[00:00:00] Intro: Welcome to more with less the podcast that looks at how businesses balance financial growth with sustainability. I am Venkata Gandikota and I’m Jaideep Prabhu.

[00:00:25] Jaideep Prabhu: Our guest on this episode is Herve Duteil, the Chief sustainability officer at BNP Paribas. Herve, thank you for taking the time to talk to us. Perhaps we could start with your personal and professional journey. How and why did you get into the sustainability space?

[00:00:42] Herve Duteil: Sure. Hello everyone. And thank you so much for having me on this podcast. So by way of the introduction, I’m the chief sustainability officer at BNP Paribas in the Americas. I’ve spent my entire career at BNP Pariba and almost all that time in New York. This is the third chapter in my career.

The first segment was at the very early days of commodity derivatives. In charge of trading activities and a long story short at the end of of that time, I had substantial P&L responsibilities, but no managerial responsibilities in terms of projects or people. And it was not the case in my personal life actually, where I was constantly asked to lead projects.

I forced myself to try to find those opportunities within my work area. And that led to my second chapter, which was to set up the municipal group for BNP Paribas and lead a number of market activities. Fast forward at the end of that second chapter. And once again, there was a dimension of my personal life that was not expressed in my work, and that was substantial community involvement.

And I guess in the e arly years of the 2010 period, what may not have made much sense in the nineties did at that time, which was that you could combine deep purpose with the core of your work. And that led me to propose the launch of a new role. Chief sustainability officer at BNP Paribas. I’m taking some shortcuts there, but basically that was the idea.

And to really move from a CSR mindset to a business mindset to view the process of being a responsible bank as a source of value. The same way we move from IT to digital, responsibility could be viewed as sustainability. And long story short that’s how I landed in this role over eight years ago now.

And it’s been extremely exciting because it’s really trying to Impact the world from an environmental and social perspective, especially, but using the deep constraints of business and business mean create sustainable economic value.

[00:02:47] Venkata Gandikota: Herve, it looks like everybody’s talking about sustainability these days. Why do you think that’s happening? Can you give us your thoughts on that?

[00:02:53] Herve Duteil: Sure. So there I have a very defined view, which I believe finance is the reason why we talk so much about sustainable finance today. To convince ourselves about it eight years ago sustainability was niche. Very few people was talking about it. Nonetheless, socially responsible investing, SRI, had been around for many years. You could say almost 200 years, certainly in the seventies and eighties. That’s when responsible investing started to grow, but it remained a niche. Development goals starting in 2000s with the millennium development goals from the UN and yet fast forward to 2014, 2015, sustainability was still niche.

So what has happened? What has happened is that we really tried to focus on sustainability in mainstream finance. We decided to shift also the focus from a portfolio approach, an investing approach, where basically you create thematic funds that are gonna impact water or carbon footprint or whatever.

And you select a few stocks and create a fund that way. Instead, we decided to flip the perspective a nd to focus at the financing. Of course, every financing ends up into some investor’s pocket. But really looking at one client at a time, one transaction at a time and see whether we could enhance the profile of the transaction by attaching to it some sustainability metrics.

And that’s how I think sustainability came to the forefront cause all of a sudden we thought about it in economic terms before thinking about it in terms of environmental and social impact and and we have created value that then has attracted attention and scaled to the size of markets.

[00:04:35] Jaideep Prabhu: So that’s a really interesting distinction in a way you’re making between being having a sustainable investing approach to sustainable finance. So you do think that move and sustainable finance in particular has the potential to save us from climate change and some of the big problems we face at the moment.

[00:04:54] Herve Duteil: Finance itself? No. But finance has had some, there was some genius about what has happened in the space of finance over the last eight years. And it is to have created a race to the top. Finance itself doesn’t solve any problem. In fact, we are a pass through, we are an intermediary between people who have capital, people who have the money and others who are actually doing things and impacting the world for better or worse. And we are just a bridge between the two. But as I said as we started to see how we could bring sustainability into mainstream finance, we made two discoveries along the way. The first one about eight years ago was that by labeling the use of funds so call it green, social gender COVID 19 response bonds and many other things, by the moment you start attaching a label to a financing and qualify the use of proceeds, you are starting to uncover investor interest, pockets of money that were not typically participating in mainstream instruments. And of course, the laws of finance with greater demand, you attract many benefits.

