At a crossroads of innovation

Sustainable finance continues to drive innovation in sustainable finance solutions for BNP Paribas. Its bankers explain how the events of 2020 are shaping their approach to both the needs of issuers and investors alike

BNP Paribas' 2021 outlook for sustainable finance

Environmental Finance: How is sustainable finance tackling the environmental and social challenges of today?

Constance ChalchatConstance Chalchat, head of company engagement at BNP Paribas CIB: We have reached a point of no return where both institutional investors and corporates realise that delivering on sustainability is essential to doing business in the 21st century.

Despite the ongoing economic and social impacts of the Covid-19 pandemic, we are continuing to witness how investors and corporates are ramping up commitments towards tackling environ-mental and social challenges, while recognising the vital role finance has to play in a responsible recovery. This will also drive innovation in sustainable finance solutions, further rebalancing towards solutions with positive impact.

EF: What trends are driving sustainable finance activity in 2021?

CC: We see three trends driving sustainable finance activity in 2021. Firstly, ahead of COP26, industry leaders are setting ambitious targets to tackle climate change. Many companies are setting their own zero-carbon announcements and science-based corporate commitments are also ramping up.

Secondly, with the US re-entry to the Paris Agreement, we foresee an important year ahead and expect we will have a great deal of work to support our clients as they embark on the ambitions of the new green deal. This alignment of climate policies towards a low carbon economy is a global phenomenon too, and we are seeing a scaling up of zero-carbon commitments from governments around the world, including China, the UK, and beyond.

Finally, greenwashing, inflated claims about sustainability credentials and questionable use of green frameworks will be addressed by more rigor and harmonisation across the industry. This will ensure that sustainability-labelled transactions are not met with investor scepticism and remain credible.

Transition as a priority for primary markets

EF: How transformational will climate transition finance be?

Frederic ZorziFrederic Zorzi, global head of primary markets at BNP Paribas: We are facing one of the biggest industrial challenges in history. Finance will be needed to support industrials and institutions through the low-carbon transition. The validity of climate transition finance has expressed itself via the use of proceeds concept with transition bonds, and more recently with an expansion of KPI-linked products. Both have attracted a broad demand from investors as it links public environmental, social and governance (ESG) strategies for the issuer with their funding requirements.

In terms of a rebalancing, we will likely see some issuers move from traditional financing to transition financing through these approaches. Overall, the objective remains to improve environmental impact and futureproof the business model towards a progressive strategy that aligns to a low-carbon economy.

EF: How have issuers and investors responded to increasing regulatory support for transition strategies?

FZ: Investors increasingly believe in the importance of transition strategies. They fully understand the importance to align what can be seen as the "brown" sectors with a Paris compliant trajectory. For those issuers and investors wanting to be ahead of the regulatory requirements from the EU taxonomy and specifically, the 'do no significant harm' criteria, transition is top of the agenda of investors who are keen to help corporates achieve their sustainability goals.

Innovations ahead for capital markets

EF: What market innovations have caught the attention of BNP Paribas?

Delphine QueniartDelphine Queniart, global head of sustainable finance & solutions at BNP Paribas Global Markets: Sustainability-linked products are growing alongside the embedding of science-based targets at a corporate level. These enable issuers to have transparent and credible targets to meet their sustainable strategies. Furthermore, a milestone moment was when the European Central Bank (ECB) included sustainability-linked bonds (SLBs) as eligible collateral in their asset purchase programme. This meant the market started to recognise SLBs as a viable tool for supporting corporate transition through finance.

We expect this increased momentum on sustainability-linked products to result in a deeper focus on ESG data and frameworks that will help align and standardise disclosures and reinforce risk management.

There is also a need to scale up the development of blended finance structures in collaboration with the public and social sector to mobilise private sector capital toward riskier investments, and we expect to see more securitisation solutions or derivatives market for climate risk mitigation and better allocation of risk.

EF: How is BNP Paribas responding to such market developments?

DQ: We learn and grow by meeting our client's specific needs, which is why knowing our clients is key. We have embedded sustainable finance experts across the entire spectrum of products within our Global Markets division to ensure that whatever the client needs, from innovative sustainable capital markets solutions through to sustainable investment opportunities, we will be able to provide them with the best solution. BNP Paribas innovates in creating climate-aligned financial instruments and also on solutions delivering social impact.

Specifically on climate finance, we are likely to see the translation of global carbon budgets into sector and region-specific pathways. Having sector expertise and a holistic strategy across sustainable finance is vital to our approach, as it is necessary to scale up transition finance across multiple high emission sectors – from steel and transport, to construction and real estate. The corporate commitments emerging across these sectors need to be reflected in the frameworks being created in the sustainable product market, and part of our role is to ensure we can support the integrity, transparency and a genuine transition roadmap for our clients.

