SG and ESG: Research, Structuring, Indices and Issuance

Holistic, quantitative and qualitative E, S and G analysis

Hamlin Lovell
Originally published in the June | July 2019 issue

Open architecture ESG research 

“SG’s sustainability research has been highly ranked in the Extel survey for the past decade,” says Isabelle Millat, Head of Sustainable Investment Solutions at Société Générale Corporate and Investment Banking – SGCIB. For instance, in the June 2018 survey, SG received 11.7% of commissions paid by key fund managers in the SRI & Sustainability category, and Yannick Ouaknine, Director, Head of Sustainability Research at SGCIB, was ranked in the top five commission “rainmakers” in the Integrated Climate Change, SRI Research and Corporate Governance categories.

SG picks and chooses ESG raw data and research providers and partners according to the needs. SG has worked with Sustainalytics on a regular basis since 2010, and others – such as ISS-Oekom, Vigeo Eiris, Trucost – for specific projects and reports, such as carbon data, or singling out the percentage of ”green” and “brown” revenues. “We used different providers for various differentiating angles,” says Ouaknine.


In the June 2018 Extel survey, SG received 11.7% of commissions paid by key fund managers in the SRI & Sustainability category.

All these providers are striving to improve their data quality and coverage. For instance, Ouaknine explains that, “the Sustainalytics process has evolved in terms of data collection, and engagement. SG universe of coverage started with mainly European companies and has steadily expanded to US and emerging markets stocks. As corporate disclosure improves, the universe should continue to increase, to cover more mid-caps, small-caps and so on. And regulations are encouraging transparency, consistency and harmonization in corporate disclosure”.

But the growing volume of raw data needs to be marshalled and manipulated in the right way to generate SG’s style of research. Ouaknine reckons, “a lot of the value added in our process can be attributed to qualitatively prioritising and weighting the key performance indicators (KPIs) for each sector. Whereas ESG ratings agencies tend to provide between 250 and 800 metrics per industry, we have distilled the analysis down to 17 salient KPIs for each sector (on average). This is important partly because not all fields in the agency reports are populated, and many of the reporting line items are duplicative. The weighting of E, S and G factors varies by sector. We prioritise those ESG factors that are material or relevant for the financial performance of specific industries. For instance, governance and ethics is more connected to banks while airlines need to focus on emissions.”

Issuance; green bonds; positive impacts bonds, and ESG issuers

SG has deep roots in ESG. Long before the French government’s groundbreaking 2015 Article 173 of the Energy Transition law, requiring many asset owners and asset managers to report climate risks, in 2001 SG became the first listed French bank to sign the UN Environment Programme (UNEP) Statement by Financial Institutions on the Environment and Sustainable Development. In 2003, it went on to sign the UN Global Compact, committing to ten general principles.

The bank has committed EUR 100 billion in contribution to the energy transition from 2016 to 2020, of which EUR 85 billion is committed to lead management or co-lead management of green bonds, and EUR 15 billion to advisory and financing of renewable energies; 78% is already achieved. 

SG has been financing renewable energy projects for more than twelve years and has issued four Positive Impact bonds; the first two in 2015 and 2016, then two more in 2018: one for ALD, its auto leasing subsidiary, and another Taiwan dollar-denominated bond in Asia.

“Positive impact bonds go beyond green bonds to address the UN SDGs, which aim to meet milestones by 2030. The land- and climate-oriented SDGs are usually seen as ‘green’ while water-oriented issues are now dubbed ‘blue’, and there are also social goals around good health, gender equality and quality education. Positive impact financings must deliver a positive contribution to one or more of the three pillars of sustainable development (economic, environmental and social), since any potential negative impacts to any of the pillars have been duly identified and mitigated,” says Millat. 

“Currently, there is not yet any significant difference in yields between a green bond and a conventional bond from the same issuer on a given maturity; however, with demand largely exceeding supply, we see more and more often green bonds being issued with a lower new issue premium”. 

There is a demand for green or social bonds with higher yields, and Millat expects this could eventually be met by more bonds from emerging markets. Different standards still exist for green bonds. China is the largest issuer of green bonds in emerging markets, but the green bond catalogue which defines eligible projects to be funded on the domestic market includes a “clean coal” category for certain thermal coal-fired power plants, which is off limits by international standards.

Green and social bonds for now make up less than 1% of global credit markets, and are mainly a “buy and hold” market as there is not much of a secondary market. An alternative approach to ESG in fixed income portfolios is to invest in bonds of issuers with high ESG ratings, even though the bonds do not earmark proceeds specifically or exclusively for green or social projects. SG’s work in ranking and rating companies on ESG can help to identify such issuers. Credit ratings agencies are also raising their game in terms of assessing how environmental and social risk affect default risk, which should expand market size. 

