Following the launch of the new Parvest Green Bond by BNP Paribas Asset Management (BNPP AM) and the Sustainable Growth Bond 12/2024 in Belgium, SRP spoke to Felipe Gordillo, Senior ESG Analyst at BNP Paribas AM, and Neven Graillat (pictured), head of sustainable investment solutions, BNP Paribas Global Markets, about leveraging the bank's manufacturing and research capabilities to build a comprehensive range of positive environmental impact offering using different instruments and investment vehicles.

Banks are getting involved in this market via partnerships with index and data providers or by building their own dedicated offering, according to Graillat. "The sales volume linked to our sustainable and green index-linked bond product range is testimony to the appeal of these products among both retail and institutional investors," says Graillat, adding that BNP Paribas sold more than €500m with a single issue (Tera Neva) in 2014, and overall the bank has more than €1bn in AUM linked to index-linked green bonds.

"Competition is always good but we have a strong presence in this segment thanks to our multi-expertise approach which allows us to capitalise on the expertise of different functions and teams to build and shape a very comprehensive offering by combining the manufacturing capabilities of our investment bank, as well as our custody capabilities, and our portfolio monitoring provided by our wealth management teams," says Graillat. "This makes our offering very unique."

BNP Paribas partnered with the World Bank in 2014 to develop an index-linked Green Growth Bonds series, and has also teamed up with FTSE Group to develop the FTSE low carbon index series.

The Parvest Green Bond, which is benchmarked against the Bloomberg Barclays MSCI Global Green Bond Index (Euro Hedged), invests in issues with a minimum credit rating of B-, and may also use futures, options and swaps, and aims to have a minimum of 83.5% of green bonds. Denominated in euros, it uses FX derivatives to hedge bonds issued in other currencies, and is currently registered for sale in Austria, France, Germany, Luxembourg and the United Kingdom.

Currently valued at €100m, the product is managed by BNPP AM's Fixed Income team leveraging proprietary analysis provided by its Sustainability Research Team. According to Gordillo (right), there are two main reasons behind the decision to launch this fund. "On one hand, we think there is a sufficient diversified market," says Gordillo. "If we look back four years ago the size of the green bond market stood at US$20bn whereas by the end of 2017 the total market volume will stands at around US$300bn, which represents a significant and impressive growth, and we think that further issuance this year will push that volume beyond the current mark."

This new launch contributes to the energy transition policy followed by BNP Paribas, according to Gordillo. The Group has a long standing commitment to sustainability and aims to rank among the top three global players for euro-denominated issues by 2018.

"The product aims at investing 83.5% in green bonds in order to get a French government label for green bonds," says Gordillo. "The remaining will be comprised of sustainable and social bonds. We won't accept green bonds from an issuer that doesn't engage or publish reports covering asset and project allocations, and outputs and impact measuring the social and/or environmental benefits."

According to Graillat, BNP Paribas wants to capitalise on the current focus on environmental issues and continue building its index-linked green bond offering, but the bank is also looking at other products and ideas developing around governance and social responsibility which will also materialise at a product development level.

"The Sustainable Development Goals (SDGs) offer a new universal framework of understanding, all across the different stakeholders, and some of the topics are more relevant amongst different region - diversity in the US is very important, water in Asia is very important," says Graillat, adding that one of the challenges the ESG segment faces at the moment is the quality of the data (transparency of reporting...). "This will also change with time. This is a young market that has improved significantly over the last few years but we think there is still a long way to go.

"Beyond structured products we see a huge appetite for illiquid and loan products, although in this area there are issues to address around new regulatory requirements such as Solvency 2," says Graillat. "ESG is opening new opportunities for us. The ESG segment is not about market making or short term returns but about setting long term goals and deploying strategies that will help to manage risk, get meaningful returns and do good to society."

Behind the current ESG growth there is a diversity in the form of different products and assets, as this is no longer about multi-lateral development banks (MDB), or supra-nationals and agencies, according to Gordillo.

"We have started to see corporates and other institutional investors from different sectors such as investment banks, utility companies and even commercial banks, real estate and transport companies getting involved and demanding green solutions," says Gordillo. "From an asset management perspective this is very interesting because our funds managers have diversified portfolio of profiles and option to invest."

On the other hand, the evolution of the green bond segment itself which up until recently was operated on a product push basis has changed dramatically, according to Gordillo. "Now we have a comprehensive framework provided by the Green Bonds Principles (GBP) which have set up a standard for the industry with a market-led initiative which has received the support of regulators that are willing to formalise definitions," says Gordillo, adding that regulation matters. "Establishing definitions and standards is crucial - the Chinese green bond market is a good example of this," says Gordillo. "The Bank of China's support of green bond initiatives has helped the Chinese green bond market to grow from US$1bn in 2015 to US$30bn by the end of that year."

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