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What are ESG criteria?

ESG stands for Environmental, Social and Governance. These are non-financial criteria used to assess a company beyond its financial performance alone.

ESG criteria do not replace financial analysis. They add elements that financial statements do not show:

  • environmental aspects;
  • social practices;
  • governance practices.

Traditional financial analysis is based on revenue, margins and cash flows. The ESG approach goes further by assessing a company’s ability to take environmental, social and/or governance factors into account.

 

 

The 3 ESG pillars: Environment, Social, Governance 

  • Environment: this pillar measures the climate and environmental footprint of an entity: CO₂ emissions, water consumption, waste management, use of renewable energy.
  • Social: this pillar assesses social practices: working conditions, diversity and inclusion, health and safety, respect for human rights throughout the supply chain.
  • Governance: this pillar aims to evaluate a company’s governance practices and policies: does it operate within legal and regulatory frameworks while promoting transparency and accountability?

Each of these pillars includes dozens of indicators depending on the sector. A bank will not be assessed on the same environmental criteria as a chemical industrial company, but all three dimensions apply to every company.

Why do ESG criteria matter for your investments?

In addition to financial criteria, environmental, social and/or governance (ESG) criteria now play a complementary role in investment decisions. Three dynamics explain this evolution:

  • Company value: ESG factors can affect financial performance. At the same time, a company’s activity can have environmental and/or social effects. Companies that manage their ESG risks well may be better prepared for the future.
  • European regulation: Europe is strengthening its requirements in sustainable finance. Companies that proactively adopt these changes can better anticipate the ongoing transition.
  • Attractiveness for investors: companies with strong ESG ratings may attract more investor interest, which can support their valuations.

Which ESG criteria for investing? Key strategies to know 

Two investors with the same budget and interest in ESG criteria may end up with very different portfolios. The right strategy for you must take into account your sustainability preferences, your risk tolerance and your objectives defined by your investor profile. In most cases, combining different strategies within one portfolio is relevant.

 

In addition to this approach, regulations also define general sustainability criteria whose application may differ depending on the management entity.

General sustainability criteria:

  • Exclusion (negative screening)

    This is the oldest and simplest strategy. It meansexcluding companies or sectors deemed incompatible with your values from your portfolio: weapons, tobacco, coal, gambling, etc.

    The advantage: it is clear and easy to understand. The limitation: it defines what you do not want, but not what you actively seek.

  • Le best-in-class

    This approach selects the best-rated companies on ESG criteria within each sector, including controversial sectors. An oil company could be included in a best-in-class portfolio if it has the best ESG scores in its sector and complies with sector policies.

    The advantage: full sector diversification is maintained. The limitation: an investor unwilling to have any exposure to fossil fuels may not find this suitable.

  • Thematic investing

    Here, the focus is on a specific ESG theme: renewable energy, water management, circular economy, gender equality, health. The portfolio is built around these principles.

    The advantage: strong consistency between principles and investments. The limitation: greater sector concentration, hence higher volatility. If the theme enters a period of fluctuation, the entire portfolio is affected.

  • Impact investing

    Impact investing goes further than ESG selection: it seeks to generate a measurable positive social or environmental effect, in addition to financial return. It is not just about avoiding negative impact or selecting the best—it actively finances solutions that might struggle to be funded outside this type of strategy.

    What sets it apart: intentionality (impact is an objective, not a side effect), additionality (the investment makes a positive additional contribution), measurability (results are monitored and reported). The limitation: sometimes this approach requires trade-offs between impact and a certain level of financial return.

  • Shareholder engagement

    A strategy often overlooked by individual investors: using shareholder rights to influence ESG practices of companies in the portfolio. Voting at general meetings, filing resolutions, engaging in dialogue with management.

    Some fund managers actively practice shareholder engagement. These actions may be described in their reports.

How to integrate ESG criteria into your investments?

Before choosing a fund, take a moment to clarify what matters to you.

Some guiding questions:

  • Do you want to contribute to environmental goals, social goals, both, or limit the negative effects of your investments?
  • What investment horizon are you targeting?

These answers will guide your investment strategy and the funds that suit you best.

Reading an ESG fund factsheet: key indicators to check

When reviewing a fund presented as ESG, here are the elements to check:

SFDR classification (Sustainable Finance Disclosure Regulation): Article 6, 8 or 9. The higher the number, the more structured the fund manager’s ESG commitment.

  • Label: a label provides external verification (unlike SFDR classification).
  • Exclusion policy: which sectors and/or practices are excluded?
  • Portfolio ESG rating: what is the average score? What are the data sources? Are there specific social, environmental or governance issues the fund aims to address? 
  • Impact reporting: does the fund publish measurable impact indicators (tonnes of CO₂ avoided, number of jobs created, etc.)?

