La Lettre du trésorier: Interview with Pierre Palmieri on responsible finance
Head of Global Banking & Advisory,
Member of the Group Management Committee Societe Generale
Interview conducted by Arnaud Brunet for La Lettre du Trésorier, November 2020
« ...ESG, a powerful driver for the engagement ... »
How are environmental, social and governance (ESG) factors a challenge facing the banking sector?
ESG lies within the context of a general trend that includes all the partners of an institution: its clients, its shareholders, whose demands are growing in that field, the supervisors and supervisory authorities, who mainly approach the topic from a risk perspective, public opinion in its various forms, the political authorities, the media or non-governmental organisations, and, of course, its employees. The build-up, which dramatically increased over the last months, is both a tremendous challenge facing the banks and a powerful driver for the engagement of their employees.
How does this growing awareness translate into in the Societe Generale Corporate and Investment Bank?
First of all, it took the form of a commitment to support our clients. From a very early stage, we financed renewable energy projects or made ad hoc financing tools available to companies, such as green, social, sustainable bonds or sustainability linked loans (loans the cost of which are linked to non-financial performance). But this is similar to the minimum level of service. For us, ESG is first and above all the opportunity to explore new frontiers, whether they be sector-specific or geographic. Finally, it means adopting a long-term approach the driving forces of which are responsibility and innovation, in order to review our own business model and help companies review their business models in the light of sustainable development.
Support, open up the sales reach, review business models, etc. but based on which organisation?
Our action is led by a guiding principle which consists of making sure that the ESG swarms at each stage at the instigation of ad hoc bodies. At the top of the structure there are a Group central CSR [corporate and social responsibility] team and a responsibility committee. In the Risk division, a unit is charged with modelising non-financial risks and discussing the matter with supervisory authorities. As part of the advisory and financing businesses, spreading the approach has been conducted in stages. As soon as the early 2000s, sector-specific teams for example developed environmental and social skills that were required in project financing, notably renewable energy projects. In the middle of this decade, a dedicated team was set up to provide third-party opinions on financing files. This team has grown – it now comprises dozens of professionals – and its purpose since the end of the 2000s is to use the accumulated expertise to serve our clients, by creating new products and services, such as the structuring of green bonds or sustainability linked loans or rating advisory. Finally, each business line includes at least one contact person who is an ESG specialist, so that the wide spectrum of our clients and products is covered. Integrating ESG may be the opportunity for each team to broaden their current mandates. Here's an example: the "mining and metals" sector-specific team, rather than dealing with rare metals, which are vital to manufacture electric vehicles, from the extraction perspective, has expanded its field of expertise to the whole industrial value chain. Another example: in the area of leasing, in which the Bank has always held favourable positions in the financing of ships and airplanes, the scope has been broadened to include public transportation. Our ambition is to spread the ESG approach. A large-scale training plan was thus implemented and included several thousand hours of sessions over the past few months.
What types of commitments has the Bank agreed to?
There are a number of commitments, whether they be public, and, in that case, auditable or for in-house use only. For instance, Societe Generale is a founding signatory to the Principles for Responsible Banking, committing to strategically align its business with the Sustainable Development Goals set by the United Nations and the Paris Agreement on Climate Change; last autumn it joined the Collective Commitment on Climate and it will progressively reduce to zero its exposure to the thermal coal sector, at the latest in 2030 for companies with thermal coal assets located in EU or OECD countries and 2040 elsewhere. The Bank has already raised €100 billion to the energy transition since 2016, and today commits to raising another €120 billion between 2019 and 2023, of which €20 billion will be dedicated to the renewable energy sector through advisory and financing. What guides our action, is the efforts our clients make to move away from unsustainable activities, while bearing in mind that it is our responsibility not to trigger social unrest by putting a sudden end to the financing of companies in highly exposed sectors.
How can the financial engineering expertise of an institution like yours be put to good use?
I will use the example of the credit risk transfer transaction completed in October 2019 with Mariner Investment Group, now known as Newmarket, which purchased a junior tranche of notes. The risk transfer transaction relates to a portfolio mainly made up of structured finance to over 40 countries for a total amount of $3.4 billion. The Bank committed to redeploy a fourth of the freed-up capital to positive impact financings over three years and will receive a reduction in the coupon if it is able to redeploy 50% of the freed-up capital to this type of investment by the fourth anniversary of the transaction. This engineering meets numerous client requirements, particularly the demands of large or medium-sized companies, since it helps provide refinancing and risk transfer solutions in a very difficult environment.
Banks in the Euro zone are already subject to restrictive rules – contribution to the Single Resolution Fund, directive on markets in financial instruments, minimum requirement for own funds and eligible liabilities, etc. Isn't there a risk that competitiveness might decrease if they are as well ahead as far as ESG is concerned?
European banks are advanced in the field of ESG and among them, French banks are amongst the pioneers. In the United States, on the other hand, they started to look into the aspects of energy transition financing at a later stage, particularly renewable energies: less pressure from the public opinion on energy transition, the country's energy independence is identified as a national priority and US banks dropped project financing a long time ago. In my view, quite the reverse will happen; spreading the ESG approach, if this approach is taken properly – which implies having powerful and well-suited IT systems available – will turn out to be a competitive advantage. Strong know-how in that field is a powerful market driver in the high-level relations we maintain with our clients.
Will the unified classification, also known as taxonomy, the European Commission calls for, be a progress?
Establishing a classification used to define what sustainable refers to and identify the activities in which sustainable investment may have the strongest impact, is, in principle, a welcome progress. However, as is the case in many fields, the devil will be in the details. If its implementation gives rise to a multitude of interpretations, it would be contrary to the initial purpose of standardisation and facilitation of sustainable investment.