Indeed, SG’s ESG analysis extends well beyond those bonds labelled as green or impact, and is considered for all issuances. 

In 2017, SG added to its range positive impact structured notes: they enable clients to invest in a custom investment solution whilst also supporting positive impact financings originated by the Bank. With these solutions, alongside its issuance of positive impact bonds, SG has “skin in the game”. The buyers of positive impact notes range from mass retail investors to institutional clients, including universities, foundations, and pension funds.

Performance studies

The evidence on the outperformance of ESG investing has brought mainstream investors into the fold. A meta-level study (ESG and financial performance: aggregated evidence from more than 2000 empirical studies, by Friede, Busch and Bassen, 2015) looking at 2,000 other studies, found non-negative correlations between ESG strategies – including ethical investing ones – and performance in 90% of cases, and positive correlations in 63% of cases.

“We have already made a big part of the journey, so it is not about convincing people anymore,” says Ouaknine. “Since 2012, the best in class (top decile of the universe) recommendations from our live rating system, based only on ESG criteria, beat the STOXX 600 by 27.7%. There is now a big appetite to integrate ESG more systematically by product and asset class.” For instance, SG’s proprietary Materiality Matrix integrates financial ratings with ESG ratings, and has found that the financial scores are more volatile.

SG’s oldest ESG system – its “CEO Value” stock screening tool – has also generated impressive outperformance. Whereas many discretionary managers looking at turnaround and recovery situations will focus on companies with bad governance that can be improved through activism and engagement, the SG system focuses on companies with sound corporate governance standards and a solid financial structure (defined on quantitative and qualitative criteria); a CEO who has been in the role at least three years; and which have seen their share prices underperform by at least 15% (vs. sector performance) over four years. The CEO Value index is updated twice a year after an independent paper is published. The model generated outperformance of 68.8% between April 2006 and 15 May, 2016. “This was mainly based on the corporate governance factor, because companies were not reporting many E or S factors when it was created in April 2006,” he adds. “It can be implemented as a long/short product, using indices on the short side,” Millat amplifies.

We have already made a big part of the journey, so it is not about convincing people anymore.

Yannick Ouaknine, Director, Head of Sustainability Research, SGCIB

“ESG Improvers,” which show positive momentum in ESG scores, may work better than a simple “best in class” rating system, according to research including a March 2019 paper entitled “ESG Rating and Momentum” that Ouaknine authored with Nimit Agarwal, reprinted by the Harvard Law School Forum on Corporate Governance and Financial Regulation. ESG momentum in this context has been a leading indicator for positive price momentum in the context of traditional factor analysis. Between March 2013 and January 15, 2019, the top 30% ESG-rated companies outperformed the STOXX 600 by 9%, while those improving their ESG ratings by at least 10% year on year, outperformed by 23.5%.

Millat realises that the ESG equity universe has recently had some overlap with traditional risk factors such as quality and low volatility and suggests “this is partly because larger companies provide more extensive ESG reporting and obtain better scores. Our research has not reached a conclusion on the correlation between ESG and the other factors”.

Part of the outperformance of ESG stocks may have come from earnings multiple expansion. Some recent research from BAML has suggested that the top quintile of stocks according to MSCI ESG ratings, stood at a discount to the overall equity market five years ago but now trade at a 30% valuation premium to market.

Subjectivity and geographic variations

There is a high degree of overlap between SG ESG ratings, and ESG funds’ stock holdings, but a SG research paper entitled “How contrarian are our ESG ratings?” identifies certain underlaps: some of SG’s higher rated, e.g. tier 1, stocks are less widely held, and some of their lower rated, e.g. tier 3, stocks are more widely held. Ouaknine explains, “There are a lot of different ESG rating approaches on the market, and on top of those fund managers apply financial criteria and portfolio constraints to build a portfolio. Feedback on the underlaps from portfolio managers has identified that they sometimes agree with SG’s rating after reviewing changed or improved corporate practices. In other cases, they do not fully understand the filter or methodology applied. And in others, the portfolio managers may personally agree, but just find it complicated to justify holding the stock in the context of their internal process, particularly if they are unwilling to provide detailed explanations. Differences of opinion and some data errors could also explain some underlaps.”

Companies’ ESG reporting methods and formats are becoming more consistent but big differences remain between regions, due to cultural and legal factors. For instance, “in the US, minority and diversity reporting has been important, but in France it is not even legal to report this,” says Ouaknine.


Between March 2013 and January 2019, the top 30% ESG-rated companies outperformed the STOXX 600 by 9%.

European companies have been leaders in ESG reporting, and Ouaknine ascribes this to onerous regulation on the depth and quality and reporting, rather than companies’ desire to be proactive and transparent. “Though European firms, on average, provide more extensive ESG reporting, there are good examples everywhere – in the US and Asia – depending on the topic and company. The more international your shareholder base is, the more pressure you feel as a corporate,” he observes.

