PRI Awards 2019 case study: Blueprint for Advanced ESG Integration

Overview of the firm’s approach to ESG incorporation 

BNP Paribas Asset Management was an early leader in sustainable investment. It launched its first socially responsible investment fund in 2002, and set up a dedicated ESG research team in the same year. It was a founding signatory to the Principles for Responsible Investment in 2006, and, in 2015, pledged to align its portfolios with the Paris Agreement goals.  

In March 2019, BNPP AM launched its Global Sustainability Strategy (GSS) – a firm-wide blueprint for sustainable investment and advanced ESG integration. As part of the GSS, the firm defined four pillars of sustainable investment:

• ESG integration;
• stewardship;
• responsible business conduct expectations and sector-based exclusions;
• a focus on the future.

The final pillar is a forward-looking perspective to enhance investment decision-making by focusing on three key sustainability issues: energy transition, environmental sustainability and equality. 

As part of the GSS, all BNPP AM analysts and portfolio managers integrate ESG factors into their decision-making processes. The firm believes this approach allows it to identify and assess areas of risk or opportunity which may not be understood by all market participants, and which provide it with a relative advantage. The goal by 2020 is that every investment strategy and process will have been reviewed and approved by the firm’s ESG Validation Committee. To support this goal, BNPP AM has established a 24-person, multi-disciplinary Sustainability Centre. The centre helps to integrate sustainability-related risks and opportunities into all investment strategies by providing managers with research, analysis and data at a company and sector level. The firm plans to increase the coverage of its ESG research from 2,600 to 10,000 companies by 2020.

Why this approach stands out in the market 

BNPP AM believes its approach to ESG integration stands out in five ways:

The firm has put sustainability at the heart of its strategy, and while there are a handful of boutique firms that do this, the firm’s size and scale makes this unique among the larger asset managers. Its process to integrate and embed ESG factors is overseen by an ESG Validation Committee and guided by formal ESG Integration Guidelines. 

1. The ESG integration method distinguishes itself through its robustness and breadth – all the assets of the firm are covered. 
2. While most mainstream investment managers will have some ESG criteria embedded in some of their products, they will not necessarily have a structured way of integrating that research into all of their investment platforms, nor will they consistently measure and report on it, which is what BNPP AM plans to do. 
3. BNPP AM has trained all of its employees to understand the role they play in the firm’s sustainability strategy. It has encouraged them all to incorporate sustainability into their work.  
4. BNPP AM engages with regulators, with stock exchanges and other industry bodies to promote a range of outcomes – from mandatory corporate ESG reporting to the mainstreaming of ESG futures. 

Practical examples of how the approach was applied, and challenges overcome  

The diverse nature of asset classes means the firm is required to apply the four components of sustainable investment in different ways. Within private infrastructure debt, for example, BNPP AM pre-screens the sponsors and then carries out an ESG analysis on the operational aspects of the project. It does this by using a specific taxonomy to identify the nature of the activity, its environmental and social contribution and/or impact.  

This is followed by an ESG assessment of the underlying asset itself and how it is managed. The latter includes qualitative criteria – such as the ESG management systems of the sponsor - the ESG policies and standards, and the quantitative criteria relating to environmental and social performance. Finally, an impact assessment is carried out by an independent expert who focuses on calculating induced and avoided emissions, the project’s alignment to a two-degrees Celsius trajectory, and its contribution to the energy transition. 

For multifactor strategies, the managers use the ESG ratings of the Sustainability Centre and carbon footprint data – both of which are proprietary calculations - to improve the average ESG decile rating of the strategies by 20%, and reduce their carbon footprint by 50%, relative to benchmark. 

BNPP AM’s ESG integration guidelines specify that it will not invest in an entity without an ESG Score. As all investment teams go through the ESG Validation Committee, one challenge could be the insufficient coverage in terms of ESG scores. To overcome this obstacle, the investment teams work with the Sustainability Centre to perform qualitative ESG analysis where a quantitative ESG score is absent.

Measurements for success and lessons learned 

This approach has yielded several transformational outcomes for the firm. BNPP AM has appointed 50 ESG Champions around the world to help promote sustainable investment to each investment team, and act as a first point of contact with the Sustainability Centre. The firm organises regular meetings for these ESG Champions with industry experts - in order to broaden their knowledge of sustainable practices – and they also get specialised training by the Sustainability Accounting Standards Board or the Principles for Responsible Investing. The goal is for the majority of ESG Champions to have formal ESG training, or acquired a relevant certification, by 2020. In addition, sustainability is embedded as a performance objective for all chief investment officers and ESG Champions.  

BNPP AM can track its success via the number of investment strategies that have successfully achieved ESG Validation status. As of the submission of the PRI award, BNPP AM has held 20 ESG Integration Validation meetings with 91 investment strategies. A total of €49.1bn in assets under management have now been validated as a result. A further 26 meetings are already scheduled, and more will follow later in the year, with the aim that every investment process will be validated by the end 2020.