(Dec 28): 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 US$20 billion worth of funds.

Firms including BlackRock Inc, Amundi SA and Axa Investment Managers have reclassified more than US$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 US$16 billion in total. But for roughly US$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.

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.

In the meantime, many asset managers are erring on the side of caution. Amundi opted to downgrade almost all its roughly US$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”, he said.

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, she said.

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,” Rahm said. “So hopefully, hopefully we’ll go through.”