Final
Written evidence submitted by HSBC Holdings plc – (DUE0079)
Introduction
1. HSBC welcomes the opportunity to contribute to this inquiry. Finance has a crucial role to play in tackling climate change – and HSBC aspires to be a leading partner in the transition to a low-carbon / net zero world. We are committed to supporting responsible economic growth and to enabling the low-carbon / net zero transition using sustainable finance. We define sustainable finance as “any form of financial service which integrates environmental, social and governance (ESG) criteria into business or investment decisions”. Sustainable finance covers both the financing and the investment activities needed to support the UN Sustainable Development Goals (SDGs), and in particular action to combat climate change.
2. HSBC understands that a rapidly changing climate represents a potent, unprecedented and irreversible threat to habitats, societies and economies around the globe. We welcome the fact that almost 200 countries have signed the Paris Agreement, committing countries to transition to a lower carbon economy and to limit the global average temperature rise to 2 degrees Celsius above pre-industrial times. HSBC is firmly committed to playing its part in delivering the Paris Agreement. In 2015, as one of the World Economic Forum’s Alliance of Climate Leaders, HSBC’s Group Chief Executive called for strong action on climate change, and in November 2017 we made five sustainable commitments of our own.
HSBC Sustainable Finance Commitments
3. The table below summarises those pledges, and the progress we have made in achieving them.
Commitment1: Providing USD100 billion of financing and investments by 2025 to develop clean energy, lower-carbon technologies, and projects that contribute to the delivery of the Paris Climate agreement and the UN SDGs. This means playing a lead role in the development of financial products for customers advancing renewable energy and low-carbon business activities | Progress: Facilitated USD28.5 billion in sustainable financing and investments (to end of 2018). Read more about the definitions we use to measure our progress in our Data dictionary PDF 82.6KB Continued to innovate and develop new products, including new low-carbon investment funds in our Asset Management business and HSBC Holdings plc’s inaugural corporate SDG bond (see below) |
Commitment 2: Sourcing 100 per cent of our electricity from renewable sources by 2030, with an interim target of 90 per cent by 2025. This means sourcing 100 per cent renewable energy via direct investment or direct purchase agreements that in turn help the financing of new renewable energy projects | Progress: Renewables power purchase agreements signed to cover 29 per cent of our electricity consumption Decreased electricity consumption per full-time employee by 19 per cent since 2011 |
Commitment 3: Reducing our exposure to thermal coal and actively managing the transition path for other high-carbon sectors. This means discontinuing financing new thermal coal mines or new customers dependent on thermal coal mining | Progress: Embedding climate risk in risk policies and processes. This included rolling out a framework to measure transition risks across the six hardest to transition sectors in our loan portfolio We updated our energy policy to align lending guidelines to science based, climate change related targets |
Commitment 4: Adopting the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) report 2017. This will help us identify and disclose climate-related risks and opportunities across our businesses | Progress: Published second TCFD disclosure including lending exposures to six high transition risk sectors. See page 29 of our Annual Report and Accounts 2018 PDF 7MB TCFD is also covered in the 'supporting sustainable growth' section on page 30 of our April 2019 ESG Update PDF 4MB The HSBC UK Pension Scheme has adopted the recommendations of the TCFD as a separate entity. The TCFD report is in the public domain. |
Commitment 5: Lead and shape the debate around sustainable finance and investment | Progress: Published over 40 reports and articles covering key themes including low-carbon transition, climate risk and disclosure, and green financial centres. These are available on our Centre of Sustainable Finance site We actively engage with clients, regulatory and industry bodies, as well as other stakeholders to promote sustainable finance. |
4. In recognition of HSBC’s recent achievements, HSBC was proud to have been awarded by Euromoney on 10 July 2019 the title of World’s Best Bank for Sustainable Finance. Euromoney praised our ‘rapid progress and commitment' to the growth of this still new segment of the financial services industry. In addition, Dealogic numbers show that no other bank was involved in more sustainable financing and green bonds by volume globally in the first half of 2019. The 2019 Extel survey ranked HSBC Research number one in socially responsible investment and sustainability.
