ESG Report 2019 - UPDATED

ESG Report 2019

Chapter 1 Introduction

Environmental and social governance (ESG) structured products have come of age and are a must-have solution in any investment portfolio. Growing numbers of product manufacturers and distributors have included them in their catalogues while investors can now benefit from the granularity of the data on offer and the use of indicators showing the impact achieved by green bond financing to make investment decisions.

ESG products are no longer the domain of utopian and visionary fixed income investors seeking a ‘feel good factor’. Investor awareness has increased and providers have leveraged their knowledge and capabilities to shift gears, and deliver instruments offering performance and risk mitigation. SRP’s data also proves that structured products are an efficient vehicle to offer exposure in different ways and to different investor types (retail and institutional) to what some quarters would argue has become an asset class in its own right.

This report provides a comprehensive overview of the ESG structured products market with a timeline of the most significant developments covering the period from 2013 to 2018. It also includes a profile section with a selection of some of the most relevant index providers and manufacturers, as well as a country-by-country analysis, a survey polling a selected number of senior executives from the buy-side and a chapter covering regulatory considerations. As a first edition this is an attempt to shed some light on an area of increasing activity in the structured products market based on the available data. We want to highlight that significant challenges remain to provide a complete picture on individual players and country-by-country analysis, especially in the context of non-public issuance and sales.

Data is sourced from StructuredRetailProducts. com and is based on issuance and sales estimations which may differ from other sources of data.

Chapter 2 Executive summary

Ethical and sustainable investing takes centre stage

Socially responsible investments started as a niche market in the early 2000s with a number of pension funds and asset managers incorporating them into their mandates. In the structured products market the first record appears in 2001 when UBS issued its first leveraged certificate linked to the FTSE4Good Europe 50, which was followed by several other products featuring FTSE4Good indices brought to market in different European jurisdictions in the runup to the 2008 crisis.

Although so-called ethical investments had been part of the theme-based investment trend pre-Lehman alongside sports, catastrophe and infrastructurelinked structured bonds, the use of indices covering environmental management, human and labour rights, supply chain labour standards, anti-bribery, corporate governance and climate change mitigation, remained on the sidelines.

has established a strong presence in the global structured products market as shown by SRP data.

In 2013, the structured retail products market saw a first batch of structures linked to ESG strategies with 13 products sold in different jurisdictions with a sales volume of US$167m by year end.

In 2014, the issuance of products featuring ESG assets increased by 715% to 106 structures worth an estimated US$1.4 billion – which represented a staggering jump of 752%. Behind the record-high sales volume there were a number of high profile transactions.

Since the 2015 United Nations Climate Change Conference (COP21), European distributors have shown willingness to promote these kinds of thematic indices and investments with French banks becoming leading players in this field.

The following year the structured products market registered its highest activity and sales volume around the ESG theme with a 36.5% increase in sales to US$1.9 billion, and a similar increase in issuance (26%) to 134 products.

Overall issuance in 2016 increased slightly to 148 products but sales fell by 22% to US$1.5 billion. Despite the slowdown in sales the ESG segment remained at the top of investor and manufacturer agendas.

In 2017, the market continued to slow down with a 16% drop in issuance to 123 and a 5% fall in sales to US$1.4 billion. 2018 saw a 16% pick up in issuance with 143 products marketed and a 22% fall in sales to US$1.09 billion.

However, a few years after the crisis, index trends showed increasing capital inflows into passive sustainable investment strategies (low carbon, index-linked green bonds). ESG became became a trending topic in the structured products market in 2012 when MSCI and Barclays launched a family of co-branded ESG fixed income indices for institutional investors to use in indexlinked investment products. Since then ESG

Overall, SRP data shows a consistent issuance and sales levels with the number of players and new entrants suggesting it is a consolidated segment of the market, and that ESG structured investments are here to stay.

A breakdown by country shows that Belgium (210 products) and Sweden (216) are by far the most active markets for ESG structured investments.

Belgium also leads sales volumes with over US$3.04 billion sold to date. France comes second with US$2.58 billion, followed by the Italy which shows over US$286.7m in sales. Ireland with US$272.7m in sales and Institutional with over US$231.6m completed the top five markets in terms of ESG activity and sales.

When it comes to activity, Europe is the leader on the ESG front, and is responsible for approximately 53% of global ESG assets under management (AUM), followed by the USA with 38% of global ESG AUM, according to the Global Sustainable Investment Review 2017. This is consistent with ESG activity in the structured products market which is also higher in Europe than anywhere else.

SRP data shows that while North America saw the first ESG structured products in 2015, with issuance and sales remaining consistent over the last three years, levels are marginal compared to Europe.

Source: StructuredRetailProducts.com

Asia Pacific

In the Asia Pacific region, ESG structured products also remain negligible in terms of issuance and sales. The highest number of products was registered last year when five products worth an estimated US$5m were sold to retail investors in the region.

It is worth mentioning that SRP’s institutional database which covers private banking products only has registered an increasing number of products albeit marginal activity over the last four years. The highest level of activity was recorded in 2018 when up to seven products worth US$130.3m were sold among these investors.

The ESG market continues to be dominated by French banks which are pioneers in this area and have remained at the forefront of developments. BNP Paribas with more than 164 products issued linked to ESG strategies and sales of US$2.4 billion leads the pack with Natixis in second place on the back of 24 products issued and US$1.1 billion in sales. La Banque Postale (11 products/US$785m) and Société Générale (88 products/US$732m) are keeping the issuance pace. A number of non-French banks including ING Bank, Bank of Ireland, Belfius Bank and Handelsbanken complete the rankings.

Among distributors, BNP Paribas leads on sales with nearly 110 marketed and an estimated US$2.3 billion

Source: StructuredRetailProducts.com

in sales. La Banque Postale comes second with 15 products issued and US$1 billion in sales followed by Caisse D’Epargne which has racked in more than US$900m in sales on the back of just four products. The top five spots are completed by Belgian insurer Crelan which has issued 19 products worth US$313.6m and Société Générale which has issued 29 products worth an estimated US$313.4m.

From an indexing perspective, Solactive dominates the market with more than 300 products

and US$3.6 billion estimated assets linked to its strategies. Euronext with 48 products worth US$1.5 billion linked to its indices and Stoxx with 98 products worth US$1.1 billion complete the top three ranking. That being said, Finvex’s indices are the second most utilised appearing in 176 products worth US$990m

SRP data also shows that in this area, a number of investment banks including BNP Paribas, Natixis, BMO and Unicredit have deployed proprietary indices in ESG structures.

Solactive’s Ethical Europe Equity remains the index with the highest ESG structured products sales volume (US$2.5 billion) featuring in 84 products with the Euronext Climate Orientation Priority 50 EWER in second position featuring in 18 products worth US1.1 billion. Stoxx’s Europe ESG Leaders Select 30 EUR Index is also a top index in the ESG structured products market appearing in 36 products worth over US$539m. Finally, the Finvex Sustainable & Efficient Europe 30 appears in 100 products worth US$506m.

The top 10 ESG index table is completed by indices from Solactive, Finvex and Euronext which represent combined sales of US$1.3 billion.

– Östersjölaxen – a growth product linked to the performance of OMXS30 Ethical Index which matured in October 2018 delivering 123.3% capital return after three years of investment. The softprotected note was based on a protected tracker and uncapped call payoff types combination.

SRP data also shows that the best-selling ESG structure in 2018 was Natixis’ Ambition COP Avril 2027, a knockout growth product linked to the Euronext Climate Orientation Priority 50 EWER Index (COP50) sold in March 2017 which gathered an estimated US$436m. An earlier tranche of the same product marketed in January 2017 sold US$425m.

From a sales and performance standpoint, Swedbank is behind the best performing ESG structured product to date with its Aktiebevis Sverige Etik

La Banque Postale with its LBP Ethiceuro 100 Avril 2023 eight-year uncapped call linked to the Solactive Ethical Europe Equity index sold US$145m.

Chapter 3 Regulatory considerations & framework

The EU sustainable investment framework

Growing demand for ESG strategies underlying structured investment products have prompted regulators to seek feedback from investors and manufacturers, and update existing guidelines to clarify how ESG structured products should be transacted including disclosure of objectives and risks.

The High-Level Expert Group (HLEG) on Sustainable Finance, established by the European Commission in December 2016, published in the summer of 2017 its first report setting out concrete steps to create a financial system to support sustainable investments.

The recommendations included establishing an EU classification of financial products that captures all acceptable definitions of sustainabilty.

At the time, the HLEG suggested this could be finalised before the end of 2018 ahead of the review of the Regulation on Key Information Documents (Kids) For Packaged Retail And Insurance-Based Products (Priips Regulation).

Another HLEG recommendation is the establishment of a single set of principles for financial intermediaries’ fiduciary duties that incorporates ESG factors. The HLEG suggests that the Commission use its forthcoming reviews of financial services sectoral legislation to address this issue.

The Expert Group has also recommended improving the disclosures made by firms and financial institutions on sustainability issues; developing a test to ensure that sustainability is embedded across all future EU financial regulations and policies. It is also using the ongoing review of the European Supervisory Authorities (ESAs) to clarify and enhance the ESAs’ roles on ESG issues.

The report is part of broader efforts to map out an EU strategy on sustainable finance, a priority action of the Capital Markets Union Action Plan. The first

wave of EU reforms focused on making the financial system more stable and resilient. The Commission is now driving forward efforts to reorient the financial system so that it can support long-term, sustainable growth. The financial sector has a vital role to play in reaching the climate change goals of the Paris Agreement and the EU’s 2030 agenda for sustainable development. It is also vital that more private capital is mobilised towards green and sustainable investment to enable the transition to a low-carbon economy.

The taskforce will further explore other policy areas to provide further recommendations in the final report. The areas on which the interim report proposes quick action include a classification system for sustainable assets, a European standard and label for green bonds, a fiduciary duty that encompasses sustainability, better disclosure from financial institutions and companies on how sustainability is factored into decision-making, and a ‘sustainability test’ for relevant EU financial legislation.

ESG products under the Priips regime

Also in July 2017, the ESAs submitted their Technical Advice to the Commission to set minimum requirements which manufacturers of Priips with environmental or social objectives (EOS Priips) will be required to comply with to ensure that they offer products that meet retail investors’ needs.

Manufacturers of EOS Priips are required to establish specific governance measures to ensure that EOS objectives of the product are met on an ongoing basis. Additionally, EOS Priips will have to demonstrate to retail investors throughout the investment process the relevance of these objectives.

