Three panellists from different background shined a light on the sustainability of ESG-linked structured products in view of the latest Esma guidelines.

“It is wrong to say that investors and issuers no longer care about ESG,” Armelle Loeb, head of Emea sell-side index & ESG Sales at STOXX, kicked off the panel by clearing the air.

The senior sales specialist acknowledged a decrease in demand for ESG indices for investments but noted that “basic ESG considerations are still part of day to day”.

2024 was “an extremely busy year” as the index provider as well as product issuers started to implement the new European Securities and Markets Authority (Esma) guidelines. 

The guidelines impact the entire industry and certain products because distributors and clients tend to expect the same as for structured products - Armelle Loeb

Published in May 2024, the Esma guidelines clarify the use of ESG- or sustainability-related terms in fund names with an aim of preventing the use of names that could mislead investors regarding the nature of the funds’ investment strategies.     

“The guidelines impact the entire industry and certain products because distributors and clients tend to expect the same as for structured products when hearing about rules with regard to exchange-traded funds and passive funds,” said Loeb.

Loeb’s team has spent the past nine months discussing with every client the guidelines’ impact on each custom index with ESG elements by potentially adjusting the index name or methodology to meet the new criteria. 

Additionally, Loeb noted that the topic of stocks in the space and defence industries has become the subject of a hot debate in France in terms of whether they should be excluded during ESG screening.

Left to right: Jean-Christophe Jouannais (moderator), Armelle Loeb, Patrick Scholl and Antonia Lim

Despite the recent developments, European regulators continue to seek an answer to the question “what is an ESG structured product”, according to Patrick Scholl, partner at Mayer Brown.

One popular definition is that any financial product that is advertised taking ESG objectives or aspects into account falls under the category. “From a product lawyer perspective, we see an ESG structure product as a combination of a debt instrument with a derivative,” said Scholl, adding that the derivative component should be subject to ESG elements.

We currently have seen more activation in the European Union with the omnibus packages towards less regulation in the ESG area - Patrick Scholl

This approach is more common in France whereas it is the wrapper that becomes the benchmark in the German market. “You cannot have the wrapper that is completely disadvantaged to the ESG idea. On the other it's not merely a green bond,” he said.

Financial instruments coming out of the ESG green bond framework should not justify an ESG structured product due to the absence of ESG elements for the derivative underlier, according to the lawyer.

“We currently have seen more activation in the European Union with the omnibus packages towards less regulation in the ESG area,” added Scholl.

Scholl noted that the conventional approach of ‘regulate first and test after’ is worth a re-think. “We need to give the markets the possibility to develop innovations and then see where there are the regulatory needs to accompany developments in innovation,” he said.

Left to right: Jean-Christophe Jouannais (moderator), Armelle Loeb, Patrick Scholl and Antonia Lim

Antonia Lim (main picture), chief investment officer (CIO) at Impact Cubed, pointed at the verification of ESG claims.  “ESG is often seen as one thing, but it is actually a collection of hundreds of things that could each have an impact on the success of your investment,” she said.

Compared to ratings, Lim finds that tangible numbers are more powerful through portfolio construction, which is measurable via outcome.

“We’re seeing real pressure from EU and UK regulators to have third party and independent verification,” Lim said.

“Transparency and customisation are key for people to really understand what's going on in their investments.”

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