French Ruling on Sustainable Funds to Drive Major Fossil Fuel Divestments in Europe

France Sets New Standards for ISR Funds

France has implemented stringent new regulations for funds operating under its “socially responsible” ISR label, potentially causing billions of euros in divestments from fossil fuel holdings by pan-European funds. Beginning in 2025, these funds will be prohibited from investing in companies involved in new hydrocarbon exploration, exploitation, refining projects, or those exploiting coal and unconventional hydrocarbons.

Impact on ESG Fund Portfolios

This decision is expected to radically reshape the portfolios of ESG funds, as noted by Hortense Bioy, Global Director of Sustainability Research at Morningstar. She explains that it would be challenging to find an oil and gas company not expanding its activities, hence affecting investment choices significantly.

Ripple Effects Across Europe

The French finance minister, Bruno Le Maire, announced the stricter rules, which will impact funds across Europe due to many asset managers marketing the same ESG funds regionally. This is especially true for exchange-traded funds (ETFs), which are typically listed on multiple exchanges and distributed across Europe.

Challenges for Fund Managers

Fund managers now face the difficult decision of aligning with the French label or opting for other national or European standards. As Bioy fears, the emergence of up to 15 different labels by 2025 could lead to a divergence in ESG standards across the continent.

Significant Holdings in Energy Companies

As of the latest data, 1,200 ISR-labelled funds hold €7 billion in traditional energy companies, with notable exposures in funds like Tocqueville Value Europe ISR and CM-AM Europe Value. BlackRock’s iShares MSCI USA SRI Ucits ETF and iShares MSCI World SRI Ucits ETF have the largest positions.

TotalEnergies and Other Energy Groups in ISR Funds

French oil major TotalEnergies appears in 161 ISR-labelled funds, amounting to €2.4 billion in holdings. Other energy groups like Neste, Eni, Repsol, and Shell also feature in many funds, although not all may be subject to divestment.

Fixed Income Funds Also Affected

The new exclusions will impact fixed income funds, potentially triggering a sell-off in energy company bonds. The French economy and finance ministry sees this measure as a key step in aligning ISR portfolios with the Paris Agreement and combating greenwashing.

Industry Reactions and Challenges

While some industry executives view this as a strong stance needed for more aggressive climate action, others express concerns about reduced investment choice and the compatibility of existing funds with the new requirements. Asset managers like Amundi are preparing to adapt their SRI-labelled funds to maintain a comprehensive market offering.