The ESG segment continues to get traction in the structured products market with a steady number of products being launched in different markets and an increasing number of providers entering this segment of the market.

Last June, Societe Generale launched the first Positive Impact Finance product for retail investors in Italy, a structured bond with a USD$50m nominal capacity and a US$2,000 minimum investment, which will pay annual coupons of 1% for the first two years, and at maturity a variable coupon linked to the performance of the Finvex Ethical Efficient Europe 30 Price index.

According to Denis Childs, head of positive impact finance and environmental & social advisory at Societe Generale corporate & investment banking (CIB), most of the activity in this segment was originally driven by institutional investors (corporates, pension funds, etc.) but now includes a significant and increasing amount of retail investors too.

As the investor base evolves the assets and investment strategies have also moved forward, Childs says. "The product mix has changed in the sense that products originally had a fixed income profile whereas now you see more demand for products that can offer a potential upside linked to indexes," says Childs.

Products

Since 2012, when MSCI and Barclays teamed up to launch a family of co-branded ESG fixed income indices for institutional investors to use in index-linked investment products, ESG has increased its profile in the global structured products market.

The World Bank made its debut in August 2014 with a green bond linked to the Ethical Europe Equity Index, and a further six structures within its Green Growth Bonds series have been targeted at institutional private placements and retail offerings, in Switzerland, Luxembourg and France, as well as in Asia (Hong Kong and Singapore) and the US.

Andreas Feiner, head of ESG research and advisory at Arabesque, the firm behind Arabesque S-Ray which has a partnership with Deutsche to develop a range of ESG based structured products believes growth will only come as the offering evolves and investors demand new products. "There is a degree of education needed as there is people that still think that SRI/ESG is just excluding tobacco and arms trading, but the world moves on and we are in a completely different situation," says Feiner.

Over the last couple of years, a significant number of investment banks have made inroads into this segment including JP Morgan (JP Morgan Ethos Investments), Commerzbank (Solactive Global Ethical Low Volatility AR EUR Index), Deutsche Bank (partnership with Arabesque); BNP Paribas (FTSE low carbon series), UBS (QIX Deutschland smart beta index), and Natixis (Euro iStoxx 70 Equal Weight Decrement 5% Index).

Indexes
In the index space, S&P Dow Jones Indexes announced a partnership with JP Morgan to develop a new range of ESG indices, including the S&P Europe 350 Climate Change LVHD Index while Stoxx continue to develop its ESG range including the iStoxx Europe ESG Select 30 Index. Finvex, the Belgian provider of sustainable indices, has also developed a number of ESG indices that have been deployed as underlying for structured products and are issued in collaboration with Societe Generale; while Solactive most recently licensed its Solactive Global Ethical Low Volatility AR EUR Index, to Commerzbank.

Responding to the needs of product providers and investors Thomson Reuters announced last week changes in the way it collects ESG data. The US firm in partnership with global indices provider S-Network has introduced changes to the methodology for the Thomson Reuters Corporate Responsibility Ratings and Indexes, which have been rebranded Thomson Reuters/S-Network ESG Best Practices Ratings & Indices. The indexes and ratings are compiled by S-Network using Thomson Reuters ESG data sets.

"The indices demonstrate how investors can achieve a similar risk return profile as a standard free float market cap benchmarks while investing in companies with the strongest ESG track record," says Lucas Garland, director of indices for the Americas at Thomson Reuters. "Based on our experience of working with S-Network on other projects we felt their index design and ESG expertise combined with TR ESG data and index calculation service would result in a compelling offering for our clients."

The updated and enhanced ratings, used to calculate the indexes, reflect enhancements that expand the coverage of Thomson Reuters ESG Data underlying the indices. In addition, certain data points are no longer being collected and have therefore been eliminated from inclusion in the ratings. The new ratings system will continue to emphasize metric data, such as CO2 emissions, over policy-oriented questions. In line with the ratings changes, the ratings and indices will be rebranded to better reflect their underlying theme.

The ratings are aimed at providing a better picture as ESG analysis showed that certain key performance indicators are less trustworthy/important/valuable to the end investor for different reasons, according to Gregg Sgambati (pictured), head of ESG solutions at S-Network Global Indexes. "It could be that the information is not reported consistently across all companies, all regions or a certain sector, or that information is captured elsewhere. Some of the non-financial information from these companies is not considered very important for the investor as an ESG metric anymore. So what TR did was to eliminate some of these data points to make the overall rating more accurate, and that resulted in a reformulation."

According to Gambati, the structured notes and unit investment trust (UIT) market are of interest to S-Network as its benchmarks can be used as a tracking point while the use of derivatives in other areas such as green bonds is also opening new opportunities for the index provider.

"This is not a matter of transparency because the methodology of the ratings is transparent and is publically available but in these ratings there is also analyst interpretation and that's an aspect that cannot be revealed," says Gambati. "However, these ratings are about providing investors and advisors with a level of granularity about the companies comprising the indexes they never had before. This we believe will help investors to make more informed decisions."

S-Networks believes this segment has opened up opportunities for new indexes and variations of existing ones, and demand from product manufacturers around the ESG theme is increasing, according to Gambati.

Outlook
ESG continues to develop and there are now a number of options as of how to grow your share or expand your activities, according to Arabesque's Feiner.

"We have seen recently MorningStar increasing its stake on Sustainalitics, and this is not because they don't have the capabilities but because Sustainalitics has made a name for itself in the market and is a reputable business in the ESG segment," says Feiner.

The recent launch of the European Commission (EC) sustainable investment framework and the new guidelines around environmental or social objectives (EOS Priips) to ensure that investment products meet retail investors' needs, as well as the launch of dedicated venues such as the Luxembourg Green Exchange (LGX), shows how serious this segment of the market has become for product manufacturers and investors alike, according to Steffen Scheuble, chief executive, Solactive.

"One of the current issues around ESG is that every market player out there has its own definitions, rules and approaches to inform and build ESG strategies and indices," says Scheubble. "It all depends of how the general standards are defined because if these are very low we could be in a situation where everybody fulfills them already. As an index provider we would like to have a framework that applies equally to all the players in the market."

Scheubble does not expect these changes will have a big impact in the market but they will be helpful as they will bring further transparency to the ESG segment which is now on the agenda of many investors across the world.

"This segment continues to drive increasing activity and it has seen significant traction over the last five to seven years with assets invested in ESG strategies growing exponentially and new strategies being launched every month," said Scheuble. "There is a clear trend towards investors using ESG in their portfolios and this is providing scope for product innovation and an increase in investor choice."

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