New rules may force green funds in France to divest €7bn from fossil fuel firms
A new regulatory regime in France may force up to 45% of what are now labelled as responsible investment funds to divest close to €7 billion in fossil fuel assets.
Last week, the French government announced that any fossil fuel firms are no longer allowed to be included in responsible investment labelled funds.
Bruno le Maire, the country's minister of Economy, Finance and Recovery, said that oil and gas companies can no longer be part of portfolios of investment vehicles that carry the responsible investment label.
“We must offer a simple and effective label to allow the French to give meaning to their savings," Le Maire stated.
"This is what we are doing with this new ISR label, in which the fight against global warming is becoming essential. We will thus allow savers to take into account the ecological transition and businesses to finance their decarbonization more easily," he added.
The French ISR label, created in 2016, has become a major tool for sustainable finance in France, with nearly 1,2000 funds currently certified, representing about €770 billion in assets under management.
Following the introduction of the new rules, funds that use the French 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.
In addition, high carbon-emitting companies will be required to gradually adopt transition plans that align with the Paris Agreement.
Out of around 1,200 of France's largest investment vehicles, 45% have some exposure to the traditional energy sector, totalling around €7 billion in assets, according to research that was shared with Net Zero Investor today.
The top three funds with the highest exposure to the oil and gas sector in percentage terms are Tocqueville Value Europe ISR, CM-AM Europe Value, and DNCA Invest Archer Mid-Cap Europe, with weights of 13% to 14% and holding values between €49 million and €62 million, the Morningstar data showed.
The top three funds with the highest oil and gas exposure in euro terms are iShares MSCI USA SRI ETF, €324 million, iShares MSCI World SRI ETF €208 million, and Eleva European Selection, €171 million.
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 remains to be seen if the exclusion rule will extend to enabling actors, including oil and gas equipment and services Technip and Gaztransport et technigaz.
TotalEnergies is currently held by 161 ISR-labeled funds for an aggregate value of €2.4 billion, representing 1.6% of the company's market capitalisation.
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, said Hortense Bioy, global director of ESG research at Morningstar.
“This revamp is a significant indicator of the mood of one of the strongest ESG markets in the world," she observed.
"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.”
Bioy added: “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."
She concluded that "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.”