The evolution of the ISR designation: straw and beam

A relatively rare amount of joy: The scourge of global warming is soon to be overcome. Thanks to the new ISR designation, France is at the forefront(2) who invests greener than green!

This is the essence of the message full of triumphalism on social networks, which responded to the decision of the French Minister of the Economy to exclude companies in the fossil fuel sector from the investment scope of the new French ISR Label (planned for the end of 2024).

Admittedly, the old label was unanimously against it. Just like SFDR(1) current elsewhere. And undoubtedly for the same reasons, the lack of clarity about the goals of sustainable management, the risks of greenwashing, the risks of losing savers’ confidence in this area.

Apart from the shouts of victory, do we realize what these new rules mean for French management companies?

Many management companies will have to comply with this new regulation or give up the ISR designation. Abandoning this designation is not an easy task: it can have significant consequences in terms of distribution. Indeed, many banks or insurance companies have designed financial products containing SRI-labeled funds. Losing this sticker is therefore tantamount to bleeding property.

For most management companies, this presents a significant challenge after two trials. They will have approximately one year to complete. This term heralds a time for reflection and intensive work on management processes, reporting and communication.

What if this new ISR label was destined to blend in with future European SFDR 2.0 labels?

We know that the SFDR regulation, like the ISR label, has failed to live up to expectations: it has caused such confusion that savers are gradually abandoning sustainable products. A pan-European consultation is underway, heralding a fundamental review of the regulations.

Without certainty about future decisions, certain axes are clearly emerging. The new regulations aim to: ensure overall consistency, guarantee optimal readability and impose strict restrictions on administrators to counter greenwashing.

SFDR 2.0 would classify funds into four categories (hypothesis to be confirmed).

  • Products investing in assets focused on concrete and measurable sustainable solutions;
  • Products meeting credible sustainability standards or adhering to a specific sustainability theme;
  • Products excluding activities and entities engaged in harmful practices;
  • Products focused on transition and aimed at improving the sustainability profile of invested assets.

This approach would be ambitious and in line with target practices in the United States or Great Britain. A second alternative would be to marginally modify current products, but this strategy would revolve around the aforementioned four axes, despite the ongoing risk of ambiguity.

Even if SFDR 2.0 boils down to a simple modification of the current regulations on product types, the introduction of minimum sustainability criteria seems certain.

Will this new ISR label actually be just one of the SFDR 2.0 avatars?

This new French “ISR Label” is in fact fully compliant with European regulations. Funds with the French designation ISR will fall into the “exclusion” category.

This development, although minor compared to potential global European regulations, has two advantages: it is in line with the European vision, the SRI designation is clearly an “exclusion” fund; and sets an increased level of requirements in terms of sustainability criteria. But it also, and above all, implies that management companies and savings distributors will have to review their entire product offering based on the four mentioned areas.

Oil stocks exit through the ISR Label door, but will return en masse through the SFDR 2.0 category window called “transition”

The category of “transition”, whether formal or not, represents a major problem with current regulations. States around the world are beginning to realize their inability to finance the transition alone, requiring private sector involvement and savings. Thus, “bridging” funds could help solve part of the equation. Oil stocks, while excluded from certain products, such as France’s ISR label, could be eligible for “bridging” funds if they meet certain criteria. Evil minds might believe that the French authorities have awarded a “symbolic” victory to ESG activists(3) by granting an oil exclusion, despite being fully aware of the SFDR 2.0 initiative and its high probability of success. This perspective presages lively debates with NGOs, but also represents a form of pragmatism.

The real change to follow is the change to the new SFDR 2.0 European Sustainable Finance rules.

The revision of the SRI label should be considered in a wider European framework. The financial issues associated with the creation of the “transition” category are actually the main problem of the European regulations (beam) and the overhaul of the French ISR designation is very marginal in comparison (straw). Unfortunately, it will only be a local brand.

Management companies and distributors therefore have to prepare more for changes in European regulations. Waiting and waiting is not an option. Forward thinking about segmentation of the offer is essential.

For financial players, this is a strategic matter.

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