Favorite folders are a set of folders available at the top of your mail folder list.

The Favorites include global pre-defined folders, formerly known as Smart folders, that unify your accounts' inboxes, sent folders, drafts, etc. They also contain special folders for all unread messages, all messages with a flag, Snoozed emails and important messages that have Watch for reply enabled.
You can also add your existing folders from any of your accounts to the Favourites, simply drag&drop the folder into this section or via right-click>Add to favorites.

This way you can have folders that you use often right at hand.

If you pin folders with the same name into the Favorite folders (for example specific Inboxes) you can rename them. The name change in the Favorite section will not affect the original folder name.