In its Technical Advice, the ESAs addressed four areas with regard to Priips with environmental

or social objectives and included the following recommendations:

 The Priip manufacturer targeting environmental or social objectives has to clearly specify these objectives, together with an appropriate and proportionate strategy on how to achieve them.

 The Priip manufacturer should disclose to the retail investors the objectives and how these will be achieved.

 The Priip manufacturer has to install and document governance and monitoring measures. The latter need to be proportionate to the ESG objectives and strategy.

 The Priip manufacturer should conduct regular reviews on the progress made in achieving the specified and disclosed objectives.

Acknowledging the cross-sectorial dimension and the need for rigorous assessments to address potential gaps, the ESAs specified, for each of these four areas, the required regulatory outcome and an assessment of existing rules, but concluded that the establishment of specific and detailed standalone obligations for Priips targeting specific environmental or social objectives would not be proportionate.

According to the regulators, existing sectoral measures already offer, or are already in the process of putting in place, a sufficiently stringent and flexible basis for the sound regulation of Priips targeting environmental and social objectives.

The regulators also noted that Priip manufacturers will also be required to ‘conduct regular reviews on the progress made in achieving the specified and disclosed objectives’.

The Technical Advice included the ESAs’ assessments and summaries of the responses received to the consultation report published in February 2017.

A number of respondents criticised the proposed draft ‘Technical Advice 2,’ which states that ‘all manufacturers of EOS Priips shall comply with the Markets in Financial Instruments Directive (Mifid 2) or Insurance Distribution Directive (IDD) product governance rules, depending on the product being a financial instrument, structured deposit or an insurance-based investment product’.

According to the comments received, it was not regarded as legally sound to impose Mifid 2 or IDD

product oversight governance (POG) rules on Priips which have Undertakings for Collective Investment in Transferable Securities (Ucits) or Alternative Investment Fund Managers Directive (AIFMD) funds as underlyings, but ‘would rather require a change on the Level 1’.

The regulators also pointed out that a number of respondents argued that from a Ucits/AIFM fund management point of view, the reference to Mifid 2 product governance ‘could not be established, as fund management is exempt from the scope of the Mifid 2 Directive’ and fund management companies would not be in the scope of the IDD.

Regarding EOS Priips tracking an index, the regulators stated that manufacturers will be required to define a basket of companies which at the start of the product comply with EOS objectives.

The Kid for these structured products would have to make it clear to investors that the selection of the companies with respect to their compliance with EOS objectives has been made only at the inception of the product. This implies that during the lifetime of such products one company in the underlying basket could breach the EOS objectives.

French regulators move to clarify rules

In the third quarter of 2018, the Autorité des marchés financiers (AMF) clarified exemption criteria around ESG strategies used in structured products in the French market.

The conditions to exempt ESG filters as a complexity mechanism, subject to conditions, within the existing regulatory framework in France, were drafted by the French Association of Financial Markets (Amafi) and the French Financial Management Association (AFG), in close cooperation with the AMF.

The guide drafted by the trade bodies and the regulator states that there are three basic conditions required, in a cumulative fashion, for an index to be eligible for the special status.

The index should respond to one or more ESG themes, listed by the UN’s Sustainable Development Goals (SDG); must be based on an ESG assessment by an independent and recognised entity; and the ESG assessment should only allow select stocks with the best ESG rating and/or exclude values with the worst ESG rating and/or overweight stocks with the

best ESG rating or underweight the stocks with the worst ESG rating.

The guidelines introduce a limited scope exception to the existing AMF guidelines (DOC-2010-05) regulating the sale of complex financial instruments. The AMF has adopted a triple categorisation of underlying indices, assigning a fixed number of additional mechanisms to each category, depending on whether the underlying used is a commonly accepted index representative of a financial marketplace, country, region and sector, or, alternatively, if it implies an additional element of complexity, such as selection of less volatile stocks, components equally weighting or payment of synthetic dividend.

The additional mechanisms are then considered alongside the existing complexity mechanisms of the payoff formula, subject to a total of three mechanisms for publicly offered products.

Late in November 2018, the AMF published its roadmap for sustainable finance – one of the regulator’s eight top priorities for 2018 and a building block of its Supervision 2022 strategy – which responds to trends observed in the market and to integrate sustainable finance goals into all its activities.

In addition to major political initiatives such as the

signature of the Paris Agreement in 2015 and the publication of the Commission’s sustainable finance action plan in March 2018, several developments have played a role in shifting the perceptions and practices of the financial community over the past few years. The regulator noted that increased awareness of climate risk, the growing consensus recognising that ESG factors influence the performance of investment portfolios, and the rapid growth of responsible investing in the green bond market are a few examples of this transformation.

As a result, the AMF will focus on several priorities including:

 supporting market participants and raising awareness in order to foster good practices;

 encouraging innovation for sustainable finance;

 supervising the various players, notably to ensure the relevance of the information provided;

 collaborating with other regulators and participating in European and international regulatory work;

 educating savers to help them understand this new product offering.

Where we stand

Thomas Wulf

Secretary general

European Structured Investment Products Association (Eusipa)

ESG labels create huge confusion in the EU as different labels using a variety of methodologies and criteria are being developed in different national markets. Priips and Mifid 2 do not provide the tools for harmonising these, nor do they contain rules for a European ESG classification.

While we know that at some point European regulators will develop an ESG framework (efforts are ongoing to standardise labels granted for environmental compliance) there are still unresolved questions around the use of these labels.

The first relates to taxonomy – in other words, what constitutes ESG business activity and practice. EU institutions are developing a classification system around environmental aspects of business activity, deriving partly from UN principles for green bonds, such as exclusion criteria, thresholds, etc. However, no definitions have yet been developed for the social and governance elements.

Beyond taxonomy, we need to clarify more generally the conditions under which an ESG label could be granted to structured products. These issues stem from the fact that a product usually has a derivative and a bond component. We can look at the asset underlying the derivative, but providers often will have to explain how the cash flows of the bond component are managed during the product’s life.

As it stands, there are three different ways to address the bond component. The issuer could

be fully ESG compliant as a corporate entity. This approach would work best for supranational public banking entities such as the World Bank, which are likely to get that ESG compliance stamp for their entire business. It is likely to be more problematic for commercial banks, who will probably have ESG non-compliant exposure sitting somewhere on the balance sheet.

A second approach is to place income from the bond sale into segregated asset structures, mainly SPVs, to be used for green project financing, for example.

A third idea is to apply an ESG label to nonsegregated assets, such as bond income, which lands on the balance sheet of an issuer under the condition that ESG-eligible assets already held on the balance sheet or which are generated through other business activities than retail sales could be used as a sort of ‘ESG collateral’ against newly-issued structured products.

These things are being intensely debated, with auditability emerging as a key challenge.

The market is contributing to the discussion and we are in touch with entities developing ESG labels to feed the view of the industry into the regulatory process.

Point of sale

We think this discussion will also help address any issues around point of sale under the new Mifid rules. Eventually, investors in an advised sale situation will have to be asked if they would like to invest in ESG-eligible products, which will very likely trigger an increase in demand. For that reason, we cannot have a situation where each market has its own definition of ESG products and criteria.

Generally, we think the ESG discussion is going to be a landmark topic when the new EU parliament convenes for its first sessions in October 2019 and will become part of any discussion around Mifid implementation regimes.

The Technical Advice includes the ESAs’ assessments and summaries of the responses received to the consultation report published in February.

iStoxx Global Women Leadership Select 30 Index

Ethical Europe Equity

Stoxx Europe ESG Leaders Select 30 EUR Index

Ethical Europe Climate Care

Sustainable Europe LR Equity

Finvex Sustainable & E cient Europe 30

Source: StructuredRetailProducts.com

Finvex Sector E cient Europe 30

Stoxx Global ESG Leaders Diversification Select 50 Index

iSTOXX Europe Diversity Impact Select 30 EUR Index

Euronext Benelux ESG Leaders 20 Index

iSTOXX Global ESG Select 100

Other

Best-selling underlyings by year, France

Euronext Climate Orientation Priority 50 EWER

Ethical Europe Climate Care

Ethical Europe Equity

Euronext Climate Objective 50 EW Index

Euronext Europe Sustainable 100 EW Decrement 50 Points

Source: StructuredRetailProducts.com

Euronext Eurozone Energy Transition Leaders 50 Equal Weight Decrement 5% Index

Finvex Sector E cient Europe 30

Solactive Sustainable Development Goals World Index

Stoxx Europe ESG Leaders Select 30 EUR Index

Other

Best-selling underlyings by year, Sweden

Solactive Sustainable Goals Europe MV

Solactive Global Ethical Low Volatility SEK Hedged Index

Solactive Oekom Ethical Low Volatility

Solactive Sustainable Development Goals World Index

Solactive European Climate Change ESG Index

Ethical Europe Climate Care

Source: StructuredRetailProducts.com

OMX 30 Ethical Index

Ethical Europe Equity Finvex Sustainable & E cient Europe 30 Euronext Climate Orientation Priority 50 EWER

OMX GES Sustainability Sweden Ethical Index

Other

Institutional

Best-selling underlyings by year, Institutional Source:

Chapter 5 Survey: what the buy-side thinks and wants

SRP conducted a survey of 30 senior buy-side executives to gather their thoughts on the state of sustainable investing. What transpired was that while feelings remain mixed on how far the trend

has managed to penetrate the structured product market, pockets of sustained, and even increasing, activity can be distinguished.

Q1. How would you rank the importance of ESG within your overall offering? (1 - ‘not at all important’, 10 - ‘extremely important’)

Asked about the value it adds to their overall offering, 42.11% of all respondents ranked the importance of ESG below a neutral five, whereas on the other end of the spectrum a combined 36.84% put that at or above six. At 21.05% of the total, the biggest number of respondents remained undecided about

the ultimate importance of ESG. Finally, despite the wide range of opinions, none of those asked went as far as to put ESG as the most important part of their activities, suggesting that even the most excited proponents of the trend may still rely on other instruments to propel their businesses forward.

Q2. How many times have you had a conversation about or promoted an ESG product over the last 12 months?

