Removing the Barriers to Sustainable Investing

The recently released BNP Paribas Global Entrepreneur Report 2020 Part III focuses on sustainable investments. One of the most striking findings of the report is that 90% of entrepreneurs polled admit they see barriers to investing sustainably, despite their being more and more interested in directing their investments to sustainable ones.

In many respects, this finding is understandable. Sustainable investments come in a large variety of formats and with a new vocabulary. Green Bonds for example, are issued by companies or governments with proceeds specifically allocated to green projects. Sustainability-linked Bonds are traditional bonds with an interest rate indexed on the issuer’s underlying sustainable performance. And plenty of other instruments exist, from Blue Bonds to Social Bonds for companies, or Sustainable or Responsible Funds for asset managers. Even the entire sustainable field can be described by such a variety of names as green investing, responsible investing, impact investing, sustainable investing or ESG investing.

This rich and still burgeoning ecosystem of sustainable assets has therefore brought together an entirely new glossary with a whole new array of terms and words that requires additional work for investors to ensure they understand in detail what they mean. Beyond the instruments themselves, new actors have come to market, providing sustainable ratings or appraisal of the proceeds of the green Bonds for example. While everybody knows Moody’s or Standard & Poors for credit risk analysis, the finance world is just starting to become accustomed to the appearance of the sustainable rating agencies. And the reports issued by these agencies use an entire new range  of indicators, KPIs and terms that need to be learned. This complexity has started to be addressed by independent regulation organisms like the International Capital Market Association, providing a clear taxonomy for some products.

Investors will need training to stay on top of this new world and this new universe of investment opportunities. While the idea beyond green finance and the  ambition to transition to a greener and more sustainable society is clear, the details about how exactly to use investments to accelerate this transition – and benefit from the trend -, must be clear and transparent for investors.

This situation is not unprecedented. When 20 or 30 years ago derivatives started to become mainstream for companies, there was the same sort of learning curve, with a ramping up in terms of understanding the basic instruments, their features and the language around it.

Over time however, more and more people started to obtain the education necessary to understand what a swap, an option, or a swaption were, and 10 years later, most investors were knowledgeable enough to understand these instruments.

Sustainable finance will likely go the same route, with the explosive growth of new instruments and new actors bringing initiatives to provide structure and harmonization across markets to the instruments and the related taxonomy. Ultimately, the efforts from market players to simplify access for investors will ensure that investors become more comfortable and more attuned to these instruments, which will in turn accelerate adoption.

In the meantime, most advisors serious about sustainable finance have launched significant efforts to streamline their offering for clients. One recent example is BNP Paribas Wealth Management unique proprietary “Clover Methodology”; every asset class is allocated a rating from 0 (least sustainable) to 10 (most sustainable). This single rating scale enables clients to have a more direct and simpler understanding of the products and to calibrate their investment decisions in line with their values and the impact they are seeking to achieve.