ESG labels are proving their worth by providing a level, more transparent, playing field for asset managers and investors in a burgeoning European market that has some EUR 496 billion in assets under management.
So: how do these labels work, and how do they help the asset management industry and investors?
Protection from ‘greenwashing’
Separating wheat and chaff among the plethora of investment funds and strategies claiming to be ‘green’ – i.e. to offer social or environmental ‘extra-financial’ benefits – can be difficult for investors. Labels can provide clarity.
They offer an independent view on the quality of sustainable financial management, the environmental, social and governance (ESG) criteria used and the engagement of asset managers with issuers. Put bluntly, they help protect investors from ‘greenwashing’ by ensuring that ESG measures and standards are applied rigorously and communicated clearly.
Something for everyone
Some labels cover the full ESG spectrum, others are more specifically focused on the environment. Certain ones prioritise aspects of the social impact of responsible investing.
Most are granted via assessments involving the two most widely used approaches:
- favour best-in-class performers
- exclude the least responsible sectors or securities.
European labelling: Still a bit of a patchwork quilt
To date, in Europe, there are national labels (in France, Belgium, Luxembourg and Austria) and cross-border ones: Switzerland, Germany and Austria work with the FNG-Siegel, Nordic countries with the Nordic Ecolabel.
The EU's taxonomy now being finalised is paving the way for a pan-European ecolabel for financial products – something the European Commission is seeking – but it is not likely to be launched until 2022.
So which ones cover what?
Supported by Ministry of Finance. Replaces Novethic labels. As of 15 January 2020, 337 (mostly equity) funds managed by 63 companies and representing total AUM of EUR 136 billion have been granted this label. Certifies that the ESG selectivity implemented in the fund is sufficiently stringent; takes into account the engagement and voting policy at general meetings and calls for full transparency. Requires a Transparency Code document to be made available to the public that clearly defines each fund’s ESG methodology. BNPP AM has more than 40 funds with this label (equities, bonds, money market and ETFs), with a total AUM of some EUR 30 billion, making it Europe’s leading SRI asset manager based on this criterion.
Supported by Ministry for Ecological and Solidarity Transition. Replaces TEEC label. Focuses on the energy and ecological transition for the climate, so has environmental bias rather than full ESG spectrum.
Created in 1997. Focused on social solidarity finance and applies both to investment funds and savings products. 5% to 10% of assets must be invested in socially responsible activities, with the rest of the portfolio meeting ESG criteria. May gain in importance as the 2019 ‘Loi PACTE’ – a law that seeks to ensure greater sharing across society of the value created by businesses – takes effect.
Developed by financial federation, Febelfin, and issued by Forum Ethibel, ensuring the collaboration of two universities recognised in this field. Label is compulsory for marketing an SRI-themed investment fund in Belgium. Since 2019 launch, 320 funds labelled representing outstanding assets totalling EUR 138 billion. Three-fold assessment: sectoral exclusions; full ESG criteria integration; monitoring of range of SRI strategies. Eighty BNPP AM funds (equities, bonds, money market, diversified, index and structured) with a total of EUR 53 billion in AUM have obtained this label.
Created by an independent, international non-profit association, LuxFLAG labels cover fewer funds (183 at the end of December 2019) than those in France (321 for SRI label) and Belgium (320). Assessment is split into three sub-categories: environment, ESG and climate change. This may deter those asset managers who prioritise getting the ESG label.
And what is our view?
There is no question of BNPP AM embarking on a race for labelling at any price. We believe that if a such seal of approval can be obtained only via excessive adjustments to our investment processes (and portfolios), it is no longer in our or clients’ interests to pursue it.
In addition, our Global Sustainability Strategy clearly defines sustainable investment and how it is applied to investment processes, i.e. precisely what is controlled by the certification agencies.
Irrespective of independent certification and labelling, we believe the rigorous integration of ESG criteria into all investment processes at BNPP AM will become the new standard for our industry.
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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.