As the world transitions to greater sustainability, and investments with it, regulators are requiring greater transparency on the degree of sustainability of financial products. The aim is to channel more private investment towards sustainable investing, while preventing ‘greenwashing’.
Here, we recap the EU regulatory landscape with a particular focus on the Sustainable Finance Disclosure Regulation and how BNP Paribas Asset Management is implementing the guidelines.
The regulations seek to clarify which activities meet sound environmental, social and governance criteria and what the impact of investments is on stakeholders including the environment, society and people. They include rules on sustainability reporting by issuers, but also by asset managers.
While directives such as SFDR and MiFID II are challenges for our industry given their complexity and the many adjustments required, we believe they are for the better. They benefit all stakeholders as well as the wider – eventually low-carbon and inclusive – economy. They fit with a growing political and social drive to reallocate capital to activities that help tackle the sustainability issues the world faces.
The regulations aim to ensure a transparency-enhancing flow of information. The Corporate Sustainability Reporting Directive requires large and listed companies to report on sustainability risks and their impact on environmental and social factors, and to notably disclose the percentage of their activities aligned with the EU environmental taxonomy. The flow also encompasses financial market participants and the end-investor (see Exhibit 1).
Asset managers use the information from the companies to build financial products with environmental and social characteristics or sustainable investment objectives. Under the SFDR , they need to report the extra-financial features of products clearly and transparently, so that distributors can select and offer end-clients financial products which fit best with their sustainability preferences, as required under MiFID II.
Here, we focus on the SFDR. Although its primary objective is to lay down harmonised rules for transparent communication of sustainability-related information with respect to financial products, it also gives a first classification of financial products based on their extra-financial features.
It defines three categories of financial products: Article 9 products (with a defined sustainable investment objective), Article 8 products (promoting environmental or social characteristics), and mainstream products without any specific ESG characteristics or a sustainable objective. It should be noted that SFDR applies to all funds that are domiciled in Europe or registered for distribution there.
This three-tier classification matters since in accordance with the regulations, asset managers and distributors need to be able to align the ESG characteristics of products and clients’ ESG preferences. This requires reporting that is clear and transparent to prevent greenwashing and mis-selling.
Target regulatory landscape – 2022-2024 timeline
- August 2022 – Investors state their questionnaire-based ESG preferences
- December 2022 – Principal adverse sustainability impacts (PASI) reported at product level
- June 2023 – Companies report their first PASI statement for the reference period of 2022
- January 2024 – Companies publish their first CSRD reports.
Source: BNP Paribas Asset Management
Article 8 and Article 9 at BNP Paribas Asset Management
The BNPP AM Global Sustainability Strategy puts sustainability at the heart of all our investment processes. It is applied across all our open-ended funds. For third-party funds, we ascertain whether they have a solid approach to integrating ESG considerations in their investment processes, even if they do not implement the full breadth of our Global Sustainability Strategy.
The SFDR provides no clear qualitative or quantitative criteria for Article 8 products; therefore, we apply our own high standards for these products to ensure that they align optimally with the sustainability preferences of end-clients.
At a minimum, we require that at least 90% of assets in portfolios investing in developed markets have a credible data-driven ESG score using our proprietary methodology.  The ESG coverage threshold is set at 75% for portfolios investing in segments or markets where data is harder to collect, such as emerging markets, small-cap equities or high-yield bonds. Also, all our Article 8 portfolios should have an ESG score that exceeds that of their benchmark.
It stands to reason that the Article 8 segment will expand rapidly as asset managers work to make more products eligible amid growing investor demand. These will represent the bulk of the offering.
For Article 9 funds, the SFDR sets minimum high-level requirements: they should invest in companies with economic activities that contribute to an environmental or social objective, comply with the ‘Do No Significant Harm’ principle and follow good governance practices.
Article 9 funds can be considered ‘dark green’ products. Given the more demanding requirements applied to these products, this typically is a smaller market segment.
As of 31 December 2021, open-ended funds classified as Article 8 or 9 accounted for 81% of the total assets of European BNPP AM funds. This is high compared to the market.  According to Morningstar, BNPP AM is ranked number one in terms of assets under management in Article 9 funds.
Getting ready for MiFID II
We believe a solid process matters when matching investment products and client preferences under MiFID II rules. Clients may signal a preference as to
a) which share of their investments they want to be aligned with the EU taxonomy 
b) which proportion of their investments they want to be sustainable
c) investing only in products which consider, address, and mitigate principal adverse impacts.
Logically, a fund that falls into the a) category and is aligned with taxonomy criteria should also be suitable for investors looking for b) type sustainable investments and c) type PASI-focused products.
As a ‘product manufacturer’, and in line with its fiduciary duty, BNPP AM will provide clients – be they end-clients or distributors – with its own clear and transparent reports on PASI, ESG characteristics and taxonomy alignment for all active, passive and ETF funds.
Distributors will use these disclosure reports for a fact-based assessment of the (minimum) ESG characteristics of a product and to match this information and the criteria set out by clients in a MiFID II mandated questionnaire.
It should be noted that the questionnaire applies to all types of clients. At this point, there is no harmonised EU-wide format for this survey across market participants, but we expect it to eventually follow a common framework based on industry guidelines.
 For detailed information about our ESG scoring framework, go to BNP Paribas Asset Management – BNPP AM – Corporate (bnpparibas-am.com)
 At the time of writing; source: BNP Paribas Asset Management  So far, the European Commission has published the technical screening criteria for only two environmental objectives: climate change mitigation and climate adaptation. The criteria for its remaining four objectives are expected later in 2022.