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Sustainability Perspectives

Episode 75: Why ESG in the Credit Markets is not ''Niche"

We welcome Agnes Gourc, Head of Sustainable Capital Markets at BNP Paribas, as she joins Keesa to explore why she strongly believes ESG in the Credit Markets should not be considered "niche" markets. They also discuss the success factors and how education goes both ways between companies and investors and the importance of everyone speaking the same language when we talk about what we want to measure.

Host: Keesa Schreane

Guests: Agnes Gourc, Head of Sustainable Capital Markets at BNP Paribas

  •  KEESA

    If you still call ESG in the credit markets a niche market, while my guest would strongly disagree with you and today she is going to tell you why. Agnes Gourc is head of sustainable Capital Markets at BNP Paraba Agnes, thank you for joining.

     AGNES

    Thank you very much.

     AGNES

    Very happy to be with you today.

     KEESA

    So first let's talk about the work you do structuring credit.

     KEESA

    We can talk specifically about sustainability, linked bonds, and some of the other areas that you focus on how long BNP Paribas has been in this space and why you are a bit annoyed when people refer to ESG and credit markets as a niche market?

     AGNES

    So first of all, kind of.

     AGNES

    We're very happy to be with you and effectively being able to tell you a bit more what we call stable finance said being the power BI and what we do with our clients from that perspective.

     AGNES

    Yeah, so actually we've been looking at stability for a very long time, I think.

     AGNES

    Well over 10 years ago the banks started putting in place policies and that cuts across all the business we are doing at the bank.

     AGNES

    So it goes far beyond even sustainable finance is really integrating sustainability in all our businesses.

     AGNES

    And that has evolved over time.

     AGNES

    You know, covering more sectors and being more refined as well.

     AGNES

    So actually this was the origins if you want.

     AGNES

    Of sustainable finance and today we look at sustainable finance.

     AGNES

    Across business lines across our client types and we try to really serve every counterpart we have in the market today.

     AGNES

    Whether it's on the investment side, whether it's on our borrower and issue aside, and and I think one of the the problem when we look at.

     AGNES

    The energy market.

     AGNES

    It's true that we called it needs for a number of years.

     AGNES

    I think the most advanced market today and is still on the stable bolts.

     AGNES

    Prompt because it was really kind of, you know, the first one to start and when you look at that just to give you a bit in number as effectively.

     AGNES

    We are, we've crossed already at the end of July.

     AGNES

    The level of issuances of sustainable bonds worldwide that we had at the end of the year last year.

     AGNES

    So effectively, in seven months we've done the volumes marketing in the market worldwide that we had seen for a whole year.

     AGNES

    2020 and pretty much every year for the last year. That's what we are seeing.

     AGNES

    And really, where we say?

     AGNES

    I think today we are at an inflection point we see in the volumes, but we also seeing in the way our clients are looking at this market.

     AGNES

    You don't really have an investor today that don't have sustainability in their investment processes in their in their funds.

     AGNES

    In what they sell to their own clients and you don't have a firm today that tells you I don't look at my financing and from a sustainability perspective.

     AGNES

    So, you know you have so many pointers that say today it is moving away from being a niche market and really becoming almost mainstream effectively.

     KEESA

    Well, you definitely make the case there, so thanks for that Agnes.

     KEESA

    I want to talk about primary trends and value drivers that you're seeing, and specifically how these trends and drivers can be used to do analysis, ensuring clarity for around default risk.

     KEESA

    For example, let's talk about those trends and drivers and how they're being used.

     KEESA

    Your analysis today so.

     AGNES

    Effectively this started with we always sell our clients on on the issue aside, if we focus on the bond market effectively, everything we do in Saint Paul Finance starts with their sustainability strategy, so we don't create anything in the vacuum.

     AGNES

    It's really worth it as a company.

     AGNES

    As a bank as its professional sometimes, what have you put in place today in your business?

     AGNES

    What have you committed to?

