BNP Paribas partners with Rafi in ESG push

BNP Paribas has entered into a collaboration partnership with Research Affiliates, through which the French bank will provide marketing support for the implementation of the Rafi ESG strategy, a newly launched smart beta strategy that aims to help investors achieve the dual objectives of social responsibility and long-horizon outperformance.

The strategy does this by emphasizing two key elements. On one hand, applying the 'fundamental index' approach - where components are chosen based on fundamental criteria as opposed to market capitalization, which has historically been shown to outperform the cap-weighted benchmark, and on the other, supplementing traditional ESG metrics by adding the dimensions of financial discipline and gender diversity.

Rafi ESG provides investors across regions an opportunity to invest in the concept that diversity is a key component of success for corporations, according to Neven Graillat (pictured), head of sustainable investment solutions, Global Markets, at BNP Paribas.

"The combination of the ESG theme with alternative quantitative strategies is to do with sustainability and performance, and about finding the right balance between risk, return, and impact," said Graillat. "Rafi ESG aligns well with this market trend by incorporating financial assessment on the return/performance side, as well as controversies management and global governance on the risk side, and diversity on the impact side."

As part of Research Affiliates' ongoing ESG efforts, BNP Paribas will act an exclusive provider and a swap counterparty of structured products linked to the new Rafi ESG indices, according to Katy Sherrerd, PhD, Research Affiliates' president and COO.

"We entered into a partnership with BNP Paribas that will enable us to provide Rafi ESG strategies for the structured products market," said Sherrerd. "BNP Paribas has the reputation of being a leading provider of ESG solutions in Europe. We are also working with other primary players in the ESG arena to provide Rafi ESG strategies in different formats and across different product types."

The Rafi ESG strategy takes an integrated approach to ESG investing by incorporating Rafi weights with a composite score of each security's environment, social, governance, financial discipline, and diversity ratings. The financial discipline score uses metrics that are associated with generating sustainable long-term performance. For the diversity score, metrics are used to determine a firm's commitment to gender diversity, with particular attention paid to women in management, in the C-suite, and on company boards.

Research Affiliates also plans to launch a stand-alone Rafi diversity strategy at a later date in 2018. Indices based on both the Rafi ESG and Rafi diversity strategies will be published through Rafi Indices, a sister company of Research Affiliates.For the ratings in Rafi ESG, the firm used data from Vigeo Eiris, a firm with over 30 years of ESG research experience and one of the largest ESG analyst teams in the industry.

BNP Paribas has been at the forefront of developments around structured sustainable investments since it entered the segment in 2014 via the first World Bank green bond linked to the Ethical Europe Equity Index, as part of its Green Growth Bonds series, and had more than €4bn of asset under management at the end of 2017. The French bank also partnered with FTSE Group to develop the FTSE low carbon index series, in 2016.

Research Affiliates is not new to the structured products market and has seen a number of its index strategies including the BetaShares FTSE Rafi Australia 200 ETF, FTSE Rafi Canada, FTSE Rafi Europe, FTSE Rafi Hong Kong/China Index, FTSE Rafi Japan, and FTSE Rafi US 1000 Index, used in structures sold mainly in Australia and Canada.

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