HSBC Responses to Treasury Select Committee Questions
Question 1. What economic costs and benefits does decarbonisation present for the UK?
5. HM Treasury has estimated a cost to the UK of achieving net zero emissions of in excess of £1 trillion. HSBC has not undertaken any specific calculations of these costs, but Reports from the Intergovernmental Panel on Climate Change suggest that up-front costs to growth of mitigating the impacts of climate change by limiting warming are more than offset by the savings from avoiding climate change. There is no reason to believe that a similar calculation would not apply to the UK and other developed countries, even though developing countries stand to lose most from physical impacts of extreme levels of global warming. It is important to note that the current trajectory based on the national commitments made by signatories to the Paris Agreement at COP 21 is for 3-4 degrees of warming, the environmental and economic costs of which are likely to be catastrophic.
Question 2. What benefits can a growth of the Green Finance sector deliver for the UK, and does the UK hold a competitive advantage in this space?
6. As a world leader in international financial and professional services, with a strong reputation in innovation, the UK is well-placed to mobilise private green finance. The UK is recognised as at the forefront of sustainable and responsible investment. Estimates[1] of the sums needed to finance the low-carbon transition of around $100 trillion represent a huge opportunity for the financial sector. London (rated as the number one green financial centre for quality by the Z/Yen Global Green Finance Index[2]) should play a major part in facilitating this. But London should not be complacent, since other financial centres are competing strongly for leadership in green and sustainable finance. For example, London was only third for depth of its market for green finance in the Z/Yen Index.
7. There is broad agreement that meeting these costs of transition are way beyond the reach of public finances and that only mobilising private sources of finance at scale and speed can deliver the decarbonisation ambition. The new UK statutory target of net zero emissions by 2050 together with the launch of the Government’s Green Finance Strategy recognise both the UK imperative and the means to deliver. This builds on UK global policy leadership with the well-respected Climate Change Act with its five-year review periods.
8. The UK’s renewable energy resource of offshore wind - predominately funded through the private sector after initial policy support – means the UK is well positioned to lead this aspect of the energy transition and export its expertise on the financing solutions.
9. The new City of London Green Finance Institute, initially backed by public funding, provides the opportunity for the UK to demonstrate thought leadership in other areas, including on data and analytics, and for private and public sector collaboration to grow UK capacity for green finance.
10. The UK official sector also has the opportunity to grow the market for green finance and particularly a sterling-denominated market which the UK lacks. A UK sovereign green bond – preferably index linked – would provide the UK Debt Management Office with an opportunity to engage and educate UK investors (including Pension Scheme Trustees who represent in excess of £1 trillion in assets, often index linked) on the benefits of green bonds and to attract new additional, potentially lower cost, capital into financing new and existing green UK projects. In countries such as France, the launch of a government benchmark green bond has led to a rapid growth in the domestic corporate green bond market.
Question 3. How might HMT deliver a regionally balanced and ‘just’ transition across the UK?
11. The costs and benefits of the transition to a zero carbon economy cannot be expected to flow evenly across the economy or wider society. Mitigating the impacts will mean ensuring these costs are made very transparent and that location, generation and industrial imbalances are dealt with. Any charges imposed on high carbon sectors will need to be reinvested (see answers to QQ4-7 below). Delivering a fair and equitable transition to a low carbon economy across the UK will require an understanding of the opportunities and challenges on a regional basis. Research shows that 1 in 5 UK jobs could be affected in the low carbon transition, with the Midlands, Yorkshire and the Humber the most exposed.
12. HSBC recognises the importance of understanding ‘Just Transition’, and is sponsoring a 12 month research project with the Grantham Research Institute at the London School of Economics. This research, “Banking on a Just Transition”, will identify the role the banking sector can play, particularly how the sector can channel capital to climate action in ways that deliver social inclusion and ‘leave no one behind’. Starting in Yorkshire, the research will seek to understand the regional impact of the transition to a low carbon economy across the UK, providing an understanding of how ‘greening the economy’ can deliver prosperity in a fair and equitable way, and ultimately offer recommendations for policy and market reform. A series of meetings will be held to understand the needs of different cities and regions to realise a just transition, involving roundtables in Belfast, Birmingham, Bristol, Edinburgh, Leeds and Manchester.
