BNP PARIBAS ASSET MANAGEMENTENVIRONMENTAL, SOCIALAND GOVERNANCE (ESG) SCORINGFOR SOVEREIGN BOND ISSUERS
For professional investors – Marketing communication - July 2024

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investor for achanging world

BNPP AM - ESG SCORING FOR SOVEREIGN BOND ISSUERS-2-SOVEREIGN ESG SCORING: INFORMINGINVESTMENT DECISIONS AND ENGAGEMENT
BNP Paribas Asset Management’s (BNPP AM) approach to scoring issuers ofsovereign bonds on their environmental, social and governance (ESG) performanceis designed to support better-informed investment decisions and engagement.
Our comprehensive methodology combines quantitative and qualitative inputs
and draws on data from trusted providers. It is applied across 109 developed andemerging countries that currently make up our sovereign bond investment universe.
The score:• Allows investors to compare countries with different levels of economic development• Involves a close focus on a country’s commitment to addressing climate change andits exposure to physical climate risk
• Combines insights from investment teams and input from our dialogue withregulators and policymakers

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SCORING METHODOLOGY

Quantitative analysis

Governance
Pillar33%
SocialPillar
33%{Environmental Pillar 33%
which includes:• 1/3 Climate mitigation x 50% +Climate Legislation x 50%• 1/3 Physical climate risk
• 1/3 Environmental metrics• Standardisation of ESG Indicators
Performance relative to GDP andindicators’ weights by income classand pillar.
• Normalisation of resultsfor E, S, G Performance KPIs,
Climate and Physical Climate Risk
scores, thanks to z-scores

Qualitative analysis
BNPP AM’s ESG Qualitative Overlay input provided by investment teams.
Information based on interaction with policymaker on future ESG trends

Country final ESG score: ESG Rating on a 1-100 scale
ESG assessments are based on BNPP AM’s proprietary methodology which integrates all three aspects of Environmental,
Social & Governance

SCORE WEIGHTINGS
Pillars

Key performanceindicators (KPI)Indicators

WeightTotal pillar’s weight

Environmental (E)Environmentalperformance

14 themes*

11.11%

Climate mitigation

Temperature score
Legislation score11.11%

Physical climate risk

Climate change
exposure

11.11%

Social (S)Social performance

12 themes*

33.33%

33.33%

Governance (G)Governanceperformance

7 themes*

33.33%

33.33%

33.33%*Examples of ESG themes are available on the next page. Source: BNP Paribas Asset Management, December 2023.
For illustrative purposes only.

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1. ESG PERFORMANCE ASSESSMENT
The ESG performance assessment combines 225 Beyond Ratings ESG KPIs within
14 environmental, 12 social and 7 governance themes to provide a comprehensive,
contextual view of a country’s ESG performance.
EXAMPLES OF ESG THEMES
Environmental

SocialGovernance• Energy infrastructure needs• Innovation & human capital• Corruption• Water scarcity• Labour & social protection• Political stability• Biodiversity• Economic inequality• Democratic life

A. ENABLING COMPARABILITY: PERFORMANCE RELATIVE TO EXPECTATIONSTo enable fair comparison among countries, the performance for each ESG indicator
is calculated relative to the expected level given the country’s degree of economicdevelopment. The expected level for each indicator is determined as the average
per income group within five income classifications as defined by the World Bank.1
Calculating a country’s ESG performance on a specific indicator requires identifying
an expected level given the country’s gross domestic product (GDP).
The expected level of an indicator is determined as its average per GDP level.
Expected levels are thus calculated empirically, by building the smoothed averageof the indicator’s values for all countries in relation to their GDP.

1Low Income, Lower Middle Income, Upper Middle Income, High Income non-OECD and High Income OECD.

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Example: The performance of two countries with different economic developmentlevels in terms of hospital beds
• Country A has a GDP of 1 000. Country B has a GDP of 10 000.
• For a GDP of 1 000, the expected number of beds is 10 per 100 inhabitants.
• For a GDP of 10 000, the expected number of beds is 20 per 100 inhabitants.
• Country A has 14 hospital beds per 100 inhabitants: 40% more than expected
given its GDP. Country B has 18 hospital beds for 100 inhabitants: 10% fewer
than expected.
• Although country B has more beds in absolute terms, the ESG performance ofcountry A on this indicator is 40%, and of country B is -10%.

GDP

Number ofhospital beds
per 100
inhabitants

Expected numberof hospitalbeds per 100
inhabitants
given the GDP

Performanceon the Numberof hospital beds
per 100
inhabitants

COUNTRY A

1,0001410+40%

COUNTRY B10,0001820-10%

Despite a lower numberof hospital beds per 100 inhabitantsfor country A, its performanceis better as it has more thanits expected number of hospital beds
per 100 inhabitants given
its lower GDP, while country B
has less than its expected
number given its higher GDP

Source: BNP Paribas Asset Management, December 2023. For illustrative purposes only.

