ESG structured products get faster, greener, stronger

Green finance on top of investors' agendas. How to bridge the gap between performance and purpose when it comes to design investment solutions?


In an ever-changing world, being able to adapt one’s business model is a key metric of success, but not the only one. Neven Graillat, Chief Sustainable Product Officer for Global Markets at BNP Paribas, reflects on the past year, on the back of the recent Best ESG House award from Structured Retail Products. He discusses how his teams are bridging the gap between performance and purpose when it comes to design investment solutions.

How are investors approaching ESG in structured products?

ESG investments saw a tipping point in 2020, with assets under management reaching close to $40Tr AUM, covering both fixed income and equities. Within this landscape, structured products provide a unique opportunity to combine the best of both worlds in a transparent and agile way.

Over the last decades, risk-return has been investors’ primary metric for their strategies. The new metric we see arising for the next decade is risk-return-impact. In other words, investors are still looking for the best risk return profile, but now also want to improve the impact of their portfolio. This is the new nexus that the industry will need to address.

For example, our Wealth Management team has developed investment strategies aiming to mitigate climate risk by selecting companies that have a positive impact, while tracking the performance of benchmark indices. The strategies are combined with nature-based solutions, allowing investors to have a tangible impact. We are particularly proud of our partnership with Tara foundation, around Ocean & Biodiversity. Their exploration projects offer a great opportunity to link our structured products to impact investing. With more than €2bn notional raised around the world, the simplicity of the ESG impact combined with the risk management techniques, were key to the success of these strategies.

On the institutional client side, we developed the Green kangaroo project in 2020 which saw the issuance of an 8-year A$140m BNP Paribas green bond linked to the Australian Climate Transition (ACT) Index. For the ACT, we worked with Australian academics and think tanks to build the first-ever forward-looking equity index in Australia, using dynamic climate scenarios which will be adjusted to reflect future regulatory, technology and social environmental changes.

What have been the most significant achievements this year, in the pandemic context?

We launched our new thematic focused platform aiming to deliver the right ESG theme, at the right time in a scalable and robust way. Here are three recurring challenges that this platform aims to address:

  • Challenge 1: How to promote thematic investment and avoid “theme” washing
    We see more and more thematic indices with attractive branding, but within the structure, the link between the theme and index members is not always obvious. This is something we have actively addressed in our platform.
  • Challenge 2 : Price efficiency and scalability
    Thematic investment is a performance engine but it needs to meet our clients’ pricing needs for structured investment solutions, including around volatility, dividends and liquidity. Very often, pure thematic play will have less liquidity and far less efficient pricing vs. a benchmark, which is something we wanted to address.
  • Challenge 3: Replicability for distributors
    Most of our distributor clients are used to promoting a product they are familiar with. So the challenge was to have thematic solutions that are very easily replicable with a stable concept and methodologies.

We successfully launched a series of indices called ‘Core Satellite indices’, that will allow us to address those three challenges within one single solution by balancing exposure to thematic and benchmark indices.

What are the next steps for 2021?

The international agenda in 2021 will be very dense with “Biodiv” COP in China and COP26 in the UK. On the investor side, we expect to see rising interest in nature-based solutions and net zero solutions to support investors’ increasing commitment to net zero.

One of the expected consequences of the Covid-19 pandemic will be around ‘relocalisation’ of impact initiatives aiming to find the right balance between climate and social issues. On the regulation side, the Sustainable Finance Disclosure Regulation (SFDR) and Benchmark Regulation will improve transparency and clarity for end investors.

This is a very exciting time for sustainable finance, as investors are more and more in tune with these issues and want to be involved. We, as a bank, can make a difference and we have a responsibility as much as an opportunity to innovate in this space and shape the world we want. 

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