As responsible investment gains momentum (+15% in assets under management in 2024), responsible funds are experiencing notable growth. ESG offerings and labeled funds are multiplying, but not all are created equal. Distinguishing true sustainable finance levers from greenwashing operations is becoming crucial for investors seeking to combine comfortable returns with sustainable development.
This comprehensive guide is here to help you understand responsible funds and build an investment portfolio that is both high-performing and responsible.
What is a Responsible Fund?
Definition of a Responsible Fund and ESG Principles
A responsible fund is an investment fund that is financially sound while prioritizing Environmental, Social, and Governance (ESG) criteria in its investment choices. Unlike a traditional fund, a responsible fund invests according to criteria that meet ESG requirements.
Responsible funds will therefore be particularly vigilant about aspects related to:
- Environment: greenhouse gas emissions, natural resource management, biodiversity preservation, etc.
- Social: working conditions, diversity and inclusion, respect for human rights, etc.
- Governance: information transparency, fight against corruption, independence of the board of directors, executive compensation, etc.
What is Socially Responsible Investment (SRI)?
Responsible funds are at the heart of Socially Responsible Investment (SRI). Today, SRI encompasses all investment practices that combine traditional financial criteria with extra-financial criteria. SRI aims for both economic performance and social and environmental impact.
SRI notably relies on the European SFDR regulation (Sustainable Finance Disclosure Regulation), which imposes transparency obligations on asset managers.
Articles 6, 8, and 9 of the SFDR aim to promote sustainable finance:
- "Article 9" investments have a sustainable investment objective.
- "Article 8" investments declare that they take social and/or environmental criteria into account.
- "Article 6" investments do not have a sustainable investment objective and declare that they do not take ESG criteria into account. They include all investments that are neither "Article 8" nor "Article 9."
How is a Responsible Fund Created?
Currently, there is no single official process for creating a responsible fund. However, several steps are essential:
- Define a responsible investment strategy: The asset management company defines an investment philosophy that integrates ESG criteria and chooses its methodology.
- Select criteria and extra-financial analysis: The asset management company precisely defines its ESG criteria and analyzes each potential company based on these criteria. This includes studying reports, ESG ratings, identified controversies, etc.
- Build the portfolio: The asset management company selects securities (stocks, bonds, and other investments) based on the results of the ESG analysis and traditional financial criteria.
- Monitor: The portfolio is monitored over time to ensure consistency with ESG commitments and company evolution. The asset management company publishes regular reports on the extra-financial performance and impact of the fund, in accordance with regulations.
- Obtain a label (optional): To enhance the credibility of the approach, the asset management company can take steps to be labeled by an independent organization.
Different Strategies for Responsible Funds
Responsible funds use several approaches to select their investments. These approaches often need to complement each other to be effective.
The "Best" Approach: Best-in-class, Best-in-universe, Best-effort
The "Best" approaches are classically used by funds. They come in 3 types:
- The Best-in-class approach selects companies with the highest extra-financial ratings within each sector. A "Best-in-class" fund can invest in polluting sectors by selecting the "best" elements of that sector. This approach can be combined with sectoral exclusions.
- The Best-in-universe approach retains the best-performing companies based on extra-financial criteria, across all sectors. This leads to "sectoral biases": certain virtuous sectors (e.g., renewable energy) will be overrepresented compared to other more polluting sectors (e.g., air transport).
- The Best-effort approach distinguishes organizations whose ESG practices and performance are improving. A "Best-effort" fund might, for example, invest in a transport company that is improving its environmental practices and seeking to reduce its carbon footprint.
Exclusions
Exclusion strategies are a complementary approach in a responsible investment framework.
- Sectoral exclusion allows for the removal of companies that generate a significant portion of their revenue from controversial activities: pornography, gambling, alcohol, weapons, etc.
- Normative exclusion goes further. It excludes companies that do not comply with international standards: Universal Declaration of Human Rights, principles of the International Labour Organization, etc. It excludes practices such as corruption, child labor, or violations of environmental standards.
Shareholder Engagement
Active shareholding transforms the investor into an agent of change. Specifically, the shareholder uses their voting rights at general meetings to influence the company's strategy. This means, for example, encouraging an oil major to accelerate its transition to renewable energies or an agribusiness leader to reduce its use of pesticides.
Thematic Investment
With thematic investment, a fund focuses on key sectors of sustainable development: water, agriculture, health. An water-themed fund could invest in a water treatment center, drinking water distribution companies, or innovative irrigation structures.
