The Wave Strength Ep5: The Future of Sustainability with Hervé Duteil and Jim Breen

The future of sustainability with irvae duterte all this and more on today's episode of the wave strength welcome to the wave strength innovative pension solutions for a secure retirement presented by pacific life.

All right everybody thank you so much for joining us on another episode of the wave strength podcast my name is jim breen i'll be your host today we have a very special guest with us today a gentleman by the name of irve duterte and irve duterte is the chief sustainability officer with bnp americas.

And irvay i want to thank you so much for for joining us on on today's podcast thank you jim and um it's my pleasure to discuss today with you yeah it's a real important topic obviously irvae and you have quite a bit of experience we were connected um a short time ago together and i'm just listening to you in the few times that.

We've we've had the opportunity to to discuss and just reading about your background you obviously have a significant amount of experience uh in this field but before we get to that um let's just talk a little bit about um you know a little bit of a background here um so maybe.

With our listeners you can you can share a little bit about about of your background or vae sure um so as you can hear um i grew up in france um had the pleasure to study in great universities in the uk and the us afterwards i've spent my entire career at bnp paribas and.

This current role is actually the third chapter in my career before that i spent a large chunk of my professional life in capital market activities more specifically in the derivatives space trading and managing activities spanning.

Across commodities currencies fixed income and electronic markets and about seven years ago i created the first position of chief sustainability officer at bnp paribas and for which i covered the americas region in this role i i lead the bank's regional strategy for sustainable.

Finance corporate social responsibility and what we call company engagement which is the positioning of bmp paribas in society as a large and universal bank with more than 200 000 employees just to give a sense of its size in probably around 70 countries.

Um we realized uh in in in a renewed fashion a few years ago the the responsibility that we have in society given our size um and given the influence that we have in some specific sectors that we do finance so we don't mean to have an opinion on everything but we believe that when you finance you know a.

Large uh large segment of uh in the industry that we we bear responsibility to to influence um the course of of uh the developments that we finance uh for the for the best of society that that's wonderful to hear in i mean some time ago so you know you're really on the forefront.

Of the sustainability movement it sounds like yes and i think um what uh what was uh critical was that back seven years ago uh a number of us who were who were in the um in in the front lines i would say in in the client in in the client-facing positions um.

We um really had had uh i had at our heart uh to ask ourselves how could we with the very core of our work influence society and when you work in a cib division a corporate investment investment banking division of a bank quite frankly what we do is fairly.

Esoteric we do revolving credit facilities quantum options equity linked bonds and many other things and go and try to figure out how you can influence the world with that but this being said that did force us to be extremely rigorous and find ways to have.

An influence um away from the easy way to to get out with the with a challenge which are typically sponsorships or volunteering which are all good but it's only a use of our surplus what really matters is how we use what makes our day-to-day the.

Core of our business uh to to to to have a material and positive impact on society well that that's interesting to hear you say that and you know working to make sure that it has a positive impact so let's talk about that because you know you discuss the fact that seven years.

Ago or seven years plus it sounds like you know you really were on the front lines uh and now here we are uh middle of 2021 um hopefully seeing uh you know the the the end of of the pandemic in sight we see a lot of companies really focusing on the fact that you know maybe this isn't just a fad right that this.

Really is maybe something that they need to really focus their sights on maybe maybe you could discuss a little bit about that that's right um i i and we're clearly are at an inflection point but first we should go back on the on on the last seven years uh to understand uh what what were the forces.

At play and the question we should ask ourselves is why today why is everyone today talking about sustainability when you think about it sri socially responsible investing has been around for probably 50 years um at least uh it's a movement that really emerged.

In the 70s and grew in the 80s when some investing investors decided to enter into some exclusionary practices it was at the time of apartheid in south africa uh but but you know the sra movement the in the u.n with the millennium.

Development goals in 2000 um and so on remain niche so what has changed over the last seven years that everyone now talks about it and i think what's one i think there are two two forces one is money uh i think the big difference is that we.

