BNP Paribas Corporate and Institutional Banking has licensed the Solactive Sustainable Development Goals World Index - a new equity index which enables investors to gain exposure to companies which have been identified as making a significant contribution to the advancement of the United Nations' Sustainable Development Goals (SDGs).
The French bank plans to issue structured products tied to the indices later this year, according to Neven Graillat, head of sustainable investment solutions, BNP Paribas Global Markets.
"We are building a full range of investment solutions including delta one, swaps, and structured notes/certificates because there is a need to meet the goals and requirements of different investors," said Graillat. "Delta one products can be more suited for institutional investors and wealth managers but there is also demand for structured notes from retail investors."
The 2030 agenda for sustainable development is a transformative global framework for people, the planet and prosperity, and applies to each and every one of us over the next 15 years, said Graillat, adding that sustainability is at the core of BNP Paribas' strategy.
"Financial markets must support commercial innovations to deliver on the SDGs, and we believe that investors and corporations have a major role to play," said Graillat. "This is the idea behind the Goal 17 Partnership for the Goals."
According to Graillat, BNP Paribas is aiming at delivering long term solutions for clients and businesses which have a positive impact on society and the environment.
"This unique set of indices (...) will enable investors to allocate their capital towards companies that are leading the way in terms of advancing the UN's SDGs," said Graillat. "BNP Paribas is building a comprehensive ESG platform to cover all markets and all clients as we implement our strategy to meet the UN 2030 agenda around sustainable development. We are still building our offering in this segment but we have now a dedicated structuring team covering this segment (ESG, green bonds, low carbon) and developing our range of products. We have now licensed a number of indices (including US and European underlyings) and over the last six months we have invested to be fully equipped to be able to offer climate solutions."
The index consists of 50 global companies which have a clear, positive net impact on sustainable development. Eligibility for inclusion is based on Vigeo Eiris' Equitics methodology which maps the SDGs against the companies' products, services and behaviours. Companies for whom sustainable products such as renewable energy or essential medicines represent a significant proportion of activity are eligible. Each company is rated with regards to their impact on people and the planet, and their business practices. For each sector, the leader is included.
A further three levels of filtering are embedded into the process: a carbon footprint exclusion filter is applied based on the companies' carbon emissions and energy transition strategies. Companies with major involvement in disputed activities such as nuclear, tobacco or firearms are also left out, as well as companies involved in critical controversies such as human rights violations. Solactive, the index provider, then applies volatility and diversification filters to reach the final composition.
The index is designed to fit the needs of a range of investors from retail to institutional in several regions including the Americas, Europe and Asia-Pacific. A second set of European indices is also available.
According to Henning Kahre (pictured), head of research at Solactive, there is an increasing demand for indices offering ESG compliant access to markets as a result of long-term initiatives such as UN's SDGs.
"For the Solactive Sustainable Development Goals Index suite we combine our expertise in ESG focused index design with strong and experienced partners in the space, on the ESG research as well as on the product side," said Kahre. "This new index series adds a Smart Beta layer on top of the initial universe of stocks, combining two of the most relevant themes in the indexing industry these days."
According to Graillat, this segment of the market is evolving and there is more demand for ESG strategies that feature some kind of smart beta filter. "Sustainability is aimed at mid- to long-term investors and it doesn't have a track record in terms of performance, but when you add a smart beta filter such as low vol it can improve the performance of the strategy significantly," said Graillat. "We think this strategy fits investors ESG goals and because of the smart beta filter we are also addressing the investor need for performance."
Although we are at an early stage of development in the ESG segment, there are a number of different approaches to build strategies and indices with a reduced carbon footprint that reflect the transition towards a green economy, according to Kahre. "There is scope when building these indices and we think there is scope to provide solutions to clients by combining different concepts such as low carbon and smart beta (mean variance optimisation) that can meet different investor needs," said Kahre. "From an index construction perspective there is room to increase the number of strategies that can address different investor and market needs. Indices can be very flexible and provide different angles and tilts in terms of exposure and performance. Our focus is on building and constructing indices, but in this particular segment we partner with external data providers to apply ESG filters that will provide the final universe comprising the index."
Over the summer, BNP Paribas launched its sustainable finance programme as one of the main pillars on the bank's strategy going forward, said Graillat, adding that the climate solutions range is being very successful. "This range is being very successful and we have sold over €2bn EUR3bn in three years with products linked to the sustainable investing, and over the last six months we have raised over €800m within Equity Climate Change solution," said Graillat.
BNP Paribas also licensed earlier this year the FTSE Divest-Invest Developed 200 Index - a new index which reduces exposure to fossil fuels and associated companies while increasing exposure to companies engaged in the transition to a green economy.
BNP Paribas is one of the largest underwriters of sustainable investment globally. In total, BNP Paribas has lead managed more than €12bn in green bonds including more than €1bn in equity-linked (converted as at August 31, 2016 exchange rates).
It also launched the World Bank's first equity-index linked green bond in 2014 and has launched or licensed 12 ethical equity indices since 2013. To date, the bank has financed or advised on more than €7.2bn in renewable energy projects across the globe. Last November, BNP Paribas committed to more than doubling the amount of capital it allocates to renewable energy to €15bn by 2020.
The United Nations' SDGs are a set of 17 goals established to guide international cooperation to achieve sustainable development, end poverty and tackle climate change. They were adopted by UN member countries in September 2015 and require active participation from governments, corporations and investors.
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