Facing down climate change: the industry fights back

Climate change is a systemic risk for banks, investors and corporates. Failure to implement meaningful change will be catastrophic for future portfolios.

Industry experts from BNP Paribas shared their insights into some of the key challenges and opportunities facing corporates and investors in the climate change battle at the Financial Times’ virtual Global Moral Money Summit, which took place between October 1 and 2, 2020.

Issuers and investors ring the chorus for sustainability

The Covid-19 crisis has served as a blunt reminder that companies and financial institutions need to focus more extensively on sustainability. Antoine Sire, Group Head of Company Engagement at BNP Paribas, said that although that the pandemic has brought about many tragedies, it has also provided a real opportunity for people to rebuild the global economy and has urged businesses to embrace transition financing, re-invest in their supply chain models, and pursue a wholesale shift towards de-carbonisation. “This de-carbonised world must be built by businesses and consumers, and supported by banks and states. Each economic agent needs to have a role by introducing new criteria in its action,” he said.

Many C-suite leaders now fully recognise that the risks of persistently ignoring climate change will have a much greater impact on their businesses than the pandemic, according to one panelist. Although a number of organisations briefly de-prioritised environment, social and governance (ESG) by diverting resources to deal with some of the initial challenges caused by Covid-19, the panelist said organisations were once again concentrating on climate change and sustainability. The Covid-19 crisis has also prompted investors to think more carefully about where they obtain their returns. Sire highlighted there has been significantly increased interest among all type of investors, including large number of individuals, in ESG and impact-orientated funds, both of which have recorded significant inflows and generated outperformance during the recent crisis. “This demonstrates the resilience of the sector. We do not believe that impact investing is a trend but a total structural change in the system,” he continued.

Supporting the sustainability market

Organisations such as BNP Paribas are at the forefront of promoting sustainability. In addition to giving employees training in sustainable development, Sire said BNP Paribas has leveraged its extensive experience in sustainable finance and debt capital markets to help clients issue $59 billion in Covid-19 response bonds. These included Nordic Investment Bank’s €1 billion Response Bond and the European Investment Bank’s €1 billion Sustainability Awareness Bond, both designed to provide healthcare and other financial support to European member states impacted by Covid-19. He also added that BNP Paribas was one of the first banks to implement comprehensive measures to cut off financing to projects that negatively impact the environment, such as coal.

A maturing market

Hervé Duteil, Chief Sustainability Officer for the Americas at BNP Paribas, agreed that, after a pause, Covid-19 was leading to an acceleration in the issuance of sustainability-linked products. The sustainability-linked bond market in particular, he said, was given a boost by International Capital Markets Authority’s (ICMA) publication of its “Sustainability Linked Bond Principles”. Recently, a diverse range of issuers has come to market including those in the pulp & paper, pharmaceutical, and luxury goods sectors.

Furthermore, regulators around the world are now taking a clearer position on sustainability, in what will likely shore up the market even further. While the E.U. has introduced its Sustainable Finance Action Plan, the U.S. Commodity Futures Trading Commission’s Climate Related Market Risk Subcommittee of the Market Risk Advisory Committee published a report titled “Managing Climate Risk in the U.S. Financial System.” “Whereas the E.U. is codifying ESG standards into law, investors and technology will be the driver for change in the U.S. Out of every crisis emerges a need for greater transparency. The 1929 stock market crisis brought transparency to risks and profits through the creation of accounting principles and auditors. The 2008 subprime crisis brought greater transparency on banks’ risks through increased stress testing regulations. The 2020 Covid-19 crisis will bring transparency on impact. The good news is that the technology is available now for us to measure impact risk,” said Duteil.

Looking ahead, Duteil said more banks and investors will embrace sustainable finance not only for the opportunities it offers but because it will be a central tenet in risk management, and a prerequisite to protecting lenders’ balance sheet strength and investors’ portfolios – allowing at the same time to be more resilient and shape the future.

Consistent lobbying is key

Adam Kanzer, Head of Stewardship for the Americas at BNP Paribas Asset Management, said it was vital for large organisations, namely those with multiple subsidiaries and separate business streams, to adopt consistent messaging when lobbying public bodies on sustainability. Robust governance can play a key role in helping to facilitate this. “At BNP Paribas, we have a charter that the whole business follows when engaging with public authorities. This includes, for example, a firm pledge not to challenge, distort or contradict any of our corporate, social responsibility (CSR) commitments, including our adherence to charters such as the UN Human Rights Declaration and the UN Global Compact,” he explained.

As a leading institutional investor, BNP Paribas Asset Management regularly engages with companies to ensure that their lobbying initiatives, directly and through trade associations, are aligned with the goals of the Paris Agreement on climate change. “We have spoken with companies who understand the risks of climate change and accept that it needs to be addressed urgently, yet who are members of trade associations, which are arguing the exact opposite,” he said. These arbitraging public policy positions often emerge because businesses operate in distinct silos, reinforcing the importance of regular internal communications. “It is not necessarily intentional that one side of the business is doing one thing and another something different. It is often because they are simply not talking to each other,” added Kanzer.

Institutional investors, however, are taking an increasingly tough line on companies who are members of trade associations whose public policy positions are not compatible with the Paris COP 21 framework, a global investor effort BNP Paribas Asset Management is helping to lead. Although Kanzer conceded that a number of companies were not always transparent about which trade bodies they were members of, he said some businesses had – following investor pressure – disassociated themselves with industry groups whose positions on climate change could not be reconciled with their own.

Preserving the future

Sustainability was once a theme that occupied the margins of financial services and businesses. Having witnessed the economic, environmental and social damage that Covid-19 has inflicted – in addition to the destruction caused by recent extreme weather events – sustainability is now a priority issue for corporates. A refusal to embrace sustainability will not only cause misalignment between corporates and their underlying consumers and investors, but also risk endangering their entire existence altogether.