Milleis, Goldman team up on capital-protected play with post-Covid component

The Milleis Protect 90 is a 10-year note linked to the Euronext CDP Environment ESG Eurozone EW Decrement 5% index. The structure has an annual early redemption option from the third year of investment onwards while the current low entry levels are poised to increase the likelihood of an early redemption, as long as market conditions do not deteriorate further.

Capital preservation is the cornerstone of this product - Mathieu Migault, Milleis Banque

In addition to limiting the capital risk to 10% at maturity, the autocall offers a coupon of 4.25% per year in the event of stable or rising markets, while the low strike remains attractive, according to Mathieu Migault (pictured), senior product manager at Milleis Banque.

“Capital preservation is the cornerstone of this product which protects at least 90% of the initial investment at maturity,” said Migault. “In conditions of strong market turbulence, we acted opportunistically to come up with such strengthened protection. Clients are demanding protected products as financial market volatility peaked amid elevated sanitary and economic uncertainty.”

The note has a charitable dimension as it includes a donation of up to 90 bps from the proceeds to the Covid-19 Emergency Aid Fund of La Fondation Hôpitaux de Paris - Hôpitaux de France, a fund seeking to fight Covid 19. The donation will be used to support hospitals and residential care homes for the elderly in the purchase of first aid medical and paramedical equipment.

The mechanism is carried out at three levels involving Milleis Banque, Goldman Sachs and the end investor. Milleis, the distributor, commits to repaying two-thirds of the amount while issuer Goldman Sachs joins the operation by reducing its margin.

“The headline rate itself is lowered by 10 bps compared to the payoff we could have offered in the formula,” said Migault. “By giving up 10bps of coupon, the end client participates in the donation mechanism.”

Responding to societal issues reinforces Milleis' commitment to corporate social responsibility. “This campaign follows on from previous offers to our clients that featured financing with a social or environmental impact, a tree planting mechanism etc,” said Migault. “The current focus on the sanitary aspect was driven by the context and we stay committed to developing this type of offer in the broad sense of social responsibility”.

The index

The index has a strong environmental focus and brings together three main current environmental challenges: climate change, sustainable management of water resources and deforestation, according to Marine Abiad (above), head of distribution France, at Goldman Sachs.

“The index does not limit itself to carbon and climate change priorities but also integrates water and forest-related challenges, all of which completely address the environment pillar,” she said.

We believe that the three [ESG] pillars will be more than ever at the heart of the investment policies of large institutional investors - Marine Abiad, Goldman Sachs

The underlying assumes a best-in-class approach, selecting the companies with the best scores in climate, water and forest management. The scores are provided by CDP, a globally recognised non-profit organisation considered a benchmark in the field of environmental impact.

“To the difference of sector-based exclusions, positive screening looks for companies that solve evolving problems and encourage all sectors to move towards better environmental practices,” said Abiad. 

The gauge is equally weighted and is calculated reinvesting dividends of its constituent shares while subtracting an annual five percent, to remove the uncertainty over future dividends.

Despite suggestions that firms could be deviating from their ESG goals because of the crisis, the pandemic has evidenced the resilience of this sector amid falling markets. ESG indices underlying structured products over-performed in April compared to other indices that do not feature ESG criteria, according to SRP data.

Future ESG trends

There may be reasons for concerns about the environment no longer being a market priority since the crisis, particularly with oil being so cheap. But according to Abiad, it would be short-sighted to set aside climate crisis concerns right now.

“The coronavirus health crisis has locked down 50% of the world's population, which itself has resulted in the largest reduction in CO2 emissions ever known,” she said. “With a forecast six percent cut in 2020 (or five times more than in previous crises), it brings us closer to the Paris Agreements objectives to keep global warming below 2°C by 2050.”

“We expect this to accelerate the emphasis on emissions from the different sectors and hence we believe that the three [ESG] pillars will be more than ever at the heart of the investment policies of large institutional investors.”

Abiad also noted that one of the structural changes coming out of the lockdown is a willingness to shorten supply chains by governments, as they realised the risk of strategic sectors, like drugs and electronics, being sourced remotely.

“We therefore believe that the post-crisis recovery plans will analyse local ‘reindustrialisation’ bringing suppliers closer to home in Europe or in France,” said Abiad. “Given the similarity between the two ongoing crises, society can’t afford to ignore or delay action in order to minimise losses.”