Jane: [00:00:03] Hello and welcome to the LSEG Sustainable Growth podcast, where we talk to leading experts about sustainability and finance. And we're back after a short summer break and what a way to come back. We are talking this week to Constance Chalchat, Chief Sustainability Officer of BNP Paribas Corporate and Institutional Banking and Global Markets. Now I'm really, really excited about this conversation because Constance joins us from BNP Paribas, where she's been for, let's say, over 20 years. And BNP are an absolute true leader on sustainability, winning numerous accolades and awards for many years, including, I think last year, the World's Best Bank for Sustainable Finance. So we're in for a treat, guys. But before we hear from Constance, a quick reminder do follow us so you don't miss any future episodes. And also, don't forget to rate us on Spotify, Apple Podcasts, or any other platform you use. And do enjoy the show. Hello Constance, thank you so much for joining us. I can't wait to have this conversation with you.
Constance: [00:01:06] Thank you very, very much for hosting us. It's really a pleasure. Thank you very much.
Jane: [00:01:11] Great. So before we get stuck into some of the details about BNP and the strategy, I'm curious about you because you've been with BNP for some time, shall we say, I think well over 20 years. And I think you've got a really interesting outlook and background, not least that I know that you're a keen diver as well, and you've also written a book as well, so I don't quite know how you fit all of that in with making sure that BNP is a leader on sustainability. But do tell me, how did you come into your role in sustainability?
Constance: [00:01:46] That's a very, very long story. But if I'm trying to go back long, long time ago, I grew up with a deep connection to nature, and both my parents were from the mountainous region. My dad was from Auvergne and my mother was from the Alps and we spent all our vacations in the mountains. And those experiences, I guess shaped me. And even today I really make a point to take my kids hiking to help them appreciate the beauty of untouched environment. And it has become essential to my personal balance. And I'll tell you a little story. When I interviewed for BNP Paribas, I was doing a lot of ski competition, and I think one of the key questions I asked was, will I be able to leave at 4pm or 5pm on a Friday? Because I have to go to ski competition to the Alps. So it's always been something essential for me. And later on I discovered the ocean through diving, which opened up a whole new world to me, a third dimensional world which is quite unique. And what's amazing is that even though oceans cover 70% of our planet, most people only see the surface and they don't know the incredible diversity that exists below. And since becoming a divemaster a couple of years ago, I've been passionate about raising awareness on ocean conservation and the need to protect marine biodiversity. And that's why this year I actually broke my pelvis skiing.
Jane: [00:03:16] Oh my goodness.
Constance: [00:03:17] And so I knew I would be laying on the bed for a month. And I said to myself, okay, how can I keep my mind busy so that I don't suffer too much? And that's why I decided to write this book about Greece and the underwater world. What was interesting is I actually managed to get the support of the Hellenic Centre for Marine Research, who reviewed the book, helped me with some of the identification of some species, and I've been promoting the book throughout summer to help people better appreciate the richness of the Mediterranean waters. So, today, what I love most about my job is really the fact that with sustainable finance, I can now merge my passion for nature, both oceans and the mountains with a very rich professional life. And I hope I can contribute to transition economies so that my kids can sustainably enjoy and benefit from the mountains and the oceans the way I did.
Jane: [00:04:15] What a wonderful story, Constance. I think that's really lovely to hear, actually, because, you know, sustainable finance is a really growing part of the market, but it's really also brilliant to hear the real stories about why people feel so passionate about it. So thank you for sharing that. I think it's really good to understand the Constance behind the scenes, both on the mountain top and obviously in the ocean as well. So well done you. I shall seek out your book. Is it in French or English?
Constance: [00:04:43] So it's actually a trilingual book. I worked with a local publishing house. So it's only for sale in Greece, but you can get it on Apple. So you put Hidden Wonders of Paros or you put my name in you will find it on Apple Books.
Jane: [00:04:55] Great. Okay, well, there you go. There's an advert, guys. Brilliant.
Jane: [00:04:58] Brilliant. Okay, let's move on to BNP, shall we? So from the outside perspective, and this is very much kind of me coming in from the outside, it looks like BNP has achieved what many organisations haven't, which is to really embed sustainability into the absolute central core of its corporate business philosophy and strategy. So I'm curious, that's an outsider's perspective. Am I off the mark or is that an accurate reflection of how it is and if it is like that, how on earth has that happened? Because it's really not easy to do, is it?
