SRI Label 3.0: Stricter Rules for France’s Socially Responsible Investments

France’s ground-breaking socially responsible investment (SRI) label enables retail investors to choose financial savings instruments that incorporate environmental, social and governance principles. To date, over 200 managers offer a total of 1,232 funds with the SRI label, representing €767 billion in assets under management. But concerns about greenwashing have prompted a new SRI label “version 3.0”, which introduces additional reporting requirements for asset managers along with stricter rules on portfolio allocation, issuer engagement, controversy management, proxy voting and other areas of stewardship.

Background

The first of its kind, the SRI label was introduced in 2016 and has been very successful in meeting investors’ appetite for ESG issues. However, the reliability of the SRI label has been called into question due to the potential for greenwashing.

Indeed, the SRI label in its initial and second versions has given rise to investment behaviour that would not appear to align with its intent. According to a study carried out by Epsor in 2022 on a sample of 814 equity funds:

• 53% of the companies in which the funds are invested are common to both labelled and non-labelled funds. For example, TotalEnergies appears in 19% of SRI funds (compared with 20% of non-labelled funds).
• 80% of SRI funds include investments in at least one company linked to fossil fuels.

Nor does this align with savers’ expectations. According to a survey commissioned by the Forum pour l’Investissement Responsable (FIR) and carried out by Ifop in August 2023:

• More than 80% of savers believe that activities linked to oil or coal are not compatible with responsible investment.
• 76% believe that “responsible” funds are mainly a marketing tool, and do not have a material impact on how your savings are actually used.
• 57% believe that responsible investment should exclude certain sectors of activity.

To address these concerns, the government has released a new SRI label “version 3.0”. The new label, in force since March 2024, is more ambitious and makes climate impact a key principle of the label.

Excluding Fossil Fuels from the SRI Landscape

Under the new version of SRI, fund eligibility is conditional on the exclusion of companies exploiting coal or non-conventional hydrocarbons, as well as those launching new projects to explore, exploit or refine hydrocarbons (oil or gas).

In view of the statistics published on past practices in the use of the SRI label in its first version, we expect an overhaul of the investment products formerly marketed under the label.

The new standards require asset managers to make a clear and unambiguous commitment to the energy transition. This is expected to help in precisely calibrating investment decisions very precisely. By contrast, other European regulations on this topic are not as prescriptive, notably because they do not include a brown taxonomy, i.e., a classification of emissions-intensive activities.

Climate Ambition

Under the new version 3.0, asset managers of SRI-labelled funds must support companies in their energy transition, with the aim of gradually aligning SRI portfolios with the Paris Agreement.

For example, managers now have to analyse the transition strategies of all the companies in their portfolios, covering emission reduction targets, resources (financial, operational, human), and the governance practices implemented to achieve transition objectives (involvement of management bodies, etc.).

By 1 January 2026, funds with the SRI label will need to have invested at least 15% of their portfolio in high-impact sectors. Under version 3.0, these high-impact investments will need to have transition plans in line with the Paris Agreement.

Voting at General Meetings

The new SRI label 3.0 standards stipulate that asset managers formalise their voting policy and publish it on their website.

The standards require management companies to be active in exercising their voting rights at both French and foreign companies. They must publish reports on the exercise of the voting policy, specifying the votes relating to the resolutions presented at the general meetings of portfolio companies, on their website (where applicable, on the page dedicated to that specific fund or UCI).

The rate of exercise of voting rights must be significant — all SRI label funds, regardless of size, must demonstrate that they have exercised their voting rights at the following proportions of general meetings:

• For French companies, more than 90% of the general meetings for which the fund holds voting rights (70% until 1/1/2025), and
• For non-French companies, more than 70% of general meetings for which the fund holds voting rights (50% until 1/1/2025).

In addition, funds must provide justification for cases in which voting rights were not exercised.

Furthermore, the management company must also disclose its participation in shareholder coalitions and any shareholder proposals filed in this context, or the reason why it did not take part in collective actions.

