent and effective.

Second, we need to restore a sense of meaning to the world of finance, which should play a key role in addressing today’s major challenges - first and foremost, climate change. This involves taking actions with a view to meeting the Paris agreement and ensuring that financial flows are compatible with the transition towards a resilient and lower-carbon economy.

Finally, sustainable finance should be made accessible to the French population, thereby allowing ordinary investors to finance the transition to a greener economy through their savings products, if they wish so.

Do you believe today’s responsible investment product offer is adapted and sufficient in allowing retail investors to play an active role in developing a sustainable economy?

Over the past few years, responsible investment has enjoyed a particularly positive momentum, of which I am very glad.

In particular, assets under management in “green” driven funds have risen sharply and this is a step in the right direction. But if we wish to address the challenge that is climate change, we have a great deal of work ahead of us to make green finance even more accessible to ordinary investors.

To achieve this objective, I made two commitments during the Climate Finance Day that was held in Paris on December 11th 2017, which will come fully into force before December 2018.

My first wish is that all French investors owning life insurance contracts be able to opt for a green investment solution that is certified either with the EETC (Energy and Ecological Transition for the Climate) or SRI (Socially Responsible Investment) labels. Furthermore, I suggested that all the money raised in the Livret de Développement Durable et Solidaire (LDDS) savings plans be allocated to funding positive carbon impact initiatives. Through these two popular savings schemes, those who wish can already add some meaning to their investments.

What role can investors and the financial industry (banks, insurance companies, asset managers …) play to meet this goal?

In this regard, the role of financial industry players is very clear: it is important that they implement suitable investment approaches and develop an effective understanding of the risks and opportunities associated with the transition towards a low-carbon economy. Climate-related challenges must be fully integrated to the decisions made by financial institutions, based on qualitative processes designed to identify and manage risks, to ensure that our economy is funded in a sustainable manner. This should be the true purpose of our financial industry.

In the face of complex risks - which by definition play out over mid and long-term horizons - it is important to encourage industry players to give serious thought to the impact of climate change for their institutions, and therefore to adopt a more forward-looking vision when assessing the risks they take. This observation contributed greatly to the adoption, in 2015, of the Law for the Energy Transition and Green Growth and of its article 173. It also explains why we support the conclusions of the G20 Taskforce on Climate-related Financial Disclosures (TCFD).

The release of pertinent information will enable players throughout the value chain to make these challenges their own. First of all, companies will explain to investors how they are preparing for climate change and how their business will be affected by weather events. Second, investors will improve the way they allocate capital based on a detailed understanding of the risks and opportunities relating to climate change. This improved transparency across financial markets will ultimately be favourable to the population, with investors in a better position to allocate their savings and make more informed choices.

The disclosure of more detailed information will also improve the granularity of the analysis performed by supervisory authorities, who will be in a better position to address the physical and transition risks related to climate change. In this respect, I wish to highlight the decisive role of the Banque de France in launching the Réseau pour le Verdissement du Système Financier (Network for Greening the Financial System) for which it acts as general secretary. The creation of this network of central banks and supervisors paves the way for an essential debate on climate risks within the financial industry.

Climate-related challenges must be fully integrated to the decisions made by financial institutions (...) To ensure that our economy is funded in a sustainable manner

What is the role of the state? In particular, what can be the role of government sponsored labels - such as the eetc and sri labels in place since 2016?

Above all, the role of the State is to set an example. It would not be acceptable for the government to lecture the private sector, while taking no action itself. This is why I urged public sector investors to align their actions with the goals set by the Paris agreement. This commitment from public investors (led by the Caisse des Dépôts et Consignations and Bpifrance) is considerable: their balance sheet amounts to 626 billion euros. It is also meaningful, as in the process, these investors have committed to embedding climate issues into their decision-making, to financing the energy transition, to engaging with companies thoroughly and to disseminating best practices. This commitment is already tangible and institutional investors involved, report on their actions, in their respective annual publications.

The government’s decision to issue a Green sovereign bond in 2017, the proceeds of which will be used to fund the energy transition, also demonstrates its commitment to exemplarity. By becoming the first country in the world to issue a green bond for a sizeable amount, and which has since been increased with four successive tap issues to reach 14.8 billion euros – making it the largest of its kind throughout the world in terms of size and liquidity – France is contributing greatly to the development of the market for green bonds. The country is also setting an example through the quality standards it promotes: transparency - by releasing an annual report on the allocation and performance of these expenses; and public policy assessments - by setting up an independent assessment council for the OaT issuance chaired by Manuel Pulgar vidal, Peru’s former Environment Minister and chairman of the COP20, whose role is to assess the environmental impact of the investments funded by the green bond.

Green bond inssuance volume in France

Government action should also drive the promotion of high standards for environmental or social themed products. The role of labels is crucial: they protect investors from the risk of ‘greenwashing’ by offering access to solutions that are certified by an independent audit. They also strengthen the visibility associated with this type of investment, thereby increasing the attractivity of the Paris financial centre - whose expertise is recognised throughout the world.

Government action should also drive the promotion of high standards for environmental or social themed products

Furthermore - and this point is obvious, meeting the goals set during the Paris Agreement is a major economic challenge which will only be successful if it can rely on the broadest engagement.

First, with our European partners. In this respect, European institutions have been set to task on tangible projects; by examining the requirements for extra-financial communication, and the integration of ESG preferences in asset management, we are working to ensure that Europeans can improve the way they direct their savings and add a new sense of purpose to their investments.

By setting up a green taxonomy at European level, we are developing a common language and a better ability to determine which business model is sustainable and which isn’t. I am convinced that these discussions – which need to be held with public authorities and at international level – are essential if we are to ensure that finance serves and supports the development of a more sustainable world.

Then, looking beyond finance, the behaviour of economic players also needs to evolve in all industries, through the implementation of relevant climate policies. It is paramount to create favourable conditions conducive to an uptake in green investments, by communicating clearly on our road to transition and by setting up a suitable price signal. In this respect, the visibility – particularly on regulatory matters – given to investors is a critical factor. Only a strategy that is consistent over time will be able to send a clear message: the government will not add any further risks to your investments in support of the transition. Meeting the goals set during the Paris Agreement will also involve boosting innovation to facilitate the expansion of new and adapted technologies.

Finally, cooperation between the private and public sectors is fundamental. On September 26th, in New York, the President held a follow-up meeting to the One Planet Summit to encourage multilateral action from public and private players in the fight against climate change.

Bruno Lemaire

Click here to read the Responsible Way 9 "Finance with a Purpose"


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