The second discovery a few years later, and it started in supply chain financing and then it moved into loans and then moved to bonds, and then into derivatives was that we could attach to the interest rate, I would say a bonus matters mechanism where the interest rate will move up or down in relation to future sustainability performance. So forget the first mechanism where you look at the use of proceeds, where you look at how the money is being used, but instead you don’t look at that. We are talking here about general purpose funding instruments. But instead you look at the future performance over the years and you measure, let’s say the CO2 intensity, the water intensity, improvements of a corporation holistically, and then you reward them or inflict the penalty on the interest.

If you think about it, it’s a deep revolution because for thousands of years, we’ve only lent money at a price that reflects the ability of the borrower to repay the lender. But all of a sudden, we’ve also added a second dimension, albeit in very minimal terms at this point, which is the ability of a borrower to do good.

So all of that has been very exciting. The second. generation of products, as I said can be used for any type of funding and so you’re no longer restrained by finding green CapEx or social CapEx on your balance sheet. The focus is really the results. But it makes those products really available to a very wide array of borrowers virtually everyone, unless you are really doing very bad.

And what finance has done is to create a race to the top because now when in a given sector, whether it’s the food and beverage sector, whether it’s the oil and gas or the mining sector, when in the early days it was the best in class who could access sustainable finance, but then it creates an emulation to all the other peers in the sector who see that because of good ESG performance, someone can tap the market at often advantages conditions and so creates an emulation to do better on ESG, to improve the economics and sustainability of the whole corporation.

[00:08:20] Venkata Gandikota: So, you just started talking about this environmental, social governance issues. So that’s very interesting, the performance of these kind of things. Herve, what do you say are the drivers of this ESG revolution?

[00:08:32] Herve Duteil: So that’s an interesting question. And first of all, let me say that sustainable finance or ESG finance is not a new segment of finance. It’s not, it’s certainly not a new niche, it’s not just a new business. I think it’s really transforming the entire financial system.

In other words, traditional or vanilla products are being replaced. By ESG products. It’s not really additive. It’s transformative. And my belief is that it’s transforming a 100 percent of finance over the coming years. And when I say coming years, I’m thinking two or four, I’m not thinking 10 or 20. Now, why is that? And the big driver to address your question is I believe, data. At the core of it, I think that availability of data is the driver. Every crisis, if you think about it is the opportunity for some big step forward and typically for the need of new transparency. The 1929 stock market crisis called for transparency on profits.

And also at each period of time, there are a certain set of technologies and one technology for the lack of a better word at the time was the emerging auditing business. So we created the accounting standards and we were able to better track company’s performance.

The subprime crisis called the need for transparency on banks leverage. And the technology of the time that had been around for quite a few years, but was, I would say stress testing Montecarlo simulations and all of a sudden we were able to stress test banks balance sheet and communicate better around that. I would say the 2020 COVID crisis has been the first true sustainability crisis at least on a large scale of this century.

And it has called for a new form of transparency, which is transparency on the environmental and social impact and the technology that we have today that we did not even have probably 15 years ago. It’s data, it’s big data, it’s artificial intelligence to process that data. And we have geo satellite imagery for methane emissions, for deforestations.

We can track at an extremely granular level corporations performance in the way they impact environment and communities. So for me, if you think about it philosophically, I think that’s the reality. So now data can be used by everyone. Data can be used by corporations to do better because we can monitor them.

Data can be used by investors because they can use that data to predict future performance of corporations. Because of course, whether you do good or bad on society, eventually comes back at you. Data can be used by regulators to impose new standards, new disclosures. That once again are gonna be used by investors. And data can be used by banks to craft new products.