Constance: [00:05:36] Yeah, absolutely. So I would say it's an accurate description. I think we really didn't become a leader in sustainable finance by chance. It's something that has been core to BNP Paribas for years. Sustainability is deeply rooted in our mission statement. In our mission statement, we say that we contribute to responsible and sustainable growth. We work with our clients to create a better future, and so it's something which is very strong. Additionally, I think where in a way we were lucky or visionary, it depends how you see it, is that we started very early, over a decade ago, well over a decade ago. We started integrating ESG in our financing and investment decisions, focusing on the sectors that needed to transition and trying to figure out how to best support our clients in those industries. And really, when we started implementing those policies in 2010-2011, it required a significant shift in our business. I remember in 2014, when I was asked with one of our general manager what would be the biggest challenge. My reply was, I think it's going to be how fast we can change our bankers, how fast we can equip our bankers with the right knowledge to do this. So instead of just creating a green finance desk, we decided to integrate sustainability into the very core of all operations. And that meant embedding ESG throughout the value chain from onboarding, risk management, advisory, structuring, financing, trading, cash businesses.
Constance: [00:07:11] That meant training thousands and thousands of people throughout the group. So we worked with key partners. We worked with Cambridge University. We were rolling out training to thousands of people. Anyone wants to take an online class with Cambridge could free of charge, a certified training, so that we could go at scale and equip the entire organisation with the right knowledge. And this is continuing. And today we have a sustainable academy, which is really diffusing the best knowledge from very basic to extremely in-depth and expert throughout the course. And I think thanks to this very early investment, we were able to build a foundation of expertise in sustainability across regions, across sectors, making sustainable finance very industrialised and core to our client engagement. And today, I would say what's interesting is our leadership rankings in sustainable finance do not even come close to what our staff really pride themselves on. What they pride themselves on is really being strategic partners to our clients, helping them build a sustainable future. Sometimes we're very proud to say to a client, don't do this, which is quite striking. So we would rather say no to a transaction or a mandate because we feel it's not the right thing to do with a client. And that makes us proud. Because today, in the long run, we believe we can't succeed in the world that fails. So we're all in for supporting our client in a successful transition.
Jane: [00:08:47] So that was well just over ten years ago you started that investment. I'm really curious to know what the trigger for that was, because it sounds like that's been a really significant investment in both time, management time, money, resources. So what kind of was the trigger? Who decided and how did that come to the point where the business said, actually, we're going to do this and we're going to do this really holistically and in a truly sort of integrated way.
Constance: [00:09:15] I must say, I think we were very honoured and blessed to have very visionary managers. BNP Paribas has been always managed as a consensus of very expert people, and I think there was a group of very, very senior managers at that time who had a very strong vision, who pulled it together. I know Michel Konczaty on the risk department was extremely solid and visionary on this. Yann Gérardin equally had very strong views on what we had to do. Jean‐Laurent Bonnafé now is extremely important in shaping the strategy of the group when it comes to sustainability. So we've had a group of very visionary and forceful and driven managers. And Laurent Pessez who's now our Chief Sustainability Officer, has been very early on extremely engaged in shaping the sustainability agenda in a forceful and ambitious way. So I think we were blessed to have a generation of managers who could see what we had to do.
Jane: [00:10:18] I mean, I think that many, many people say, it starts at the top of the house, right? Leadership is absolutely vital. So let's talk about the strategy a bit more. At a high level, how would you describe the sustainability strategy of the group?
Constance: [00:10:32] It's true. ESG is embedded everywhere at BNP Paribas and it's really starting from the top of the board, Jean‐Laurent Bonnafé, our COMEX. I would say our sustainability strategy aligns with our client objectives and with the UN Sustainable World Development Goals. Basically, we want to ensure we support our clients in their transition. We want to deliver or support the world, deliver on the UN SDGs. And while climate is central, it's interconnected with other priorities like the circular economy and biodiversity and nature. Our approach I would describe it as a very straightforward. We will only reach net zero if our clients reach net zero. So our job is to support their transition. And instead of turning away from high emission industries, we engage with them. We are there to finance more sustainable solutions that reduce their carbon footprint while still enabling people to continue working, caring for themselves, for their family, heating their home and moving around. So it's really we're acting as a support of a transitioning economy. Through sustainable financing, we encourage our clients to be more ambitious, more transparent about their sustainability goals. And that's why, as part of our strategic plan, we've committed over 200 billion of euros to support low carbon transitions.
