BNP Paribas’ Hervé Duteil On Sustainability, Finance & The Future Of CSR - Emerging Market Views

BNP Paribas’ Hervé Duteil On Sustainability, Finance & The Future Of CSR

Hervé Duteil’s tenure at BNP Paribas spans two decades. From trading to managing capital markets activities, his tenure with the group has taken him to multiple continents across various lines of business. Today, based in New York City as Chief Sustainability Officer for BNP Paribas, he is overseeing a global initiative to not only drive home the importance of a “carbon neutral” organization, but developing and implementing innovative financing for a changing world. One in which ESG and CSR are a given, commanding business solutions that not only address the bottom line, but are aware of the social and economic circumstances impacting the world today.

The Bank works on large projects delivering sustainable progress in the developing world. It is in this spirit, Duteil tells Emerging Market Views, that BNP Paribas signed at the One Planet Summit in December 2017, a Memorandum of Understanding (MoU) with UN Environment to deliver €10 billion of financing with highly positive environmental and social impact in developing countries over the coming years.

In 2018, BNP Paribas closed the Tropical Landscape Financing Facility (TLFF), a $95 million investment to develop a sustainable rubber plantation and rehabilitate heavily degraded land in two provinces in Indonesia, on a land area bigger than Singapore, ultimately creating around 16,000 jobs. “The successful structuring and distribution of the TLFF transaction has paved the way for future projects,” he explains, adding that in In June of 2018, BNP Paribas, UN Environment and the state government of Andhra Pradesh (India’s largest state), announced plans to roll out “zero budget natural farming” to the state’s 6 million farmers, with a capital cost of $2.3 billion. “This bold plan could see Andhra Pradesh become 100% natural farming by 2024.”

A number emerging markets require a deeper level of planning and execution when taking into consideration various climate, structural and societal issues. A large-scale earthquake occurring in a developing economy brings different implications as opposed to one of the same magnitude hitting a more developed and disaster-ready environment.

Duteil, who holds and MBA from Harvard Business School, an MS from the University of Cambridge and studied physics at the University of Paris, spends his days working across the global teams at BNP Paribas to educate, ideate and roll out strategies not only for clients, but the many non-profits and partner organizations the group maintains relationships with. Of note are new funding mechanisms in which the cost of capital is not only linked to the creditworthiness of the borrower but also its ability to do good, and driving home the notion that big banks, too, must transition from a position of on-balance sheet lender to a single large-syndicated and relatively short-dated project to aggregator and distributor of small fragmented long-duration investments. A portfolio of thousands of 20-year residential solar panel loans, the long-term financing of millions of smallholder farmers, to name a few examples. He touches on all this and more in his first extensive interview with our Editor-in-Chief.

What does “sustainability” mean to BNP?

Broadly speaking, we may look at sustainability through two inseparable lenses:

How we operate – making sure that both our operations, as well the sum of all our financing and investment activities, are aligned with 2°C scenario (such as through a particular effort to finance the energy transition).

What we create – striving to provide as many financial solutions as possible that present incremental value to our stakeholders when related to sustainable assets or responsible behaviors, contributing to the achievement of the United Nations’ Sustainable Development Goals (SDGs).

In the latter, financial solutions can not only be loans or securities, such as green, social, sustainable, SDG, transition, bonds, etc., but also carbon emission trading, carbon credits, investment portfolio ESG analytics solutions, or sustainability economic research. Incremental value can be tangible (in the form of a reduced cost of funding or a broadened investor base, for example) or intangible (through the communication of a sustainability strategy to the financial community, enhanced reputation, branding, employee engagement, etc.) Stakeholders are not only our corporate and institutional clients, but also our own employees (who may find pride in the purpose we assign to ourselves) as well as the civil society at large as it benefits from a more resilient world.

Sustainable assets are typically sustainability projects but can also be cash flows derived from sustainable assets, and sustainable companies distinguished themselves through responsible behaviors (reflected in high ESG extra-financial ratings) and ambitious sustainability goals (that can be measured and assigned KPIs).

As BNP’s Chief Sustainability Officer, how are you working to implement sustainable practices into the Group?

When I took the position of Head of Corporate Social Responsibility (CSR) five years ago and created the role of Chief Sustainability Officer, it was very much about changing mindsets. In investment banking, CSR was primarily either a risk management function – geared towards avoiding environmental, social, and governance (ESG) risks that are related to our financial transactions – or a “good citizen” department, in charge of a range of initiatives such as reducing the direct environmental impact of our operations or promoting social and financial inclusion in the local communities we operate.