Impact Investing
Some funds choose to invest in companies that prioritize environmental and social impact on par with financial performance. Impact can take various forms: fighting food waste, developing renewable energies, financing social housing, etc. In any case, it must be quantifiable and verifiable.
Responsible Fund Labels: ISR, Finansol, Greenfin
Labels have existed for several years to help investors and savers navigate the landscape of responsible funds.
The ISR, Finansol, and Greenfin labels embody the three pillars of sustainable finance in France.
The ISR Label
Created in 2016 by the Ministry of Economy, the ISR (Socially Responsible Investment) label is the reference label in France. It is the first state-backed label that allows the general public to invest by integrating ESG principles into their management.
Deemed too permissive, the label was reformed in 2024. From now on, it excludes companies that exploit coal or unconventional hydrocarbons, or those that launch new exploration, exploitation, and/or refining projects for hydrocarbons (oil and gas).
An ISR-labeled fund must therefore prove that it genuinely integrates environmental, social, and governance criteria into its investment choices. Funds are audited annually to determine if management rules comply with the label's requirements.
The Finansol Label
Created in 1997, Finansol is the first French label for solidarity finance. For over 25 years, this label, supported by the FAIR association, has distinguished solidarity investments from conventional savings products.
These labeled savings products support employment in the social and solidarity economy, finance the ecological transition, combat poor housing, and fund international solidarity, thereby contributing to sustainable development. Labeled products must finance socially impactful activities or allow at least 25% of interest to be shared as a donation.
The label committee, composed of independent experts, verifies annually that the funds comply with their commitments and publishes a detailed impact report.
The Greenfin Label
The Greenfin label was created in 2015 at the time of COP21 by the French Ministry of Ecological Transition. Formerly named "Label Transition Énergétique et Écologique pour le Climat" (TEEC), it is the official label for funds that finance the ecological and energy transition.
This label guarantees that 100% of investments finance the ecological transition. Fossil fuels are excluded, as are companies that have undergone social or ethical controversies. Conversely, nuclear power has been eligible since 2024.
Performance and Profitability
Are Responsible Funds Less Performing Than Traditional Funds?
Responsible funds often have a persistent bad reputation: that they are less profitable than their traditional counterparts. Societal impact and economic performance are supposedly incompatible.
Studies tend to demonstrate the opposite. A meta-analysis conducted in 2015 by the University of Oxford and Arabesque Partners indicated, based on 200 sources including academic studies, journalistic writings, and asset management company reports, that "80% of the studies examined show that prudent sustainability practices have a positive influence on investment profitability." There is, therefore, a consensus that it is possible to achieve ESG performance without deteriorating financial performance.
For example, the MSCI World SRI has historically outperformed its traditional counterpart, the MSCI World, with better returns in 9 out of the 13 years studied.
What are the Management Fees and Costs?
Another common misconception about responsible funds: that fees are (much) higher than traditional funds. The AMF (French Financial Markets Authority) has demonstrated the opposite. A study published in 2021, analyzing 28,480 fund units marketed in France between 2012 and 2018, shows that the management fees of SRI funds are, on average, 0.17% lower.
This confirms that sustainable funds can combine financial performance with ecological and social considerations.
To reduce management fees (and increase investment returns), it is possible to invest via ESG ETFs. However, this entails two major drawbacks: passive management and indirect impact.
Risk/Return Profile
Responsible funds often have a more favorable or at least equivalent risk/return profile to traditional funds, while offering better management of extra-financial risks.
On one hand, they generally exhibit lower volatility than traditional funds. This is partly due to a better appreciation of risks. Extra-financial criteria help to understand risks that go unnoticed by financial analyses. ESG funds thus show better resilience during crises.
On the other hand, responsible funds can achieve financial returns equal to or even higher than their traditional counterparts.
Choosing the Best Responsible Funds
One important question remains: how to choose the best fund aligned with your commitments?