Jane: [00:11:56] To what extent does your sustainability strategy pull in the people element of sustainability? Because you've talked about nature, climate, circular economy, which obviously have people elements within them. But how explicitly does the strategy say actually we're about an inclusive economy as well as a sustainable one?
Constance: [00:12:15] You're very right to ask the question, because one of the five priorities as part of our sustainable plan is actually delivering inclusive finance. And to date, we have millions of beneficiaries, either through making our banking solution accessible to all. One of the solutions that we are rolling out throughout Europe is called Nickel, which is a banking account accessible to all. Very simple. In five minutes you can open an account which enables people to have jobs. I mean, if you don't have a bank account today, you cannot have a job. So this is amazing solution for people who are political refugees, who are people who have been left outside of the society. And today, thanks to this solution, they are enabled to regain access to the job market, to having like a banking footprint, which is absolutely fantastic. Social inclusion also is achieved through microfinance. We have been a very long dated actor in microfinance. I think we've been doing this for 30 years, and today we work with the microfinance institutions throughout the world to be able to deliver positive benefits and social outcomes.
Jane: [00:13:30] It's great to hear, actually, because often the environmental side of sustainability gets the headlines. And I think personally, from my perspective, I think it's really great to hear that there's a balance and we don't forget the people in all of this.
Constance: [00:13:41] But I think, you know, if I may, I mean, there's social inclusion and banking inclusion, but I think what's great and what I see in terms of market trends is we are starting to see an increasing social angle in capital markets. BNP Paribas actually structured a social bond. And we've been placing it in quite a lot of networks. It was one of our biggest commercial success of the past few years. More recently, we did a very specific bond with Iceland promoting true diversity and gender equity. And this is where we believe that there's still lots to do in capital markets, and especially on the bond format, to promote a social version or even more social version of those sustainable.
Jane: [00:14:30] Yeah. And actually, that's given me, given me a reminder that one of I'd love to cover on the series social bonds, because the London Stock Exchange, as a venue, we have a number of issuers raising social bonds in the market and I find them fascinating. Anyway, I digress. Let's go back to the conversation. I wanted to touch on some of the key themes that are taking your time and attention at the bank at the moment, and starting with physical climate risk adaptation, because I think it's fascinating, and particularly also for the ripple effects into things like the insurance sector. So tell me more about that theme and how BNP are kind of thinking about it.
Constance: [00:15:12] Yeah. So I think it's a rising theme of the year, it's extremely important. Because climate risk isn't just about unpredictable weather, as you were saying, it has a domino effect that disrupts industries, economies, communities, up to governments. And what we're seeing is that the pace of these extreme events is picking up. According to NOAA, the US administration, back in the 1980s, billion dollar climate disasters happen every 15 weeks. Now it's down to once every 2.5 weeks. And even if you rebase to correct inflation, what we're seeing is that the frequency of those extreme events have drastically increased. So today there's four extreme weather events: floods, tropical cyclones, winter storms and severe thunderstorms that cause a global estimated economic loss of $200 billion every single year. And what's striking, and I think that's one of the biggest challenges we have today, is that A) not all countries are exposed in the same way to those climate impacts. Today, in absolute terms, economic losses from weather events in the US account for roughly 50% of the losses in the world, and that's mostly driven by tropical cyclones and hurricanes. And B) some sectors are a lot more vulnerable than others. For instance, industries like agriculture, which rely heavily on waters or industries with fixed assets that they can't relocate, are particularly at risk. And in some cases, we've seen companies that have swings of revenues up to 30% in a single quarter due to extreme weather. So as a result, what we're seeing is that insurance is becoming harder and harder to obtain for these high risk sectors, high risk areas, and by extension, competitive financing is becoming tougher to secure.
Constance: [00:17:13] So you can see physical risk is now a financial risk. And what's worrying is that it's still probably underpriced. So what can be done? Because this is a big question of the year I think. We see three things that have to be done. First, we need better data models and better data at large to assess those risks. This needs to be accessible widely because this will help governments, companies, individuals make more informed decisions. This also should trigger the implementation of risk mitigation plans through adaptation finance. The second thing that needs to be done is adaptation. Investing in adaptation is key because in the end, it's the only way to increase resilience and ensure long term stability. Risk reduction through adaptation will also improve insurability. Today I was reading this survey, even in moderate warming scenarios more than half of the global population will face climate hazards in the upcoming decades, including heat waves, draught, flooding, water shortages, etc. I don't know if you saw what happened in Barcelona over the summer, but this was spot on. And today, only 20% of the companies surveyed by S&P have disclosed any adaptation strategy. What's more is that adaptation, regulation, infrastructure, adaptation finance at large is severely lacking, even though proactive measures could save up to ten times the cost when it comes to natural disasters. Without proper adaptation measures, the billions we're spending every year on recovery rebuilding will be wasted. So that's why, in addition to climate change mitigation finance, we are strongly advocating to ramp up adaptation finance on a much larger scale. The bright side is that more and more public private partnerships are stepping up to protect communities and ecosystems and really finance adaptation.