The investor perspective

EF: How have investors responded to the events of 2020?

Anjuli PanditAnjuli Pandit, primary markets sustainability manager, BNP Paribas: 2020 was the year of the "greenium" – the clear trend that there is some pricing advantage to issuers bringing a strong sustainability framework to the market as we saw multiple issuers price inside their secondary curve.

Although there were various market dynamics which contributed to the cheaper pricing, we heard directly from many key ESG investors that they believe there is a value to be placed on ESG data, on ESG frameworks, and on investing directly in the ESG ambitions of an issuer.

The call for social action also stimulated a more balanced look at ESG investing, where social and governance started to take more prominence both from a products perspective (e.g social bonds and Covid bonds), but also in informing the larger ESG view of the issuer. It is no surprise that as investors start to focus on the big picture ESG story, that they will also begin to align with SLB structures. The beginnings of this market started to grow in the second half of 2020, and the first SLBs received very positive responses from investors. We can imagine this will be a main focus for 2021 now that the ECB can also buy this format (albeit only with an environmental KPI).

EF: What needs to happen for the sophistication of ESG investment strategies to keep improving?

AP: Data will be the key focus on helping investors to develop more sophistication on ESG investing. This will be driven through the EU taxonomy and the EU's Sustainable Finance Disclosure Regulation (SFDR) as investors put market pressure on issuers to disclose more information so that they can report against these new regulations. As investors become more accurate and specific in their measurements, through the integration of scientific data into the assessment criteria – e.g. carbon metrics and biodiversity impacts, or granular social data – such as employment security and gender balance – they will be better able to identify impactful investing opportunities.

KPI-linked products in 2021

EF: When do you expect to see more sustainability-linked products come to market?

Cecile MoitryCecile Moitry, co-head, sustainable finance markets at BNP Paribas: By nature, sustainability-linked loans (SLLs) are available to a wide range of companies and sectors as they aim to improve the overall ESG performance of a company, whilst not being constrained by a specific use of proceeds.

Nevertheless, some sectors haven't yet fully entered this space. On the back of the landmark transactions of Eurazeo and EQT last year, we are expecting private equity funds to be much more present in the SLL market in the near future. We'd also anticipate smaller size companies to tap into SLL funding, with adapted KPIs targeting transition towards a low carbon economy.

EF: What are some of the unresolved questions in this space?

CM: What we anticipate for the year 2021 is a convergence of the SLL with the SLB. Greater transparency and analysis of the two instruments are now being undertaken. Ultimately it will result in a common and integrated approach adapted to the sustainability strategy of our clients and will bring increased integrity to the market.

We already saw an interesting example of this with Tesco, as in October 2020 BNP Paribas supported Tesco to become one of the first UK retailers to establish a SLL which was linked to emissions reduction, renewable energy and food waste. Then three months later the bank was joint sustainability structuring advisor and joint bookrunner on Tesco's €750 million ($910 million) benchmark SLB, which also targeted reduction in the UK retailer's greenhouse gas emissions. This is a great example of how a large corporate can utilise both the SLL and SLB to completely align their financing and environmental strategy, in a transparent and scientific way.

This is the reason why BNP Paribas is taking a very active part in discussions both at the Loan Market Association level, but also in connection with International Capital Market Association (ICMA) dialogues.

Sector specific outlooks for sustainable finance

EF: Which sectors are as yet untapped and have potential for issuance for SLBs?

Agnes GourcAgnes Gourc, co-head, sustainable finance markets at BNP Paribas: We are at an interesting crossroad for the ESG bond market, led by regulation on the one hand, investor demand on the other hand, and finally product innovation.

The result of these three factors is a greater product and sector diversification.

With new products, such as SLBs, issuers from resource intensive sectors can now access the ESG bond market provided they have the right sustainability strategy in place. In that respect, LafargeHolcim has opened up the market to the cement industry with its debut SLB, and we expect more carbon intensive sectors to follow suit including steel, and energy intensive industries.

SLBs are also well adapted to sectors which are less capex intensive. We anticipate we will see a range of sectors in that category to tap the market.

2020 was also the year of the auto manufacturers coming in size to the green bond market with great results, pricing through their conventional bond curve for the most part, with more players expected from the sector.

We are seeing the development of sustainable convertible bonds coming to the market as well, and we have been active on several landmark deals including green convertible bonds from EDF and the first ever sustainability-linked convertible bonds for Schneider Electric.

From an issuer category and geographical perspective, we expect a broader range of issuers to come to the ESG bond market in the high yield and emerging market spaces which could open new sectors as well. Also given the notable shift in climate policy in the US, we can expect increased activity in sustainable bonds coming out of issuers in the Americas, which will be matched by equally high engagement from the investor community.

Contact: Sarisher Mann