Have managed finally to create a virtual circle where sustainability can be directly linked with uh money creation and i think it has been the change of focus from investing to financing i mentioned earlier that some of us launched this initiative from the front lines within the cib.

Division and within the cib division all what we do it's financing or managing managing risk of our clients unlike the asset management side of of the firm which is more about creating portfolios you know selecting securities um and creating uh invest in investment funds.

When you're looking at the financing side you're looking one at one client at a time in fact you're looking at one transaction at a time and the question we ask ourselves is how can we create additional benefits to borrowers of money when we are financing either sustainable.

Projects or when we are financing companies that are recognized for being sustainability leaders and with that we've created an ecosystem where everyone can find an interest investors um or investment managers certainly can cater the needs of retail investors that are demanding to have impacts through.

Their investments we banks you know can earn underwriting business when we focus on green bonds social bonds and many other things borrowers of money can find new outlets uh new pockets of money when they are trying to finance sustainable.

Or sustainability related initiatives rating agencies can integrate esg within uh credit analysis and so on and so forth so this has really been the movement that has brought that has brought to the fore um the.

Sustainability now last year was really a turning point because while the last seven years we really focused on the opportunity side of sustainability showing you know how you could optimize funding by linking that funding with sustainability related initiatives of course this was only available to the.

Best in class but what last year has brought to the fore is that there is another side of esg which is risk and risk does apply to everyone and in fact that there is a clock ticking we know that by 2050 we need to be at what we call net zero in terms of carbon emission.

And so this is really creating a big acceleration and actually the pandemic uh which uh crisis which was probably the first sustainability crisis of the 21st century i think brought accelerated the realization that we had uh such a limited amount of time to to to to make the turn and i would say you know every crisis.

Brings brings with it the need for a big step forward and especially towards new transparency um if you think about it the 1929 stock market crisis brought the need for transparency on profits and that led to the creation of the sec and the accounting principles the 2008 subprime crisis brought the need on transparency.

Of bank on bank's leverage and with it came uh a lot of regulations like by the name of dodd-frank volcker and many many others i i would claim that last year's crisis the kovi 19 crisis brought the need for transparency on environmental and social impact and we have there is one thing that we didn't have.

In that way at least 15 years ago and it's data so data is the enabling technology to get better disclosure uh and with and and as we know what you can measure you can manage so the two forces basically uh just to summarize of the last seven years have been money uh create moving to an ecosystem where.

Sustainability can be sustainably economical and data because with data we can make progress excellent oh wow yeah this is this is very very very uh poignant and just especially with everything that has happened in these last 15 months um and.

So then looking then to the future right how will this then in your opinion reshape the landscape of our future so now we're um you know this the last seven years we set the stage now we are in the big acceleration um and and this we this will be the topic.

Of the next 10 years um it's the time we can accelerate and and quite frankly either make it or or fail um and there are two strong forces behind this acceleration as i told you the story the last seven years were primary led by the private sector primarily by the financial sector.

Giving incentives to the corporate sector to make commitments now we're moving to to the next level and the two forces at play uh the first one is the public sector um for the first time the public sector in a while the public sector is coming back to the front scene and especially.

With a large with the last large piece of the puzzle uh re-entering uh the conversation which was the u.s and so now we have you know from china to uh america's with uh europe in in the middle we have a a a a very aligned world um that is set on uh setting regulations.

Uh and setting targets uh and and and moving towards so i think this is a huge force um that will uh bring to scale what the private sector has uh uh done over the last seven years the second is.

The powerful coalitions that are finally finally crystallizing across the financial sectors sector long story short today you have something called defense the glasgow financial alliance for net zero that is led by mark connie.

And that is an umbrella for over 160 financial institutions representing more than 70 trillion dollars that have committed to align their lending and or investing portfolios to net zero so in fact under the g funds you have.

