Analysis of the Perrier Report: A Call for Stronger Government Commitment to the Financial Sector

More than just a fact-finding mission on actions already underway, the Minister of the Economy sought a “mission to coordinate stakeholders in the Paris financial center” and, above all, to “define a path toward decarbonizing finance in line with the Paris Agreement.” To this end, Finance Minister Bruno Le Maire appointed Yves Perrier (chairman of Amundi and vice chairman of Paris Europlace) to lead the effort, providing him with support from the Treasury.

After three months of work and consultations with 200 financial sector professionals, the report was released in early March 2022: “Perrier Report—Making the Paris Financial Center a Model for Climate Transition: A Framework for Action.”

In the absence of a regulatory framework (except for reporting requirements), the government and the Paris financial market are treading water

The engagement letter sets the tone: “While the government will certainly play its part, meeting [the challenge of combating climate change] requires greater commitment from the City of Paris.”

In response to this call, the report essentially argues that “regulatory frameworks have not yet stabilized.” In the second chapter, which provides an overview of existing tools (European taxonomy, non-financial reporting, corporate carbon footprints, ESG ratings, analytical methodologies, and draft international standards), the authors clearly highlight the “proliferation” resulting from this lack of a framework—a phenomenon against which the report warns.

The authors call for greater harmonization. Seven years after non-financial reporting became mandatory for financial institutions (Art. 173 of the 2015 Energy Transition Act, Art. 29 of the 2019 Energy and Climate Act —N.B.: The first regulatory requirements for non-financial reporting by companies in France date back to 2001), the report laments that analytical frameworks are still far from being harmonized, and that there are no “real developments planned to date [regarding analytical standards] …”.

He then qualifies this statement, revealing an underlying trend: “… apart from European regulations expected in 2023 to provide a framework for non-financial ratings, but which, in principle, are not expected to legislate on the methodologies themselves so as not to hinder innovation in this still-maturing field.”

It is surprising that the report does not make more explicit mention of the fact that, with regard to carbon footprints—the fundamental tool for reducing GHG emissions—there is an international standard (accompanied by recognized standards and implementation guidelines) that essentially need to be made mandatory.  If lawmakers are hesitant to create or strengthen this requirement, it is not due to a lack of standards, but rather because of pressure from economic stakeholders (led by MEDEF in France) who do not wish to provide the means to refute their claims of being “model students.”

By seeking to “not hinder innovation [in methodologies],” is the government being too hesitant?

The minister’s letter of assignment warns of the “efforts the financial sector must make”… before asking it to define and adopt a course of action.

The authors set forth several prerequisites: the “standardization of companies’ non-financial data” and standards for climate analysis of financial portfolios. The report argues that with “access to reliable, comparable, and relevant information,” financial institutions would be able to “reallocate capital in line with the needs of the ecological transition.” The best path toward sustainable finance would therefore be the standardization of carbon accounting methods.

Seemingly contradicting this unquestioned assumption, he nevertheless dares to argue that “no analysis has been conducted to ensure the feasibility [of the option to maintain current oil and gas production capacities at current levels in order to meet carbon neutrality commitments by 2050] and the conditions for replacing fossil fuels with carbon-free energy sources.” This assertion makes no reference to recent forward-looking studies—which are, of course, open to debate—that provide detailed answers to this question without promising unhindered economic growth. More fundamentally, the report does not emphasize enough that the fight against climate change is strategic for the European continent. Reducing emissions also means fighting for energy sovereignty, which is not guaranteed, as Mr. Putin reminds us. This is a vital imperative.

It is also surprising that the report presents the standardization of non-financial data as a prerequisite for aligning with the appropriate allocation of capital. It is not the provision of information—even standardized information—that will compel or incentivize companies to align with the Paris Agreement, much less financial actors, the vast majority of whom consider it their business to finance projects and companies that request it, provided they are adequately compensated (by analyzing the risk-return profile associated with the service provided) and in compliance with their regulatory obligations.

Expectations regarding financial returns must be rationalized; otherwise, alignment is impossible

Going beyond the issue of information and its standardization, the report advocates for a European carbon tax—in addition to the EU ETS—and for a carbon border adjustment mechanism for the European Union.

Above all, he offers the following assessment of the operating conditions for financial actors and, consequently, of the role of the state: “The scale of the investments to be made, their duration, and their low utility value will require investors to reevaluate the criteria for capital profitability (return on equity and an IRR of 15%) established in the 2000s, the level of which appears incompatible with the nature of the transformations to be carried out. Furthermore, they will require the development of new financial solutions in collaboration with the government to secure the necessary resources.”