B. ENABLING COMPARABILITY: PERFORMANCE RELATIVE TO EXPECTATIONS
The relevance of ESG risks and opportunities for a country depends to a significant
degree on its level of economic development. Therefore, the weightings of individual
indicators in the overall score differ according to the country’s income group.
Weightings are statistically determined through an approach that identifies how
well each indicator can discriminate among countries within each income group,
while having an impact on GDP.

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Example: Weighting of access to electricity within environmental (E) performanceassessment
Increasing access to electricity delivers more impact in lower-income countries
and so is weighted more highly than for countries in higher-income groups. If adeveloped country underperforms relative to its peers on access to electricity, itwill not significantly affect its overall ESG score.

Access to electricity(% of population)
Low Income

2.7%

Lower Middle Income

2.2%

Upper Middle Income

1.1%High Income – non OECD

0.7%

High Income OECD0%

Source: BNP Paribas Asset Management, December 2023. For illustrative purposes only.

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2. CLIMATE MITIGATION ASSESSMENT
Given the vital role of sovereigns in addressing climate change, the scoring
methodology emphasises countries’ climate commitments. The climate mitigationassessment evaluates the measures countries have in place to combat climatechange. It supplements the evaluation of current climate performance, which ispart of the E pillar of the ESG performance assessment.
This component combines a quantitative assessment of the country’s climate
ambitions with a qualitative evaluation of the laws and policies it has in place tosupport those ambitions.

50%

CLAIM NDC
temperature score+50%

Qualitative climate
legislation score

CLAIM Nationally Determined Contribution (NDC) temperature score
The Beyond Ratings CLAIM2 methodology provides an assessment of the commitment of each country to the goals of the Paris Agreement. To generate a score forthe country’s climate ambition, it compares:• A 2°C-compatible emissions budget for each country by 2030.
WITH• The emissions expected for the country based on its Nationally Determined
Contribution (NDC).

2

CLAIM is the Climate Liabilities Assessment Integrated Methodology. The methodology was defined in 2017by Gaël Giraud from the CNRS, and Hadrien Lantremange, Emeric Nicolas and Olivier Rech from FTSE Russell- Beyond Ratings, in their paper “National Carbon Reduction Commitments: Identifying the most Consensual
Burden Sharing”.

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A country’s NDC is its action plan to cut emissions. Each signatory to the ParisAgreement is required to establish an NDC and update it every five years. A larger
gap between the country’s NDC and a 2°C-compatible emissions budget means thecountry has weaker climate ambitions: it is not currently committed to reducingemissions to a level consistent with limiting warming to 2°C.
The country receives a score of -5 to +5 based on the warming that would result if
every country had the same ambition as the analysed country, with a score of zero
indicating alignment with the 2°C target.

-5Highest Temp

Normalised Scale

Lowest Temp

+5

QUALITATIVE CLIMATE LEGISLATION SCORE
The qualitative score is designed to assess whether the country’s climate ambitions
are enshrined in its current laws and policies. Countries receive a score from 0 to5, based on five key performance indicators.
Rating Key Performance Indicators.

Scoring/1

Number of climate laws1 if higher than the median number of climate
laws in our countries universe, 0 otherwise/1

Number of climate policies

1 if higher than the median number of climate
policies in our countries universe, 0 otherwise/1

Ratification of the Paris Agreement

1 if ratified, 0 otherwise/1

Mitigation score

1 if climate policies involve mitigation,and 0 otherwise/1

Adaptation score

1 if climate policies involve adaptation,and 0 otherwise/5

Qualitative climate legislation scoring

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3. PHYSICAL CLIMATE RISK ASSESSMENT
The physical climate risk assessment evaluates the exposure of each country toclimate events such as floods, storms and droughts, given the potential implications ofsuch events for the country’s physical structures, industrial processes, supply chainsand critical infrastructure.
This scoring component uses Verisk Maplecroft’s Climate Change Exposure Index,
which provides a quantitative assessment of exposure to climate extremes andfuture climate change. Unlike other physical risk assessments, the Verisk Maplecroft
methodology maps risk at a subnational level, enabling index users to identify
exposure hotspots. It is comprised of 41 indicators, which together form four pillars.

Current climate extremes (40%)

Changes in climate
extremes (20%)
Changes in climate
variability (20%)

Climate shifts (20%)

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4. QUALITATIVE OVERLAY
Quantitative assessment allows for efficient evaluation and comparison of acountry’s ESG characteristics. However, the information captured through a fixed
set of indicators is necessarily imperfect.
When investment teams believe the quantitative assessment does not fully capture
a country’s current situation and expected evolution, an overlay based on detailed
qualitative analysis and/or a dialogue with the country can be applied to the ESG score.

RATIONALE FOR QUALITATIVE ADJUSTMENTS
Qualitative adjustments are used for several defined purposes:• Data timeliness: Sovereign ESG data typically has a 1-2 year lag. The primary useof a qualitative overlay is to capture more recent information.
• Supplementing a quantitative model: A qualitative overlay may be used to fill gaps
in the ESG score, although the breadth of the quantitative model means these cases
are likely to be limited.
• Correcting data points in the quantitative model: In rare circumstances, an overlay
may be used where there is a disagreement with the data points employed by adata provider.

