19 minute read
Pretty Green
Gareth Thomas Head of Global Banking, MENAT, HSBC provides MEA Finance with insights into the appetite for sustainable related financial products in the region, detailing some of the findings of their just published Global Sustainable Financing and Investing survey and how they are integrating ESG principles into their services and day to day operations
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Sustainable finance and investment in the Middle East, North Africa and Turkey (MENAT) continues to grow and develop, influenced by an ever-changing combination of forces that are driving change among issuers and investors.
HSBC globally is committed to aligning the financed emissions from our portfolio of customers to net zero by 2050 or sooner, in line with the Paris Agreement goals. To help get there, the HSBC Group has set a target to provide between US$750 billion and US$1 trillion of finance and investment, worldwide by 2030, towards the transition.
We have been expanding our suite of green products for all client segments, from corporates and institutions through to entrepreneurs and individuals. That approach has brought a number of “firsts” to the region this year.
In the UAE, where this year HSBC marks its 75th anniversary of doing business here and the nation is celebrating its own Golden Jubilee, we’ve committed to “thinking big” across every aspect of our operations, so we’ve issued the nation’s first Green mortgages and launched the first Green deposits to give corporate and institutional clients a mechanism to make deposits in the UAE knowing their funds will be used to finance green initiatives.
We’ve innovated elsewhere too – HSBC Saudi Arabia is now offering the first environmental initiative investment fund in the Kingdom, known as the HSBC Global Equity Climate Change Fund, offering eligible investors exposure to renewable energy, clean transport, sustainable water management and climate change adaptation. This provides direct access to investments that help reduce the impact of climate change and supports the sustainability objectives under the Saudi Vision 2030 programme.
Our latest Global Sustainable Financing and Investing survey, published in September, shows that the valuesbased belief that it is right to care about environmental and social issues is driving the behavior of issuers and investors.
Our survey is conducted annually and gathers opinions from more than 2,000 capital market issuers and institutional investors, asset allocators and asset owners, covering 19 industry sectors and this year it shows this trend very clearly, with 42% of respondents saying they have a firming in their belief that it is right to care about the world and society, and the same proportion saying increasing regulatory demands require them to pay greater attention to these issues.
MENAT is the only region, according to our global survey results, where these two forces are given as the top two drivers of behaviour. It clearly shows the rising importance of ESG issues in this region and their influence it is having on both investors and issuers.
We know the appetite is strong for economies across the region achieve their climate targets – we saw a six-fold increase in 2020 versus 2019 in sustainable and transition finance activity in the region – which is why in January 2021, we formed a dedicated Sustainable and Transition Finance Team for the Middle East.
The Team has deep technical knowledge of the Environmental, Social and Governance (ESG) opportunities and challenges facing our customers, as well as the evolving regulatory space and its impacts. The team works with all of HSBC’s bankers to provide advice, expertise and financing solutions to customers across all sectors and segments – no matter what stage of the sustainability journey they are on.
Responsible or environmental, social and governance-focused investing has been developing in MENAT during the past few years, as our annual surveys have shown.
Gareth Thomas Head of Global Banking, Middle East, North Africa & Turkey at HSBC
The responses to our survey, however, highlight some key challenges to ESG investing’s growth and development.
Positively, about a fifth of investors in the region say they have a firm-wide policy on responsible investing or ESG issues and 36% say they do not but do intend developing one.
Investors in the region are, however, experiencing some challenges. Some 61% of investors – a global high although this percentage has fallen consecutively in the past three years – say certain issues are holding them back from pursuing ESG investing more fully and broadly.
Top among those issues this year is a shortage of expertise and qualified staff – 44% of investors say this is a problem for them (the highest percentage regionally) up from 26% last year. Asian investors similarly say this is a problem, but it is less of an issue for their European and Americas peers.
Other challenges include regulatory or legal constraints (28% - down from 36% last year), poor quality or availability of ESG data (28% - flat to last year), lack of demand among clients (27% - down from 44%), and a lack of comparability of ESG data across issuers (27% - down from 55%).
We are committed to the transition to a global net zero economy, not just by playing our part, but by helping to lead it. We’re doing this across the bank – in our operations and supply chain – and by supporting our customers in their own transitions.
Since 1 January 2020, cumulatively we have provided and facilitated US$87 billion of sustainable finance and investments. In the first half of 2021, we helped raise more Green, Social, Sustainability and Sustainability-linked (GSSS) bonds for clients than we did in the whole of 2020. Those funds pay for green projects and new technology and initiatives that open up new opportunities and avenues to net zero.
We’re increasing our portfolio of transition finance solutions to help enable even the most heavy-emitting sectors to progressively decarbonise, while helping to ensure a just and stable transition to maintain economic stability.
And we apply a climate lens to our financing decisions, taking into account the unique conditions for our clients across developed and developing economies.
Please describe your own ESG initiatives?
We are transforming our own operations and supply chain to net zero across HSBC by 2030, and asking our suppliers to do the same. We’re on the right path – from
installing solar panels in our car park in Oman to reducing our energy, paper and water consumption worldwide, in the past decade we’ve cut our operational emissions by almost half.
We’ve joined up with World Resources Institute (WRI) and WWF to form a fiveyear philanthropic partnership to help climate solutions become commercial reality and have real-world impact.
The Climate Solutions Partnership is powered by US$100 million of philanthropic funding from HSBC and, with a network of local partners, aims to scale up climate innovation ventures, nature-based solutions and help to transition the energy sector towards renewables, by combining our resources, knowledge and insight.
In the UAE, the focus is on the management and restoration of coastal ecosystems, including mangroves, to mitigate climate change and drive socioeconomic benefits such as eco-tourism and food security.
