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ESG criteria in infrastructure and commercial real estate investments

BNP Paribas Asset Management

Extra-financial factors are at the heart of BNP Paribas Asset Management’s (BNPP AM’s) investment philosophy. Environmental, social and governance (ESG) criteria are fully integrated in our investment decision process for our infrastructure and commercial real estate debt funds.

Our ESG policy is implemented by a dedicated team within BNPP AM, the Sustainability Centre. The Sustainability Centre is composed of 10 recognised and sectorial experts with respect to social and responsible investment (SRI), which has a 16-year history in covering ESG matters (Source: BNP Paribas Asset Management, as of 24/05/2018). Our ESG research is independent. It is based on various sources that are not limited to ESG data suppliers, and complemented by regular contact with issuers.

ESG is integral to fulfilling our fiduciary duty

At BNP Paribas Asset Management, we are convinced that taking into account ESG issues in our analysis and investment decisions is an integral part of our fiduciary duty to our investors. As such, the implementation of BNP Paribas Asset Management’s responsible investment policy follows a strict framework.

BNP Paribas Asset Management applies several exclusionary, normative and sectorial exclusion policies to all investment decisions.

  • Firstly, companies in breach of one of the UN Global Compact principles are excluded from our scope.
  • A second level of exclusion applies to companies involved in certain sectors banned by BNP Paribas Group (such as controversial weapons, tobacco and asbestos).
  • Finally, we exclude – in accordance with our investment policy – companies involved in sensitive activities (such as palm oil and wood pulp production, coal-fired power generation, mining & oil sands extraction, nuclear power generation and agriculture) that do not meet certain requirements as defined in our sector policies [1].

BNP Paribas Asset Management is one of very few asset managers promoting ESG integration in alternative debt solutions. This means we are committed to participating in local initiatives designed to promote good practices in this area, encouraging businesses to be more transparent by ensuring their data is reliable, accessible and up-to-date.

With this in mind, BNP Paribas Asset Management’s ESG analysts initiated dialogues in 2017 with the Principles for Responsible Investment (PRI) working group on private debt and equity investments in infrastructure: “the PRI Infrastructure Workstream”.

ESG integration in real asset debt strategies

Our real asset debt funds follow a proprietary Socially Responsible Investment (SRI) strategy. This means that ESG is embedded in our investment process through an assessment of the ESG performance of each investment by our Sustainability Centre, the measurement and the reporting of the environmental and climate impact of each property or project, and through portfolio construction driven towards green or sustainable assets.

Our approach involves identifying the issues related to sustainable development, to determine the risks and opportunities that could impact the value of a project and to support sustainable and value-creating growth. For example, no matter how ‘green’ a project is, it can be challenged in court by local residents and be blocked or even shelved. By assessing extra-financial elements like the licence to operate or the environmental implications of the project, we can identify those risks and favour the more responsible projects.

ESG integration is structured around several commitments:

  • A pre-screening of the sponsor and the project based on BNP Paribas Group and BNP Paribas Asset Management ESG policies: the point of this is to pre-identify risks and avoid projects associated with potential controversies and/or negative social and environmental impacts, or that are sponsored by a controversial entity. This is why, for example, a project whose sponsor has been found responsible for a violation of Human Rights would not be eligible for investment.
  • The implementation of a taxonomy specific to each asset class (i.e. infrastructure and real estate) to analyse the nature of the activity, its contribution to and its impact on the energy and ecological transition as well as its social impact, the aim being to drive the portfolio construction towards green or sustainable assets.
  • The evaluation of the ESG performance of the project: Our methodology combines quantitative data and in-depth research and analysis of the most critically significant issues based on common ESG indicators and sector specific indicators, as well a qualitative analysis reflecting a more in-depth study of the principal ESG issues identified. As examples, we will analyse how biodiversity is taken into account in a solar project, or how the social licence to operate is facilitated in a ultra-high-speed broadband project.
  • In addition, to finalise and confirm our selection process, we require, for each investment opportunity, an environmental and climate impact assessment, which is carried out by an independent expert, Icare Consult.
  • We produce an annual report of ESG topics that includes quantitative elements such as an ESG evaluation of all portfolio positions, the percentage of investments with a positive environmental or social impact, and the climate and environmental impact report compiled by our external provider at portfolio level. This is complemented by an analysis of the evolution of each asset’s ESG practices from one year to the next.

[1]  As a leading global asset manager, BNP Paribas Asset Management is committed to becoming a responsible investor in all aspects of its business. Because we believe in responsible practices for ourselves, but also for entities in which we invest, and consistent with our fiduciary responsibilities to act in the best long-term interests of our clients, we are committed to incorporating ESG standards into our investment criteria and ownership practices. This policy is consistent with BNP Paribas Asset Management adherence to the UN PRI in 2006 and BNP Paribas Group’s commitment to corporate responsibility and sustainable development.

ESG is part of BNP Paribas Asset Management’s DNA. With a 15-year history in ESG, we were among the first asset managers to address investment-related ESG issues. We have been rewarded for our engagement and approach to responsible investing by a first-in-class ranking (A+) by the Principles for Responsible Investment (PRI). Our membership of several advisory committees at an international level is also a token of our performance and commitment. We thus find it entirely natural that we strive to replicate such high standards in the universe of real asset finance, as we believe this is key to having access to the best-quality assets in tomorrow’s world.

This article was written by Pauline Fiastre, Senior Fund Manager (Energy & Telecoms), and Philippe Deloffre, Head of Real Estate Debt in the Alternative Debt Management team.

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