After two years of work, the new version of the ISR (socially responsible investment) label has finally seen the light of day. An expected overhaul as this label, which certifies virtuous funds on an extra-financial level, was criticized. “It is a very useful tool for communicating about our products to individual customers, but it was necessary to evolve it, because it was a little dated,” recognizes Jean-Baptiste Morel, head of ESG research at Arkea IS. With more than 1,200 certified funds, representing 823 billion euros in assets, the stakes are high. These supports will have to comply with three major changes.
Starting with the introduction of exclusions. In particular, “companies which exploit coal or unconventional hydrocarbons, as well as those which launch new projects for the exploration, exploitation or refining of hydrocarbons (oil or gas)” will be ineligible. A criterion which bans, in fact, all major oil companies like TotalEnergies, ENI or Shell. “The approach is quite extensive,” emphasizes Nathaële Rebondy, European sustainability manager at Schroders. “All companies where more than 5% of their activity comes from these operations are concerned.”
Professionals divided
Michèle Pappalardo, the president of the ISR label committee, wanted to be reassuring by specifying that these companies represented, on average, less than 1% of the outstanding amount of labeled funds. This figure, however, varies greatly from one product to another: according to Morningstar, the ISR funds most exposed to the energy sector through TotalEnergies alone hold up to 10%.
The subject has strongly divided professionals in the sector. On the other hand, the French label was the last to have no exclusion. “This was missing, believes Leila Lhuissier, product manager at BNP Paribas AM. Each management company had its own policy, whereas today the label sets very precise common rules.” On the other hand, the exclusion limits the possibility of putting pressure on the oil companies. “The shareholder commitment of the ISR managers has contributed to changing the strategy of a player like TotalEnergies, points out Coline Pavot, head of responsible investment research at Financière de l’Echiquier. However, it is estimated that only 1.6% of the capitalization of this player is held by labeled funds, so a divestment of the latter will have little stock market impact.”
New constraints for managers
At the same time, the framework reinforces the obligations of managers in terms of voting and commitment: 15% of companies belonging to sectors with a high climate impact (construction, agriculture, etc.) must have a credible climate transition plan. vis-à-vis the objectives set by the Paris agreement. For the others, up to 20%, the managers will have to encourage them to have such a plan. If there is no result after three years, these issuers will have to be removed from the portfolio. A significant increase in work for management companies. “This will require significant resources, especially for management companies with diversified portfolios holding a lot of securities,” notes Nathaële Rebondy. At BNP Paribas AM, it is estimated that the text could lead to a doubling of the number of commitment actions to be carried out. Some observers also question the capacity of monetary funds to meet this imperative, because they have, by nature, little influence on companies.
Finally, the selectivity rate is increased: SRI funds will have to exclude 30% of their investment universe, compared to 20% previously. “These developments now make the ISR label the most demanding general label in Europe,” believes Leila Lhuissier. These new rules will come into force for all new labeling requests from March 1st. Products already certified will have to comply by 2025. While some management companies have already indicated that they want to align their funds with this new benchmark, others could consider the step too high.