And for example, link an interest rate to some measured metrics that will be disclosed over time. And also put a price on transparency and disclosure.

[00:11:27] Jaideep Prabhu: So that’s a really powerful picture you’re painting of, data helping us really track and monitor and that thereby leading to transparency. And yet we hear almost daily of all kinds of scandals, environmental social, some maybe intentional, some maybe unintentional that even though the organization intends and people intend to be clean, you still have problems. And we hear about greenwashing all the time. So what explains that and how do we deal with that issue of greenwashing?

[00:11:57] Herve Duteil: Sure. To be honest, greenwashing is not the thing. I was about to say fear the most, but I would even say that I fear. First of all I would say that at a transaction level, there is very little greenwashing. If you look at green bonds, social bonds, green loans and green derivatives or green repos that have been done as a practitioner, my view is that the almost entire majority of those transactions are quite good to robust and have their real merits. Greenwashing starts when the tree starts to hide the forest and when a bond, let’s say with a very legitimate green bond or social bond is hiding the rest of its impacts. The one bond is only a tiny portion of a balance sheet. And if you start make then taking, a page in some media, press newspaper bragging about the latest transactions you’ve done, you start portraying maybe, or inferring a picture that’s not close to the reality. But I’m not overly afraid of greenwashing at this stage. First of all, because markets are fairly well organized. And there is this notion of self regulations in markets. Of course we need markets regulations, but the self regulations is also extremely powerful.

And on the whole, practitioners have tried to keep and maintain really high standards. What I’m fearing is complacency. Greenwashing in a way is intentional by those who overly exploit the benefits of what they do. Complacency is more insidious because we’re not aware of it.

And what I’m afraid is that sustainable finance is only one part of the solution, as I said, we are not doing anything directly. We’re just facilitating the flow of capital towards positive actions. But until ESG truly significantly affect the cost of capital, we will make very little difference on the course of our societies and the topic is not to finance a few more positive actions or efficiency improvement. The goal at hand is really to embrace fully the second industrial revolutions.

We have spent the last 262 years powering stuff by burning something. We have 28 years left to keep all these moving and rolling without burning anything. 28 years left eight years to achieve significant progress. Three to four years to really take the real decision that will bring us where we have to be on track by 2030.

So the time is extremely limited. That’s what we call the net zero transition. And the complacency would be to applaud too loud what finance has achieved so far, which is huge in the sense that I think we brought the topic on the mindsets of everyone, every CEOs, every CFOs, every treasurer around the world from Asia to Americas, every media channel, every TV, everyone is talking about sustainability, all of these, frankly in almost the span of five years.

That’s really tremendous, but all the work remains to be done. And so I think greenwashing is going away in a way, because people are being more educated on the topic. And I think they recognize the cat when it’s a cat. But the transition will be painful, will be costly. There’s no way around it.

[00:15:20] Venkata Gandikota: Really good points. The 2030 that I would assume this is about the sustainable development goals targets. And then, we are doing this podcast conversation after the conclusion of cop 26 in Glasgow. And then all this rhetoric about net zero, which you also just briefly brought up.

So my question would be, do you think the net zero transition will become as universal as ESG?

[00:15:45] Herve Duteil: Yes, I have no doubt. The only question is speed. One reason I have no doubt is because over the last two, three years, we have seen a wave of net zero commitments by corporations and despite that it’s always great, something new happened this year which we call GFanZ the global financial Alliance towards net zero. Because after corporates, you’ve had a succession of coalitions within the finance community, starting with the net zero asset owner alliance about two years ago, followed by the net zero asset manager initiative, followed last April by the net zero banking Alliance, and more recently the net zero insurer Alliance. So it’s a collective of, I don’t know how many now way over 200 financial institutions collectively representing trillions of dollars of assets, a significant part of the financial assets and these net zero commitments are much more powerful than any single individual corporation net zero commitment. Because many of us are universal owners we own the world. And so we have leverage. When we take a net zero commitment for our portfolios. It means that it’s our portfolio that has become net zero and meaning it’s the world that has to become net zero. So if the corporates already had operational pressure to be sustainable, to have access to water, to emit less, to satisfy growing consumer preferences for more sustainable products, if corporates add also the pressure of increasingly more stringent regulations, now they will have the pressure of money because there’s no way we can become net zero if our clients don’t become net zero. And so that’s the reason why I’m convinced that the net zero transition will become universal.