A large number of respondents disclosed that in the past 12 months they have either promoted or had a conversation about an ESG product. Six of those did so on more than five occasions, and the same number of people said that such interactions were limited to one to three times during the last

Q3. Are investors aware of ESG structured products?

year. Overall, considerably more people (52.63%) placed their ESG interactions at three times or more per year. “[It] was not in our offering [but this is] changing now,” said one survey respondent, suggesting more conversations may well be underway.

According to the survey, there is still a lack of homogeneity in investor awareness of ESG trends in the structured product field. Roughly 32% of those who responded thought investors’ interests lie elsewhere at present (the same number of people were positive about investor awareness of the trend. Two people chose not to commit either way.

Q4. Which regions and markets are most active in their demand for ESG products?

The majority of all respondents (78.57%) cited Europe as the place where most of the demand for ESG structured products is coming from. North America and the international market gathered noticeably fewer votes, at 14.29% and 7.14% of the total, respectively.

Q5. What percentage of your clients portfolio is allocated to ESG products?

In Europe, France, Sweden, and Benelux gathered most responses, though Switzerland, Italy, and Canada were also mentioned.

Of the suggested underlying activity in these markets, retail collected 68.75% of all responses to trump institutional (25%). Only one respondent saw both as equal sources of ESG interest.

Overall, private banks and retail gathered the most responses in the 50-75% range, as only two types of investor – wealth managers and retail – collected any

votes attributing 75-100% of overall interest. There was at least one vote claiming no interest for any of the investor types. The 25-50% category collected the highest number of votes across all types.

When asked about the importance investors attach to product performance in their pursuit of ESG structured solutions, all respondents ranked that at or above seven. This sentiment goes some way towards corroborating the suspicion that, though we may be in the realm of sustainable investments, returns still reign supreme.

How important is performance to investors? (1 - ‘not at all important’, 10 - ‘extremely important’)

Very important

Positive impact, on the other hand, gathered a mixed bag of responses, with some people ranking it as low as two and others going as far as to attribute the maximum importance of 10. An equal number of respondents thought the positive impact of ESG offerings features as a seven- or eight-degree priority in an investor’s decision-making process, while a quarter put that at below five.

More people considered ESG products to be opportunistic solutions than put them in the risk management category (41.18% and 35.29%, respectively). A respondent from the UK said: “In terms of structured products, I find it difficult to see how any plan that isn’t radically different to the current shape of UK retail SPs can truly take ESG into account.”

Q6.

Q7. How important is positive impact to investors? (1 - ‘not at all important’, 10 - ‘extremely important’)

While this signalled the need for a shift in the way the British structured product market handles sustainable products, another respondent said, ‘ESG should be seen like any other solution which we benchmark against’.

Q8. Do you sell ESG as a standalone feature or in combination with other factors (e.g. smart beta)?

Overall, respondents perceived ESG to have more value as a standalone feature than as part of a multifaceted approach. Only one respondent said they employed it both on its own and in combination with other factors. “We combine ESG underlying with classical payoffs. Also, we are working on some green structured notes issues,” disclosed one of the respondents, while another said their approach may vary, as ESG products may be offered “for example in the form of ‘ethical’ portfolios”.

Q9. What are some specific examples of how ESG factors are incorporated into your investment analysis and decision-making process?

“We use an ESG filtering in our product approval process,” came one response, as others followed to underscore a diverse set of investment analysis practices, including stock selection, asset allocation, and indexation.

In its role as a forming factor for organisational culture, ESG was highlighted as central for “governance, workers’ rights, (and) UN Sustainability Development Goals”.

Although responses showed there are businesses where ESG has taken firm root, elsewhere it seemed like an ideal around which to rally before unlocking a full and lasting potential. In the words of one of the people surveyed: “We have topics for the year and our products should be aligned with the topics, ESG is one of them for 2019.”

“We look at sustainable investments (funds, stocks, and bonds), as well as impact social investment where we mainly focus on funds and lastly impact investment environmental where the underlyings tend to be bonds (and bond funds),” added another respondent.

Chapter 6 Dealer profiles Goldman Sachs

Goldman Sachs has become an active player in the ESG structured products segment after partnering with Stoxx to develop a dedicated range of sustainable structured investments.

The US investment bank released an ESG report in 2017 (Purpose & Progress – 2017 ESG Report) setting out several key priorities, including ‘combating climate change, fostering an inclusive and service oriented workforce and strengthening the communities in which we work and live’.

Goldman Sachs sees the consideration of ESG factors as ‘an important driver’ of the way it advises clients and conducts its business, and believes that corporates’ ‘commitment to leveraging their operational footprint to become long-term creditworthy off-takers of renewable energy resources is catalysing the market for clean energy beyond traditional investment and financing activities’.

In addition to dedicated ESG and impact strategies, the bank incorporates the consideration of ESG factors in its active and passive investment strategies across its business.

Goldman points out that fundamental to the growth of ESG and impact investing is an increased understanding that a disciplined approach can potentially generate competitive risk-adjusted returns while also driving measurable social and environmental alignment.

The investment bank also notes that an additional growth driver is greater understanding of the tools available to investors — from risk-managed, ESG-aligned passive strategies, to ESG-integrated fundamental strategies and private-market impact investments seeking sustained alpha alongside measurable social and environmental impacts.

Goldman also believes that ESG factors are among the variables that have the potential to drive returns and manage risk in active investment strategies, and

has harnessed the firm’s big data and technology capabilities to help identify specific. This is an important area of research and focus for Goldman Sachs’ Quantitative Investment Strategies team.

Goldman reported that assets under supervision in the ESG space continue to grow steadily since the launch of its Risk Aware, Low Emissions investment strategy three years ago in partnership with New York State Common Retirement Fund. That strategy has reduced the portfolio’s carbon emissions intensity by approximately 70% relative to their benchmark, while maintaining broad-based equity market exposure similar to that of the benchmark. In 2017, New York state committed an additional US$2 billion to the strategy, bringing their total commitment to more than US$4 billion.

Index partnerships

In February 2018, the US bank licensed the iStoxx Global Diversity Impact Select 30 Index and the iStoxx Europe Diversity Impact Select 30 Index to be used as an underlying for the issuance of structured products.

In an interview with managing director, Emea equity derivatives sales, Tom Groothaert, and Pooja Mishra Prahlad, equity and fund derivatives structuring, at Goldman Sachs, said that this was a reflection of the increasing demand for ESG strategies and the ESG segment overlapping with smart beta.

Goldman sees this demand as an opportunity to facilitate access and help clients achieve their investing goals without having to give up on performance. The US investment bank is now seeking to capitalise on the iStoxx index family and “build products with a thematic payout,” according to Groothaert.

In the summer of 2018, Goldman licensed the new Euronext CDP Environment France EW Decrement

5% (FRENV Index) in a second iteration of its ESG structured products offering to retail investors. The equally weighted index is created, calculated and published by Euronext, and offers exposure to the 40 companies with the highest environmental score among the 100 largest companies in terms of floating market capitalisation in France.

ESG 2.0

ESG is an area where Goldman Sachs’ structured products and systematic trading strategies (STratS) teams are working together under the equity structuring umbrella, said Nick Baltas, head of R&D of the STratS group.

As the bank assessed opportunities in this segment it looked at existing academic findings to produce a second report on how to use ESG on equity multifactor investing and how can ESG be incorporated into that kind of systematic strategies.

“It’s not strictly speaking what a stock picker would do to dig into how the ESG score of each stock is constructed as we look at the broader universe of stocks and look at a high level ESG information to build portfolios in a systematic fashion,” says Baltas. “Goldman has entered the ESG structured products market at a stage when ESG and smart beta came together.”

The first report comprises the findings of five academic papers and some of the work on these papers relates to how the bank is integrating ESG in its offering.

“One of the aspects we looked at first was how ESG information is used today from a global landscape perspective,” says Baltas. This research included a survey across a number of investors focusing on four key questions: the motives for using ESG; the barriers for using ESG; how the data is currently used; and how investors expect ESG to be used in the future.

The research found that there are two types of ESG investors: those who use ESG from a norms-based perspective (ethical investing excluding nonethical assets) and are not necessarily motivated by financial performance; and those who are more financially motivated and use ESG data as a source for future performance.

“This is a key finding that suggests we cannot treat ESG as an asset class because there are many different ways to look into ESG, and within those two

groups you can find more sub-groups,” says Baltas. “So we took a ‘not a one-size fits all approach’ when it comes to ESG as a starting point.”

Then Goldman looked at the barriers and found that one of the biggest problems when it comes to ESG data is the lack of standardisation and reporting protocols which has led to a number of data vendors offering ESG scores “but not necessarily in line which each other because everything is up for interpretation”.

“There are some characteristics that are easily measured such as CO2 emissions but others are very qualitative such as work-life balance, etc.,” says Baltas. “Another hurdle is the lack of comparability between companies and lack of reporting standards. This area is improving but remains at the forefront of concerns for investors.”

Regarding the use of ESG data, there are up to eight different ways investors use ESG data with some overlapping (negative screening, thematic investing, an overly portfolio tilt, positive screening, risk premia investing, relative screening). This is used either top to bottom (more of a factor-based approach) or from a bottom-up approach (more like a stock picker looking into the ESG characteristics of those stocks to build a concentrated portfolio).

From that point on, the bank took on further research to look into ESG as a group and to integrate ESG into equity factor investing.

Goldman’s own research found that when it comes to factor investing, investors have been looking into characteristics such as momentum, market capitalisation, valuation, profitability, quality, and risk (low beta).

“At this point, we try to understand if ESG is a characteristic masked under the smart beta umbrella,” says Baltas. “This is a simplistic approach but useful nevertheless. If all large cap companies are high ESG companies then buying ESG is no more than buying large caps. This step is about understanding any dependencies and account for those.”

Effectively try to orthogonalise as we say in the quantitative space the ESG information versus the existing factors you are already using on your factor allocation.

With this information the bank then tried to understand whether high ESG will outperform low ESG – in other words whether ESG is a risk premium.

Looking at the data, the answer is probably no, according to Baltas.

“There is no uniform behaviour from the top to the bottom, and if anything low ESG seems to outperform high ESG,” he says, adding that most of the research out there suggests that ESG as a standalone factor is not really a risk premium, as it doesn’t pay out to invest in names with high ESG scores.

Regardless of whether ESG is a standalone factor or not, the bank looked into how to integrate ESG in its offering.

“This is important because there is a good incentive for product development as a lot of the activity around ESG comes from client interest and demand,” says Baltas. “This comes either as a genuine / personal interest or on the back of new ESG oriented investment mandates.”