Constance: [00:19:16] And we believe that the development finance trend that we're seeing, like initiatives structured by BNP Paribas with multi development banks, can play a crucial role in funding those adaptation projects, but it's crucial to start rebalancing mitigation finance and adaptation finance. The third thing that can be done when it comes to mitigating a physical risk is innovative risk transfer solutions. At BNP Paribas, we've been focusing quite a lot on parametric insurance, which offers, I don't know if you know about it, but it's offering payouts based on predefined events like extreme weather. And we've invested in this company called Arbol. What they're doing is they're combining vast amount of data with cutting edge technology, a strong knowledge in derivatives and risk capital. And what they do is they provide parametric insurance solutions that offer financial resilience against climate risk but to anyone, so even if you're located in a high risk area, high risk sector, you can still find some insurance. And I personally believe that scaling up those kind of solutions is essential, because today we're going to have an increasingly wide insurance gap that will result in an increasingly wide financial risk if we are not able to scale up the solutions. So this is important, it will most likely require efforts across the insurance sector and the financial industry if we want to go at scale and if we want to develop simple, standardised parametric coverage. But personally, I believe this is one of the most important things that needs to be done in the upcoming few years.
Jane: [00:20:56] Yeah, I agree entirely, and I think that's why climate transition plans are so important because they enable or they should enable organisations to think both about kind of the risk as well as the mitigation and the adaptation. And really we should be far more focussed on both sides of the equation. That was really interesting. And it kind of leads me on to, I suppose, another part of the market, which perhaps could be a partial solution to some of this climate risk and the transition risk and that is carbon markets. I mean, it seems that carbon markets on the voluntary side at least, is moving quite slowly. So I was wondering from your perspective, what perhaps needs to happen in order to get these markets functioning more effectively?
Constance: [00:21:41] Yes. I think you're very right, it could be part of the solution, but there's still lots to do so that they are truly part of the solution. I mean, when you think about carbon markets, there's really two things, it's both compliance and voluntary. But to my view both are essential for reaching net zero. So if we look at compliance very briefly. Compliance markets I mean they're driven by government regulations and what they do is they create financial incentives for companies to reduce their emissions. So the way it works in Europe, for example, is that companies that exceed limits must purchase compliance carbon credits from those who have reduced their emissions below the mandated cap, and that market mechanism ensures that there is a financial incentive for companies to innovate, to reduce their carbon footprint, and that overall drives reduction in GHG emissions. Today, I must say, thanks to the enlargement of the EU trading scheme and the compliance market in Europe and their enlargement to all heavily emitting sectors, the innovation and the decarbonisation we're seeing in industries like construction, cement, transportation throughout Europe is a direct result of carbon compliance market. And today, when you look at it, the battle for green cement is happening in Europe, nowhere else, thanks to those compliance carbon market because they are pushing companies to invest in decarbonisation rather than simply pay pick the carbon tax. So it's a critical tool. On the other hand, voluntary carbon markets, as you were saying, are quite slow, even though they enable companies, organisation and individuals that are already improving to go way beyond what they're doing and offset the residual emission that they have.
Constance: [00:23:29] For me, those markets are absolutely crucial for financing global carbon reductions, especially when those projects, whether it's reforestation, forest methane captures, have no cash flows. Today, there's almost no other solution than voluntary carbon markets to finance projects that are good for the environment, good for society, but without cash flows. And this is important. And it's true that those markets have been heavily challenged, very heavily challenged. NGOs were all over them. The media were highlighting the risk of greenwashing. And that's where I would say there is a very strong role for those markets to work. Why? Because I think it's true that today things could be improved. We could have more standardised framework. We could have better scrutiny, better standard. When it comes to ensuring the forest protection, more imagery made available to everyone, etc. Nevertheless, we believe those markets remain overly positive and because of massive attacks from a lot of parties accusing them of greenwashing, today they're stalling and they're not picking up the way they should do. So today, that's why I think at the last COP, there was a very strong consensus from all parties to do what they could to restimulate the market and rebuild those markets. It's absolutely crucial. On this rebuilding we are seeing very different approaches. So typically in Europe we are seeing the EU very, very advanced and trying to have a fight for quality. Typically, the EU program is really focusing on ensuring that any type of carbon price or voluntary carbon benefit financing European transition.