All the funds in our thematic range selected by BNP Paribas Asset Management integrate ESG criteria to varying degrees.

Discover our investment funds

How are ESG criteria assessed?

As there are financial rating agencies (Moody’s, S&P, Fitch), there are also agencies specialized in ESG ratings. Their role: to analyse companies’ practices and assign them a score or rating.

  • MSCI ESG: This agency rates companies from AAA to CCC on a 7-level scale. It covers around 8,500 companies and 680,000 funds and assesses their ability to manage ESG factors.
  • Sustainalytics: This Morningstar group agency uses a scale from 0 to 50. The lower the score, the better the rating. It covers around 16,000 companies.
  • ISS ESG: It measures ESG performance on a scale from A+ to D-, comparing companies with each other and against absolute standards. It covers around 10,000 companies.
  • S&P Global ESG: It assigns a score from 0 to 100 based on its annual assessment of corporate sustainability. It also covers around 10,000 companies.

These agencies are not regulators. They are data providers that may be used by fund managers to build and filter their portfolios.

Why do ESG ratings vary between agencies?

Because methodologies are not standardised. MSCI may give more importance to climate risks while Sustainalytics focuses more on governance. Data sources differ. Selected criteria and their weighting also vary depending on the sector.

While financial ratings from Moody’s and S&P converge in around 99% of cases, correlations between ESG rating agencies are around 50 to 60%.
What this means for you: compare sources. Review the methodology to understand what each score measures.

ESG labels and certifications 

Several labels provide additional guidance alongside ratings. They certify that a fund complies with defined specifications.

  • The ISR label (Investissement Socialement Responsable) is a French label. It certifies that the fund integrates ESG criteria. It was strengthened in 2024, notably with the exclusion of fossil fuels.
  • Thee Greenfin label, also French, targets funds financing the energy and ecological transition. It excludes companies linked to fossil fuels and nuclear energy.
  • The Towards Sustainability label is a Belgian label. It frames investment funds by setting rules on transparency and ESG criteria.
  • The FNG-Siegel label is a German label. It certifies funds that take ESG criteria into account and comply with certain transparency and sustainability rules.

The sustainable finance regulatory framework in Luxembourg

SFDR : understanding Articles 6, 8 et 9 

The European Sustainable Finance Disclosure Regulation (SFDR) classifies funds into three categories based on their level of ESG commitment.

  • Article 6 funds do not commit to systematically integrating ESG criteria into their management. They are aimed at investors for whom ESG is not a key criterion.
  • Article 8 funds systematically integrate environmental or social characteristics into their approach, often combining best-in-class, exclusion and shareholder engagement strategies, sometimes even thematic exposure for part of the portfolio. They are suitable for investors who wish to add an ESG dimension to their investments.
  • Article 9 funds are fully dedicated to sustainable investment. This is the most committed category. It is intended for investors who wish to give a clear direction to their investments, often linked to specific themes (circular economy, renewable energies, energy efficiency, etc.).

When reviewing a fund factsheet, the SFDR classification appears among the first pieces of information. It is a useful reference point.

European taxonomy: the sustainable finance framework 

In addition to SFDR regulation, the European taxonomy defines which economic activities can be considered “sustainable” under EU standards. It acts as a common dictionary that prevents each stakeholder from defining “green” differently.

In practice, when a fund indicates that 40% of its investments are “taxonomy-aligned”, it means that this share finances activities recognised as contributing to the European Union’s climate objectives (e.g. climate change mitigation, adaptation to climate change, water and marine resources, circular economy, pollution control, biodiversity).

It should be noted that, for now, given the remaining room for improvement in the real economy, Article 9 fund managers still have the possibility to define themselves the sustainable investments that must make up 100% of their portfolios.

 

Your devoted BGL BNP Paribas Team, 26/05/2026

The information on this web page does not constitute investment recommendations or advice. This web page does not aim to provide an exhaustive description of the investment services it refers to, nor of certain related risks.
An investment decision cannot be based solely on this document and should only be made after careful analysis of the characteristics and risks (as described in the Investor Panorama), and after having obtained all necessary information. BGL BNP Paribas recommends that, if you feel the need, you do not hesitate to consult professional advisers, including tax advisers.
BGL BNP Paribas Société Anonyme, with its registered office at 60, avenue J.F. Kennedy, L-1855 Luxembourg, as a credit institution, is subject to the regulation and supervision of the Commission de Surveillance du Secteur Financier (CSSF), 283, route d’Arlon, L-1150 Luxembourg.

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