     AGNES

    And that will deliver a sustainable plan of development for your activity.

     AGNES

    And that's really the starting point.

     AGNES

    And what we have seen in stable finance over time.

     AGNES

    And that's really, I think, the big hidden value, sometimes unspoken value of sustainable finance, is that actually.

     AGNES

    We have and we want to see more and more of those, but effectively what we are looking at is when we have clients that how sustainability is tried.

     AGNES

    That are good, but not yet fully developed.

     AGNES

    Coming to the stable finance markets really helped them to speed that process and and I would say when they come with, you know, beat the Green Ball beta stable NBT link bond.

     AGNES

    They will effectively really have a deeper engagement with the investor base.

     AGNES

    You know when you when you look at what stable finance have delivered and it's even more true today.

     AGNES

    It's really an acceleration of the sustainability strategy that our clients are putting in place.

     AGNES

    So I would say you know a driver is really, you know, striving for always better, always faster and avoid, which is what investors are demanding.

     AGNES

    And if you know since the Paris Agreement we've had so many evolutions.

     AGNES

    Trends, but a lot of them recently you will have heard of the net zero, an asset manager alliance net zero asset owner line.

     AGNES

    So all those investors signing up to those reliance are saying effectively we need to have our portfolio reaching. Net 0 by 2050 and we need to have intermediary steps.

     AGNES

    To get there and they are driving really the issuers to attain do start to help them attain those targets in the portfolio.

     AGNES

    So I would say in acceleration of sustainability overall and that's one of the key trends.

     AGNES

    Carbon is really one.

     AGNES

    The main focus today and as soon as you say carbon, then you put the light on everything else because you know we know carbon is not enough.

     AGNES

    You need to look at circular economy.

     AGNES

    You need to look at water and then you need to talk about just transition.

     AGNES

    Because if we are going to move away, some businesses from what they do today to something new, what do you do?

     AGNES

    With the start of the local community, so all this into account when we look at sustainable finance.

     KEESA

    So just keeping along those lines you're talking about key trends, the acceleration and how that comes to bear carbon, as well as looking at transition.

     KEESA

    I want to take a particular area I want to look at oil.

     KEESA

    And gas drilling gas sector.

     KEESA

    So if we're looking at.

     KEESA

    This from that perspective, and if we're talking.

     KEESA

    Think about the acceleration that we see as a trend.

     KEESA

    If we're talking about transitioning, how can we look at those transformational strategies in the oil and gas sector?

     KEESA

    And and then, how are you acting as a bridge between the investor as well as the as a separate self in this transformation?

     AGNES

    Yeah, so thank you for using.

     AGNES

    Actually the word bridge key.

     AGNES

    So because I think that's really the way we see ourselves saying.

     AGNES

    Look, there are many parties.

     AGNES

    Effectively you know involved in sustainability and I said pretty much kind of in every function market participants today and we are really here to facilitate a connecting effectively.

     AGNES

    Relevant part is.

     AGNES

    And I think oil and gets the oil sector is actually a very good example.

     AGNES

    What we are looking at in a lot of you know, area that the economy is really sector.

     AGNES

    They are still really carbon intensive or we call them sometimes hard to abate sectors.

     AGNES

    And oil and gas, especially when you look at European major.

     AGNES

    They've made such huge strides actually in the recent months and really show.

     AGNES

    How they are going to transform their businesses so you know you will have heard some of them saying we are actually becoming energy companies.

     AGNES

    We should maybe call end gas anymore in the future and it's really a transformation that they are putting in place and from a sustainable.

     AGNES

    Finance perspective the way we look at it is really if you are in a in a sector and if you have a strategy where really you have to explain and to educate quite deeply actually.

     AGNES

    And try to put your message across as efficiently and as quickly as possible, because things are moving ahead very rapidly and you will see all the oil and gas you know, CEO, CFO.

     AGNES

    They will explain at length if you listen to any of their earning presentation.

