BNP Paribas is one of the leading providers of ESG-linked products in the retail structured products market and has been at the forefront of developments since it entered the segment in 2014 via the first World Bank green bond linked to the Ethical Europe Equity Index. As part of a series of articles showcasing the most active providers in the ESG segment, SRP spoke to Helena Viñes Fiestas (pictured), head of sustainability research at BNP Paribas AM and Neven Graillat, head of sustainable investment solutions at BNP Paribas Global Markets, about how the ESG segment has evolved, how data is bringing granularity to discern social impact from performance, and the bank's plans to lead the way.
ESG is a booming area but there is still a lot of scope to support this growth, according to Graillat. "The reason why this segment is getting so much attention and driving increasing activity among investors is that it reflects that we're moving towards a different type of economy and society," he says. "We see how data and information around the green economy is making investors aware about the possibility of investing and doing good for society."
According to Graillat, regulation is also providing a framework through which to build a market and force companies to improve their governance and other aspects such as carbon footprint, etc, which is also being supported from a political perspective.
"In Europe, we see a significant commitment from many market players and institutions to promote climate and sustainable finance - in December there will be an event in Paris to celebrate the 2nd Anniversary of the COP 21," says Graillat. "BNP Paribas has made a commitment to green finance. We are developing a range of products to support institutional investors as well as wealth managers and retail investors to have access to investment and financing solutions that meet ESG criteria and help them to meet their investment goals."
Graillat points that to respond to this trend BNP Paribas has invested and deployed the resources it needs in order to meet client demand with ESG-based products and solutions.
"We have been involved in this segment of the market for some time now and we have been able to develop a comprehensive range of products and work with index providers and other institutions," says Graillat. "We're an established player and we are now focused on expanding our structured solutions range to cover all types of asset classes and all types of management (delta one, passive mandates)."
Major institutional investors such as Swiss Re are consistently integrating ESG considerations into their investment processes since the start of 2017 and are switching to benchmarks that systematically integrate ESG criteria - via the equity MSCI ESG Index family and the fixed income Bloomberg Barclays MSCI Corporate Sustainability Index family, for instance.
"Asset owners are increasingly turning to ESG solutions as part of their asset allocation in their investment portfolios while asset managers are demanding these products in order to meet their client demand and have a full range of products covering different asset classes and different type of investment management," says Graillat. "Our mission is to shift our focus towards this segment and to align our product offering to respond to investor needs for ESG-based strategies."
According to Graillat, ESG-based structured products are not built to provide instruments to speculate with the value of underlying assets. "We see them more as products that enable investors to manage risk in the long term," he says. "This is backed by the shift institutional investors across markets are making in their exposure to equities.
"These are long term investments that are changing the benchmarks of reference," says Graillat. "ESG is no longer just about adding filters to an equity benchmark but also allocating assets to an overall strategy. In the fixed income segment, investors are seeking yielding strategies and ESG products can offer that as well."
According to Viñes, the segment has evolved in such a way that we can now be certain that in the long term there is an alignment between the financial interest and performance with ESG returns.
"The problem faced by investors with anything ESG is that this kind of investment approach tends to materialise in the long term or at an unpredictable time," says Viñes. "We have also seen in the emerging markets how disclosure has a direct impact on the value of shares. The 'G' is a key element as it has stronger proven correlation with the value of assets. It tells us how well - or not - companies are run."
However, Viñes believes the market should move away from the performance discussion around ESG because there are aspects of ESG investing that are no longer a choice.
"Climate change is an example, and the shift towards a low carbon economy is inevitable," says Viñes, adding that this kind of consideration will dictate asset allocation on ESG strategies going forward and there is no point on opposing the shift.
"The main selling point of ESG is not performance but risk management and this is done on a long term basis as opposed to speculative trades seeking to capitalise on sudden market moves, etc," says Viñes. "We think ESG will play a key role in providing pension funds with the ability to meet their responsibilities and obligations, as it will help capitalise on future market performance."
Climate change and natural resource scarcity are just starting to raise questions on the accuracy of the current modelling of actuaries, and forcing a change in how we perceive traditional finance, according to Viñes. "This is where ESG will contribute the most," she says.
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