13. The Research will look at:
14. HSBC Global Asset Management was one of over 100 investors to sign the “Statement of Investor Commitment to Support a Just Transition on Climate Change” launched at COP 24.
Questions 4 – 7:
4. What is HMT’s current strategy, and approach to, UK decarbonisation, and is it fit for purpose?
5. How does HMT work with the Clean Growth Strategy and government departments to support decarbonisation? Is this working well?
6. How should HMT’s approach evolve to ensure the Government meets the legally binding carbon budgets (and the net-zero targets, if applicable)
7. What role should the 2019 Comprehensive Spending Review play in UK decarbonisation? What projects or measures should receive additional funds through this process?
15. HSBC notes that the UK Green Finance Strategy commits HM Treasury to undertake a review to understand the costs of achieving net zero carbon emissions by 2050 and to understand where these costs will fall across the economy. HSBC welcomes this review and supports a cross-departmental approach by the Government to decarbonisation and delivering on the UK’s new net zero emissions target. This target cannot be delivered only by financial policy, financial regulation, or the activities of the financial sector alone. HM Treasury should therefore lead an assessment of the balance of costs and incentives across the economy to ensure alignment with the Government’s decarbonisation strategy and target and how to bridge finance and the wider economy. Clear Government policy is critical to mobilising sustainable finance. The success of the UK offshore wind industry demonstrates how policy supported the growth of renewables to decarbonise the energy sector. Policy interventions are now needed to support the growth of energy efficiency, hydrogen technology and potentially other areas that can support and drive the transition.
16. HSBC believes that an effective mechanism for pricing carbon – either a carbon tax, or a carbon trading scheme – is an essential tool to help create the right incentives to drive the transition. [As indicated in the answer to Question 3 above, the costs of transition need to be made transparent and any charges on high carbon sectors need to be invested to support a just transition.]
Question 8. What role do UK financial services firms currently play in the decarbonisation of the economy, (for example, through stewardship, capital allocation to green projects, green financial products)? What more can they do?
17. As the leading bank for sustainable finance, HSBC is committed to playing a major part in decarbonising the UK economy. HSBC already plays an important role via educating and engaging with customers and facilitating the allocation of private capital to green finance. This includes incorporating customers’ sustainability / green preferences in our advisory processes. HSBC is looking to provide “best practice” solutions in terms of strategy setting, disclosures and processes.
18. As an asset manager, HSBC’s role includes the following activities which support the decarbonisation of the economy in different ways:
Question 9. What steps have UK banks, asset managers, and pension funds taken to ‘green’ their business models, investments strategies and balance sheets, taking in to account climate and transition risks?
19. HSBC is a strong supporter of improved disclosure, and was one of the first institutions to commit publicly to implementing the recommendations of the Taskforce for Climate-related Financial Disclosure (TCFD) (in line with our commitment 4 above). We started implementation in 2018.
20. We are increasingly incorporating climate-related risk, both physical and transition, into how we manage and oversee risks internally and with our customers. We are working to embed transition risk into day-to-day risk management. HSBC’s TCFD disclosures will continue to evolve and expand over time. We will start to disclose the additional climate risk-related metrics relating to our portfolio for specific sectors as the availability of sufficient, reliable and relevant customer data permits.
21. Work is underway among financial institutions and with prudential supervisors and central banks (working through the Network for Greening the Financial System, in which the Bank of England is playing a prominent role) to create appropriate scenarios to use for analysis and stress testing of the financial sector. HSBC is involved in this work and chairs the UK Climate Financial Risk Forum Working Group on Risk Management (see answer to Q11 below).
22. HSBC has launched its own programme to understand how the risks from climate change will impact HSBC through both physical and transition channels. If crystallised, these could lead to increases in financial losses and Risk Weighted Assets and a deteriorating capital position. HSBC’s understanding of transition risk, in the context of climate change, reflects the possibility that our counterparties’ ability to meet their financial obligations will deteriorate. These risks could arise from stricter environmental policies or regulations, physical risks, changing consumer preferences or new technologies, and could require significant investment to adapt business models or even to exit entire business sectors. Reputational or litigation risks can also be factors. It is important to note however that climate risk doesn’t currently affect pricing since risk weights are calculated on a 12 month basis: this is too short to reflect the impacts of climate change.