European pension funds have been early movers on ESG and so, too, have pension funds in other regions such as Japan’s GPIF. Ouaknine has clients in Asia, where the interest is now moving to Asian private banks, as the next generation of more ESG-aware millennials and women inherit trillions of dollars of assets.


Subjectivity is one reason for customisation. SG has used its expertise in financial engineering and indexing to create investible ESG indices, including a new one containing a dynamic basket of 30 companies that contribute to the SDGs – and can construct customised indices for clients, using innovative ESG data. “SG’s ESG teams in global markets activities include both financial engineers and ESG experts, to assess and optimize any investment solution. This combined expertise is winning new business,” says Millat. 

ESG index solutions leverage on a 10+- year index platform, which administers a universe of 1,500 indices, over half of which are bespoke; ESG index clients can benefit from these customisation capabilities, in specifying their preferred filters and ESG data provider to design their own indices. 

As an example, Millat tells how, “for smart beta clients, we designed a range of indices that first implements an equity factor-based filter, and secondly adds an innovative “consensus” ESG filter as an overlay. Over 40 ESG equity indices exist, and a long/short or market neutral strategy can be created by going long the index – or perhaps a subset of stocks with the highest ESG ratings – and short the benchmark”. 

The performance of an ESG index can be delivered through many different investment solutions: the product design and structuring can be customised using various wrappers – funds, swaps, certificates and notes, some of which may involve an element of capital protection. 

SG’s affiliate, Lyxor Asset Management, also has a number of ESG oriented products, including a green bond ETF. 

Future developments: credit and more qualitative analysis

“The approach could be extended to credit investing, and disclosure is getting better, not least since Moodys has bought Vigeo Eiris, and S&P has bought Trucost,” says Ouaknine.

There is a limit to pure quantitative analysis however. All sorts of alpha may be prone to suffering from decay or degradation, and ESG may be no exception. “The next frontier for our ESG research will include more qualitative assessment of corporate culture, which is harder to systematically evaluate. It could also include engagement. We are adding qualitative analysis to flag up tomorrow’s big issues, which may not currently be reported by Sustainalytics. We identify issues from several sources: meeting with companies, clients, industry experts, and scanning Reuters and Bloomberg,” he reveals. 

EU sustainable finance regulation: mainly climate-centric

“The European Commission has determined that policies will be decided on all ten items of their groundbreaking action plan for financing sustainable growth by the end of 2020. This momentum is very positive but also highly ambitious in terms of timetable,” says Millat. We highlight anticipated outcomes for three of the items. 

The implementation guidelines are not yet finalised, but early indications show that regulations on labelled sustainable benchmarks will only be relevant to a small subset of the benchmarks with an ‘E’ (within ESG) purpose (i.e. limited to climate issues). In addition, selection and weighting criteria are also quite strict and restrictive compared to the level of granularity of available data on firms’ impacts on and approach to climate change. Therefore, we anticipate that only a very small niche of current ESG investment solutions referring to a sustainable benchmark will be impacted by the new regulation on labelled sustainable benchmarks.

“Initial discussions about an ESG benchmark, moved onto a low carbon benchmark, and were then reduced to a climate transition benchmark,” she continues. “As such the proposals tackle a very, very limited scope for benchmarks.” 

Millat agrees that there is a need for a taxonomy for sustainable activities starting with environmental aspects and a label for investment funds marketed as sustainable, because confusion about labelling has hindered adoption: “standardisation and transparency are needed to develop the market”. Even so, “while some clients like labels, others prefer customised solutions, and we are not sure how labelling can be reconciled with customisation”. 

It is expected that the future EU’s eco label will focus on the environmental sustainability of activities of underlying firms with minimum social safeguards. By contrast, she says, “for customised ESG investment solutions, customers are rather expecting that we pay equal attention to the three E, S and G dimensions. Clients need insights on all three aspects before investing in that type of solutions. Finally, within E, clients are also interested in firms’ practices/behaviours/policies/engagements that have a positive impact on the environment beyond the sustainability level of the firms’ activities”.

The MiFID II suitability test – which will incorporate clients’ ESG preferences while also considering clients’ financial preferences, situation, risk tolerance and knowledge and experience – may turn out to be broader in scope than the investment solutions for which underlying are completely aligned with the taxonomy on environmentally sustainable activities, the Eco labelled funds or labelled sustainable benchmarks. “The early indications are that it covers all three ESG headings; will be more principles based and less prescriptive; and apply broadly to advisory activity”, she asserts. However, “one question to resolve is how the ESG and financial criteria will be balanced”.