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OVERLAY GOVERNANCE PROCESSUse of the qualitative overlay is subject to a robust governance process.

Investment team proposes
an ESG adjustment andsupplies a clearly
documented rationale

Sustainability Centre reviews request•	 Agree: Overlay is applied•	 Disagree: Case submitted toSovereign ESG Overlay Committee

Sovereign ESG Overlay Committee•	Ensures alignment between BNPP AM sustainability targets
and associated measures implemented by investment teams•	Addresses differences in views among investment teams
on a single country•	Addresses differences in views between investment teams
and Sustainability Centre on ESG qualitative overlays.

BNPP AM - ESG SCORING FOR SOVEREIGN BOND ISSUERS-12-Examples: Qualitative overlays in practice
Positive E-pillar overlay: Emerging market country sets out net zero pathway
We applied a positive E-pillar overlay for Country C after its cabinet
approved an updated Nationally Determined Contribution (NDC) – a setof long-term goals to cut carbon emissions and adapt to climate impacts,
required to be provided and updated every five years by every country
signatory to the Paris Agreement.
The updated targets include commitments to reduce the carbon intensityof the country’s GDP and achieve a defined threshold of electric power
capacity from non-fossil fuel targets.
Negative E-pillar overlays: Developed market countries backslide on climate
Several OECD countries announced policy changes that resulted in theapplication of negative overlays to their E-pillar scores.
Country D approved a new oilfield and backtracked on other policy
measures supporting its transition to net zero. Following engagement, wewere not convinced that the government would abide by its intermediateemissions reduction targets.
Country E reduced taxes on automobile fuel as part of a fiscal programme,
leading to the acknowledgement that it would deviate from its emissions
reduction pathway.
Country F remains committed to phasing out coal as a source of power by
2030, but announced plans to reactivate coal and oil-fired power plants
on a temporary basis.
Reduced negative S-pillar overlay: Developed market country sets out
planned improvements to migrant rights
We had applied a negative S-pillar overlay for Country F due to its discriminatory citizenship policy, which left those born and living with the statusof ‘non-citizen’ with limited rights to participation in public affairs, travel
within the EU, and employment in parts of the public sector.
The country has now set out plans for the integration and social inclusion ofpeople with a migrant background. We reduced the size of the negative overlay
and will continue to monitor the finalisation and implementation of the plans.

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5. FINAL ESG SCORE
Combining both qualitative and quantitative inputs, we reach an ESG score ranging
from one to 100, with countries ranked in deciles against peers.

Final score example: OECD country with weak overall ESG score
This OECD country is ranked in the ninth decile in its High-Income OECDpeer group, with an ESG score of 50.
The country has a high degree of misalignment with the 2°C target under
the CLAIM methodology and a highly negative climate mitigation score.
However, positive government changes in recent years have resulted
in significantly improved climate commitments, so we apply a positive
overlay to the E-pillar score.
The country’s performance on S-pillar KPIs is average, with notablestrength in the Innovation & Human Capital KPI and weakness in several
KPIs due to poor indigenous rights and concerns over the mismanagement of the Covid-19 pandemic.
The contribution of the governance pillar is negative due to several
weak KPIs.

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional
investment experience. 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 takedifferent investment decisions for different clients. This document does not constitute investment advice. The value of investments
and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past
performance is no guarantee for future returns.

BNP PARIBAS ASSET MANAGEMENT Europe, “the investment management company”, is a simplified joint stock company with its
registered office at 1 boulevard Haussmann 75009 Paris, France, RCS Paris 319 378 832, registered with the “Autorité des marchés
financiers” under number GP 96002.
This material is issued and has been prepared by the investment management company.
This material is produced for information purposes only and does not constitute:
1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract orcommitment whatsoever or
2. investment advice.
Opinions included in this material constitute the judgement of the investment management company at the time specified and may
be subject to change without notice. The investment management company is not obliged to update or alter the information or
opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting,domicile and tax advice prior to investing in the financial instrument(s) in order to make an independent determination of thesuitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained
within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either besuitable, appropriate or profitable for an investor’s investment portfolio.
Given the economic and market risks, there can be no assurance that the financial instrument(s) will achieve its/their investment
objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the financial instrument(s)and material market and economic conditions, including interest rates, market terms and general market conditions. The different
strategies applied to the financial instruments may have a significant effect on the results portrayed in this material.
All information referred to in the present document is available on www.bnpparibas-am.com

July 2024 - Design: CREATIVE SERVICES BNPP AM - P2406007

Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating
ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This alsomeans that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection andweightings applied to select investments may be based on metrics that may share the same name but have different underlying
meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources
provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being beincomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to theexclusion of securities of certain issuers. Consequently, (the Sub-Fund’s) performance may at times be better or worse than theperformance of relatable funds that do not apply such standards.

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investor for achanging world