France’s Article 29: biodiversity disclosure requirements sign of what’s to come

New French disclosure regulation illustrates the urgent need for standardising nature-related data, metrics and methodologies

French financial institutions are now required to disclose both biodiversity- and climate-related risks and impacts, as a new decree from the French financial regulator is being published in the coming weeks. The inclusion of biodiversity in the new disclosure regulation signals a broader shift in the finance sector: climate risk is no longer the only environmental risk receiving significant attention.

“We view the biodiversity challenge as a natural extension of our climate efforts and the next frontier of sustainable finance”

– Sylvain Vanston, Group Head of Climate Change and Biodiversity at AXA

Adding biodiversity risks to climate risks

The new decree under Article 29 of the French law on Energy and Climate provides extensive details on expected disclosures across both biodiversity and climate. It requires financial institutions to publish information on the portion of their assets complying with the environmental criteria set out in the EU Taxonomy.

The new Article 29 will replace the pioneering Article 173, which has required French investors to disclose their climate-related risks on a comply-or-explain basis since 2016. The notable difference is that Article 29 now requires all French financial institutions – including banks, investors and insurers – to disclose biodiversity-related risks as well as climate-related risks.

The new decree adopts the concept of double materiality, aligning itself with the new EU Sustainable Finance Disclosure Regulation. Double materiality means that financial institutions must disclose how their financial activities depend on climate and biodiversity, as well as how their financial activities impact on climate and biodiversity. For example, an investor with agricultural companies in their portfolio may impact on biodiversity through agricultural activities potentially causing deforestation and soil degradation. At the same time, the agricultural investments are reliant on climate and biodiversity: if climate change continues unabated and insect populations continue declining, more severe droughts and disrupted pollination services could lead to lower agricultural productivity.

Under Article 29, French financial institutions will also have to disclose their strategy for reducing biodiversity impacts. They must include specific targets and a measure of alignment with international biodiversity goals.

Lack of standardised metrics and methodologies for biodiversity

French financial institutions are now concerned about how to deliver against the new biodiversity-related disclosure requirements. Implementation of Article 29 will be sequenced, with financial institutions having to disclose how they will identify, prioritise and manage climate- and biodiversity risks from 2022 (covering financial year 2021). From 2023, they will have to expand their disclosure to include, amongst other indicators, the share of outstanding financing aligned with the EU Taxonomy.

“For climate, we know what to do now, but for biodiversity it is still unclear how we should be assessing our footprint. What do we measure? And how do we measure it? There’s no standardised answer to these questions.”

– Michele Lacroix, Head of Group Investment Risk & Sustainability at SCOR.

Even if financial institutions knew what they wanted to measure and how, lack of biodiversity data would make it challenging to do in practice. The absence of standardised corporate disclosures, in addition to other data gaps, makes it difficult for financial institutions to identify, measure and disclose their own biodiversity risks.

The current lack of guidance for financial institutions around disclosure of biodiversity-related risks illustrates the urgent need for a Taskforce on Nature-related Financial Disclosures (TNFD).

“Many investors are asking for the creation of sound biodiversity-related impact metrics to complement increasingly robust climate-related impact metrics,” says AXA’s Sylvain Vanston.

The Taskforce on Nature-related Financial Disclosures will close current gaps

Building on the successful Task Force on Climate-related Financial Disclosures (TCFD), the Informal Working Group bringing together a TNFD, now includes 74 organisations, including 49 financial institutions and corporates from five continents, as well as governments, regulatory bodies, think tanks and consortia. The Taskforce is due to launch later this year. Once launched, the TNFD will develop recommendations for more effective nature-related disclosures across both impacts and dependencies on nature, and the associated financial risks.

The standardised reporting recommendations from the TNFD are planned to be released in 2023, and so the TNFD can’t immediately alleviate the pressing concerns of French financial institutions, who have to respond to the new regulatory requirements already now. But financial institutions can get involved in the TNFD process to help ensure that when the recommendations are released, they will meet the needs of financial institutions. Extensive road testing by financial institutions will be a key aspect of ensuring the final recommendations from the TNFD will be universally useful and attractive to adopt. 

Like France’s new disclosure regulation, the TNFD will adopt the double materiality concept and include disclosure recommendations for both impacts and dependencies on nature. This is a departure from the TCFD, which only requires financial institutions to disclose dependency-related risks. But overall, the TNFD and the TCFD will be highly complementary. The TNFD will for example align with the four-pillared framework of the TCFD, which France’s new disclosure regulation also adopts. The TNFD aims to make its recommendations simple to operationalise for financial institutions that have already implemented the TCFD, so that financial institutions can easily provide simultaneous disclosures across both nature and climate.

Signalling increased policy pressure on tackling biodiversity

Regulatory pressure for standardising sustainable finance disclosures is not limited to France. The EU Sustainable Finance Disclosure Regulation (SFDR) also began to apply from last week. France’s new disclosure regulations illustrate that policymakers and financial regulators will increasingly demand that financial institutions systematically assess both nature-related financial risks and their own impacts on nature. Last year, the Dutch Central Bank and financial supervisor, De Nederlandsche Bank (DNB), became the first central bank to highlight biodiversity as a material financial risk. 

Eight governments and regulators are already involved in the initiative to bring together a TNFD. As the work of the TNFD develops, other countries will likely soon follow the French regulator and include biodiversity and nature in disclosure regulations.

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