23. We have focused initially on the sources of most emissions. In our TCFD reporting, HSBC has begun to disclose our exposures in six high carbon sectors: Oil and Gas, Building Materials & Construction, Chemicals, Automotive, Power & Utilities, and Metals & Mining. These sectors have been chosen based on their contribution to CO2 emissions and therefore on their potential exposure to transition and physical risks. We have asked our frontline Relationship Managers (RMs) to engage directly with clients in these carbon-intensive sectors within our priority “focus” markets. In 2019, we widened the scope to a further four markets that now represent each of the regions in which HSBC has a presence (c.1,000 clients across our Global Banking and Commercial Banking businesses). A bespoke Learning & Development module was developed to give support to our frontline staff to help them to prepare for these discussions and to ensure they are able to offer the best advice to clients to support them through the low-carbon transition.
24. We have taken steps to address climate and transition risks in the investment products we offer to our customers of our Retail Banking and Wealth Management (RBWM) business. We have customer education programmes to promote understanding and awareness of climate and transition risks. We request our product manufacturers to provide transparency about how they integrate climate risk into their investment strategy and provide ESG/climate related reporting for retail customers. In October 2018, HSBC Global Asset Management published a paper on “Low carbon transition scenarios: exploring scenario analysis for equity valuations” and we are active participants in the “Investor Scenario Analysis” Working Group (which is part of the Institutional Investment Group on Climate Change (IIGCC) Investor Practices Programme). Our product offerings include sustainable and climate change investment options to meet customer preferences, including sustainable investment funds, green bonds and structured products linked with ESG indices.
25. HSBC Global Asset Management (GAM) is taking a leading role, including by signing up to the Principles for Responsible Investment when they were launched in 2006. In 2007 GAM developed an integrated research platform, which uses data from multiple external research providers and internally-sourced data to generate both proprietary absolute and relative ESG ratings on 10,000 companies. This research platform is regularly reviewed and for the last 18 months GAM are focusing on low carbon transition scenario analysis to address climate-related risk more specifically. We have had a public climate change policy in place since 2016, which sets out our approach to addressing climate-related risks, including disclosure aligned with the TCFD recommendations.
26. GAM signed the Montreal Carbon Pledge in 2015 and discloses each year the carbon intensity of our investment assets. We integrate ESG and climate data into our analysis before making investment decisions as well as when monitoring and reviewing investment portfolios and report to clients on these metrics on request. Additionally, we have a significant holding of green corporate bonds in our mainstream portfolios which we view as investment opportunities.
27. HSBC UK Pension Scheme (“the Scheme”) is a strong supporter of improved disclosure and was recognised for this in 2018 by the Environmental Audit Committee of the House of Commons. The Scheme is one of only a few pension funds to adopt the TCFD disclosures (in line with our commitment 4 above). In common with other financial institutions, we recognise that having initiated the process of implementation in 2018, additional work will be necessary to identify the metrics and targets needed for full implementation, to accommodate the planned strategic development of the Scheme’s de-risked investment strategy. The Scheme has received widespread recognition for its focus on climate change risk management. The Scheme’s current allocation of £3.8bn of developed market equities is invested in the Legal & General Future World Fund. This fund uses an approach developed by the Trustee, L&G, FTSE and Redington where the constituents of a factor-based index are tilted such that those exposed to fossil fuels are underweighted and those with green revenues over weighted. The Pension Fund Trustee outsources investment management and expects all its investment managers to take account of all ESG risks, including climate risk, in their investment decisions, and analysis of how the managers assess ESG risks forms part of the Trustee’s manager monitoring process. The Trustee is committed to continuing its thought leadership and maintaining its leadership position within the pensions industry to ensure other pension schemes take into account climate and transition risks.
Question 10. Are there any barriers (regulatory or otherwise) preventing financial services firms from delivering green finance or investing in ‘green’ assets?
