A new label for ESG structured products

Structured products offer flexible investment solutions and enable investors to gain exposure to sustainable assets, often through benchmark indices focused on environmental, social and governance issues. Accordingly, there is a strong sense that ESG promises should be underpinned by a more secure framework. While the SFDR provides this kind of framework for structured products marketed as UCITS, it does not apply to products issued as euro medium-term notes.

The Paris financial community therefore came up with the idea of creating a label for ESG structured products that could be used to identify them easily, while also providing a quality guarantee. The French Structured Products Association (AFPD), the FBF and AMAFI presented members with draft specifications, which are being finalised for presentation to the AMF in the near future. An initial step, before creating the label itself, might be to draw up an industry charter that could provide an interim frame of reference and help participants to get accustomed to the requirements of the future label.

FBF-AMAFI Charter on synthetic hedging of ESG funds

The FBF and AMAFI have published a joint charter on the synthetic hedging of ESG funds. Compliance with the charter will allow funds to communicate centrally on non-financial features, subject to certain requirements.

In December 2020, the AMF published Position-Recommendation 2020-03 to restrict “synthetic” funds from communicating about compliance with nonfinancial ESG criteria. These funds replicate the performances of an index or basket of assets through total return swaps (TRS), but do not invest directly in them, since the investments are conducted by the TRS counterparty banks. At the same time, the AMF asked the financial community to prepare a robust framework for funds’ use of such derivatives for ESG exposure purposes.

AMAFI and the FBF responded by drawing up a charter intended to ensure that synthetic hedges are aligned with funds’ ESG objectives. In addition to setting out the commitments that must be met by synthetic hedging instruments used by funds in this area, the charter seeks to ensure consistency between the ESG promises made to investors and the assets acquired by counterparties for hedging purposes.

The AMF has accordingly updated Position-Recommendation 2020-03 on the required disclosures by collective investments incorporating non-financial approaches, by authorising “synthetic” funds to communicate centrally on the recognition of ESG criteria, provided, among other things, that the derivatives used comply with the provisions of the FBF-AMAFI charter.