The asset management arm of BNP Paribas SA said using a different interpretation of “sustainable investment” than some of its peers has allowed it to keep the European Union’s top ESG tag attached to about $20 billion worth of funds.
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Firms including BlackRock Inc., Amundi SA 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% sustainable investments, save for liquidity and hedging needs.
But reaching the 100% 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 told Bloomberg 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 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, ESMA, has asked the EU 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.
Sustainable Investments in the EU...
The EU Commission currently allows two definitions.
For example, assume a financial market participant invests €100,000 in the stock of a company that follows good governance practices and does no significant harm to any of the EU’s environmental or social goals. That company might report, say, that 20% of its economic activities are “sustainable.”
The asset manager can choose to count only 20% of the company’s holding as a “sustainable investment,” or classify the entire position as “sustainable.” If they go with the latter option, EU guidelines currently don’t set a lower threshold.
Read the full article here by Natasha White, Frances Schwartzkopff, Advisor Perspectives.
