Talking Heads – I servizi specialistici per processi d'investimento "sostenibili"

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This is an audio transcript of the Talking Heads podcast episode: Offering tailored support and advice on sustainable investment solutions

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis through the lens of sustainability on the topics that really matter to investors. In this episode, we’ll be discussing sustainable solutions. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Sophie Debehogne, Senior Client Solutions Manager, and Maurice Kraaijenbrink, Head of Portfolio Design. Welcome, Sophie and Maurice, thanks for joining me.

Sophie Debehogne: Hello, Daniel. Happy to be here.

Maurice Kraaijenbrink: Yes, likewise for me.

DM: What do you mean when we talk about ‘sustainable solutions’, and why do you feel it is such an important topic these days?

SD: [Sustainable solutions] refers to a series of services to support institutional clients such as pension funds and advise them on strategic investment matters such as sustainability. Our objective is to build investment solutions customised to their sustainable specific requirements. That means we work in partnership with the client, and the first step is to understand their situation and their objectives in terms of sustainability.

We are completely product-agnostic – we will select what we think is the best investment strategy to meet the client’s requirement. This can be a multi-asset sustainable solution or a sustainable strategy linked to a specific asset class.

As to why sustainable solutions is an important topic today, there are several reasons. The first is that in the past, investors were asking us to build investment solutions based exclusively on financial criteria such as return objectives and risk constraints. Over more recent years, they have been asking us almost systematically to integrate a third dimension – environmental, social and governance (ESG) indicators – because institutional investors as well as stakeholders such as shareholders, regulators and beneficiaries recognise the growing role that investors have to play in addressing global challenges.

Those challenges include the energy transition and climate change, but also the protection of ecosystems and biodiversity, and the funding of companies which are addressing this topic, as well as the reduction of social inequalities.

The second reason to integrate ESG is that investors are more and more convinced that not addressing sustainable risk in their portfolio may affect their long-term [financial] return. If we take climate change, this is an important risk for all industries and corporates. The corporates are exposed to physical risk, such as the impact of severe weather events, but also to transition risk such as the potentially higher costs linked to regulatory changes on CO2 emissions.

If those climate risks are not properly tackled by a company, it may affect its financial [health] and profits over the long term. This is why [institutional] investors want to integrate sustainable criteria into their investment decision-making process when they invest in issuers which are considering sustainable risk; it will help them to achieve a better long-term risk-adjusted return.

So, in this context, most investors have progressively adapted their mission and investment objective. In the past, financial performance was the primary objective. Now it is to combine a financial return and environmental and social objectives. The desire of investors to address global challenges and manage their sustainability risk is a crucial topic today.

DM: What does your team do to accompany investors on their journey to greater sustainability? Specifically, what are some of the services your team provides?

SD: Our aim is to equip investors with the necessary insights to make investment decisions based on their sustainable ambition. We want to help them integrate relevant, sustainable criteria into the management of their assets.

Of course, there is no one size fits all, so our advice will depend on the sustainable convictions or preferences of each client. A sustainable solutions approach consists of a series of services to support clients on their sustainable journey, and we can intervene at each step of that journey.

To give you an idea of the services we offer, the first is ESG training. Here, we try to help the client understand the importance of integrating ESG and the impact it can have. The aim is to help them define their sustainable ambition.

Then we have a second type of service, ESG advisory. In this, we try to help the client translate a broad, sustainable ambition – such as contributing to net zero – into specific objectives such as the decarbonisation of the portfolio or investing a certain percentage in climate solutions providers.

Once these objectives are defined, it’s extremely important to set measurable indicators, targets and milestones. This is key to being able to monitor progress towards the objectives.

For instance, a key indicator could be carbon footprint reduction.

The third service is an ESG analysis of the client’s existing portfolio, whether it is managed internally or externally. The aim here is to assess the status of the portfolio from a sustainability angle and see how close it is to its defined target.

If a portfolio is behind target, we need to do something, so we run an optimisation [analysis] to determine a target portfolio based on an optimal asset allocation and an optimal underlying sustainability strategy.

In other cases, we might have a situation where an investor is looking to start a new portfolio, so we would build the investment solution from scratch aligned to the client’s defined target.

Our services include reporting and disclosure on the defined indicators to be able to monitor the portfolio and ensure it is in good shape to reach the objective. Our services can be provided as a package if the client is starting out on a sustainability journey, or as individual building blocks if the client is looking for support on a specific step in that journey.

DM: Maurice, you are Head of Portfolio Design, one of the services Sophie mentioned. You help clients put together a sustainable or more sustainable investment portfolio. What does your team do to help clients in that respect?

MK: We have built an integrated platform which allows us to analyse multi-asset portfolios in a completely holistic way. This means we can analyse the whole portfolio of an investor such as a pension fund or an insurance company, even if the underlying assets are not all managed by us. Of course, for investments managed outside of BNPP AM, we need to have access to information to be able to make proper assessments.

We do not just look at the return potential or the risk profile of the portfolio, we also assess its sustainability profile, which is interconnected with the risk and return.

So three things come together: risk, return and sustainability. In essence, we have added a third dimension to the portfolio construction process. The classic ‘old fashioned’ process was all about risk and return, now we have added non-financial sustainability indicators to the overall assessment.

When we zoom in on these indicators, we can see there is a wide variety. The indicators that should be in scope of the analysis are defined in close cooperation with the client – basically, what does the client want to achieve with a sustainable portfolio?

This can be, for example, that they want to improve the portfolio’s ESG score or its carbon footprint by a certain percentage. These are seen as mainstream sustainability indicators.

But there are also clients with more sophisticated ambitions. Two examples are clients that have the ambition of aligning their investment portfolio with the transition to a net-zero economy, or that are seeking to ensure their investment portfolio is aligned with one or more of the United Nations’ Sustainable Development Goals.

With the integrated platform we have developed, we can give the client an insight into the impact of certain investment decisions on the sustainability profile of the portfolio while also factoring in the potential financial implications of these decisions.

To give an example, let’s assume an investor has the ambition of achieving a significant reduction of the carbon footprint of the portfolio. This means it’s likely that you would exclude a large number of names from the investable universe, which creates a substantial specific investment risk. Such a low carbon portfolio would have more volatility than a classic equity index that you would normally be invested in.

What is key in this advisory or support function is [having] a continuous, constructive dialogue with the client. The preferred sustainability solution is not the result of a one-off exercise, but typically takes the form of multiple iterations and interactions with the end-client.

DM: Sophie and Maurice, thank you very much for joining me.

SD: It was great to be here.

MK: Yes, me too, thanks.