BNP Paribas: From delta one to high conviction

Lack of robust data makes it very difficult to fully assess the performance of ESG strategies

Following the launch of the partnership between BNP Paribas and Research Affiliates for the implementation of the new smart beta quantitative Rafi ESG strategy, SRP spoke to Neven Graillat (pictured), head of sustainable investment solutions, BNP Paribas Global Markets, and Katy Sherrerd, PhD, president and COO at Research Affiliates, about the new partnership and the challenges around the lack of 'robust data' to build indices for investors seeking to make an ESG impact while preserving the potential for added returns.

BNP Paribas' expertise in sustainable investing and Rafi's track record on smart beta are a perfect fit to develop the bank's ESG offering, and align its product development efforts to what clients want, according to Graillat.

"The third pillar of this development is diversity which is also a fundamental need from an investor and regulatory perspective," said Graillat. "Diversity is a key component of success for corporations, and a very important element of BNP Paribas strategy around social responsibility."

The French bank is planning to develop a full range across wrappers and instruments because "these underlying strategies can be delivered in different ways", and because BNP Paribas' ambition is to create a comprehensive catalogue of structured notes, certificates, etc. "so that investors can deploy the strategy in a way that suits his/her needs", according to Graillat.

The initial target market will be the institutional market but there will also be products available via public distribution. "From a market perspective, the range will be targeted at European and North American institutional clients and then will be made available to a number European markets via public distribution," said Graillat. "Different markets want exposure to specific assets and themes, and our responsibility is to understand the different needs and provide solutions and meet our clients' expectations. Carbon indices remain a huge topic in Europe while gender diversity is very much in focus in Asia-Pacific, and we have seen an increase in demand for strategy indices in the US and the Nordics so there is scope to expand this range and provide new underlyings."

The partnership with Research Affiliates comes to hand as the US research firm "are staunch believers in designing products that respond to investors' needs" and "provide solutions built on positive investment characteristics, such as high investment capacity and low transaction costs, which are critical to net performance", according to Sherrerd.

"In the ESG space, we saw an opportunity to offer a strategy that delivers on the 'sustainability' aspect of ESG investing, while also preserving the potential for outperformance in a cost-effective and accessible way," said Sherrerd. "We're able to accomplish this by using a smart-beta return engine, and combining it with measures of financial discipline and gender diversity, which we believe results in a very compelling and unique alternative to many existing ESG strategies."

In developing and constructing the Rafi ESG index, one of the challenges the firm encountered was the lack of robust data-whereas good data existed in some areas, for the most part, it was unavailable or of poor quality, according to Sherrerd.

"The lack of robust ESG data makes it very difficult to fully assess the performance of these strategies," said Sherrerd. "In fact, there is a growing awareness among sophisticated investors that many existing ESG strategies are not well researched and, potentially, not well constructed."

Going forward BNP Paribas plans to partner with other third party providers including research firms, index providers and distributors to continue developing its ESG range, and capitalise on their expertise, according to Graillat.

"Our ESG range is being developed in stages starting with delta one strategies tracking benchmarks, then via low tracking error strategies and we are now developing a set of products based on a high conviction /smart beta approach,"

Sales remain stable and consistent. ESG is not about 'flavour of the month' type of investing but about long-term commitment to a sustainable way of investing, but we talk regularly with a number of stakeholders and the demand is real. We expect to bring more products to the market and we will continue developing and expanding our offering to respond to demand."

BNP Paribas has partnered with a number of index providers over the last few years as it develops its ESG range of products including Solactive for its Green Growth Bonds series, and FTSE Group for the FTSE low carbon index series.

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