Sustainable finance or ethical or responsible finance promotes financial practices contributing to the well-being of society and the globe in the long term, by generating financial returns deemed sustainable. The concept reform is currently at the center of a major controversy in France.
The finance of the ISR label and origin of the debates in France
The SRI (Socially Responsible Investment) label is at the heart of a reform in France. A structural overhaul which is sparking a lively debate between various responsible finance players.
This label was launched in 2016. It aims to identify responsible investment funds to help investors and savers make informed decisions. However, over the years, its credibility and relevance have waned.
To say the least, its transparency is strongly questioned. You should know that in December 2020, a report from the General Inspectorate of Finance warned that the ISR label risked an inevitable loss of credibility. Unless it experiences significant development.
To take these concerns into account, the French authorities, responsible for financial issues, then initiated a reform. The latter, launched in March 2021, aimed to strengthen the requirements of the ISR label. Since it has been underway for two years, the said reform has been controversial.
The heart of the controversies
The exclusion of companies whose activity comes from more than 5% of unconventional fossil fuels constitutes a major bone of contention. According to certain sources, the Ministry of the Economy has considered backing down on this flagship proposal from the ISR Label Committee. Obviously, this decline has raised concerns among responsible finance players. In an open letter addressed to Prime Minister Élisabeth Borne, a number of experts and organizations expressed their concerns about the possibility of a weakening of the exclusion criteria.
These actors consider that the existing criterion, already considered quite minimalist, is not sufficient to guarantee the responsibility of investments. This is also what a study by Rift and Reclaim Finance in 2023 corroborates. According to its report, around 43% of the 735 SRI funds studied invest in companies linked to coal, oil or gas. If the label excluded companies involved in new unconventional hydrocarbon projects, this figure would drop to 3%.
Furthermore, the reform of the ISR label also proposes other measures. Among these, the consideration of the three ESG pillars (environment, social, governance) up to 20% each in the rating of issuers of financial securities. One approach aims to prevent issuers from neglecting one of these pillars. In addition, the committee suggests the integration of a climate policy and the requirement of double materiality in the management of all labeled funds. Double materiality consists of taking into account the impact of investments on ESG plans in addition to the effects on economic activity.
Despite everything, these proposals give rise to reluctance. Asset manager Amundi fears that certain reforms will exclude too many companies from investments. For its part, the Forum for Responsible Investment wants a more demanding label, including several levels of corporate responsibility. It also envisages exclusions in the name of biodiversity. This is somewhat reminiscent of the ecological debates around crypto.
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