24. A number of barriers to the growth of green finance remain. For example, there is a general perception from investors that there are not yet enough investment grade green assets, despite a significant market for green bonds, renewable energy assets etc. By way of example, most green bond issues are heavily oversubscribed, although UK corporate supply is still small. There may also be perception barriers – for example pension funds not requesting the inclusion of green bonds even though their mandates will permit this. To overcome these barriers will require education and awareness-raising across the industry, supported by strong, clear policy from government.
25. Before we can recommend any investment products for our Retail Banking and Wealth Management (RBWM) customers, HSBC needs to consider customers’ circumstances and investment goals. The industry is still at an early stage, and, as indicated above, the related investment solutions are relatively limited. Given the set of opportunities available, we might not be able to find a green/ESG investment solution that meets customers’ circumstances and financial goals. In this case, we do not consider that a client’s ESG preferences should prevent non-ESG products from being treated as suitable if they otherwise meet the clients’ financial objectives and needs.
26. More work on the investment opportunities provided by green bonds and renewable energy assets in addition to the current work on climate related risks by regulators could include best practice guidance on reporting on green asset allocation and including funding research projects that analyse historic ‘green’ market returns. HSBC Global Asset Management is playing a role in increasing the offering across asset classes.
27. Improved carbon reporting by entities beyond listed companies would assist the greening of asset classes such as credit and private equity.
28. By advancing the TCFD work on disclosure, the gap between demand and supply should begin to close as better information helps the allocation of finance towards green assets. Work on taxonomies – for example by the European Commission Technical Expert Group – should help the market to define more clearly what assets are green and sustainable. While good in theory, our concerns about the EU Taxonomy are that it may end up being too narrow in scope.
29. Other barriers may result from uncertainty or sudden shifts in policy or regulation. As the science associated with climate change develops along with our understanding of its impacts, further measures may be necessary to correct market failures or to speed up the transition – for example to accelerate the electrification of transport. Regulation of air quality in cities can provide an important stimulus.
30. Beyond sectoral policies and regulation, there is a debate, particularly in the European Union, about whether financial regulation can or should be used to incentivise banks to increase funding to the low carbon economy. The European Banking Authority has been tasked with reviewing this by the European Commission, and HSBC awaits the outcome of this review with interest.
Question 11. What prudential risks does climate change pose?
31. Prudential risks from climate change arise from several sources. The prudential risks for financial institutions translate primarily to credit, operational and market risks. Credit risk crystallises if the client defaults in the repayment of their financial obligations and the bank suffers a financial loss because of it.
32. Climate-related risk, both physical and transition, are being increasingly incorporated into how we manage and oversee risks internally and with our customers. Transition risk is the possibility that a customer’s ability to meet his or her financial obligations will deteriorate owing to the shift from a high carbon to a low carbon economy (for example, if a client’s business model and revenue are dependent on fossil fuels). Climate change can create operational risks through the economic disruption caused by flooding or a severe weather event that prevents the normal functioning of the institution’s processes. This is a physical risk posed by climate change. Climate-related market risks can arise when there is financial loss from negative changes in market prices of positions held by institutions. For example, if the issuer of a bond is downgraded owing to a new climate risk-related restriction that affects its financial performance.
33. These prudential risks facing banks in the UK have been analysed by the Bank of England in its report “Transition in thinking: The impact of climate change on the UK banking sector” (published in September 2018).
Question 12. What is the Financial Conduct Authority and the Prudential Regulation Authority doing to support decarbonisation and a ‘greening’ of the financial system?
34. HSBC welcomes the leading role both the FCA and PRA are playing in engaging with industry and developing expertise on the financial risks resulting from climate change. As indicated above, the PRA and FCA have set up a Climate Financial Risk Forum to support the integration of climate-related factors into financial decision making. HSBC is one of the industry members of this Forum and chairs its Working Group on Risk Management.