The net zero asset owner alliance the net zero asset manager alliance the net zero banking alliance and soon the net zero insurers alliance so so the four main segments of the financial industry aside from the official sector um and and you know when a large corporation like walmart or fedex just to name a few.

Make a net zero commitment it's fantastic these are huge corporations and certainly it's very important but when you think of large financial institutions which i will not name you know but have trillion trillions of dollars of investment portfolios then you have a huge leverage so i think this is a force you know when.

Large banks large um asset managers large insurance are making a collective commitment to net zero this will both increase the magnitude but also the the speed of transition of mega trends and with it it will foster both new risk because you know the the sectors that.

Have to transition well uh believe me uh two or three years from now the pressure will be far greater than what we can imagine today but it will also present a lot of opportunities so i'm convinced that there is extraordinary economic benefit that awaits us from.

This transition that's part of the story of why banks and asset managers are now beginning to move forcefully and as a whole and it's probably the biggest opportunity for job creation since the industrial revolution interesting great insight and yes these next several.

Years we'll really begin to see uh you know if we could fast forward you know i'm sure looking back we would we would really begin to see as you say this is a pivotal moment right now um for for uh the sustainability arena and you know in in talking about that then you know what platforms or what products.

Innovative products innovative opportunities are available um and maybe you can shed some light on that survey absolutely um so you know i was saying sustainable finance um will substitute traditional finance by 2025. and i'm revising this tune a little bit um.

Okay in fact esg is becoming integrated into all financial products and financing i think over the coming years so in in if you rephrase it that that way i was right um but i think in fact you know as.

And as we witness this acceleration towards net zero in fact traditional finance whether it's m a spin-offs uh or or just traditional financing will be the the toolkit to finance this transition and what will be great is that the purpose of those financing will be to uh gradually reorient businesses towards where they need to be.

Specifically called sustainable finance products will continue to grow of course um and but will serve for more i think dedicated purposes um so first of all what what what is the point of sustainable finance products and i would say it's really to optimize.

Funding when you are finished financing either sustainable projects or really sustainable corporations and the benefits that borrowers find when they use those products can be a better funding cost than by using using traditional finance it can be investor diversification because when you issue.

Issue a green bond or a social bond you you uncover pockets of money that regular financings couldn't reach like sustainable funds for example those products are also the opportunity to communicate of a core business strategy that is anchored around.

Sustainability to the financial community uh it can be internal engagement and staff retention it can be good pr and so on and so forth so first of all that's that's the purpose of those sustainable finance products now broadly speaking you have.

We've seen two generations of products so the first discovery of sustainable finance about seven years ago was that by labeling the use of proceeds you could uncover sources of capital that we didn't suspect so that was the creation of labeled products like green bones social bonds.

Gender bonds uh sdg bonds blue bonds uh kovin-19 response bond pandemics emergency bonds forest bonds and many others um so um in in that regard actually uh pac-life uh just issued a few weeks ago.

An 800 million five-year sustainability bond um and um with it i mean uh paclife basically is committing to allocate the proceeds to existing or future investments in or financing of eligible uh green and social projects like green buildings uh renewable and energy efficiency uh sustainable water.

Or wastewater management um biodiversity conservation projects clean transportation or access to essential services and that's more the social part like education or affordable housing so this is the first class of products um very pure in the sense that you know what the proceeds are used for and then a second generation of products uh.

Emerged in 2016 first in supply chain financings and then in loans in 2017's and then in bonds and derivatives in 2019 and that's what we call the sustainability linked product and it goes as you as you could see across assets class so here the idea is not to look at what the proceeds are being used we don't.

Track the proceeds to see whether they're used to build a wind farm or to distribute vaccines uh in emerging countries let's say instead so the the proceeds can be used for general purpose uh funding at the corporation level instead we're gonna link the interest rate that the borrower is paying on the border.