     AGNES

    A lot of it will be on the edge.

     AGNES

    A lot of the questions will be on energy and actually what we tell our clients is really there is a unique tool to help you communicate this new strategy in an effective manner to your investor base.

     AGNES

    In particular, you debt investment.

     AGNES

    And this is around sustainable finance and sustainable bonds in particular.

     AGNES

    So again, kind of you know, we take as a starting point.

     AGNES

    Really, the the strategy of the issue sometimes will reach a point where actually we don't have all the technology at hand that is needed, and that's where you know we get really.

     AGNES

    Innovation coming into play.

     AGNES

    That's very frequent, I would say because it's such a growing market.

     AGNES

    There are so many new things that we.

     AGNES

    When you frontier that we keep pushing effectively so and alongside the volume growth, I would say innovation is always kind of going in pair with what we see in the market and in the oil and gas sector.

     AGNES

    That that's very true and you will have seen in the market.

     AGNES

    Two players in the oil from the European Major ENI and reps. Also being P5. I was active on both transactions.

     AGNES

    And and they've been really successful into bringing their new sustainability strategy to that investors in in a very kind of formatted way.

     AGNES

    So every investor straight away you know it attracts attention and they can clearly see you know what the salient points are.

     AGNES

    If you want of this decarbonization trajectory.

     KEESA

    So if we're looking at what's really differentiating what's the differentiating factor between a successful strategy or successfully bringing sustainability to investors versus an unsuccessful bid, is it simply in the education?

     KEESA

    So you mentioned using those earnings?

     KEESA

    Reports and those earnings conversations to talk about it.

     KEESA

    Really communicating.

     KEESA

    Is it simply in having the conversations or do you feel that there are other factors that lead to success outside of.

     AGNES

    So I think.

     AGNES

    Having the conversations is key because if you ask you know you will have kind of talked to a lot of energy investor.

     AGNES

    They will always say we need to engage with companies with you, know, every you know every each year, every company we hold in our.

     AGNES

    Portfolio we need to engage more to understand them better, but also to be able to influence and sustainable.

     AGNES

    Finance is a key tool for investing.

     AGNES

    So it goes both ways.

     AGNES

    You know, issuers will educate investors on where they see themselves today where they want to go.

     AGNES

    But also investors will educate issues where they need them to go effectively, so it goes both ways, but also one of the very important examples and you know.

     AGNES

    There are companies when we start the discussion around stable finance.

     AGNES

    We have really a full review of where they stand in their stability strategy and there are cases where effectively we'd have to discuss.

     AGNES

    You know what new campaign corporate you know typical example?

     AGNES

    Can they actually start having commitment on scope free for example?

     AGNES

    Which then gives the full picture of the carbon footprint of the company and so.

     AGNES

    You know, it said, I would say the transaction or the framework that we that the company published and we advised them on.

     AGNES

    That's only the tip of the iceberg.

     AGNES

    There will be cases before where actually you know the company strategy has shifted from the first time we spoke, and that's you know, obviously.

     AGNES

    That you know you don't see it as easily as they then transaction itself, but that's I think one of the true value of sustainable finance.

     AGNES

    That's why we're saying, you know, it's an accelerator effectively of the development.

     KEESA

    Great no.

     KEESA

    Let's transition and talk a bit about data.

     KEESA

    What KPIs and data are helpful to investors to know if corporates are getting on that sustainability path in that accelerated way that you just mentioned?

     AGNES

    So I think.

     AGNES

    If you look at S&G and I would say Gee is a whole topic by itself and any investors you know whether it's conventional types of transaction or whether it's stable finance.

     AGNES

    There will be a bit the basis effectively.

     AGNES

    And here a lot of investors will directly through really deep engagement with the company.

     AGNES

    If there was anything they wanted to see change in the governance when we look at the stable bond market will typically, so that's a bit the foundation.

     AGNES

    Effectively, you know you need to have a good governance.

