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Green funds: should emitting sectors be banned or “best in class” encouraged?

Stocks, bonds, real estate funds… More and more investments are offering to support the energy transition. For Patrice Geoffron, the greening of finance is now unavoidable and guided by economic rationality.

COP 28 has taken the commitment to the fight against climate change a step further. Progress is certainly timid, but the mention of a necessary transition away from fossil fuels is unprecedented (“transitioning away from fossil fuels”), the shadow of the latter having hovered over the first 27 COPs, without ever having been explicitly mentioned until now.

The necessary financial transition

In this context, in the absence of a coherent carbon price, the “greening” of finance is a necessity. The fight against climate change has long been seen as a challenge for engineers. But, as climate constraints increase, and faced with the urgency of a massive deployment of low-carbon technologies – renewable energies, energy efficiency solutions, electric vehicles, etc. – one thing is obvious: a financial transition is also imperative.

It is in this perspective that the reform of the SRI (Socially Responsible Investment) Label is part of the reform that will come into force in March 2024. This label was created in 2016 by the Ministry of the Economy and Finance with the aim of distinguishing funds backed by a robust SRI methodology (equity or bond UCITS, alternative funds, real estate funds, etc.). Nearly 1200 funds are SRI-labelled, for a total of around €800 billion.

The reform of the SRI Label, a change of approachThe current reform aims to restrict the companies eligible for this financing: those that exploit coal or unconventional hydrocarbons, or those that invest in new hydrocarbon exploration, exploitation or refining projects are now “banned”. In addition, from 2026, 15% of portfolios will have to be oriented towards high-impact sectors whose transition plans are consistent with the objectives of the Paris Agreement (threshold that will be gradually increased thereafter).

In clear terms, this leads to an abandonment of a “best in class” approach that consisted of supporting, within a sector, the most advanced companies in terms of the sustainability of their practices, including in sectors that emit a lot by nature. This exclusion is opposed to various objections: it would put the European majors, whose decarbonisation objectives are both more ambitious and more credible than the American ones (not to mention the national companies of the producing countries), on the same level as the European majors, whose decarbonisation objectives are both more ambitious and more credible than the American ones (not to mention the national companies of the producing countries) on the same level as the desired objective; In addition, it would deprive investors (especially institutional investors) of leverage to influence, from within, the environmental orientations taken by the companies financed.

A political signal in the face of the emergency

In reality, this ban stems from a political signal: since the creation of the SRI Label in 2016, in the wake of COP 21, the curve of greenhouse gas emissions has continued to rise, moving the objective of maintaining the climate drift away from around +1.5°C. The urgency, confirmed by the latest IPCC reports, thus invites us to no longer do “nuance”. In addition, it could meet the expectations of clarity and legibility of labels, as reflected in the latest annual Barometer of Responsible Investment CPR AM.

All in all, “green” finance is a field of political tension, as much as it is guided by economic rationality. To be convinced, one only has to cross the Atlantic and observe the battle in the Republican states (Florida in the lead) to prohibit environmental and social criteria in investment strategies, by posing a legal risk to the recalcitrant. A far cry from the European debate on shades of green.

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