After this summer's launch of the Finvex Ethical & Efficient Europe 30 structured notes, Societe Generale's first positive impact finance product for retail investors in Italy and the latest of its index-linked green bond series, SRP spoke to Isabelle Millat (pictured), head of sustainable investment solutions, a newly-created position, and Sandrine Enguehard, head of positive impact structuring, about why structured products deliver ESG exposure so well and where the sector is heading.
Since her appointment earlier this year, Millat has been working on creating an offering of ESG solutions, including a range of underlyings comprising ESG indices or baskets, and products that support positive impact assets originated by the financing activities of SG. "I'm [also] responsible for coordinating all sustainable and responsible investment initiatives across asset classes for markets activities, and to work with other activities of the bank, to further develop the range of solutions offered to investors," said Millat.
The positive impact finance assets are originated by various financing activities that include teh provision of loans to large corporates and small- and medium-sized enterprises, according to Millat. "This portfolio of assets, whose sustainable credentials and alignment with the United Nations Environmental Programme's Principles for Positive Impact Finance are reviewed yearly by a third-party auditor, enables us to create products," said Millat. "Within my scope, we have developed a range of positive impact finance structured notes, by working together and deploying the capabilities of the investment bank's impact structuring team."
According to Millat, the recent launch in Italy is an example of the kind of approach the French bank is taking. "When clients invest in a positive impact finance note, SG commits to holding positive impact finance assets in its books, for an amount equivalent to the nominal invested in the note and throughout the life of the note," says Millat. "This new product has already been sold to institutional and retail investors across Europe. It's a new product and the traction with investors is very encouraging."
On the retail side, SG will continue to work with Finvex to develop its ESG offering: the partnership has already proven to be "very effective", according to Millat. "We have a large amount fo assets under management linked to structured products featuring Finvex strategies," said Millat.
SG has marketed 26 ESG-linked structured products in Europe, including 17 offering exposure to the Finvex Ethical & Efficient Europe 30, eight to the Finvex Sustainable & Efficient Europe 30, and one featuring the Finvex Sustainable & Efficient USA 30 Index.
Most recently, Finvex launched a new generation of low carbon indices, which reflects how quickly carbon research is moving and how you can capitalise on state of the art data (combining quanto and free carbon emission filters), according to Millat.
The Finvex ESG Low Carbon Europe Index is designed to reflect the performance of a dynamic portfolio of 50 equally-weighted securities with low carbon footprint which are listed on various European exchanges. "This index takes into account the available carbon emissions data and also embeds the opportunities linked to carbon by making sure there is a sufficient number of stocks in the index with a large green revenue share, which are thus likely to benefit from the transition to a greener economy," said Millat. "This is an ESG 2.0 strategy because it has the latest data and the revenue share feature."
According to Millat, ESG indices can play an interesting role in the structured products market as an alternative to some of the most commonly-used indices as the pricing-friendly design translates in the possibility to offer full or partial capital protection, and more upside for the end client, "which in the current environment provides a very interesting proposition. Our range of ESG underlyings and positive impact structured notes reflects the transition towards a new ESG stage, where we can now create products that combine the ESG component with the financial structures investors want," said Millat. "This has opened up opportunities to serve retail and smaller institutional clients and is reflected in the growth of the ESG retail market share in Europe which from 3.4% to 22% over two years**, which is proof that new categories of investors are using ESG products in their portfolios."
This is also very encouraging, as research suggests that the younger generations (millennials) of private wealth customers are really pushing this sector as they want to combine performance with meaning in their investments, according to Millat. "Demand for ESG strategies and products from the institutional investor segment is also supported by more and more empirical evidence showing the financial materiality of ESG investing," said Millat. "When we have conversations with clients, the focus has shifted to finding those ESG indicators that can help improve the performance. More and more investors are also looking to integrate ESG in their selection process, so it is no longer about having exposure to a few dedicated ESG products but about factoring ESG broadly in investment decisions."
As a pioneer in corporate and social responsibility, SG has been incorporating environmental and social criteria for financing activities through the adoption of key international standards and best practice initiatives like the Equator Principles in 2007, for some time now, according to Sandrine Enguehard (right), head of positive impact structuring.
"The longstanding, indepth ESG capabilities rely on a dedicated team of experts with an operational background on environmental and social risk management and supports the bank's long term commitment to Positive Impact Finance," said Enguehard.
Since 2011, SG has been at the forefront of developments after defining what positive impact finance was, according to Enguehard. "[We then] developed a methodology and launched a number of initiatives to build a Positive Impact finance and investing product offering," says Enguehard. "Our approach is to accompany our client issuers to identify and assess the ESG benefits and risks of their projects by developing fully-fledged financing solutions to help them achieve their sustainable goals, promote their sustainable credentials and diversify their investor base."
According to Enguehard, this specific 'impact structuring' expertise combined with the investment bank's "high level financing expertise" will be key "to develop a full range of positive impact products as well as to provide our clients access to products that would fit an ESG mandate such as social bonds, positive impact structured notes, etc", and achieve the bank's goals.
** EUROSIF Study 2016
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