Alone to sustainability performance in the future years so you select some key performance indicators whether it's a reduction in co2 emission intensity or in water intensity or it's in percentage of women sitting at the board level or in executive management whatever you want as long as it's material to your.

Business as long it's also that the levels of performance that have been chosen are ambitious that we try to stretch uh the the publicly committed targets that the corporation may have done around sustainability and give a financial incentive to go one extra mile so.

Um this is the second class of products that has been that has been very uh successful especially because as you can see it can apply virtually to all sectors or almost all sectors uh since uh you don't need to identify purely sustainable projects but in instead to identify sustainable measured sustainability performance and.

In many instances those products are substituting to traditional products bringing them with an esg version of them excellent oh great insight and you know speaking of products maybe we can switch gears here a little bit and i'd love to hear your take or maybe some background on um you.

Know the recent idb's innovative uh index americas initiative which was uh structured by b and b priebus maybe you can just discuss that a little bit yes sure so this is a just an example of how far innovation can go and how we can combine esg structuring with traditional.

Products to to create impacts so in this instance initially it's a note that was uh issued by one of our financial institution clients which is a scotiabank it was issued in uh by scotiabank mexico denominated in mexican pesos and.

The coupon of the note instead of being a traditional interest rate the coupon is linked to the return of an equity index and that equity index was developed by the idb and structured and commercialized by bnp paribas and this index is extremely interesting it's called in idb index americas it invests in.

The 50 u.s companies that have a large footprint in latin america and the caribbean that not only display high esg performance but also demonstrate a significant contribution to socio-economic development in the region so you know it goes one step beyond selecting companies that have a good.

Environmental and social and governance performance but on top of it what the idb did and with with our help was to develop an index where aside from the 150 plus esg indicators they are an additional 17 development indicators one for each of the un sustainability sustainability development goals the sdgs and trying to.

Evaluate how each of those 50 companies are helping eliminate poverty by generating employment by fostering inclusion by empowering and serving serving vulnerable communities while at the same time respecting social and natural capital so it's a very interesting investment product that's being.

Offered to investors you know they have the ability to invest in a local currency note with a interesting credit profile and have the return of an equity basket that has been carefully selected for having impact and especially socio-economic development.

Impact uh in latin america and the caribbean well great or va thank you for unpacking the idb story there is very interesting to learn about that and congratulations on the great success there uh in addition to that you know i want to thank you for taking this opportunity to uh you know spend time with us taking.

Time out of your busy day i know our listeners are very grateful i'm sure for this insight into sustainability into esg and i i really want to thank you uh personally for for coming on today and and sharing your thoughts with us thank you jim it was really my pleasure uh wonderful wonderful and i want to encourage our listeners also you know.

You can learn more about the work irvae and his colleagues are doing in sustainability by visiting bnp barribas's cib website by going to cib.bnparibus.com again irvay i want to thank you for your time today and to our listeners thanks for spending some time with us today and i want to encourage you to listen to our.

Next episode of the wave strength podcast have a great day everybody thank you and congratulations to pacific line for their inaugural sustainability bond this has been another episode of the wave strength presented by pacific life don't forget to catch us on youtube and make sure to subscribe.

Although this podcast is presented by pacific life the opinions and views expressed are those of the hosts and participants and do not necessarily reflect pacific life's views on any of the topics discussed pacific life is a product provider it is not a fiduciary and therefore does not give advice or make recommendations.

Regarding insurance or investment products pacific life its affiliates its distributors and respective representatives do not provide any employer-sponsored qualified plan administrative services or impartial advice about investments and do not act in a fiduciary capacity for any plan.

Pacific life refers to pacific life insurance company newport beach california and its affiliates including pacific life and annuity company insurance products are issued by pacific life insurance company in all states except new york and in all states by pacific life and annuity company product availability and features may.

Vary by state each insurance company is solely responsible for the financial obligations accruing under the products it issues this podcast was recorded on may 17 2021 you
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