35. Transparency is important, particularly in a fast moving space in which there is little uniformity as to how ESG or climate change risks are adopted in investment decisions. Distributors rely on product manufacturers’ disclosures in the due diligence and advisory process on investment products. Regulators can help to provide clarity on definitions and guidance on what good disclosure looks like, taking consideration of the wider industry landscape and the roles of different market players, from product manufacturing, to advisors and institutional investors. A principles-based approach may be preferable, given that the area is rapidly evolving. The focus should be expanded beyond the existing green / sustainable investment market to the broader financial system. We welcome the work by the British Standards Institute with the involvement of BEIS to develop a set of Sustainable Finance Standards as set out the Green Finance Strategy. HSBC is supporting this work and is represented on the Strategic Advisory Group.
36. HSBC welcomes the decision of the PRA to set out its expectations on managing the financial risks from climate change in its supervisory statement “Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change” (see question 12 b) below). The PRA expects financial institutions to have an initial plan in place to address the four areas set out below and to allocate the responsibility for managing the financial risks arising from climate change to a senior management function holder by 15 October 2019.
Question 12 b). What expectations do (and should) they place on regulated firms about their role in the transition through their policy and supervisory activities?
37. HSBC has summarised the PRA’s key expectations below, together with our observations.
38. Given the inherent uncertainties of climate change impacts, prudential assessments should capture mid to long-term financial risks only in qualitative terms. These assessments should focus on the extent to which firms are embedding climate change in their strategic approach and are progressing risk management, governance and disclosure initiatives. At this stage, any additional regulatory capitalisation would be premature and may lead to unintended macro-economic consequences e.g. disincentivising lending to customers that need finance to transition to lower-carbon operating models.
39. The translation of potential climate-related impacts into corresponding future prudential impacts will require regulators, firms, corporates, researchers and other stakeholders to collaborate and coordinate extensively, both domestically and internationally.
Question 13. What is the consumer demand for ‘green’ financial products?
40. HSBC has not undertaken a dedicated customer survey to quantify retail customer demand on green financial or investment products. But we have observed increased customer awareness and demand through advisors’ feedback. There is growing interest in green loans in the Commercial Real Estate sector. In UK RBWM, the recently launched sustainable multi-asset investment funds with HSBC Global Asset Management represent approx. 10-20% of mutual fund advisory inflow. Information about total market size, product launches and flows of sustainable managed assets can be found in a recent GSIA[3] report.
41. HSBC Global Asset Management has seen gross flows of c5-10% of all our new advised flows going into our sustainable investment funds. For the six months since we made the sustainable multi-asset funds available, this has equated to a total in excess of £30 million. We expect this to increase significantly over the next 18 months as we continue to roll out the offering into our other product wrappers.
42. Demand from clients for sustainable investment products is growing. Now that there are solutions for those investors that want to invest sustainably and client relationship managers are increasingly more aware and knowledgeable about the concept of sustainable investing we are able to support more clients and offer more solutions and deliver a stronger client experience.
43. HSBC does not however have robust evidence that a green loan product (such as a mortgage or term loan) would provide enough motivation for a client to change his or her behaviour (for example to invest in energy upgrades). Loan margins are relatively slim, so the opportunity for discounting is limited and qualifying green assets (such as highly efficient homes, solar panels, electric vehicles) are often relatively expensive. This limits the population of people who will be able to afford these options.
Question 14. Are there a range of accessible options available to consumers seeking to source ‘green’ financial products across the product suite (for example, mortgages, bonds, investment products, savings accounts, loans)? Do certain instruments dominate the green finance landscape, and if so, why?
44. There is a growing range of green financial products. For Retail Banking and Wealth Management (RBWM) customers, we have provided the following for customers who prefer green or ESG investment products:
Climate change or sustainable investment funds;
Green bonds; and
Structured Products with an ESG index as the underlying.
45. Since the industry is still at an early stage, the related investment solutions are relatively limited. So far, we see there is higher customer take up on retail investment funds given a number of factors such as lower minimum investment requirement, range of available products, liquidity and ease of access.