However, this intention does not appear to be accompanied by specific recommendations that would make it anything more than a pipe dream—or even a public relations stunt designed to create the impression of an awareness—which does not seem to be widely shared—of a contradiction between expected return on equity and the ecological transition.

The Necessary Alignment of Businesses, the Financial System, and the Government

The report highlights the need for a “common roadmap involving all relevant stakeholders—the financial system, businesses, and public authorities,” and emphasizes the necessity that “the entire process [be] steered at the highest level, in coordination with the steering of developments in public policy and industrial strategies.”

He seems to be calling on the government to fulfill its responsibilities when he emphasizes that it is essential to finally “adopt a collaborative approach”: “The success of the climate transition will depend on the alignment of businesses, the financial system, and the government.” He affirms the central role of the government when he highlights the challenges of the climate transition in terms of “industrial policy, social policy, and sovereignty.”

Recommendations: The report calls on the government to bring these scattered stakeholders back on track

The report acknowledges that “we are at a unique juncture where the regulatory framework is incomplete and unstable.” However, it states, “We must nevertheless move forward and begin to implement internal tools to steer the transition.” It makes recommendations on analytical methodologies, governance and management of carbon externalities, training, financial products and labels, the financial center’s transition strategy regarding fossil fuels, financial innovation, and, finally, the organization of the Paris financial center.

On this last point, he warns of a relative decline in Paris’s status as a financial center. While praising the historic pioneering role of French financial players, the Perrier report mentions the Observatory of Sustainable Finance but acknowledges the superiority of London and Frankfurt in terms of research and innovation.

This “concession,” however, may come as a surprise, given that the carbon metric and its developments are all of French origin, with Carbone 4 being one of the key players.

Regarding the organization of the Paris financial market, the authors recommend—following the London model—more resources (a dedicated budget, a network of experts, etc.) and, above all, better coordination with public authorities, which should be responsible for strategy. We can only welcome these two goals.

Finally, the report calls for the creation of a new operational body separate from Finance for Tomorrow, which would be “responsible, within the framework of the guidelines defined by [a strategic steering body chaired by the Minister of the Economy and Finance, with the Treasury serving as its secretariat], to coordinate the work of the various initiatives, represent the financial center in European and international technical bodies, and lead a network of experts.” In late June, just a few days after Finance for Tomorrow elected its new executive board, Paris Europlace announced that Finance for Tomorrow would indeed be replaced by a new “Institute for Sustainable Finance.” The institute is expected to be operational in 2023 and would be led by a finance industry executive—with Yves Perrier tasked with overseeing its creation.

This decision was made and announced by the board of directors of Paris Europlace (chaired by Augustin de Romanet (CEO of AdP), and vice-chairmen Yves Perrier and Jean Lemierre (chairman of the supervisory board of BNP Paribas)) without prior notification to the management and executive committee of Finance For Tomorrow, which caused confusion and strong reactions.

Conclusion

The Perrier report puts it bluntly: “[The] analytical frameworks remain highly heterogeneous and are not governed by regulations. [However], analytical standards are fundamental to credit ratings, and thus to the cost of capital and the reallocation of financial flows.”

After at length criticizing the shortcomings of the “heterogeneity of approaches,” the report concludes: “The proactive nature of individual actions cannot compensate for the inadequacy of collective efforts.”

To regain its leading position and take meaningful action in support of the transition, the Paris financial market needs a referee to set the new rules of the game.

We believe that it is indeed It is essential to make carbon assessments mandatory for companies, because it is a standardized and stable tool. On the other hand, It is wrong to suggest that, more generally, the standardization of information is a prerequisite for ambitious climate action. On the one hand, because in many cases the tools (for addressing environmental issues in the broad sense, not limited to climate) are still being developed, and it is still very useful to allow methodological innovations to evolve. On the other hand, because The role of public authorities cannot be limited to the standardization of information. It is up to them to establish a course of action, a roadmap, a framework, restrictions, and incentives across all relevant areas. In this regard, the Perrier report is hesitant, appearing to make concessions—as we have seen— but without developing the analysis and merely mentioning avenues that are either already on the agenda (such as the border adjustment mechanism) or unrealistic as they stand, such as a European carbon tax. We need a well-thought-out “green plan” that is implemented without delay, in which the financial sector will play its part. We're still a long way from that.