French finance minister Bruno Le Maire unveiled new rules that will prohibit funds operating under its “socially responsible” ISR label from investing in companies involved in new hydrocarbon exploration, exploitation or refining projects from the start of 2025.
Companies that exploit coal or “unconventional” hydrocarbons will also be off limits.
The sweeping nature of the new regulations is likely to radically reshape environment, social and governance (ESG) fund portfolios.
It means that pan-European funds claiming to invest on an ESG basis may need to sell all their fossil fuel holdings which could lead to billions of euros worth of forced divestments over the course of 2024.
According to Morningstar data, the existing 1,200 ISR-labelled funds hold €7 billion of stock in traditional energy companies, with 45% of such funds holding oil and gas stocks.
The Tocqueville Value Europe ISR, CM-AM Europe Value, DNCA Invest Archer Mid-Cap Europe and two BNP Paribas funds all have exposures of at least 13% to oil and gas companies, Morningstar said.
In euro terms, the largest positions are held by BlackRock’s iShares MSCI USA SRI Ucits ETF, at €324 million as of mid-November, the iShares MSCI World SRI Ucits ETF, €208 million, and Eleva European Selection,€171 million.
Morningstar research showed that French oil major TotalEnergies is held by 161 ISR-labelled funds with aggregate holdings of €2.4 billion, representing 1.6% of the company’s market capitalisation.
Rival energy groups Neste, Eni, Repsol, Galp Energia, BP, Shell and OMV also appear in many funds, although ISR funds may not have to sell some of these, such as Finland’s Neste.
The new rules will also apply to fixed-income funds, potentially leading to a sell-off in the bonds of energy companies.
The stricter rules are expected to reverberate outside of France because many asset managers market the same ESG funds across Europe in order to minimise duplication and costs and maximise liquidity.
This is particularly true of exchange traded funds (ETFS), which are typically listed on several exchanges and “passported” into other European countries.
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