Date: 24th November 2023

Aimed at certifying the most virtuous funds, the SRI label, which has just been reformed by the government, now excludes companies with new oil projects. Guillaume Prache denounces an ideological reform that risks favoring foreign oil and gas companies.

The reform of France's SRI (socially responsible investment) label, as announced by the French Ministry of Finance, is essentially designed to encourage French "institutional" investors to shed even more of their oil stocks. They are very fond of this label for the funds they sell to retail investors. And Les Echos is not mistaken, predicting in its wake the expulsion of the last BP and Total shares from the portfolio of the already imposing mass of "SRI" funds, the same companies that have just become the leading investors in European offshore wind power by winning the €13 billion German tender.

And why did they win? In particular, because they had the considerable investment capacity required to cope with the project's uncertain economic viability - capacity acquired thanks to their oil margins. But also because they are among the world's "best- in-class" oil companies in terms of their commitment to energy transition and ESG improvement.

This ideological reform seems to ignore the basics of how the global economy works. First of all, it is demand for oil that creates supply, not the other way round: this exclusion of BP, Total, Shell, ENI, etc. - in short, all listed European oil companies - will further push European investors to sell what remains of their shares in these oil companies at a discount, but will certainly not reduce the demand for oil by one iota, despite the fact that it is the key issue in the energy transition.

7% of global emissions

Secondly, oil supply is global, not confined to the borders of France and Europe: the increasing penalization and devaluation of European oil companies alone is a magnificent gift to Saudi Aramco et al, and to non-European hedge funds and investors, not exactly the "best in class" in terms of ESG. Incidentally, Europe accounts for just 7% of the world's CO2 emissions: it's high time we redeployed investments outside our continent. This is where the battle against global warming is being fought. But the SRI Label says nothing about this.

Oil production is therefore likely to become even "dirtier" in terms of ESG, with the SRI label favoring even more the companies least involved in this area. These companies are not subject to European ESG rules, and even less to minority shareholder rights, where they exist. And this decision will further increase Europe's energy dependence, by selling off its most ESG-compliant energy companies to less ESG-compliant investors and players from outside Europe.

Brown firm

This approach to sustainable investment, known as negative (or positive) exclusion, i.e. disengagement, is certainly intuitive and the easiest to implement, butitis also the most damaging to the environment during the energy transition phase. Indeed, it is the most prone to "greenwashing", as it fails to inform investors of its impact on the real economy, the environment, society and governance. And with good reason, as Shue and Hartzmark (Yale University and Boston College) have clearly demonstrated, "if a 'brown' firm changes its emissions by just 1% more or less, it is much more significant than a typical 'green' firm that changes its emissions by 100%".

We have a vital need to finance the environmental transition, and the current dominant investment approaches of negative and positive exclusion, consisting in practice of stuffing so-called "green" funds and indices with largely dematerialized service companies (the likes of Google, Microsoft and Visa sit at the top of the major "ESG" indices) and washing our hands of the "dirtier" companies, are leading us straight into the wall.

Greenwashing the label

Massive investment in the energy and environmental transition calls for much more appropriate and courageous approaches to sustainable investment, aimed at positively impacting the environmental and ESG transition, such as shareholder engagement by "institutional" and individual investors, and the "best in class" approach, not the disengagement that might just as well be called the "courage, run away" approach.

This new and irrational "reform" of the French label comes on top of the one allowing massive SRI labeling of money market funds, i.e. very short-term funds, which further adds to the label's high risk of "greenwashing". Finally, for some years now, the SRI label has excluded any representation of investors in label-eligible products, the main stakeholder.

The European Commission is consulting publicly on changes to the categorization of "green" funds. Among the new categories proposed are funds with an exclusionary approach, and - for the first time - funds focused on environmental transition. Let's not repeat the same mistake we made with the SRI label, and this time let's rely on the facts by excluding exclusion, and focusing investors on the fastest possible transition from a still massively "brown" economy to a "greener" one. The future of our planet depends on it.

Guillaume Prache, founder of Better Finance, the European Federation of Financial Services Users.

➡️ Read the Les Echos article in French here.