However, as a former trader and manager of capital market activities, it was also clear to me that we would be missing out on our social responsibility as an investment bank if we did not do everything possible to invent new financing mechanisms that would promote a more sustainable world. So we work along these three dimensions: analyzing clients and transactions from an ESG perspective, furthering the bank’s operations in terms of its own environmental and social impact, and promoting – internally and externally – the development of sustainable finance.

With regard to ESG advisory and analysis, the Bank has long-established very rigorous policies with regard to sensitive sectors such as defense, nuclear, coal, mining, palm oil, wood pulp and paper, and agriculture. More recently, it strengthened its unconventional oil & gas policy so as to end commercial relations with companies primarily involved in the exploration, production, transportation (pipelines and LNG export terminals), marketing or trading of shale oil & gas as well as tar sands.

The Bank has also started to introduce a shadow carbon price in the credit analysis of companies in a number of relevant sectors. Last fall, BNP Paribas announced that it was ending its financing and investment activities for the tobacco industry, while also being a founding signatory of the Tobacco-Free Finance Pledge, which is the result of a collaborative effort between the financial sector, the health industry, governments, and the civil society to accelerate progress towards a tobacco-free future.

With regard to our direct operations, the Bank has been carbon neutral since 2017, through the purchase of renewable energy when possible, Renewable Energy Credits (RECs) otherwise, and carbon credits to offset other impacts, such as travel. More importantly, the Bank is on a course to reduce its own greenhouse gas emissions by 25% from a 2012 baseline, despite the continued growth of its operations.

When it comes to social and financial inclusion, BNP Paribas now has over €5 billion in support to associations and social enterprises (investment for third parties, financings supporting microfinance institutions and social businesses, sponsorships and volunteering), with a goal to reach €6 billion by 2020. Recently, the Bank also committed to providing one million hours of skilled-based employee volunteering by 2020.

With regard to our direct operations, the Bank has been carbon neutral since 2017.

Finally, on sustainable finance, my role primarily consists of creating internal advocacy – highlighting to senior bankers how specifically tailored financings can accelerate our clients’ sustainability projects, as well as promoting externally sustainable financing solutions to borrowers and sustainable investment products to investors. By the end of 2017, BNP Paribas had arranged €155 billion of financings towards sectors considered as directly contributing to the fulfillment of the United Nations’ Sustainable Development Goals (SDGs), with a goal to reach €185 billion by the year 2020.

The Bank also achieved this year a target to have at least 15% of its loan portfolio extended to companies contributing strictly to the achievement of the SDGs, a metric which with 7 others will impact 20% of the deferred variable compensation of the top 6,300 managers of the Bank at year end.

While we actually reached 16.5%, our focus truly remains on how we can shift the other 83.5% of our portfolio towards a more direct environmental or social impact. The key message for now is that we have mapped our entire business strategy along the SDGs, set KPIs, measured our portfolio, and aligned our compensation incentive system for our top managers accordingly.

Given your tenure with BNP, how has the notion of sustainability evolved since you joined 20 years ago? Do you feel as though employees understand it more and are more open to the notion or no?

I have no doubt about it – and it may have to do with the work that we have done collectively over all these years. Indeed the notion has evolved but it was not always called sustainability.

It started with corporate philanthropy in ages I do not even recall. In the 80s, the notion of Socially Responsible Investing (SRI) started to emerge as a formal way of investing, combining values alignment and positive and negative screening. In the late 90s, the notion of CSR took the forefront, with a focus on social and financial inclusion, including volunteering, financial education, and support to microfinance. In the early 2000s, the ESG integration movement began; instead of restricting the investment universe by excluding specific securities or entire sectors for ethical reasons as in SRI, the idea was that best-in-class ESG standards could be material to financial performance – in other words, that sustainability was a core business driver.

The same way “IT” has become “digital”, “responsibility” has become “sustainability.”

In parallel and under the impulse of the Rockefeller Foundation, impact investing was also starting to emerge as a style of its own. But it is really with the launch of the UN SDGs in 2015 that the financial community started to pay more serious attention to the real impact of investments as opposed to simply protecting value.

This is this latest iteration that has led the CSR function to evolve into the business of sustainability, whereby responsible behaviors are not only processes to manage risks but also sources of value creation. It is not like anything that we have seen before: information technology was all about operational efficiency in the 90s, but has become about data monetization in the 2000s. The same way “IT” has become “digital”, “responsibility” has become “sustainability”.

I believe employees are very aware of this evolution where efficiency processes are now becoming business opportunities. In the case of sustainability, the world is in obvious need of solutions to limit the looming climate disaster or reduce an increasingly growing social fracture, for which the funding gap is in the order of several trillion dollars a year. Banks certainly have a role to play to create the bridges between purposeful capital and impactful projects, and bankers understand it at an increasing pace.

Illustration: Alexandra Compain-Tissier, Paris.