As part of a bigger effort to clamp down on greenwashing and enhance transparency for retail investors, France has announced that funds under its socially responsible ISR label will be barred from investing in companies involved in fossil fuel projects. This includes all firms that explore, exploit, or refine hydrocarbons, as well as those that have interest in unconventional hydrocarbons. The new rule is expected to take effect from 2025.
The Financial Times predicted that the move could “radically reshape ESG fund portfolios” and lead to “billions of euros worth of forced divestments over the course of 2024”. The effect of the rule is likely to be felt beyond France’s borders as many ESG funds, especially ETFs, are listed on multiple exchanges and passported to other European markets. Fixed income funds are also likely to be affected, potentially resulting in a mass sell-off of energy company bonds.
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Hortense Bioy, global director of sustainability research at Morningstar was quoted expressing concern about “a proliferation of differing ESG standards across the continent”. She believes that there could be “as many as 15 national and European labels by 2025”, and funds would have to choose which to align with.
The French economy and finance ministry claimed that the new measure was designed to achieve “a progressive alignment of ISR portfolios with the Paris Agreement”. A recently introduced stipulation requires portfolios with the ISR label to have at least 15 percent invested in companies that have carbon transition plans that are in line with the Paris Agreement. The ministry has plans to increase this percentage over time.