Here is a selection of responsible funds that allow you to combine economic performance and ESG requirements in your equity and bond investments:
| Fund |
Sector |
Region |
Risk |
Label |
| BNP Paribas Aqua Classic | Water | Global | 4 / 7 | ISR |
| Amundi Funds Global Equity Responsible | Ecology (general) | Global | 4 / 7 | ISR |
| Mandarine Global Transition R | Ecology (general) | Global | 4 / 7 | Greenfin |
| Mirova Europe Environmental Equity Fund | Ecology (general) | Europe | 4 / 7 | ISR + Greenfin |
| Fonds Euro Objectif Climat | Ecology (general) | France | 1 / 7 | Greenfin |
| Sycomore Eco Solutions | Ecology (general) | Europe | 5 / 7 | Greenfin |
| OFI RS Act4 Green Economy | Ecology (general) | Global | 4 / 7 | Greenfin |
| Echiquier Major SRI Growth Europe | Multi-sector ESG | Europe | 4 / 7 | ISR |
| SC Terra Europe | Forest | Europe | 3 / 7 | — |
| SCI Territoires Avenir | Real Estate | Europe | 2 / 7 | — |
| FCPR Tikehau Financement Décarbonation | Decarbonization | France | 6 / 7 | — |
| FCPR Eiffel Infrastructures Vertes | Infrastructure | Europe | 3 / 7 | Greenfin |
| FCPR Invest For Tomorrow | Ecology (general) | Europe + USA | 7 / 7 | — |
What are the Alternatives to Responsible Funds?
Despite their growing popularity, responsible funds have several limitations that should be known before investing. Some alternative investments offer a direct impact while potentially providing higher returns.
Limitations of Responsible Funds: Risks to Avoid and Greenwashing
Responsible funds are not immune to the risk of greenwashing. Some "ESG" funds actually include companies whose environmental or social impact remains questionable. Selection criteria vary considerably across indices, requiring investors to exercise the utmost vigilance.
Labels do not always provide complete clarity. The ISR label took a long time to exclude fossil fuels. And it does not exclude certain practices like armaments. On the ESG side, there is a cacophony of standards. The same company can obtain contradictory ESG ratings depending on the standards and agencies.
Furthermore, the impact of responsible funds on the environment or society is sometimes limited. Some merely exclude a few sectors without a real transformation strategy. As for ETFs and passive funds, they simply replicate an index without exerting direct influence on the practices of the companies they hold.
Prioritizing Direct and Measurable Impact: Carbon Allowances
Faced with the constraints of sustainable funds, an innovative alternative is emerging in the field of sustainable finance: carbon allowances.
Unlike ESG funds, which have an indirect role, carbon allowances directly impact decarbonization. Each allowance purchased literally removes one ton of CO2 from the European carbon market, creating an immediate and measurable environmental impact.
European carbon allowances show average returns of 16% to 25% per year with low correlation to traditional markets. This allows for portfolio diversification while maximizing climate impact. The European Union Emissions Trading System (EU ETS) has already reduced emissions in covered sectors by half.
Previously reserved for institutional investors and large corporations, European carbon allowances (EUAs) are now accessible to individuals with Homaio. Homaio thus enables investors to participate directly in the fight against climate change, transforming their savings into a tangible lever for decarbonization.
Conclusion
Responsible funds have spread widely over the past 10 years, driven by new labels, particularly the ISR label. Contrary to popular belief, these funds are as, if not more, performant than traditional funds, while offering attractive fee and risk levels. However, despite the labels, greenwashing persists, and the real impact of funds remains difficult to measure. Other investments offer a direct and measurable impact on the climate; this is the case for carbon allowances.
Key Takeaways
- Responsible funds combine financial performance with Environmental, Social, and Governance (ESG) criteria in their investment choices.
- In France, three labels govern sustainable finance: the ISR label, Finansol, and Greenfin.
- Contrary to popular belief, responsible funds show performance equal to, if not superior to, traditional funds, often with lower volatility.
- However, not all "ESG" funds are equal, and greenwashing is a common risk, sometimes limiting their direct impact.
- Carbon allowances offer a direct and measurable impact on decarbonization, with attractive returns and low correlation to traditional markets. They are now accessible to individuals via platforms like Homaio.
FAQ
What is an ESG fund? An ESG fund is a responsible fund that relies on ESG (Environmental, Social, Governance) criteria for its investment decisions.
What is the difference between ESG and SRI? SRI (Socially Responsible Investment) is a generic term for sustainable investment practices and also a reference label in French sustainable finance. ESG evaluates a company's policy across three areas: environmental, social, and governance. While the ISR label has a single evaluation framework, there are multiple ESG evaluation standards and agencies, which can lead to contradictory ratings for the same company.
What is an SRI fund? An SRI fund is a fund that has obtained the ISR (Socially Responsible Investment) label. Created in 2016 by the French State, this fund was reformed in 2024 to be less permissive, notably by excluding new fossil fuel exploitation