46. HSBC UK does not offer green mortgages or retail green loans. We have offered green mortgages in other jurisdictions with limited success. So far we see limited consumer appetite – especially at low interest rates of around 1.5% - when any additional incentive would not be meaningful. But our existing loans and mortgages, which offer very competitive rates, can be used by consumers to buy energy efficient homes, home improvements, and low or zero emission cars. Nor do we offer at present secured personal loans, which limits our ability to have an assurance that the loan proceeds would be used to buy, and be secured by, an energy efficient asset.
47. In some of our markets, such as Bermuda and Malta, HSBC has green loan programmes for retail customers that are commercially sustainable and have been in place for some time. These programmes were formed because there were government tax rebate schemes in place for solar panel purchases which helped consumers to afford the capital outlay to make the purchase.
48. In November 2018 HSBC UK launched green loans compliant with the Loan Market Association’s Green Loan Principles (GLP), initially to large corporate customers with a minimum loan of £25m. HSBC UK expanded its suite of green products in July 2019 during London Climate Action Week making GLP-compliant loans available for small to medium-sized enterprises (SMEs). Our suite of products now includes green loans, a UK industry-first green revolving credit facility (RCF) and a green hire purchase, lease and asset loan.
Question 15. Do accompanying documents for ‘green’ instruments (bonds, funds, etc.) articulate why and how the composite holdings within that instrument are ‘green’? Are obligations placed upon listed companies, to report their carbon emissions, to inform fund composition?
49. We do not find a consistent reporting approach across different financial products for retail investors. For investment funds, we continue to see increasing transparency, especially for funds that target ESG or climate change, but there is no standardisation on measurements, data source, investment approach/exclusions or thresholds. The most common parameters would be portfolio-level carbon intensity and ESG scores versus mainstream benchmark, and portfolio exposure to certain investment themes. It is also worth noting that many climate change/ESG funds still do not provide related reporting to retail investors. The work of the British Standards Institute (see para 35 above) is designed to improve this situation.
50. We provide both marketing material and fund fact sheets to our clients and advisors laying out in detail our approach to delivering on this proposition. We continue to develop them as we learn more about what interests our customers.
51. As indicated above, we are strong advocates of climate-related disclosure, publicly supporting the CDP climate disclosure initiative and the TCFD recommendations. We use these disclosures within our investment analysis and decision-making processes, and they are central inputs to a growing number of our investment products. We note that mandatory reporting, for example through regulation or listing requirements, has a pronounced impact on the quantity and increasingly on the quality of issuers’ disclosures.
52. We support the ICMA Green Bond Principles and note with approval the recent EU Technical Expert Group Report on the EU Green Bond Standard. Transparency and consistency are important for the credibility, and therefore market growth, of these instruments.
53. HSBC Global Asset Management has defined its own Green Impact Investment Framework, specifying eligible activities and issuer level sustainability requirements for green bond impact products.
54. HSBC has set up an independent committee with an external director to approve any products we offer which carry a title of “sustainable”.
Question 16. Does the current advice and KYC process effectively facilitate a consideration of sustainability preferences?
55. HSBC RBWM has incorporated questions on ethical or sustainability preference in the fact finding process used with customers. As indicated above, we do not consider that a client’s ESG preferences should prevent non-ESG products from being treated as suitable if they otherwise meet the clients’ financial objectives and needs. Advisors will recommend sustainable investment products provided that the customer risk appetite and investment goals also fit.
56. We support collecting information on clients’ ESG/green preferences in a systematic approach such as during fact finding or KYC processes. Suitability of advice requirements however should also consider customers’ financial goals and circumstances, given the limited range of appropriate products currently.
57. We believe sustainability/green preference should be assessed as a whole: the more narrowly defined the ESG/green assessment is, the more restrictive the investment options available. This could compromise advisors’ abilities to give prudent recommendations. A customer’s preference for ESG is included in our sales procedures, and triggers a more in depth discussion of the options available. As indicated above, we do not consider that a client’s ESG preferences should prevent non-ESG products from being treated as suitable if they otherwise meet the clients’ financial objectives and needs.
INTERNAL - 1
[1] OECD, IEA, Investing in Climate, Investment in Growth, July 2017.
[2] March 2019.
[3] http://www.gsi-alliance.org/wp-content/uploads/2019/03/GSIR_Review2018.3.28.pdf