[00:17:43] Jaideep Prabhu: So sticking with the net zero transition, given how important it is, what role do banks play and how do banks facilitate that process?

[00:17:51] Herve Duteil: So I think we could talk at lengths about this, but I think there are three main levels where banks can be influential in the net zero transition. The first one, it’s to accelerate the embracing of the net zero transition by our clients. And the way we do that from a financial perspective, it’s to show them how access to capital and cost of capital in some given sectors, of course, the most capital intensive will be disrupted over the next 3, 5, 7, 10 years. And also in relation to them, positioning from an ESG perspective within the sector. The second level where we can be influential is once you’ve realized that it’s guide our clients in choosing transition pathways that will be most valuable to investors because what they look from us is of course access to money. So that’s where we can advise them. They are consulting companies to also advise them how to minimize environmental impacts in some dimensions of their business. And then this third level is once you’ve decided how to transition, it’s to finance this actual transitioning depending, whether you have to sell or decommission your most carbon intensive assets, whether you need to acquire some companies to fast track some sustainability transformation where you’ve been lagging, et cetera. So these, I think are the three areas where banks can be useful in the net zero transition journey.

[00:19:22] Venkata Gandikota: I want to now come back specifically to the organization you represent BNP Paraibas. So can you tell us a bit about sustainability within BNP Paribas and what has BNP Paribas been doing in this space? And what has your job as CSO entailed regarding this?

[00:19:38] Herve Duteil: Sure. So I’ll have to focus just on a few elements because we could write mini books to answer your question. But maybe more to frame some key dimensions. One very important dimension for us at BNP and it’s been over 10 years pretty closer to 15 or 20 years now, it’s to keep our own house in order.

And we have moved from the traditional ESG approach to define sector policies, on most sensitive sectors, whether it’s defense, nuclear, oil and gas, mining, Palm oils agri, et cetera. We have moved from a number of iterations of those policies with stricter and stricter criteria to an approach of portfolio lines.

So we have committed and are working at developing methodologies and implementing actions to align our portfolio with a 1.5 degree world. And so it it means having some predictive impact of our clients over the next five years, let’s say with given trajectories that we would like to have the dialogue with our clients and eventually making the right decisions to make sure that our portfolios stay on course.

The second dimension of our work has been to integrate ESG in the products that we do. So I talked about some of those earlier, from green bonds to sustainability link loans, to sustainable supply chain financing, to sustainability linked cross currency swaps to green repos. And the list could go on and on. But it’s basically reintegrating within pricing, an externality that had been too long ignored, which we believe has impact on long term credit risk, which we believe has impact on systemic risk embedded within our portfolios. And which has also an impact on the behavior of our clients, because it gives them an incentive to accelerate faster towards more sustainable model.

The last component I would add is what we talked about, transition. So, you want to align your portfolios, which is very much around the client selection and education. You want to create products that gonna help your clients get rewarded basically when they accelerate and get penalized when it’s not the case.

The third component is really to assist o ur client on this net zero transition journey, because as I said more and more, the sustainability choices you make today, it’s no longer about, having a nice prize on the front page of some newspaper, but it’s about whether you’re still gonna have the ability to access capital at the same conditions in a few years from now.

So it’s a very significant advisory business that we can do to our clients. So these in a nutshell is what a bank can do, especially at its corporate and institutional banking level. Just briefly because we have two other sides to our bank. We’re also a retail bank and we’re also an asset manager.

