French ISR funds directed to divest €7bn from traditional energy sector
From 2025, funds already using the ISR label will be banned from investing in companies involved in new projects related to the exploration, exploitation, and refining of fossil fuels, whether conventional or unconventional.
The ISR label, created in 2016, has become a major tool for sustainable finance in France, with nearly
1,200 funds currently certified, representing about €770 billion in assets under management. On 7 November 2023, Finance Minister Bruno Le Maire announced he would support the label committee’s
proposal for a more ambitious and demanding label, and, among other things, the expansion of the scope of exclusion
In addition to the ban, high-carbon-emitting companies will be required to gradually adopt transition plans that align with the Paris Agreement. According to Le Maire, the stricter eligibility criteria are “essential” to combating global warming and will make it easier for sustainability-oriented investors to know what they’re really getting.
Out of around 1,200 ISR-labeled funds, identified in Morningstar Direct, 45% have some exposure to the
traditional energy sector, totaling around €7 billion in assets. The top energy stocks held in ISR-labeled funds that will be affected by the new fossil fuel exclusion rule include TotalEnergies, Neste, Eni, Repsol, Galp Energia, BP, Shell, and OMV. It has not been determined yet if the exclusion rule will extend to enabling actors, including oil and gas equipment and services companies.
Morningstar believes the universe of ISR-labeled funds will likely shrink as portfolio managers who find the new criteria too constraining will drop the label. It remains to be seen if large passive funds offered by BlackRock and Amundi will align with the new criteria.
The new criteria focuses on three key areas:
- The integration of a climate policy in the management of all labeled funds. The scope of exclusion will be expanded to include all new projects related to the exploration, exploitation, and refining of fossil fuels, whether conventional or unconventional. In addition, portfolio managers will have to ensure that high carbon-emitting companies gradually adopt transition plans that align with the Paris Agreement.
- The best-in-class approach is maintained with increased selectivity, resulting in a 30% reduction of the investment universe, compared with 20% previously.
- Labeled funds will be required to consider the impact of investments on ESG factors (double materiality), using principal adverse impact indicators, or PAIs, as defined by the Sustainable Finance Disclosure Regulation. Moreover, funds must commit to achieving better performance than their initial investment universe on two indicators that are most closely aligned with their ESG objectives.
The final eligibility criteria will be published by the end of November and the updated framework will go
into effect on March 1, 2024, for new candidate funds. Existing funds with the label will have one year
to comply with the new criteria.
Global Director of ESG Research at Morningstar and author of the report Hortense Bioy commented:
“This revamp is a significant indicator of the mood of one of the strongest ESG markets in the world. It is clear that the French government is aiming to reflect the expectations of French end investors and demonstrate their backing against further investment in fossil fuels. The description provided by Bruno Le Maire of the companies affected by the new exclusion rule is quite vague. We will have to wait for the publication of the final criteria at the end of the month to better understand the impact of the new rules on existing portfolios. The devil is always in the details. As for the impact on companies, it will likely be insignificant for some, like BP and Shell, non-negligible for TotalEnergies, and potentially very significant for others like Technip if the scope of exclusions extends to all companies in the fossil fuel value chain.”
To access the full report, click here.
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