     AGNES

    Then what we work on is really the environmental and the social.

     AGNES

    So enst social the data.

     AGNES

    There's been a lot of dogs around it over the years.

     AGNES

    That's even more complex effectively.

     AGNES

    More difficult yet to quantify, and then when you look at the environmental side so I would say social, that's probably where we have even more work to do.

     AGNES

    We are actually code sharing the social Bond working group within the ECMA principles.

     AGNES

    And that's a big focus on you know, how do you have social?

     AGNES

    How do you have impact reporting on social bonds?

     AGNES

    Word measures?

     AGNES

    Can you improve there?

     AGNES

    And on the environmental side I.

     AGNES

    Would say it's probably step ahead.

     AGNES

    And in particular around carbon, that's probably where we have is.

     AGNES

    Not perfect yet, but that's where we have most progress so far.

     AGNES

    And even then I would say where we find difficulty is that you know we'll be able to find data company by company.

     AGNES

    So going onto you know, each separate sustainability report is still fairly difficult.

     AGNES

    And to have somewhere weights all aggregated you know, are they committed to. Net 0 by 2050 that they have intermediate targets? Against which methodology? So there is still a lot of a lot of room to go. I would say you know.

     AGNES

    Different you will see different region.

     AGNES

    Different investors will favor one methodology over the other.

     AGNES

    I would say 4 start.

     AGNES

    Could have you know, an easy way to find references of, you know?

     AGNES

    Do they have target?

     AGNES

    Which one out there, which methodology?

     AGNES

    That would be a good start there I would say.

     KEESA

    Great and in keeping with.

     KEESA

    Obviously you are not the only person who believes that just having that sense of reliability as well as just comparability across methodologies would be extremely helpful.

     KEESA

    And to that everyone is speaking and saying to me what I'm hearing is that Europe is really leading the way as it relates to.

     KEESA

    Regulations as it relates to the.

     KEESA

    Guidance you know and there are good proof points to support this.

     KEESA

    When you look at the taxonomy there, when you look at the sustainable Finance disclosure Regulation there.

     KEESA

    So Agnes with that, are you seeing specific behaviors in other regions that lead you to believe that these other regions may be following the lead quickly?

     KEESA

    I think in the accelerated pace is our theme for today.

     Speaker 3

    Sam Smith

     KEESA

    Do you see and accelerate it?

     KEESA

    Case in other regions, and if so, where are you seeing it?

     AGNES

    So I think it's true that you know Europe has been kind of at the forefront around the SG.

     AGNES

    It still has maintained that lead.

     AGNES

    I would say it's probably, you know, accurate that other regions are picking up, and if you look at the US under the new administration most certainly and it had.

     AGNES

    Started even before so that that will definitely accelerate.

     AGNES

    And I would say one of the key pieces of regulation we look at in Europe is under the Commission drive.

     AGNES

    Really, with the Green Deal, and in particular in stable finance, we look very much at FDR on the investment side and everything to do around the EU.

     AGNES

    Sex in the media will very much impact really the way we look.

     AGNES

    Specifically at some of the the instrument, like the green bombs for example.

     AGNES

    That will have a big shift actually.

     AGNES

    In effectively we now have a dictionary.

     AGNES

    What is considered or what is the definition of a green project according to the EU Commission?

     AGNES

    And that's very important, because then we can start.

     AGNES

    Then we have a common language and we can start discussing.

     AGNES

    Maybe we disagree on the definition, but at least we all talk the same language.

     AGNES

    And I think you know alongside measurement, having a clear understanding of definition is very important, because you know, you know when you're trying to measure.

     AGNES

    So in that respect, I think you know Europe has really, you know.

     AGNES

    Keep at least probably showing kind of where we try to have the next step coming from, and there are clearly you know lots of bridges being built.

     AGNES

    For example, in the taxonomy between regions and with every regulation, it needs to be properly dosed effectively, so it achieves the right the right ambitions.

