11 February 2020
Sustainable finance is a strategic priority at BNP Paribas. Its bankers explain how it is changing the investment landscape – and creating opportunities for investors and issuers alike.
Environmental Finance: The sustainable finance market has been evolving rapidly recently: how are your corporate clients approaching the market?
Agnès Gourc, co-head of Sustainable Finance Markets: It varies depending on the sector, but the big change over the last 18 months has been growing interest from issuers in more resource- or carbon-intensive sectors. They are starting to understand that ESG is something that is becoming a real consideration for the investor base, and that there is going to be a capital reallocation as a result of the risks caused by climate change. This is a fundamental shift that our issuers are increasingly understanding.
The first question they ask isn't whether to do a green bond or a sustainability loan – it's what does this shift mean for my funding profile going forward? The answer requires the company to define and set out its sustainability strategy and, very often, consider what that means for how the company is going to have to shift its business model. From that point, then there's a conversation about the right structure.
But certainly, this is a much more holistic discussion than before. Issuing a sustainability bond was always a big strategic decision but, now, issuers are putting it into the wider perspective of what is happening in 'ESG land' and how that will affect their funding in the future. That's a new question.
EF: For these types of clients, are sustainability-linked loans, or now bonds, more suitable than traditional green bonds?
Cécile Moitry, co-head of Sustainable Finance Markets: Sustainability-linked loans [SLLs] open the door to other types of discussion, and other types of company. The success of the green bond is that it involves looking at green assets and green capex, but some companies that are at the forefront on sustainability were not able to reflect that due to the lack of volume of green capex.
For some companies, it makes sense to start with an SLL and then think about a sustainable bond.
The approaches are very complementary; there is no contradiction between the two instruments nor cannibalisation.
AG: I agree they are complementary, and they serve different purposes; in the future, they are likely to appeal to different issuers, depending on their state of development, and also to different investors. The EU work on disclosure, the EU Taxonomy and EU Green Bond Standards will also be key drivers of the development of sustainable finance, improving transparency in the EU, and for any issuers wanting to tap that market. For investors who want to know how the funds are deployed, and want metrics linked to particular fund deployment, then sustainability-linked loans or bonds don't serve that purpose.
On the other hand, sustainability linked loans or bonds can deliver an ESG product in large volumes, and that's what mainstream investors need. The success of this market will be about placing all the various pieces of the jigsaw together in a coherent manner.
EF: Where do transition bonds – where 'non-green' issuers raise bonds to reduce, but not eliminate, environmental impact – fit into the sustainable finance jigsaw?
Trevor Allen, sustainability research analyst, BNP Paribas Markets 360: There is going to be some amount of carbon that we will continue to expel into the atmosphere while we make the low-carbon transition. For example, if a cement company is going to issue a bond to make lowercarbon cement, there is still carbon involved, so it would be erroneous to label that as a green bond. Transition bonds can help high-carbon emitters become lowercarbon emitters, but not necessarily to become green.
Part of the challenge is that, unlike with green bonds, there is no standard definition of what a transition bond actually is. One approach might be to introduce a taxonomy of economic activities and agree specific metrics that could dictate whether transition bond proceeds could be used for a particular activity – such as a carbon-intensity target for energy or cement production. Transition bonds should also be of a shorter duration than green bonds (which typically are issued for eight to 10 years) to maintain the emphasis on transitioning quickly and allow for any penalties to be enforced, if necessary.
This is an essential new asset class to really help companies transition to a lower-carbon future. We want to open this up as much as possible and see transition bonds overtake green bonds by 2025.
Chaoni Huang, head of sustainable capital markets, global markets, for Asia Pacific: We expect to see Asian issuers looking to take advantage of the emerging transition bond market. Asia is full of transition opportunities – heavy industry, manufacturing, textiles. These are heavy impact sectors that have been excluded, for good reasons, from the deep green bond market. When robust methodologies have been developed, it will really help these issuers access the capital they need to make their businesses sustainable.
EF: The US, meanwhile, has traditionally lagged behind Europe in terms of the sustainable finance market. Do you see this persisting in 2020?
Hervé Duteil, CSR head Americas: We've been saying this year after year over the last five years, but it's my conviction that we won't be saying it this time next year. There are cultural reasons, such as Europe's recent history of shortages and resource scarcity during the last century, and perhaps more of a focus in the US on seizing near-term opportunities rather than worrying about longer-term considerations. There are also legal issues around potential liabilities surrounding disclosure in the US, and perceptions – which we believe are misplaced – that fiduciary rules require investors to focus only on financial returns.
So what's changing? We are at inflexion point on climate change; and for pragmatic American investors and issuers, it means it is time to move. There are also signs of cultural and regulatory shifts, such as the Business Roundtable's decision last year to rethink its definition of corporate purpose to include commitments to stakeholders beyond their shareholders. The Commodity Futures Trading Commission, meanwhile, has launched a sub-committee to report on the risks to financial markets posed by climate change.