These are the three components of our large banking model. On the retail side, we’ve offered numerous products to stimulate, the financing of energy efficiency projects in homes to integrate sustainability in small and medium enterprises, which also need financing.

We’ve worked also on numerous financial inclusion product. Also supporting social businesses and so on. And on the asset management side, so it’s no longer a financing mindset as I described heavily during our conversation, but it’s more an investing mindset. And there we are prepared to be, I would say future makers. Traditionally the investors have tended to see themselves as future takers, basically understanding what’s coming up around the bend, if you wish and prepare by basically buying or selling securities, but they were not thinking of themselves as people who could affect outcomes. And it’s not actually true. Investors do influence outcomes. And so to your question, we have been extremely active in what we call companies stewardship or company engagement. Engaging the people we invest in, which are in the funds that we craft, even when it’s not equity, but when its bond to have a dialogue with them and to communicate our expectations around climate, around biodiversity about around social inequality.

So if we don’t embrace our role as future makers, we will both be forced as investors to take a future that neither we or our clients don’t want.

[00:24:25] Jaideep Prabhu: That’s really comprehensive. Very insightful response. Speaking of the future, then Herve, what do you think the future holds? What is your own view when you step back and look at the landscape and what is likely to happen in the next few years?

[00:24:40] Herve Duteil: Sure. And I’ll maybe close with this, but maybe we can start from COP 26 actually. And while it would be tempting to see the outcome of COP 26 as yet another failure, I would say in the slow. and so far not so successful climate change fight the outcome in fact, indicates the beginning of robust action and it’s reinforced by the fact, by the way that the Glasgow pact reflects the commitment of all 197 or so. nations.

So my outcomes, I have three key takeaways. So first of all, as before COP 26, we were on a trajectory of 2.7 degrees of warming. After COP 26, give or take we should be around 2.4 degree track. It’s a baby step. And that baby step reflects our inability to overcome some deep contradictions between our countries with diverging economic interests.

But, the first thing I would say is that while the public sector is still quite divided, the private sector, surprisingly is much more United. It’s the first COP where we see so many companies, so many CEOs around and believe me, they were not there to be seen. Maybe it was the case at DAVOS or some other COPs or whatever years ago, but they were there to do business.

So while our countries may have diverging interest our corporate s for the most part is much more United around common economic interest. And this is where our best hopes are. The second thing is COP 26 sound the beginning of the exit of fossil fuels. I see for the first time in nearly 30 year history of COPs, the word coal, oil, and gas were mentioned with a call to phase down.

Some would’ve wanted to hear phase out, but to phase down from elevated coal and oil and gas subsidies. I think it’s really symbolic that 197 countries agreed to have this in writing for the first time. And it’s really crystallizing the fact that we’ve turned around and that we are entering the second industrial revolution.

And my third key takeaway was the presence of so many new technologies, so many startups at COP 26, which are really showing that investment in green technologies are accelerating and that an entirely new economy is emerging. For those of us who were too young or too poor 20 years ago to be investing in the birth of the dot com economy, we have a new, amazing cycle that is just starting.

I would take as an image, the fact that Elon Musk’s wealth reached nearly 300 billion at some point. This ranking him well beyond Jeff Bezos, Bill Gates, or Mark Zuckerberg making him the wealthiest person in recent history and putting him on par actually with John D Rockefeller, who amassed his fortune from fossil fuels a century ago.

And by the way, five years ago already the John D Rockefeller foundation divested from all fossil fuel investments. I think it’s really symbolic of the fact that we are really entering a new era. All this means is that there is an entirely new industry roadmap ahead of us and banking has to travel on it.

[00:27:58] Jaideep Prabhu: Thank you so much for that really insightful conversation, Herve.

[00:28:02] Herve Duteil: You’re welcome. My pleasure.

[00:28:03] Outro: Thanks for listening to our More With Less podcast. You can follow us also on social media, our Twitter handle is more with less pod and our handles on Instagram, LinkedIn and YouTube are more with less podcast.