Amundi’s $48 Billion ESG Fund Call Exposes a Lot of Holdouts

Europe’s biggest asset manager is setting a high bar for how to interpret ESG regulations, and that’s putting pressure on others in the industry to explain their strategies.

(Bloomberg) — There’s an awkward realization spreading across Europe’s ESG fund-management market.

A wave of downgrades triggered by stricter regulatory guidance has exposed significant variations in how investment firms are interpreting rules for the European Union’s top environmental, social and governance fund class, known as Article 9.

Amundi SA, Europe’s biggest asset manager, says it thinks Article 9 can now only be applied to a very limited set of products, which is why it’s stripping the label from almost all its €45 billion ($48 billion) in such funds, effective this month. It currently holds about €3 billion of Article 9 funds, representing roughly 7% of its previous offering.

Jean-Jacques Barbéris, director of the institutional and corporate clients division and ESG at Amundi, said clarifications from the EU likely mean that Article 9 should only be attached to “very ‘pure’ funds.” These include “some green bond or social bond funds, plus some private asset funds where the rules are different,” he said.

Since the European Commission made clear Article 9 must be reserved for funds holding 100% sustainable investments, with allowances for hedging and liquidity, asset managers have stripped the tag from well over $140 billion of client assets. But not all firms are arriving at the same interpretation of what constitutes a sustainable investment.

Disagreement is emerging as to whether Article 9 can be applied to portfolios of publicly traded stocks, for example. And there are questions as to whether so-called UCITS funds, for which diversification and liquidity requirements apply, might be hard to package as Article 9.

The strictest, narrowest interpretation of EU ESG investing rules implies that “it’s to some extent easier to construct an Article 9 strategy for a private fund than it is for a public UCITS fund,” said Tristram Lawton, managing associate at Simmons & Simmons. “But it’s not to say that it’s impossible, there are UCITS funds which are Article 9, some firms have managed to do it.”

Amundi’s decision to apply a very strict reading of Article 9 rests on concerns that to do otherwise would risk “greenwashing allegations, potential legal risk, reputational questions for our clients,” Barbéris said.

One of the world’s biggest Article 9 funds is managed by the investing arm of Nordea Bank Abp. The Nordea 1 – Global Climate and Environment Fund, which is an actively managed €9.5 billion equity portfolio, won’t be reclassified, said Eric Pedersen, head of responsible investments at Nordea Asset Management.

“We haven’t downgraded anything yet and we — for the moment at least — don’t think that we will,” he said. “We’re looking at this all the time and reviewing it, in light of new information that’s coming up. But I think we’re in a relatively good place because from the beginning we didn’t put very many funds into Article 9.” Nordea manages a total of €10.5 billion in the product class.

The EU has yet to nail down a clear definition of “sustainable investment.” One interpretation, namely that 100% of a company’s activities must contribute to an environmental or social goal, would rule out most equity funds and if that’s what the EU expects, then Nordea would have to downgrade, Pedersen said.

Sustainable Investments in the EU…

The EU Commission currently allows two formulas:

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.

The asset management arm of BNP Paribas SA has said it’s using an interpretation of “sustainable investment” that has allowed it to continue applying an Article 9 designation to about $20 billion worth of funds. These are predominantly actively managed, and include thematic funds containing publicly traded equities.

Back in September, before a wave of Article 9 downgrades upended Europe’s fund industry, Morningstar Inc. estimated the designation covered about €470 billion in client assets. Many Article 9 funds aren’t disclosing what they hold in sustainable assets, according to a December study by Novethic. The Paris-based ESG data and analysis provider, which looked at almost 200 French products, found that just 19 report a minimum share of sustainable investments in their documentation.

Hortense Bioy, Morningstar’s global director of sustainability research, said last year that Article 9 will “clearly” shrink and be limited to “thematic and impact-oriented funds investing in companies that focus on sustainable products and services,” which often tend to be small- or mid-caps, or to “bond funds whose proceeds help finance green and social projects.”

Lawton notes that there are “liquidity and diversification rules for public funds that don’t exist for private funds, which therefore makes it easier to construct a strategy around a narrow sustainable investment framework that would work for a private fund that wouldn’t work for a public fund.”

BNP, which has downgraded about $16 billion of passively managed Article 9 funds, said in December that deciding what constitutes a sustainable investment is “much more akin to security valuation than to objective company-level data.”