After some analysis, the bank concluded that there are different ways to integrate ESG into equity factor investing. “You can for instance remove the bottom 10% with the worse score; you can integrate it as a factor in your multi-factor allocation; or you can think of ESG as part of your quality allocation,” says Baltas. “Whichever way you go, there are not statistical differences with the version with no ESG assets.”

However, a positive finding was that the overall ESG score of the portfolio is significantly increased. ESG allocation may not impact negatively or positively the return profile of the portfolio but the ESG score increases dramatically.

“If your goal is to increase your ESG score because you have a mandate, there are ways to achieve this by integrating ESG within your multi-factor equity allocation,” says Baltas. “These are the considerations we take before engaging in any product development discussion. We want to be data agnostic simply because we’re not in the position to assess which vendor is better than the other, and because we wanted to use our research department to have our own in-house ESG scores.”

Implementation approach

After that process, Goldman decided the best way forward was to use a combination of approaches (take the bottom 20% out of the universe by ESG scores and, for the remaining 80%, do a multifactor allocation with ESG also as part of the quality factor), and partnered with with Stoxx and Euronext to develop structured products.

“These are implementation choices,” says Baltas. “There are a number of questions around how ESG is going to evolve and if ESG can also be used by investors seeking to outperform the market.”

Obviously, there is a clear momentum around ESG but factor investing is not new so the question is how and if this approach will reward investors.

“When we talk about asset pricing, assets that are expected to outperform should have some sort of systemic risk embedded on them,” says Baltas. “Investors must be happy to exchange that kind of risk with other investors not willing to be exposed to that risk; while the investor that is willing to take on that risk and paid by the investor not taking the risk. That’s how the market clears.”

If everybody wants to buy high ESG, investors should expect lower returns as that comes at a premium whereas those buying low ESG assets will get a higher premium because of the risk they are taking. From an asset pricing perspective, the low ESG assets will outperform. However, some of the motives to invest in ESG are not financial.

In practice, as ESG became more popular, there has been an increased allocation towards high ESG which in turn has resulted in better performance. “If something receives attention it will perform better but expectation is a different story,” says Baltas. “The current environment suggests we could be in a rally towards that equilibrium between the expected returns and the ethical views expressed.”

ESG has several underlying themes that resonate with retail investors from an ethical and sustainability perspective, and these themes have acted as a catalyst. “These strategies naturally lend themselves to this kind of product because you can deploy a bullish (leverage) or a bearish (capital protection) view with a product and still have that ESG exposure,” says Baltas. “There is a clear trend around ESG and structured products can be a very efficient way to deliver these strategies in combination with multi-factor asset allocation.”

Baltas concludes that as a relatively new thematic, the market requires education although the hype around ESG is not one-sided. “This is not about manufacturers pushing products out there or initiating a trend but about the industry responding to new demand,” says Baltas. “And the industry can provide solutions to deployed this strategies in a more streamlined and systematic approach.”

Natixis

Natixis has fully integrated sustainability as a theme in its 2018-2020 strategic plan, ‘New Dimension’. It is committed to building on its historic sustainable expertise to achieve strong environmental and social strategic ambitions, including:

1. Contribute to the environmental & social ambitions of group BPCE, with objectives regarding green financing growth (x2 green revenues by 2020) and ESG integration throughout its asset management affiliates.

2. Commit the entire company by involving all Natixis businesses (CIB, Natixis Investment Managers, SFS, Insurance, Private Banking) and operations (Risks, Compliance, HR, Communication, Logistics, Supply).

3. Generate additional performance and enhance client intimacy by developing innovative offers to support its clients’ transition towards a more sustainable model, thus positioning Natixis as a green and sustainable expert bank and asset manager.

For Natixis, ESG investing is no longer a niche space as there is a growing body of evidence supporting ESG as a risk management approach can contribute to long-term performance. The bank believes that new sustainable investment approaches, including multi-theme strategies, may provide researchdriven, diversified equity portfolios that seek to identify well-managed, responsible companies positioned to reshape the world in the next decade and beyond.

From a wealth management perspective, Natixis Investment Managers has worked closely with its Mirova affiliate specialising in sustainable investing for more than 30 years, to offer sustainable investments across multiple asset classes with a multi-theme approach to ESG research.

The eight sustainable investment themes identified by Mirova include sustainable resources; sustainable energy; sustainable consumption; sustainable health; sustainable mobility; sustainable buildings and cities; sustainable information and communication technology; and sustainable finance.

Earlier this year, a Natixis survey found that institutional investors are increasingly integrating ESG factors into investment analysis to help manage risk and enhance return potential. Whereas a year ago the top reason institutional investors

were integrating ESG was to comply with their firm’s mandate or investment policy, their top reason for implementing ESG strategies now is to proactively align investment strategy with organisational values (47%).

From an investment perspective, Natixis Corporate & Investment Banking (CIB)’s Green & Sustainable Hub (GSH) provides finance origination and structuring (bonds, loans, securitisation) based on an originate-to-distribute approach to facilitate syndication and distribution to a specialised investor base.

Natixis’ main innovation around climate action was the introduction of the first Green Weighting Factor for its financing deals to comply with the Paris Agreement goals. In line with its announcement on December 11 2017 during the Climate Finance Day in Paris, Natixis has built on its full range of sector expertise to develop an innovative Green Weighting Factor methodology. This mechanism will be applied to analytical risk-weighted assets (RWA) on the company’s financing deals to address potential changes in regulation.

The Green Weighting Factor system was rolled out at the end of 2018 and will gradually apply to new asset or project finance deals, as well as corporate loans by Natixis across its various business sectors worldwide. The GSH also offers access to investment solutions engineering and structuring including equities, fixed income and credit aimed at ‘designing investment products and solutions’ and advisory for issuer and investor clients. This is in addition to the bank’s ‘comprehensive range of ESG products’ sold through its affiliate Mirova.

Natixis entered the ESG structured products segment in 2016 following the launch in Q4 2015 of its NXS Climate Optimum Prospective index, a composite smart beta strategy of low-carbon stocks designed to be used as the underlying of index-linked products, which responds to numerous COP 21 issues and particularly the restriction of greenhouse gas emissions and the transition toward low-carbon economic models. The index underlies a 12-year structured green bond launched by the World Bank.

This coincided with a push around market access indices and smart beta strategies such as the Euro iStoxx 70 Equal Weight Decrement 5%; Euronext CAC Large 60 EWER Index; FTSE Custom 150 index,

idDAX50 Equal Weight Decrement 4% and BeNe 40 EWER Index.

Beyond the market access and smart beta indices, Natixis moved to capitalise on the increasing demand for socially responsible investing (SRI) indices from active and passive asset managers, the structured products providers.

The French bank launched the Federal Objectif Climat Index in October 2016, a climate index which consists of the 50 shares from the Stoxx Index 600 Europe, recognised for the performance of their climate-related strategy, and selected according to ethical, climate and financial criteria.

The index, launched in March 2016, was designed to diversify exposure across all economic sectors, including the most carbon-intensive, where the potential to reduce greenhouse gas emissions is the greatest. The Federal Objectif Climat index is calculated and published by Solactive, and was developed by Natixis in collaboration with Grizzly Responsible Investment, with Sustainalytics providing the analysis of the quantitative and qualitative criteria.

This index features in a 7.8-year structured life insurance product sold in France by Federal Finance Gestion, among other products.

This was followed by the licensing of the Euronext Climate Orientation Priority 50 Equal Weight Excess Return Index, which was launched in July 2016 and comprises 50 European low carbon and low volatility stocks. This was Natixis’ second iteration in the SRI/climate index space. The index did well in the retail networks as it sold approximately €800m with just two issuances during the first half of 2017 in France and Italy. Natixis has marketed 18 products linked to this index with an estimated sales volume of US$1 billion.

Over the course of 2018 Natixis has increased its footprint in the ESG segment and its global commitment to play an active role in financing energy transition and fighting global warming, as well as providing new investments and renewable energy financing. The range of Climate indexes was expanded with the launch of the Euronext® ECO5E index in collaboration with Carbone 4.

Moreover, a new range of ESG indexes has been launched along with the creation of three ‘Responsible Investment’ indexes sponsored by Euronext. The methodology relies on the Mirova/ ISS-oekom approach, which allows combining value

creation and sustainable development. Without disregarding the need to control extra-financial risks, the idea is also to capture the value induced by technological and social innovations.

Early in 2018, Natixis expanded its range of green structured investment solutions offered to institutional investors with the creation of the first green structured note, for Agence France Trésor (AFT), a government agency part of the French Ministry for the Economy and Finance.

The OAT 2039 Green Repack is a repackaging of the first green obligation assimilables du Trésor (OAT) issued by AFT, allowing the coupon to be adapted to investors’ needs. The note was a standalone issue structured via a Natixis SPV and aims at creating a synthetic debt not directly available in the markets with a callable feature sold by the investor to the SPV, known as ‘Purple’. The product was independently reviewed by Vigeo-Eiris, a financial rating agency, which had provided the second party opinion (SPO) on the green character of the OAT when it was issued in January 2017.

OATs are bonds issued by the French government backed by the ‘full faith and credit of the State’. Retail investors can purchase fixed-rate OATs with maturities ranging from two to 50 years. These bonds have annual coupons, are redeemable at maturity and are also available for retail investors as index-linked OATs.

The bank is building a range offering new products and yield pick-up potential to existing buyers of green bonds, as well as diversifying further the green bond investor base (a repack can of course be sold on primary market issuances) and educating ‘mainstream fixed income structured products investors’ about green underlyings.

Again, this conviction is rooted in the bank’s 2018/2020 strategic plan for Natixis CIB as a green and sustainable business. This is one of its pillars with a twofold objective: becoming the reference bank in green business and doubling its greenrelated revenues.

Most recently, Natixis teamed up with Euronext to launch the Euronext Climate Objective 50 Euro EW Decrement 5% Index (ECO5E), selecting 50 low carbon stocks from the Eurozone. This index is currently Natixis’ ESG flagship underlying within structured products as evidenced by the new Caisse d’Epargne & Banque Populaire public offer ‘Nymphea Avril 2029’.

An offering based on risks, impact and contribution

Thomas Girard

Green & Sustainable Hub, Product Specialist

Natixis

How are investors putting ESG strategies into action?

More than 20 distinct SRI strategies are spread across four main categories: exclusions & normsbased screening; engagement & voting; best-inclass & ESG integration; sustainability themed & impact investing.