     AGNES

    But I I think at least so far it has proven to be done.

     AGNES

    Fairly well actually.

     AGNES

    I, I would say you.

     AGNES

    I would say from the investment sides.

     AGNES

    What we have seen in the US is really, really interesting because effectively, you know, even if there wasn't, assume the same drive effectively from a regulatory perspective, really the demand on the investor side has been there and and we can probably see, you know.

     AGNES

    Or those two or three years even.

     AGNES

    And what we get from you know my counterparts sitting in York.

     AGNES

    They get so many more discussions and and so many more inbounds actually.

     AGNES

    Whereas in the past they would have been, you know, trying to kind of, you know, engage and have the discussion and, and now it's more kind of, you know, so many kind of discussions that need to be started.

     AGNES

    From the client side, so you can really see that that change and APAC.

     AGNES

    I would say has always been keen on ESG overall, so maybe you don't see.

     AGNES

    Kind of you know such.

     AGNES

    Such a big change of gear effectively that we would see in the.

     AGNES

    US, and more generally.

     AGNES

    I would say so.

     AGNES

    Here I'm talking about, you know regulatory aspects and investment side and what is quite important to us at the Empire buys as well.

     AGNES

    You know we see our role obviously in in what I do and what if suddenly my colleagues unstable final.

     AGNES

    But also, as I was mentioning at the very beginning, everything we do as a bank.

     AGNES

    How does it translate effectively?

     AGNES

    You know, with our clients with our communities.

     AGNES

    And here I I do think there is.

     AGNES

    You know there's been a drive as well in Europe and we were among five of the category, but we called the cat Avicii banks and there were already European at.

     AGNES

    That it was looking basically at methodology to devise the carbon footprint of our lending portfolio and this goes really hand in hand with something that is more recent, which is called the net Zero banking alliance and effectively it's when we signed it. It was 43 and founding banks.

     AGNES

    Saying effectively all our lending and investment portfolio need to be. Net 0 by 2015.

     AGNES

    And that goes, you know it's a pair.

     AGNES

    Basically, now we have the long and medium and we are going to have the medium term targets and we have the.

     AGNES

    So the Cateechee banks and created what is called the pattern methodology, and that's effectively giving you the tools to measure your portfolio sector by sector.

     AGNES

    So we can unite the two.

     AGNES

    How do we effectively have the commitment?

     AGNES

    How do we reach those?

     AGNES

    Commitments in practice.

     KEESA

    Perfect, so the tools are there in practice. How can we reach the goals? Such great information. Also talking about the SuccessFactors that you mentioned earlier.

     KEESA

    Agnes having conversation is key, but to your point.

     KEESA

    Education goes both ways, so there's a need for companies to engage.

     KEESA

    And speak to the investors about what their plans are, what the strategies are.

     KEESA

    But there's also need for the investors to educate the issue or on where they need them to go and what they need from them in order to meet.

     KEESA

    Goals and obviously a lot of folks would agree with you here.

     KEESA

    Agnes the social data it carries a higher level complexity simply because it's just much more challenging to quantify, and there's definitely more work to do there.

     KEESA

    Uh, governance is foundational need that definitely, and also environmental data.

     KEESA

    Carbon is where there seems to be most progress.

     KEESA

    But the difficulty again, and this is something that we see over and over again.

     KEESA

    Understanding which methodology is being used, making sure that it's comparable, comparable, and also the different regions which regions are favoring which methodology over the other.

     KEESA

    Just a real need to get comparable information.

     KEESA

    And that is reliable there.

     KEESA

    And also I think one of the most important things we all need to speak the same language, so knowing what we're trying to measure and making sure we have the same measuring stick can help us out tremendously.

     KEESA

    Agnes Gourc head of sustainable capital markets at BNP Paribas.

     KEESA

    Thank you so much for being our guest.

     AGNES

    Thank you very much, thank you.