Since its implementation three years ago, Article 29 of France’s Energy and Climate Law (Article 29 LEC) has been essential in promoting transparency and accountability in the disclosure of climate-related and environmental risks by financial institutions.
Despite these advancements, financial institutions continue to face challenges in integrating these requirements into their operational frameworks. Common hurdles include the complexity of acquiring data for sustainability reporting and aligning existing strategies with emerging regulatory demands.
Using advanced technologies, such as those provided by Clarity AI, can assist institutions by streamlining data collection and analysis. This support simplifies adherence to Article 29 requirements, helping entities in navigating compliance.
What Are Article 29 LEC Requirements? Who Do They Apply To?
The regulation targets financial institutions such as asset managers, insurance companies, pension funds, credit institutions, and portfolio management companies, mandating them to disclose how they integrate Environmental, Social, and Governance (ESG) criteria into their business and investment strategies on the following topics:
- Climate Change: strategies that align with the Paris Agreement’s goals, encompassing efforts to mitigate greenhouse gas emissions and adapt to the impacts of climate change.
- Efforts on Biodiversity: approaches to align with global biodiversity targets, safeguarding ecosystems.
- EU Taxonomy Eligibility and Alignment: revenues and investments that adhere to the EU’s green classification system, ensuring their contributions to sustainable activities.
- SFDR Principal Adverse Impacts (PAIs): disclosure of PAIs to help stakeholders understand the broader consequences of their investments on social and environmental factors.
All entities subject to the regulation are required to publish an Article 29 LEC Report by June 30th annually, using the templates supplied by the AMF (the French financial markets authority).
Tailored Templates for Different Use Cases
There are three distinct sets of templates for reporting Article 29 LEC, categorized based on the size and profile of the reporting entity:
- Entities with a balance sheet total or assets under management (AuM) of less than €500 million are required to provide a brief description of their approach to integrating ESG criteria.
- Entities with over €500 million in balance sheet total or AuM, who do not report Principal Adverse Impacts (PAI) must disclose additional information related to the EU Taxonomy, and specific metrics on their climate change strategies and biodiversity preservation efforts.
- Entities with over €500 million in balance sheet total or AuM, who report Principal Adverse Impacts (PAI) will include those disclosures as well.
A complete use case mapping of the qualitative and quantitative annexes for Article 29 LEC reporting templates is available in the following table.
What are Article 29 LEC Reporting Challenges?
After three years of reporting under Article 29 LEC, financial institutions continue to face practical challenges:
- Data complexity and availability: institutions must aggregate and analyze often large amounts of data on ESG factors. This data is often complex to source consistently, especially for criteria related to biodiversity impact or long-term climate alignment.
- Regulatory alignment and updates: ensuring that the reporting is not only compliant with French regulation but also aligns with other, evolving, international frameworks (such as SFDR and EU Taxonomy).
- Funds look-through: for investment managers, especially those managing funds with multiple underlying assets or funds of funds, it is challenging to obtain detailed data for each component. A “look-through” capability is critical for accurate and comprehensive reporting but can be technically complex to develop.
Despite the regulatory push for detailed and frequent disclosures, many entities still rely on manual processes to report data, which can lead to inefficiencies and an increased potential for errors. Partnering with established third-party experts can provide access to advanced technology and expertise, reducing the lead time and potentially the cost.
How Clarity AI Can Help Asset Managers Meet Article 29 LEC Reporting Requirements
By leveraging its advanced technology platform, Clarity AI offers a comprehensive, end-to-end solution that enables managers to conduct thorough look-through analyses and automatically generate the necessary Article 29 LEC reports. This significantly reduces the time required from regulatory experts and simplifies complex data processing.
With Clarity AI’s data suite, financial institutions can easily access the regulatory and environmental metrics essential for compliance under Article 29 LEC. The platform’s datasets are curated to align with the quantitative annexes required by the law, including disclosures on Climate Change Alignment, Biodiversity Effort, SFDR PAIs, and alignment with the EU Taxonomy.