How important are ESG structured products in terms of volume?

They are worth €1.2 billion of business mainly on the retail distribution side (EMTN & funds).

What is your differentiating factor?

Natixis has developed a climate indices range to address the growing need of climate and energy transition investment in various geographical area with a differentiated approach. These indices have been designed based on expertise from the Natixis Green & Sustainable Hub. A climate scoring for listed equities has been defined aiming to offer a differentiate climate approach by having a holistic climate selection and a fully transparent methodology.

Our objectives:

1) To have a clear focus on ‘Climate’. The index focuses on climate challenges, making the strategy as transparent as possible for investors.

2) Address the climate problem wherever it is the most relevant, looking for the greatest potential carbon efficiency gains and thus take on a high level of industrial exposure.

3) Adopt a holistic approach of climate-related issues by capturing company strategies and policies related to climate change to measure their awareness, to ensure the related risks are managed; capturing not only Scope 3 data but also the supply of low-carbon solutions, products and services with climate

Hong My Nguyen

Green & Sustainable Hub, Investment Solutions Specialist

Natixis

added value, to take the contribution to the energy transition into account; and measuring the carbon footprint of companies and reducing the impact of their operations by picking up the best-performing companies in their sector, both statically and dynamically in order to integrate the notion of progress and capture trends.

We are proposing custom climate indices by giving investor a choice in the investment universe (world, European), in the selection of added ESG exclusion criteria (ethical criteria, controversy criteria), in the introduction of minimum decarbonisation vs benchmark features in our weighting system, in the addition of volatility target mechanism and in the weighting scheme (minimum variance, minimum tracking-error).

What are the principles driving your proposition?

Our philosophy is based on risks (reduce the risks that the climate imposes on assets), impact (reduce the impact of assets on climate and measure their carbon footprint), and contribution (participate in the financing of products and solutions that contribute to the energy transition).

How important are ESG structured products within the overall offering?

ESG is a strong part of our DNA. However we offer multiple range of tailor made solutions (investment & hedging). That’s the aim of a crossasset financial engineering approach.

What is your definition of an ESG investment?

Responsible investment is an approach to investing that aims to incorporate environmental, social and governance factors into investment decisions, to better manage risk and generate sustainable, long-term returns.

Société Générale

Société Générale (SG) has a longstanding commitment to ESG practices across all of its activities. From an investment banking perspective, the French bank is also one of the leading manufacturers of structured products offering exposure to ESG as part of a full Sustainable and Positive Impact Finance framework.

SG began its ESG activities in the structured products market in 2014, and further built up its capabilities and offering in 2016 with a number of initiatives at a product and also at an organisational level.

SG launched its first ESG indices as early as 2007, with a range of environmentally-themed indices advised by RobecoSAM: in this range, the world water index and the world alternative energy indices currently account for €700m of AuM in two Lyxor AM ETFs.

In 2014, the bank launched its dedicated ESG offering following an agreement with Finvex, the independent index provider (now owned by Horus Wealth Management Partners Group) behind the Finvex Sustainable & Efficient Europe 30 Price Index – one of the most featured ESG indices in the structured products market.

Building on its early activities, it was at the beginning of 2017 that the bank’s global markets division made a bold move to become a key player in this segment by creating a sustainable investment solutions role for global markets aimed at bolstering retail and institutional coverage within SG CIB.

The newly-created role went to Isabelle Millat as head of sustainable investment solutions. Since then, Millat has been responsible for coordinating all sustainable and responsible investment initiatives across asset classes for markets activities and developing a range of solutions, leveraging on the bank’s financial engineering capabilities. The bank has a dedicated banking team looking at social and environmental issues with responsibility for developing products that responds to investors’ needs.

SG highlights that sustainable investment is rapidly gaining momentum, accounting for more than $1 of out every $4 of managed assets globally, an increase of 25% between 2014 and 2016 as shown by the Global Sustainable Investment Alliance. To respond to that demand, the bank has accelerated its efforts to build up a broad offering, leveraging on its expertise in sustainable and positive impact finance,

and the work of its ESG research team, which has been in existence for over 10 years and consistently ranked within Extel’s top five over that period.

The offering of ESG underlyings is available through the bank’s leading proprietary index franchise ‘SG Index,’ Positive Impact notes as well as equity risk premia factors with ESG filters, which can be accessed via swaps, funds, or structured products.

The cash to derivatives market offering is complementary to the bank’s sustainable financing capabilities as illustrated by SG’s role in sustainable & positive impact finance including in renewable energy financing and green bonds.

While the Green Bond Principles brought something new to sustainable investing in that investors could better understand what their investment was supporting, the French bank went a step further by pioneering Positive Impact Finance with UNEP FI, the United Nations Environment Programme Finance Initiative (which has 200 financial institutions, including banks, asset managers and insurance companies) at the end of 2014. Positive Impact Finance serves to deliver a positive contribution to one or more of the three pillars of sustainable development (economic, environmental and social), once any potential negative impacts have been duly identified and mitigated.

The Positive Impact Finance manifesto was launched at the end of 2015, the ‘Principles for Positive Impact Finance’ at the beginning of 2017, and a grounding paper ‘Rethinking Impact to Finance the SDGs’ in November 2018 (the SDGs are a collection of 17 Sustainable Development Goals set by the United Nations General Assembly in 2015).

From a financing perspective, from 2012 to 2017, the number of Positive Impact Finance transactions was multiplied by 4.4. In 2015 and 2016, the bank successfully issued two Positive Impact Bonds, each a €500m five-year fixed-rate senior note. In 2018, it launched two more Positive Impact Bonds, one by its ALD subsidiary and one by its SG Taiwan branch. The French bank has committed to contributing €100 billion between 2016 and 2020 to finance the energy transition, of which €15 billion in renewable energy financing and 85 in green bonds issuances. Nearly 60% of the latter objective was achieved at Q3 2018.

The idea to combine the bank’s Positive Impact Finance capabilities with its structured product expertise led to the launch in 2017 of the Positive

Impact notes, which allow clients to invest in a structured note whilst promoting Positive Impact Finance: when a client invests in a Positive Impact note, Société Générale commits to holding in its books loans dedicated to Positive Impact Finance projects (such as education, public transportation, healthcare), equivalent to 100% of the value invested in the note. This flexible solution, which can be tailored to the specific financial needs of investors, has been very popular with retail and institutional clients in Europe, selling over €600m to date.

The French bank also launched its first ever Positive Impact equity-linked note deal in the US with BNY Mellon Capital Markets, which will act as the distributor. The new structured note represents a milestone, as it is the first Positive Impact note sold by SG CIB to a US client.

This was seen as a further evidence of the growing international adoption of the Positive Impact Finance principles after several successful trades in 2017 across Europe, and an opportunity to push sustainable investment beyond green as Positive Impact Finance addresses all three pillars of sustainable development. The bank pointed out that while European investors have been early adopters of ESG, the pace of growth in the US and Canada should make for a rapid catch up. The Global Sustainable Investment Alliance Report shows a 34.7% growth in sustainable assets in North America between 2014 and 2016, when Europe experienced a 11.7% increase over the same period. The initiative originated from a purely banking perspective but, because of the engagement and feedback from investors, the bank was able to combine both views and respond to demand.

The bank is now in a position to meet its clients’ sustainable investment objectives through key services such as linking a wide range of issuers (sovereigns, supras, agencies, corporates) and investors (insurance companies, asset managers, etc.) in the realm of green bonds, or structuring tailor-made products.

In November 2017, SG rolled out a consolidated ‘Sustainable and Positive Impact Finance’ offering within the global banking & investor solutions activities incorporating the bank’s environmental & social (E&S) expertise into a wide range of innovative financial solutions that satisfy the environmental and social requirements and challenges of its issuer and investor clients.

As the bank’s global markets business unit implements its ESG 2.0 strategy, it has expanded its

partnership with major index providers to distribute new ESG underlyings including the latest data and the UN SDG revenue share feature. SG sees ESG indices as an alternative to some of the most commonly-used indices as the pricing-friendly design translates to the possibility to offer full or partial capital protection, and more upside for the end clients.

SG has also developed a range of indices which combines equity risk premia factors with ESG filters, aimed at risk premia investors. The ESG equity risk premia range uses an ESG consensus approach developed by the research firm Beyond Ratings, as opposed to using just one ESG rating agency to get the ESG scores and filters. SG’s ESG equity risk premia range therefore builds on three benefits: ESG consensus, financial materiality and ESG sensitivity.

In addition to the bank’s off-the-shelf range, the SG Index (SGI) team is developing with Millat a catalogue of custom products tailored to client requests which can be delivered via indices but also via packaged products linked to baskets of instruments and indices that have been selected based on financial and bespoke ESG criteria.

In March 2018, SG entered the French green OAT repackaging field with a green structured note. An investment in the notes implies an equivalent investment in the green OAT 2039, which supports the French state’s commitment to financing or refinancing green eligible expenditures, including: buildings, transport, energy, living resources and biodiversity, adaptation, pollution control and ecoefficiency. The size of the green bond market and its liquidity is increasing steadily, supported notably by very large issuances from sovereigns, which entered this market in late 2016.

SG’s asset management arm, Lyxor, is also the only European supplier to offer ETFs that match up with four of the United Nations Sustainable Development Goals, i.e. the water and renewable energy sectors, initiatives to fight climate change with an ETF on green bonds, and, more recently, a new ETF on gender equality.

SG also licensed in April 2018 the Euronext Europe Sustainable 100 EW Decrement 50 Points index which is based on Vigeo Eiris’s ESG scores and raised nearly US$86 million in sales volume in the second week of January (Jan 7 – 13 2019) according to SRP data*. The figure came from one structured product issued by Société Générale, called SG Formule Essentielle n°8.

A good opportunity to get the market on the right path

Isabelle Millat

Head of Sustainable Investment Solutions

Société Générale

How are investors putting ESG strategies into action?

There’s more nuance in the market, and sophistication is also increasing because of the variety of strategies on offer. Investors can now compare and are asking more questions about the strategies but also about the data (filters, screens…) and the data providers, as well as the ESG focus of companies and their activities, products and services.

We want to promote a dialogue and listen to what clients want to achieve so that we can provide solutions. We are at an early stage of development especially around retail distribution and the challenge is to reach end-investors with clear and transparent explanations on ESG strategies, and reach them through all the distribution channels (advisers, private banks, wealth managers).