Constance: [00:25:21] So the objective is to cover 75% of EU emissions with the European Trading scheme by 2027 and reinvest the amounts that are collected to decarbonise Europe. Carbon markets and voluntary carbon markets, they will remain largely domestic. The goal is to ensure that a maximum amount of capital is channelled to finance again European industrial transition, and efforts are put on removals. What’s interesting is that when you look at markets like Singapore, they are taking a very different route. They are developing a very holistic approach, mixing carbon taxes and carbon markets. But they are a lot more inclusive in the way, so they're focusing on both carbon reduction and carbon removal. They can look at any single carbon offset coming from anywhere in the world. So it's a lot less domestic than Europe. The only thing they want to ensure is that it's high integrity carbon offsets. And what's interesting, what I've seen happening this year is that since the beginning of the year, carbon intensive companies in Singapore are allowed to pay up to 5% of their tax through voluntary carbon credits. And that truly stimulates demand for high integrity credits. So they're taking a different route, different approach, but they're trying to reach the same objective rebuild voluntary carbon market, stimulate demand so that those carbon markets can truly play a role in accelerating the transition. This is actually happening throughout the world and we're seeing many regions, many countries setting up their own carbon markets, setting up their own schemes so that they can leverage on tax and voluntary scheme to finance climate action.
Jane: [00:27:01] I think that's so interesting in terms of some of the innovations that we're seeing and that Singapore case about blending the use of carbon markets with corporation taxes is really interesting. We are running out of time Constance. We could talk forever. So I just wanted to close with one short question, if I may, the outlook. What's the kind of the one thing you think that the market's not doing now that it really needs to action to start moving at pace to a more sustainable economy?
Constance: [00:27:28] Sustainable finance. That's why it's so interesting. It's far from mature. It's evolving every year and there's still lots of work to do ahead. But if I had three priorities, one is rigour and respect for market standards, with a strong focus on client interest. There are still deals that fall short of those standards, which can create reputational risk for issuers, but also in a way, destroy the reputation of sustainable finance, which remains something very important. Second priority, integration at scale of new data sources. We collectively need to gain access to more standardised data model, which will allow us to better assess climate risk and especially physical risk, to build more resilient financial solutions and channel capital toward adaptation finance. Three, I think we need to find a way to reconcile sustainable outcomes with investor profits. We've seen a lot of outflows from ESG funds, and we need collectively to move beyond simplistic strategies which were just underweight or exclude sectors and focus on robust, research driven themes like water access, resource scarcity, health in the face of demographic changes. Things that have undeniable fundamental trends and that can deliver both sustainable outcomes but also profit for investors. If we are trying to build a sustainable finance strategy which is not profitable, it won't be sustainable. So for me, this is going to be a key milestone this year, how we are able to pivot the outflow or regain inflow into strategies that deliver both profit and positive outcome. So lots to do. This requires a lot of data.
Jane: [00:29:15] So that's a good three Constance. So basically in summary we're looking for high quality market standards, data data data, and also credible sophisticated investment solutions that deliver value. So just a few things then on our to do list. Well collectively I'm sure that we're all in support of those priorities that you've set out. Constance, thank you so much for coming on. We really could have spoken for hours. Maybe you'll come back and see us again next year and update us on things that have been going on there at BNP. But for now, thank you so much and see you again. Thanks for sharing your time and experience with us.
Constance: [00:29:53] Thank you very much for the invitation and keep on doing the great work you do at LSEG and through IFR. I think the publication is really supporting the transition and helping the industry, so thank you very much.
Jane: [00:30:06] So that's it for this episode. I hope you enjoyed that conversation. I found it fascinating. I mean, there's so much to talk about with an organisation like BNP and a wonderful individual like Constance. But until next time, if you've got questions, comments, or someone you'd like us to talk to, then do get in touch by email at fmt@lseg.com. That's all from me, but watch out for the next episode very soon.
