This mobilization of the financial sector is seen as critical regarding the levels of investment – and the requisite financing – at stake to achieve the 2°C objective. This critical role has been increasingly raised in a number of studies – such as the UNEP Inquiry reports – and declarations from mainstream actors – such as Mark Carney, Governor of the Bank of England.

As host of the COP21, much attention is now focused on France and whether domestic action gives legitimacy to the role the State hopes to play internationally. While more progress is needed to reach long-term objectives, our recent report for the UNEP Inquiry assessing an increasing awareness and integration of sustainability issues into the French financial suggests that France is ‘walking the walk’ in line with ‘their talk’ internationally. While much attention has focused on the most recent law introducing mandatory reporting of climate-related risks and impact assessment for financial institutions,  it is incorrect to interpret this law as the start of something new. It is rather the result of a twenty-year long process involving a broad ‘eco-system’ of different actors. Let’s review why this ecosystem and long-term process is so important.

Firstly: the change of the scale necessary to achieve a low-carbon transition cannot be forced from the top-down.

Given the scale of change – both in terms of shifting trillions in investment as well as retooling a fossil-fuel focused economy – room for appropriation, learning, innovation and discovery is important. Furthermore, there are almost as many different types of ‘transitions’ that need to occur in terms of strategy as institutions themselves. Space must therefore be given to institutions to develop the most relevant tools, methodologies and indicators for themselves. In some cases when the hard law is too constraining, compliance may be concentrated in the legal department rather than in the more appropriate operational teams.

This can contribute to developing the essential financial culture among actors to increase appropriation of relevant issues by different actors. Within this process, the emergence of an ‘ecosystem’ of different actors appears important. This has occurred in France, where different actors were involved in improving integration of sustainability in the financial sectors: government, policymakers and regulators, non-profit expertise, commercial expertise and financial operators.

Initially focusing on Socially Responsible Investment and ESG integration, the interactions between actors within the ecosystem are rich and synergetic. Indeed, legislation may sometimes be inspired by private initiatives implemented by actors within the financial system; conversely, the legitimacy of individuals and institutions holding expertise on sustainability is sometimes reinforced by the implementation of dedicated legislation.

Secondly: a successful approach builds on incremental steps allowing actors to learn over time

The French regulatory framework on sustainability in the financial sector consists of three principal milestones, each of which has focused on improved extra-financial reporting for both companies and institutions financing them. In 2001, the New Economics Regulation law formalized the reporting requirements on ESG issues based on pre-existing practice nascent among financial institutions. In 2010, the ‘Grenelle II’ law expanded reporting requirements in terms of content and to directly include asset managers. Finally, the 2015 Law on Energy Transition for Green Growth has been the most recent step in this process, introducing a coherent package to foster an improved assessment of both climate-related and the contribution of financial actors to the energy and low-carbon transition.

Sustainability issues have mainly been tackled through reporting requirements, focusing on improving the availability of information, fostering the development of market-wide expertise, and incentivizing improved risk assessment. Moreover, these reporting requirements are often seen as flexible and adapted to a large range of institutions and issues as they are based on a supervision-oriented approach increasingly attuned to sustainability issues.

Thirdly: an ecosystem is at times a garden that must be tended to face coming challenges

As in nature, financial ecosystems are fragile: it is necessary that each part of the ecosystem to remain active and engaged. This implies overcoming a number of challenges as seen in the French context in the coming months.

The methodologies and tools necessary to fully implement the Energy Transition law requirements are still emerging. Overcoming the technical challenges to apply the reporting requirements adequately implies finding ways to define indicative climate financing targets for institutions. To be feasible in practice, this must be partially based on existing tools and available data. The capacity of different stakeholders to facilitate the development of the relevant tools will be therefore crucial as the capacity of financial institutions to appropriate the reporting framework improves gradually.

The implementation of the legislation will consist of both hard and soft laws. Therefore, the compliance of financial actors will take a supervision-oriented approach rather than additional regulation. This implies that the reporting process must be in and of itself useful for institutions – and the risks covered are seen as material. Approaching actors through risk, whether financial or reputational, is a way to make the financial system fully play its fundamental role. However, on the one hand, the appropriate pricing of associated risks implies ensuring the emergence of a broader economic context where externalities are priced explicitly or implicitly by regulatory frameworks – such as direct or indirect carbon pricing. Clear signals by governments on future sustainability-related policy can ensure that they are seen as material. On the other hand, reputational risks can also increase the materiality of climate and sustainability-related topics, thus implying that follow-up on the implementation of both hard and soft rules will be crucial to enhance their impact – whether done by supervisory institutions, professional associations or non-profit organisations.

The sharing of practice between inter-dependent national and regional financial ecosystems. Being able to share practices both internationally and at the European level will be key. Discussions have turned to the value and pathways of expanding certain reporting frameworks – including Article 173 of the EETG Law – to other countries at the European level. The ongoing discussions at the EU level around the “Capital Markets Union” has been specifically identified by several financial institutions as potentially the most rapid and relevant way to implement at the EU level regulation that improve the integration of sustainability issues into the financial sector. Furthermore, the recent development at the FSB is encouraging and France could share its experience to help other countries improve the integration of sustainability in their respective financial sectors.