Can the structured products market benefit from promoting sustainable investing?

This is a good opportunity to get the market on the right path and improve how it is perceived. Investment banks need to be very transparent about how these strategies are built and how they work. It’s a whole new field of discussion and one that could help the market grow further, if it’s done right. We see structured products as a very efficient way to deliver ESG solutions because, starting from an ESG-filtered universe, you can work around coupons, capital protection and all other elements that make these products to achieve investors’ custom financial goals than solutions that existed previously.

Is ESG a marketing tool or a real source of performance/risk management?

ESG investments are used by different types of investors with individual objectives. For some investors, ESG strategies provide a side benefit

around risk mitigation alongside the alignment to a set of values. In addition, with ESG research and solutions initiated 15+ years ago, empirical evidence has now proven that companies that avoid controversies and are good on material ESG criteria perform better in the long-run. ESG investments are like any other investment and you can’t really put a number on how an investment would perform in the future. However, with structured products, we have the ability to provide a defined payout which is appealing to many investors.

A considerable amount of studies around ESG performance over the last few years suggests that ESG products do not sacrifice performance in any way, with a vast majority finding positive correlation – albeit not necessarily causation – between ESG and financial performance. Investor surveys also point that the relevance to investment performance is the most frequent motivation for sustainable investors. Our inhouse ESG research’s bi-yearly publication ‘SRI Beyond Integration,’ also proved that if you look at financially material ESG scores over the last five years, the top 10% ESG ratings in each sector outperform the European benchmark (Stoxx 600) by 27.7%.

What’s next in the ESG space?

Today we see specific demand for ESG indices, and we see an increasing number of investors asking for ESG customised equity indices. We are definitely seeing a shift, supported notably by the demonstration of financial materiality. The idea of ESG being increasingly mainstreamed across asset classes would benefit this segment because investors are no longer asking for just a screen but for fully-fledged sustainable assets, including fixed income.

The increasing number of providers and solutions out there suggests that there is scope to grow this segment and that market players don’t want to miss out. The initial focus was in Northern Europe (Belgium) and the Nordics but we are seeing a clear shift towards Southern Europe with for example increasing appetite for our positive impact notes in Italy, and there is clear scope to grow this market in other European countries. This demand also helps us to focus on delivering relevant solutions for each market.

Barclays

Barclays and MSCI launched a green bond index family in 2014 measuring the global market of fixed income securities issued to fund projects and initiatives with direct environmental benefits. The Barclays MSCI Green Bond Index family was aimed at complementing the existing Barclays MSCI ESG (Environmental, Social and Governance) fixed income index family, and was made available to institutional clients to licence for their index-linked investment products, such as ETFs, separately managed accounts and structured products.

In 2018, Stoxx licensed the Euro iStoxx 50 ESG Focus and the Euro iStoxx 50 ESG Focus GR Decrement 5% indices to Barclays as underlyings for a range of structured products targeted at private banking clients in several countries.

BMO

Bank of Montreal (BMO) launched two principal protected deposit notes linked to the BMO Environmental, Social & Governance (ESG) Index in 2016. This was the first time a sustainable index was used in Canadian structured products since HSBC launched two notes linked to the Investable Climate Change Index in December 2007 and March 2008.

Citi

In November 2017, Citi licensed the iStoxx Global Economic Growth Select 50 Index to be used as an underlying for structured products. The component selection of the iStoxx Global Economic Growth Select 50 Index excludes all companies which are in contravention of UN Global Compact Principles, and whose three-month average daily traded volume is below US$3m.

Commerzbank

Commerzbank moved to develop an ESG low vol range in 2016 after licensing the Solactive Global Ethical Low Volatility AR EUR Index. The new ESG range was a complement to the existing offering, which includes products linked to the bank’s proprietary indices. Commerz had previously worked with MSCI and S&P on a number of trades

for institutional investors. In January 2017, the German bank launched the Commerzbank LIFE index, a new sustainable index comprising mutual funds based on ESG ratings.

Crédit Agricole CIB

The French bank rolled out a sustainable product range in Q3 2018 based on two layers including green investments, for which the invested amount is earmarked exclusively for finance companies and projects playing a key role in energy transition, and green financial performance, where the financial return is structured to add exposure to a green equity index. Cacib is commited to arranging €100m worth of sustainable and green financing transactions by 2020, and to issue €2 billion worth of investments linked to sustainable assets and strategies. The bank has issued around €2 billion worth of investment products.

Deutsche Bank

In 2016, Deutsche Bank and Arabesque Partners launched a new family of investment products that apply a ‘proven quantitative stock selection mechanism’ to ESG investing. The product tracks the returns of the Arabesque Prime and Systematic indices which are designed and operated by Arabesque.

Early in 2018, Deutsche Bank and Solactive launched the Solactive Sustainability Index Europe, an index designed to track the performance of environmentally and socially responsible European companies, based on the data-driven platform Arabesque S-Ray. The German bank also launched in 2018-Dig (Alpha-dig), an interactive web tool that uses natural language processing to quantify the materiality of ESG issues and other company intangibles such as brand value, corporate culture, innovation and management quality.

HSBC

At the end of 2017, HSBC teamed up with MSCI to develop the World Select SRI and Europe Select SRI Indices, which will be used by the UK bank to build a new range of structured products. The new MSCI Select SRI indices are a response to increasing institutional demand for ethically

sustainable financial investment benchmarks that were designed to deliver on three facets of ESG investment: enhanced values-based screening, reduced carbon footprint, and increased exposure to companies exhibiting positive sustainable behaviour. In the second part of an interview following the partnership between HSBC and MSCI to develop a range of indices to be deployed as underlying of index-linked products.

JP Morgan

JP Morgan entered the ESG structured products space in 2015 after licensing the iStoxx Europe ESG Select 30 Index which is derived from the Stoxx Global ESG Leaders Index, an equity index with components selected based on a comprehensive set of sustainability ratings. This was followed by the World Bank’s first green bond linked to the performance of the iStoxx Europe ESG aimed at institutional investors in Europe. Lead manager JP Morgan licensed the iStoxx Europe ESG Select 30 Index in November last year.

In 2016, the US investment bank rolled out JP Morgan Ethos Investments, a sustainable investments platform for institutions and distributors looking to create tailored ESG products. The new platform offers a range of fully-customisable products for clients looking to deploy capital in ESG investments and, although it is not targeted exclusively at the structured products market.

Merrill Lynch

The World Bank teamed up with Bank of America Merrill Lynch in the summer of 2014 to launch a 10year Step-Up Callable Green Bond which was sold to retail clients of Merrill Lynch Wealth Management. This was the third time that the World Bank had collaborated with the US bank to sell a green bond. In 2018, Merrill Lynch and Merrill Edge launched today five portfolios incorporating ESG factors in response to growing demand for investments with the potential to produce positive societal outcomes without sacrificing financial returns.

Rabobank

Rabobank also entered the ESG segment in 2016 with a €500m green bond sold to institutional

investors. The proceeds for the bond, which is listed on the Luxembourg Stock Exchange, are invested in renewable solar and wind energy projects. Crédit Agricole CIB, HSBC, SEB and Rabobank were the bookrunners for the bond which had a minimum denomination of €100,000 and a maturity of five years.

Morgan Stanley

At the end of 2018, Morgan Stanley licensed the new iStoxx Europe ESG Climate Awareness Select 50 Index for the issuance of structured products. The iStoxx Europe ESG Climate Awareness Select 50 Index is designed to combine ESG and climate considerations in a single basket, addressing growing demand from investors to incorporate climate change awareness within a broader ESG factor investment, according to Inderpal Gujral, head of product at Stoxx.

UBS

UBS entered the US green bonds segment in 2015 via its Wealth Management Americas business which targeted US retail investors via the indexlinked green bond structured notes developed by BNP Paribas Securities and the World Bank. Shortly after, the Swiss bank licensed the Dow Jones Sustainability Europe Diversified High Beta High Dividend Index and then the Solactive Global Gender Diversity Index.

In 2018, UBS partnered again with Solactive to launch the Solactive UBS Development Bank Bond Index Family, a new suite of financial benchmarks targeting the World Bank and other high-grade development bank debt. This was followed by a new structured note issued by UBS and the World Bank’s International Bank for Reconstruction and Development in Q3 2017 that supports its sustainable development activities.

Chapter 7 Index provider profiles

FTSE Russell

SRP data shows that despite being a marginal supplier of ESG underlyings to the structured retail products market, there are over US$600m of assets linked to FTSE Russell’s sustainable indices including the FTSE4Good Environmental Leaders Europe 40 index, which has featured in 13 products worth an estimated US$255m. In addition, the FTSE4Good Global 100 index features in six products worth US$240.8m while the FTSE4Good Europe 50 index appears in 10 products worth US$131.6m.

FTSE Russell first started integrating environmental and sustainability factors into indices back in 2001. The index provider offers two ESG-focused index products: the FTSE4Good Index Series and the FTSE4Good Global Minimum Variance Index. The FTSE4Good Index Series includes more than 15 benchmarks, based on research of over 3,000 securities in 46 developed and emerging markets. In order to be included, companies must have an overall ESG Rating of 3.1 out of 5 – that number is calculated using more than 300 indicators. Among the issues considered as part of that exercise are biodiversity, climate change and pollution.

The index methodology sets out that any company with a failing rating is allowed a 12-month grace period before it is removed from the index. Within the FTSE4Good Index, one of its larger benchmarks is the FTSE4Good Global Benchmark, which has over 839 constituents. Some of its largest US holdings are Apple, Microsoft, Johnson & Johnson, AT&T and Wells Fargo.

FTSE Russell expanded its sustainable investment index offering in December of 2017 with the launch of the FTSE Global Climate Index Series and the FTSE ESG Index Series. The new index series build on the FTSE All-World ex CW Climate Balanced Factor Index, the first FTSE Russell index to combine a smart beta factor approach alongside climate change considerations.

The FTSE Global Climate Index Series weights index constituents by three climate change measures while maintaining a risk and return profile similar to broad

market benchmarks. The rules-based construction reflects the performance of eligible securities from the FTSE All-World, FTSE All-Share and the Russell 1000 indices, with constituent green revenues measured by FTSE Russell’s Green Revenues data model.

