New strict French rules may force 45% of ISR-funds to divest €7bn

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 EUR 770 billion in assets under management. 

On 7 November 2023, French Finance Minister Bruno Le Maire announced that from 2025, 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.

Morningstar Manager Research has published a report on French ISR Label Revamp, looking at the potential impact of the new rules on oil and gas companies. 

Key Takeaways 

• Out of around 1,200 ISR-labelled funds identified in Morningstar Direct, 45% have some exposure to the traditional energy sector, totaling around EUR 7 billion in assets. 

• 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 EUR 49 million and EUR 62 million.

• The top three funds with the highest oil and gas exposure in euro terms are iShares MSCI USA SRI ETF (EUR 324 million), iShares MSCI World SRI ETF (EUR 208 million), and Eleva European Selection (EUR 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 EUR 2.4 billion, representing 1.6% of the company's market capitalization.

• 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.

Hortense Bioy, global director of ESG Research, Morningstar, and author of the report said: "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."