The US fixed income markets are, of course, much larger than the European ones; so I think over time we'll see the US accounting for greater volumes of ESG fixed income paper, but maybe product innovation will continue to be led by Europe.
EF: What about the picture in the Asia Pacific? How is the regulatory and policy landscape likely to support sustainable finance markets in 2020?
CH: For 2020, I expect to see more leadership from Asia to tackle the climate emergency, and we are seeing mainland China, Hong Kong and Singapore addressing their respective financial systems to incorporate environmental assessment, with more emphasis on climate change, in addition to the existing focus on pollution prevention and control. With this kind of regulatory support, these efforts will trickle down to the private sector in terms of issuance and investing.
Regulators are also acting as catalysts as investors themselves. The Monetary Authority of Singapore has just set up a $2 billion green investment programme to accelerate the growth of Singapore's sustainable finance ecosystem. Similarly, the Hong Kong Monetary Authority, which manages HK$4 trillion of reserves, has made a public commitment to integrate ESG into its investments and it is keen to buy green bonds.
This will help to accelerate growth in issuance in the region: it's grown very fast, an at annual average of 48% from 2016 to 2019, admittedly from a low base. The issuer mindset has shifted: the key motivation to issue sustainable bonds has shifted from the 'green halo' reputational driver, to the strategic targeting of investors. It's now embedded within issuers' investor relations strategies, to use the sustainability bond label to diversify their investor base across borders, taking advantage of the ESG liquidity in Europe and the US.
Issuers in the region have also noticed the better performance of Asian sustainable bonds during the US-China trade tensions during the second half of 2019. In terms of liquidity and secondary market pricing, their performance held up better than their conventional equivalents; ESG bond investors tend to be 'sticky' and less likely to sell out during periods of market volatility.
EF: What about market size? What's BNP Paribas's estimate for 2020?
TA: We think both the number of transactions and the average deal size are both set to grow this year. The latter has been an average of around $275 million for a few years now, and I think we're going to see some growth there. For the sustainable bond market – green bonds, social bonds and sustainability bonds – will be somewhere between $360 and $400 billion by the end of this year, a 30-40% increase in volumes. There's a lot of momentum behind the market.
BNP Paribas's sustainable finance journey
There are two "transformation levers" facing BNP Paribas, explains Antoine Sire, the head of the French bank's Corporate Engagement department. "One is digitalisation; the other key transformational driver of the company is sustainability," he says.
"We believe that the future of finance is sustainable finance," he says. "Concerns about climate, biodiversity, social inclusion and territorial imbalances means that we will have to integrate sustainability criteria in everything we do."
The bank has set out a leading position in sustainable finance. In 2011, it made fighting climate change one of its priorities, and has carved out leading positions in renewable energy finance and green bond issuance. It is ranked number one in renewable energy project finance in Europe, the Middle East and Africa, and number three globally, according to figures from Dealogic, and is one of the top-three issuers of euro-denominated green loans.
"There is a genuine willingness from the very top to be a sustainable finance leader, and to mobilise resources that have a positive impact," says Constance Chalchat, head of company engagement, BNP Paribas CIB. "Green intermediation – to be a bridge between institutional investors aiming at positive impact and corporates transforming – is core to our strategy."
As examples, Sire notes that BNP Paribas's asset management division has decided to integrate sustainability criteria in its investment decisions for all its investment strategies by the end of 2020, and the bank is also working on systems that will allow it to calculate the carbon emissions across its entire credit portfolio.
In addition, it has begun calculating the volume of lending that it is directing towards the UN Sustainable Development Goals (SDGs). In 2017, the first year of the exercise, the figure came to €142 billion – last year, it had risen to €168 billion.
BNP Paribas was also one of the co-founders of the UN-backed Principles for Responsible Banking. Unveiled last September, the principles commit signatories to aligning their business with the SDGs and the goals of the Paris Agreement on climate change, as well as assess, disclose and set targets regarding their greatest sustainability impacts.
While there are opportunities to be had from sustainable finance and banking, such a shift also entails exiting some businesses. The bank has introduced sector financing policies that have led it to exclude a number of unsustainable activities, including ceasing lending to new coal-fired power plants in 2017, and tightening those criteria, to exclude utilities with coal-fired generation in the EU by 2030, and globally by 2040.
"When we've implemented these sectoral policies – such as coal, shale gas and tobacco – we renounced substantial revenues, and were able to reallocate resources to assets and projects that contribute to the UN Sustainable Development Goals," says Chalchat, who adds that the banks shareholders are supportive of these moves. "Our shareholders are not only there for the short term ... Simply generating short-term revenue is not enough. We need to also safeguard the longterm profitability of the Group, and that means gradually shifting our portfolio to the sectors that are here for the long run ... These renunciations and shifts are what are making us a credible partner for clients on sustainability."