Earlier, in 2016, FTSE Russell developed the FTSE All-World ex CW Climate Balanced Factor Index for HSBC. The rules underlying this index are applied to capture and combine broad, comprehensive market exposure with factor-based smart beta while making adjustments for climate change such as reducing exposure to fossil fuels and greenhouse gases in addition to increasing exposure to the revenues from green products. Also in November 2016, the index provider launched its FTSE All-World Ex Controversial Weapons Climate Balanced Factor Index, which was the first attempt to integrate ESG into passive investment strategies by combining a smart beta approach with a focused set of sustainability parameters. The index is based on the FTSE All-World Index, and adds four factor tilts – size, value, low volatility and quality - as well as three climate change adjustments – fossil fuel reserves, carbon efficiency and green revenue. It further excludes companies involved in manufacturing weapons banned under international treaties, such as cluster munitions and land mines.

During the second quarter of 2016, FTSE Russell licensed its FTSE Divest-Invest Developed 200 Index to BNP Paribas Corporate and Institutional Banking (CIB) for the development of delta one, swaps and structured products. The index reduces exposure to fossil fuels and associated companies while increasing exposure to companies engaged in the transition to a green economy, and tracks the largest 200 companies in the FTSE Developed All-Cap Index

All constituents of the underlying index are eligible for inclusion, except for those in the following Industrial Classification Benchmark (ICB) sectors and subsectors: oil & gas producers, oil equipment services & distribution and coal & general mining.

The index which was developed taking the FTSE Russell green revenue data model called LCE, as a reference covers 98.5% of global market cap, and provides a completely new optic and a different way to assessing the revenues. The model is used to exclude companies and replace them by green companies whose weights are based on their Low Carbon Economy Industrial Indicator factor. FTSE Russell commenced this project four years ago when it realised that this was a broader issue than pure ESG investing. FTSE Russell’s LCE is a fundamental database which provides a standalone set of data covering 13,500 companies across the best part of 50 global markets. It provides a very granular breakdown of the revenues those companies generated and what proportion of those revenues are tied to the green economy, according to Gordon Morrison, managing director, responsible investment, FTSE Russell.

In December 2017, the index provider entered into a collaboration agreement with Taiwan Stock Exchange’s wholly-owned subsidiary, Taiwan Index Plus, to launch the FTSE4Good TIP Taiwan ESG

Index. The launch came in response to increasing demand both in Asia and globally, for asset owners to integrate ESG considerations into their investment strategies. The FTSE4Good TIP Taiwan ESG Index is part of FTSE4Good Index Series. The new index is constructed using the FTSE4Good Emerging Index with selection criteria covering ESG ratings as well as financial performance criteria.

In Japan, where the introduction of the Japanese Stewardship Code in 2014 acted as a catalyst to promote responsible ownership of investee companies by Japanese institutional investors, FTSE Russell launched the FTSE Blossom Japan Index in 2018. The index only includes companies that exhibit effective management of ESG-related risks and closely tracks the industry weights of the broad-based market index.

FTSE Russell indices remain a top choice for structured products providers as suggested by the more than 18,000 structured products featuring FTSE Russell indexes across jurisdictions that are still live with estimated asset under management of US$20 billion.

Passive investments can be effective stewards of assets

Fong Yee Chan

FTSE Russell

ESG is an important topic that is being embedded into financial markets. We see a blossoming of demand from product manufacturers for new ESG strategies and an increased level of sophistication in these strategies. Reasons for this growth include regulatory drivers (e.g. EU Action Plan, IORP Directive II), fiduciary duty, and improved availability, quality and comparability of ESG data. Integrating ESG into passive investment has become a key growth area for FTSE Russell.

The roots of ESG stem from ethical investing of which a common approach is to exclude those companies that do not align with an individual’s values. Exclusions based approaches are still common today. However, the market has evolved and investors are now using a range of ways to implement ESG in their portfolios. We observe four common implementation approaches which may be combined.

1) Stewardship – using corporate engagement and shareholder rights to influence company and market behaviour.

2) Screening – excluding or including companies or assets based on specific ESG criteria. The criteria could be determined through investor choice or based on guidelines from an external authority like the UN Global Compact Principles.

3) ESG integration – treating ESG parameters as another ‘factor’ in investing. ESG parameters could be incorporated alongside risk premia factors like value, quality, low volatility, momentum and size.

How are investors putting ESG strategies into action?

Sustainable investing product for Emea

4) Thematic – allocating assets or selecting companies based on a sustainability theme.

How can investors integrate ESG into their passive investment solutions?

Investors have a range ESG objectives. We work closely with clients to understand their objectives and implement these objectives into index design. Based on our deep experience of working with investors, we have developed a range of tools and indices to help investors integrate ESG into their passive investment solutions. Examples include the following:

• For investors interested in thematic investments, we offer a range of environmental themed indexes. An example is our FTSE Environmental Markets Index Series which provides investors with concentrated, thematic exposure to the green economy. This series has been running for more than 10 years, making it attractive as a structured product.

• For investors interested in applying ESG criteria as a screen, our FTSE Global Choice Index Series helps investors align their individual values with their portfolio by selecting companies based on the products and services they are involved in (e.g. tobacco, gambling, fossil fuels).

Increasingly we observe investors wanting to integrate ESG as a parameter for adjusting constituent weights in an index – rewarding those companies that perform well on ESG parameter(s) and penalising those that perform poorly. They may also want to integrate ESG alongside risk premia factors. In our annual smart beta survey, 38% of 185 asset owner survey respondents indicated that they anticipate applying ESG considerations to a smart beta strategy1

Our Smart Sustainability Framework provides investors with flexibility in selecting the ESG parameters that are aligned with their ESG objectives and how strongly they would like to apply their ESG convictions. A recent example is the FTSE All-World Climate Balanced Comprehensive Factor Index that we developed in collaboration with UK local government pension scheme – Merseyside Pension Fund. A key objective for the client was to generate long term risk-adjusted returns through incorporation of climate change considerations (fossil fuel reserves, carbon emissions, green revenues) alongside balanced exposure to five risk premia factors (value, size, low volatility, momentum and quality).

Can investors meaningfully drive change through engagement, in their passive investments?

There is a misconception that passive investments cannot be effective stewards of assets. As an index provider with significant market share, we believe we can provide a service to investors globally to enable collaborative engagement by investors with companies. This is largely achieved through our transparent, rules-based Index construction and ESG methodologies that help companies assess their own performance against their peers.

Regarding index methodology, the FTSE Russell tilt-tilt methodology enables investors to clearly understand how constituents are scored on each ESG parameter, and how a constituent’s individual score compares with their peers in the index universe. Investors can then engage with companies on each ESG parameter.

More broadly, in our ESG research process we provide all companies that we research with the ability to view and feedback on their assessment. In 2018, we launched a corporate peer comparison tool that allows companies to view their assessment and how their assessment compares with their peers, enabling companies to identify specific areas for improvement.

Does ESG add or detract from portfolio performance?

FTSE Russell’s objective is to create indexes and benchmarks that incorporate ESG and sustainability considerations in a way that caters to a range of client objectives. At a minimum we believe that it is possible to integrate ESG considerations without sacrificing returns or significantly increasing risk.

Further, the incorporation of, for example, climate change into index design should insulate the resulting portfolio from the risks arising from climate policy risk (e.g. whereby carbon emissions and reserves become a liability). Including Green Revenue exposure into climate indexes provides a further hedge against these risks as we also believe that the green economy will grow in parallel to efforts to reduce our dependence on fossil fuel energy sources.

Our experience of working with asset owners is that low tracking error approaches are favoured, certainly as a first step when integrating ESG considerations into a broad market portfolio. Therefore many of the sustainable investment

indexes that we develop for clients – including our FTSE Global Climate Index Series – provide broadly similar risk / return characteristics to the underlying benchmark while also improving ESG / sustainability characteristics.

For those investors with strong sustainability convictions, our FTSE Environmental Markets Index Series provides a more concentrated, thematic exposure to the green economy, with higher tracking error. The main index in that series – the FTSE Environmental Opportunities All Share Index – has outperformed its benchmark over the last five years.

What key themes do you foresee in 2019?

We observe investors wanting to implement ESG strategies across asset classes beyond equities. To this point, integrating ESG across asset classes is a key priority for us. At the end of 2018, we launched the FTSE EPRA Nareit Green Indexes which provide increased coverage of real estate companies with strong sustainability performance. Greening the real estate sector is a major challenge for the transition to a low carbon economy. According to UN estimates, buildings account for over half of global energy consumption and approximately 28% of global carbon emissions2. This makes real estate a key asset class within which to achieve ambitious global emissions reductions. This also creates significant policy risk for investors (e.g. as policy measures to incentivise carbon reductions in real estate assets strengthen).

Another important trend is that investors are taking a holistic approach to addressing climate change – focusing both on the risk and opportunity sides of the issue. Many of the tools that exist in the market focus on the risk side of climate change – for listed companies this tends to be exposure to fossil fuel reserves and carbon emissions. We believe that there will be an increased focus on the opportunities generated from those companies that are contributing to the transition to a low carbon economy. A recent report from the Intergovernmental Panel on Climate Change stated that $2.4 trillion of new investment is needed each year into clean energy and green technologies in order to limit global warming to 1.5 degrees Celsius above pre-industrial levels3. This has important implications for policy makers, businesses and for investors who choose to align their portfolios to this investment opportunity. In 2018 we published a report on the green economy which states that the economy for low carbon products and services is a significant opportunity for investors – representing 6% of the global equity market, or US$4 trillion4. This is about the same size as the fossil fuels segment, which is decreasing in size as the global green economy is growing.

References

1 FTSE Russell, Smart beta: 2018 global survey findings from asset owners, 2018

2 UN Environment, ‘Towards a zero-emission, efficient, and resilient buildings and construction sector’, 2017

3 IPCC, ‘Global Warming of 1.5 ºC’, 2018

4 FTSE Russell, ‘Investing in the global green economy: busting common myths’, 2018

ICB Supersectors plus green economy ranked by market capitalisation

STOXX

The Deutsche Borse owned index business made its first foray in the structured products ESG segment in late 2011 following the launch of its Global ESG Leaders report with Sustainalytics, a provider of ESG and corporate governance ratings and research. This also coincided with the launch of its Stoxx Global ESG Leaders Index family comprising the Stoxx Global ESG Environmental Leaders, the Stoxx Global ESG Social Leaders and the Stoxx Global ESG Governance Leaders. The family also included a broad index, the Stoxx Global ESG Leaders.