Shareholder Engagement

The new SRI label standards make engagement with portfolio companies compulsory for asset managers and provide a quantitative and qualitative framework for engagement. The obligation to engage is an enhanced obligation of means — so, although asset managers are not required to align companies’ climate strategies with the Paris Agreement, they must nonetheless punish failure to achieve their objectives by instituting an escalation policy that culminates in disinvestment.

The new standards stipulate that management companies should formalise their ESG engagement policy and publish it to their website, including:

• The content of the formalised ESG engagement policy and in particular, its link with the manager’s controversy policy (see “Controversy Management”, below), engagement themes, etc.;
• The human resources, or external resources (consultancy) dedicated to the ESG engagement policy and how they relate to ESG research resources;
• Its formalised escalation process, differentiating between actions constituting enhanced dialogue, public actions and actions constituting a management act. An escalation process culminates in the sale of shares if there is no improvement at the end of a given period; and

• How this ESG engagement policy is consistent with the fund’s sustainability objectives.

Whereas previous domestic and regional efforts to promote engagement have been somewhat vague or difficult to apply, these standards are intended to facilitate ambitious engagement campaigns by providing a comprehensive framework. The SRI label engagement model includes an explicit request to the issuer, a clear objective and degrees of achievement, a predefined timeframe for assessment and, if necessary, follow-up and escalation actions.

The SRI label 3.0 standards also promote greater transparency on the part of asset managers with regard to their stakeholder engagement activities. Periodic reporting covering these engagements must be published on their website, and should include the number of ESG engagement actions carried out, the proportion of portfolio companies where engagement took place, the classification of ESG engagement actions within E, S and G categories, the degree of management company involvement on any collective ESG engagements, and details of any other significant engagement actions.

General Engagement

Under SRI label 3.0, management companies must systematically engage with issuers representing the worst performing 30% of their portfolio, on the basis of their ESG rating. If no improvement is observed after a maximum duration of three years (including potential escalations), the issuer may not be retained in the portfolio.

Climate Engagement

From 1 January 2026, management companies will be required to commit to undertaking engagements to ensure that, in addition to the 15% of portfolios invested in high-impact sectors (see “Climate Ambition” above), at least a further 20% of the portfolio has plans in line with the Paris Agreement within three years. The threshold will be raised each year on the recommendation of the label committee. Similar to the general engagement requirement, if these issuers have not implemented plans in line with the Paris Agreement after a three-year period, they may not be retained in the portfolio.

As a result, ambitious thematic engagement campaigns on these companies, representing at least 20% of the asset portfolio, will have to be conducted meticulously and annually.

Controversy Management

Finally, the new SRI label guidelines focus on controversies that reveal the shortcomings of a company’s ESG strategies. Asset managers of SRI label funds will have to pay particular attention to identifying, analysing and monitoring controversies.

The new standards also take the unprecedented step of requiring the asset management company to provide its policy for preventing and verifying controversies, and to specify all of the following criteria:

• Its process for identifying controversies (sources, monitoring process);
• Its methodology for analysing the controversies identified. The methodology must lead to a classification of controversies (for example: serious, proven, repeated); and to the identification of controversies in relation to the ESG objectives of the fund;
• The escalation process (in particular: initiation of dialogue, reinforcement of dialogue, placing under surveillance, management action, etc.), types of action and timeframe resulting from analysis of the various levels of controversy identified, and the potential link with the ESG engagement policy;
• The conditions for lifting measures taken against issuers that are the subject of controversy;
• The committee procedures put in place and the tools used to monitor the decisions taken;
• Disclosure of any formalised records of decisions relating to controversies over the past year; and
• Potential conflicts of interest identified between the management company and issuers that are the subject of identified controversies.

The management of controversies may, where appropriate, be closely linked to an investor’s engagement strategy, particularly in the context of an escalation process.

Conclusion

Many of the SRI label 3.0 rules share at least some overlap with common ESG stewardship practices. Nonetheless, asset managers who wish to use the new SRI label for their funds will need to review their research and analysis, voting, engagement and controversy management activities and be careful to meet each of the requirements.