ESG is not about being different but about creating strategies that are financially material, SG

In the second part of an interview on SRP's ESG series of articles, Societe Generale Corporate & Investment Banking's (CIB) head of sustainable investment solutions, Isabelle Millat (pictured) and head of positive impact structuring, Sandrine Enguehard, talk about the French bank's plans around sustainable investing in the short term, its approach to innovation in this segment and how the combination of demand and research has become the main driver of activity around the development of ESG products.

According to Millat, Societe Generale is aiming at creating new comprehensive sustainable investment solutions range, "so that we can address specific needs from clients seeking exposure to ESG assets".

"We have a holistic approach on our product development initiatives and benefit fully from the bank's expertise in financial engineering, in ESG research, in impact structuring, etc.," says Millat. "The sustainable investment solutions segment has really materialised our holistic approach in a tangible way as we can deploy and leverage the different capabilities SG has as a product manufacturer, and it enables us to deliver the products that will provide the ESG exposure investors are seeking."

One of the goals of Millat's team which reports to Marc Saffon, head of financial engineering for global markets at the French bank, is to deliver structured solutions covering "all sorts of positive impact finance initiatives". "We think it is very important to combine our financial engineering franchise with the positive impact approach so it's never about one or the other, either doing' good' or doing 'well', but the combination of the two," says Millat.

The second pillar of Societe Generale's ESG initiatives is to further develop its catalogue of underlyings that extract value from ESG instruments (financial performance) and package them to make them available to investors, according to Millat. "For this we are also tapping into our existing capabilities, with the SG Index franchise which has been around for 10 years and has developed a comprehensive range of proprietary indices aimed at extracting value from different assets," says Millat. "SG Index manages over 1,200 strategies across asset classes and we also want to use that expertise to build a very strong ESG proposition. We are working with this team to create new strategies that embed ESG assets and are backed by ESG research."

In addition to the bank's off-the-shelf range Millat's team is developing a catalogue of bespoke products that are tailored to client requests which "can be delivered via indices but also via packaged products linked to baskets of instruments that have been selected based on financial and ESG criteria".

"Our approach to innovation is also based on responding to clients' financial needs with ESG themes that are aligned with their views," says Millat. "We don't think this segment can be built on a one-size fits all approach as a given client may want exposure to a delta one certificate while another may want leveraged exposure to specific assets, or capital protection."

On the underlying side, the French bank has developed a range of indices aimed at risk premia investors which combines equity risk premia factors with ESG filters, and reflects "how we can build up our flagship offering by leveraging our structuring capabilities to provide ESG-customised strategies", according to Millat. "This allows us to engage with investors and tailor our products to their specific views, and we think that will be crucial to have an edge," says Millat.

Millat believes that the combination of ESG and smart beta is already happening. "There is demand in the Nordics for equity risk premia and those markets have been pioneers in sustainable investment," says Millat. "The combination of the two seems like a natural evolution."

According to Millat, the bank's ESG equity risk premia range also adds value because it uses an ESG consensus approach developed by the research firm Grizzly Responsible Investment, as opposed to use just one ESG rating agency to get the ESG scores and filters.

"We use comprehensive, granular and independently sourced data that evaluates each company based on how much it is featured in big ESG funds," says Millat. "This is not about being different but about creating strategies that are financially material. Additionally, we put a lot of emphasis on sensitivity to ESG topics since this selection process is likely to exclude companies that are good on E and G but not so good on S, for example. ESG consensus, financial materiality and ESG sensitivity are the three pillars of the ESG filter in our ESG equity risk premia range, and we think this is fairly unique."

ESG is becoming part of risk management and in that sense, "we think it will become mainstream", according to Millat. "There is a genuine interest from product providers and investors alike and the feedback loop that has been created will help to continue growing this segment and improving the quality of the products on offer," says Millat. "Green bonds are just the tip of the iceberg, and underneath that tip we see increasing activity from a manufacturing perspective but also from a client demand. Distributors are also helping to promote ESG investing and some tell us they would not consider any more products that do not have a sustainability feature."

Millat also notes that ESG has become a driver of growth, and issued in response to specific market demand as opposed to being pushed from manufacturers. "We think this is a very important point and shows that clients are more aware and informed about the investment options out there," says Millat.

Sandrine Enguehard, head of positive impact structuring Societe Generale CIB, points that the bank's Impact Structuring expertise is cross product as the team does not serve just one business line or a product set but any ESG initiative within SG CIB.

"[We] support any business line wanting to develop an ESG product, and we work alongside the business and the client to define the best product/strategy to achieve their ESG goals," says Enguehard. "On one hand, the Impact structuring team is responding to the increasing demand from our clients for financial solutions and therefore is in line with their Sustainability agenda," says Enguehard. "On the other hand, our aim is to structure products that address global challenges such as energy efficiency."

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