In 2012, Stoxx added four new blue-chip indices to complement its existing Stoxx Global ESG Leaders Index family including the Stoxx Europe ESG Leaders 50, Euro Stoxx ESG Leaders 50, Stoxx Asia/Pacific ESG Leaders 50 and Stoxx North America ESG Leaders 50 indices, and in 2013 the iStoxx Global ESG Select 100 Index.

Since then, the index provider has developed three ESG series of indices including the Stoxx ESG and Stoxx Sustainability index families which provide access to companies that are leaders in terms of ESG criteria; as well as the Stoxx ESG Impact Indices which offer a broad market exposure that is tilted towards companies that score better with respect to a small set of ESG key performance indicators (KPIs).

product providers with a series of ESG Impact Indices including the Stoxx Global ESG Impact and Stoxx USA ESG Impact indices which are tilted towards companies that perform better with respect to a set of selected ESG KPIs.

Also in 2016, the index provider launched the iStoxx Global Women Leadership Select 30 EUR Indexits first social and governance index. The index was licensed to AG Insurance which marketed the Smart invest Bon Women Leadership 2027. Stoxx closed 2016 with the news of Belgium’s Kempen becoming the first structured product provider in Europe to launch a public offer linked to the Stoxx Europe ESG Leaders Select 30 EUR Index.

In early 2017, the index provider launched the Stoxx Europe Industry Neutral ESG and Stoxx North America Industry Neutral ESG 150 indices which were licensed to Dutch pension fund Stichting Algemeen Pensioenfonds Unilever Nederland - Kring ‘Progress,’ to be used as benchmarks.

The increased activity around ESG coincided with Stoxx’s switch from single-player mode into a multiplayers mode which followed the licensing of Stoxx’s factor indexes to Eurex as underlying for futures. This validated the index provider’s definition of factors while making them available in the market as a tool for everybody to use, but also as building blocks for strategies targeted at index-linked products.

Stoxx also moved to capitalise on ESG as a crossroad between factor and thematic investing with the launch of several indices including the iStoxx Global Diversity Impact Select 30 Index and the iStoxx Europe Diversity Impact Select 30 Index which were licensed in February 2018 to Goldman Sachs to be used as an underlying for the issuance of structured products.

The index provider entered the low carbon arena in 2016 with the Stoxx Low Carbon index family, a series consisting of four sub-indices which offer varying degrees of carbon exposure to enable market participants to limit the exposure of their portfolios to carbon risk while participating in the low-carbon economic growth.

In the summer of 2016, Stoxx targeted US investment

In Q2 2018, Stoxx licensed the Euro iStoxx 50 ESG Focus and the Euro iStoxx 50 ESG Focus GR Decrement 5% indices to Barclays as underlyings for a range of structured products. The new indices enable investors to overweight EuroStoxx 50 companies that rank highest in terms of ESG, according to a model provided by Sustainalytics.

Most recently launched (October 2018) is the Stoxx Europe 600 ESG-X Index – an index developed based on feedback from asset owners, in order to accommodate their need for a version of Europe’s key benchmark that is in line with the exclusion criteria of their responsible investing policy.

Demand for ESG structured products has increased

Willem Keogh Director, senior product development manager Stoxx

How important ESG structured products within the overall offering?

ESG is now mainstream and has become an essential part of investment practice. Stoxx is a major player in providing solutions for structured products and catering to ESG requests is now more or less business as usual.

We are seeing an increase in requirements which are very targeted (e.g. women leadership, environmental, etc. themes), requiring data on a granular level from a number of complementary datasets. We are further seeing an increase in integrated solutions (e.g. ESG & factor investing) where ESG integration is required (e.g. ESG & real estate, ESG & fixed income, etc.). Finally, we are seeing an increase in demand for structured products which have to be in line with Regulatory ESG requirements (e.g. article 173 of the French Energy Transition Law).

What is your definition of an ESG investment?

There are numerous ways of integrating ESG in the investment process, which makes a single definition difficult. ESG is seen in a wide spectrum ranging from saving the world to using ESG as a risk management measure.

Do you offer ESG as a standalone investment or do you combine with other factors?

Both, depending on the investment belief. Stoxx has a long history of providing ESG solutions. Over time, ESG has been integrated further, including integration with other factors.

What is your differentiating factor in the ESG arena?

Stoxx has a long track record of providing innovative, customised solutions. Coupled with Stoxx’s open architecture of best-in-class data providers, we are able to provide integrated solutions utilising data on a granular level.

Roberto Lazzarotto Head of global sales Stoxx

We realised that having our own research on ESG intertwined with our indexing business was against our open architecture philosophy as we wanted to be able to work with different players and look for synergies to develop different concepts. This has led to long standing partnerships with some of the largest ESG data providers such as Sustaynalitics which has given us great insight in how data can be used to inform best in class ESG strategies with a precise composition and objective.

The second factor that differentiates Stoxx from other index providers is our relationship with Eurex. We are in a position to list derivatives in pretty much any index of interest to the market and by doing that we can increase the liquidity of ESG indices and the efficiency of the market.

Is ESG a factor?

ESG has evolved in a way that we at Stoxx consider it a factor. The claim that ESG underperforms has been proven false in the sense that performance is linked to ESG criteria. More adoption will have a positive impact on the performance and the long-term sustainability of the companies that are being measured.

ESG continues to be an efficient way to deliver ESG and other assets: not because they are a flexible vehicle that can provide access to assets via derivatives but because they deliver more predictability than other products. The definite outcome element of structured products means you can target different risk profiles and respond to different investor needs. That’s why structured products are also essential in any investor portfolio. Portfolios managers now use structured products alongside multiple other strategies and products. Their value is not questioned any more and that is testimony to the industry.

S&P DJI

In the structured products market, S&P DJI made its first appearance following the launch of the S&P ESG Index Series. This launch was S&P DJI’s first index family to treat ESG as a standalone performance factor, using the RobecoSAM Smart

ESG methodology, and the first global ESG index family that serves the growing market of smart beta indices. The index family consists of the S&P Global 1200 ESG, S&P 500 ESG, S&P Europe 350 ESG and S&P/TOPIX 150 ESG.

MSCI ESG Indexes

SRP data shows that MSCI is a marginal player in the ESG segment of the retail structured products market with only five products linked to the MSCI Europe ESG Leaders Select Top 50 Dividend index worth an estimated US$10m.

As an index provider, MSCI made its first foray into the structured products market ESG segment in 2012 after reaching an agreement with Barclays

investment bank to launch a family of co-branded ESG fixed income indices for institutional investors to use in index-linked investment products.

It was in 2016 when the index provider rolled out a range of impact-oriented thematic investment indices including the MSCI ACWI Sustainable Impact Index and MSCI ESG Sustainable Impact Metrics – provided by MSCI ESG Research.

Nasdaq

SRP data shows that Nasdaq has over $30.5 million of assets linked to the OMX 30 Ethical Index and OMX GES Sustainability Sweden Ethical Index via 14 products.

Nasdaq OMX Group expanded its OMX GES Sustainability Index series in 2018 with the launch of the Nordic Sustainability Index. The exchange also launched the OMX Stockholm 30 ESG Responsible Index a version of its benchmark OMX Stockholm 30

index that is compliant with ESG investing. The exchange also rolled out two new market segments in Stockholm – Nasdaq Stockholm Sustainable Commercial Papers and Nasdaq Stockholm Sustainable Products. The launch followed strong growth of Nasdaq’s Sustainable Bond Market, the listing of the 100th green bond, and the first publicly distributed structured placement based on a green bond.

Finvex

Finvex specialises in the creation of financial investment solutions and has developed several sustainable indices for the structured products market since 2011, including the Finvex Sustainable & Efficient Europe 30 – Finvex Ethical & Efficient Europe 30; Finvex Sustainable Efficient Japan Index;

Finvex Sustainable & Efficient World 30; Finvex Sector Efficient Europe 30; Finvex Ecofi SRI Europe PR Index; and Finvex Sustainable & Efficient USA 30 Index.

SRP data shows that Finvex has over US$990m of assets linked to its indices across 176 products.

Solactive

Solactive has been one of the most index providers in the ESG / sustainable segment of the structured products market and was the first to bring to the market a benchmark offering exposure to green

bonds via the the Solactive Green Bond Index. SRP data shows that the German index provider has US$561.3 in assets liked to its indices across 214 products.

Source: StructuredRetailProducts.com

Chapter 8 Methodology

Description of the survey

In the most extensive research into the ESG and sustainable structured products market to date, SRP contacted product manufacturers, index providers and distributors, five of which were portrayed as case studies. These companies were profiled using SRP data as background, and with a short interview showcasing their structuring capabilities and crossover with other banking functions.

Between the end of November 2018 and January 2019, SRP surveyed 30 senior executives from buyside companies selling structured products on the topic of sustainable investments, receiving a total of 239 responses across 12 questions.

The survey broadly focused on two areas of investigation:

Part 1 - Quantitative

We asked respondents to the survey to specify the number of times they had promoted or discussed ESG products over the last 12 months, and highlight

specific examples of how ESG factors are being incorporated into their analysis or decision-making process. The survey also asked for some specific examples of how ESG factors are incorporated into the investment analysis and decision-making process.

Part 2 - Qualitative

The respondents were also asked to rank the importance investors attach to certain features of ESG products (from 1 to 10), the weight these offerings carry within their own portfolio, and the type of markets and investors that are most likely to show interest in such products. The poll also looked at the different aspects and use of ESG structured products such as performance, risk management or positive impact.

Description of SRP data

This report provides an analysis of ESG structured retail products distributed in all regions that struck between 2013 and 2018. The data analysed includes a total of 1070 products and it is compiled from the StructuredRetailProducts.com database.

The right indices for responsible investments

Smart choices for a sustainable world: STOXX ESG, Low Carbon and Climate Impact indices

In an era of climate change and societal advancements, environmental, social and governance issues have become a priority. More and more investors are looking to allocate capital in a flexible manner that matches their values.

With the STOXX suite of ESG, Low Carbon and Climate Impact indices, you are certain to meet your principles and target opportunities in a simple, reliable and transparent way.

ESG investment just got easier

Futures are now available on the STOXX Europe 600 ESG-X, EURO STOXX 50 Low Carbon and STOXX Europe Climate Impact Ex Global Compact Controversial Weapons & Tobacco indices.

Find out more on stoxx.com and contact us:

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