The asset management arm of BNP Paribas said using a different interpretation of sustainable investment to some of its peers has allowed it to keep the European Union’s top environmental, social and governance (ESG) tag attached to about $20 billion (€18.7 billion) worth of funds.
Firms including BlackRock, Amundi and Axa Investment Managers have reclassified more than $140 billion of so-called Article 9 funds – the EU’s highest environmental, social and governance fund designation – to a less stringent category known as Article 8. The downgrades follow stricter EU guidance stipulating that Article 9 must be reserved for 100 per cent sustainable investments, save for liquidity and hedging needs.
But reaching the 100 per cent threshold depends on how asset managers define a sustainable investment. And under current EU rules, that’s “a judgment call left for each market participant to make”, the asset management unit of BNP said in an emailed response to questions.
Calling an investment sustainable is “much more akin to security valuation than to objective company-level data”, BNP said. That paves the way for “possible and natural disagreements in the outcome of the analysis between financial market participants”.
BNP has interpreted the EU’s stricter guidance on Article 9 to mean that all but one of its passive, index-tracking funds can no longer carry the designation, representing about $16 billion in total. But for roughly $20 billion of actively managed funds, the classification won’t be removed, BNP told Bloomberg.
BNP’s asset management unit said it is aware that its “approach differs from other investment firms operating under EU rules”. It continues to apply the Article 9 designation to funds that hold publicly traded equities, which some fund managers say is incompatible with EU guidance. BNP said its Article 9 equity funds are “mostly thematic”.
It’s the latest sign that the EU’s Sustainable Finance Disclosure Regulation (SFDR) is feeding industry fragmentation, despite efforts to encourage a more consistent interpretation of the bloc’s ESG investing rules by setting minimum thresholds.
Europe’s markets watchdog, European Securities and Markets Authority (ESMA), has asked the European Commission to provide clearer guidance on how financial professionals should define a sustainable investment, and the bloc’s executive arm has said it’s now looking into the matter.
A look ahead to 2023
In the meantime, many asset managers are erring on the side of caution. Amundi opted to downgrade almost all its roughly $46 billion in Article 9 funds. DWS Group, the asset management unit of Deutsche Bank AG, has removed the tag from funds holding publicly traded equities.
Recent Article 9 downgrades at Allianz Global Investors followed on from its so-called activity-based methodology, which looks at a portfolio company’s economic activities and calculates the proportion of those deemed sustainable.
The model, which requires that fund managers “get granular in their analysis, makes it hard to defend classifying equity funds as Article 9″, said Matt Christensen, Allianz GI’s head of sustainable and impact investing.
“The market is still trying to find out what latitude there is,” he said. But Allianz prefers “the conservative approach”.
Anna Maleva-Otto, a partner at Schulte, Roth & Zabel LLP, said fund managers “are having to make subjective decisions. That’s in large part due to a lack of data on which firms can base sustainability claims.”
BNP said its actively managed Article 9 funds use an in-house sustainability approach that benefits from “our long-term focus on sustainability”.
“Our Article 9 active sustainable thematic funds have a sustainable investment objective by construction. So the SFDR requirements are aligned with these strategies enabling them to remain Article 9, also after the recent clarifications.”
The EU’s guidelines around Article 9 are also spurring product innovation. Sophie Rahm, head of impact investment at Credit Mutuel Asset Management, said she’s had to reclassify “a couple of funds” due to “the recent clarifications from EU regulators”.
She’s now trying to figure out how to design a product that will meet the EU’s updated guidelines for Article 9, which has entailed close talks with the regulator in France, where Credit Mutuel AM is based.
“I’m waiting to hear from them,” Ms Rahm said. “So hopefully, hopefully we’ll go through.” – Bloomberg