We’re also leveraging our network throughout the Middle East to identify start-up firms in the region that are developing carbon-cutting technologies as part of the climate innovation workstream within the bank’s global Climate Solutions Partnership.
At our 2021 Annual General Meeting, a special resolution on climate change – proposed by the HSBC Board – was backed by shareholders and provides further detail on our approach to the net zero transition, and how we will achieve our climate ambition.
We’re also working with peers and industry bodies to mobilise the financial system to take action on climate change, by collaborating to develop globally relevant common standards to gauge progress.
We maintain high standards of governance and meet our responsibilities to society. And we monitor and regularly publish updates on our ESG performance. They set out how we support our different stakeholder groups and do business in a responsible way.
Transparent reporting is essential to building stakeholder confidence and creating value for all our stakeholders. Our ESG review – together with other publications – accords with our reporting obligations under terms of the UN Global Compact and renews our commitment to the Compact’s principles.
Setting the Standard
Dr. Owen Young is the Regional Head of Wealth Management, Europe, Middle East and Africa for Standard Chartered Bank and here he provides MEA Finance with an overview of the current regional market movement towards more sustainable and ESG sensitive investing, detailing the rigour applied to the requirements to meet their Green and Sustainable Product and their ESG Select Framework’s, and how recent circumstances have brought it to wider attention
Up until the fairly recent the past, we have seen the appetite for Sustainable Investing come largely from the Private Banking client segment. However, in recent years the demographics in the region have changed and shifted thus having the effect of increasing the demand for more sustainable investing opportunities. With more younger generations and a significant portion of the female population now becoming directly involved in investing and decision making, the emerging affluent and established affluent segments have started to show greater interest in terms of sustainable investing activities. These new breeds of clients are looking beyond just the generating of an income or the growth of wealth, they are also interested in how, at the same time, to make a positive impact on global issues, and therefore we are seeing a growing demand for ESG solutions becoming a critical factor in nearly every one of their investment decisions.
We define sustainable investing as investing in solutions that not only give financial returns but also generate clear social and environmental benefits. As customers have now become more curious about and knowledgeable of sustainable investing, we have also seen a corresponding increase in the appetite for this proposition. As a result, our wealth management teams across the AMEE (Asia, Middle East and Europe) region have been concentrating on working with our product partners to enable the development of more solutions that allow our clients to invest in products that are positively contributing towards ESG values and outcomes. Alongside
continuous growth and expansion of our sustainable investment universe is a robust ESG fund selection process, to ensure that all ESG products offered to our customers are properly rated and aligned to Standard Chartereds’ Green and Sustainable Product Framework.
Due diligence is an important part of the decision-making process. Given that the sustainable investing space is at its nascent stages in most parts of the world, and asset managers have different and varied approaches in developing ESG products, we have established our own in-house criteria, the ESG Select Framework for the selection of ESG products to better curate ESG Solutions. At Standard Chartered, we apply both “hard exclusions” (for example, we do not invest in any businesses that may be at all involved in controversial activities
such as thermal coal mining and the like, or companies with controversial and questionable behaviours, or involved in controversial or unethical issues, such as child or forced labour), and a revenue thresholds approach depending on the activity. For example, when looking at certain industries, we make a distinction between production and distribution and apply a “hard exclusion” to the former and have a threshold approach for the latter. We have set our thresholds in line with our values and industry best practice. In addition, there are major categories that we evaluate to determine whether the asset manager and product are meaningfully embedding ESG into their processes. These categories include corporate profile, ESG expertise, ESG strategy, ESG integration, and impact and measurement.
Please describe your own ESG initiatives?
Our vision is to be the world’s most sustainable and responsible bank and enhancing our Wealth Management proposition with sustainable offerings will become one of the key contributors to achieving this important goal.
Aside from curating and expanding our sustainable investment solutions, we are also continuously educating and training our wealth advisors internally while also boosting customer interest, knowledge, and demand.
While across the bank we are launching numerous initiatives towards meeting this agenda, we believe that there are still so many opportunities to drive this even further still. Standard Chartered has lined up various campaign initiatives and client engagement sessions, in partnership with different product partners and organisations which share the same belief, passion and goals with us in terms of this important proposition.
Dr. Owen Young Regional Head of Wealth Management, Europe, Middle East and Africa, Standard Chartered Bank
Has the COVID-19 Pandemic changed your ESG programmes and products and if so, then how?
Post the Covid-19 pandemic, investors are increasingly focused on ESG and how it helped during the market downturn, and as a result it has come to attract much greater attention and interest. In an analysis conducted by S&P Global of ESG ETFs (exchange traded funds) and mutual funds from March 5, 2020, up to March 5, 2021, 73% of the funds grew between 27.3% and 55%, outpacing the S&P 500 index’s 27.1% rise 1.
S&P, Morgan Stanley, Morningstar and academic researchers have all conducted a similar analysis with respect to the market downturn and/or for 2020, with them all reaching the same conclusions.
The investors’ interest has grown, and apprehension levels around sustainable investing have fallen significantly, based on the results of our recent survey. That being said, Standard Chartered will continue to strengthen this proposition by offering more options for investors in terms of sustainable products and solutions to invest in, and to providing additional ESG data that they can use in making their investment decisions
Principles with Principles
Christophe Lalandre and Stéphane Monier of Lombard Odier talk with MEA Finance about how the embedding of ESG as a core principle is shaping the intentions and activities of investors and financial institutions alike
Christophe Lalandre: Without doubt, we are seeing a rapidly growing appetite for sustainable investments among clients in the Middle East. A recent CFA Institute survey found that interest in sustainable investing among private investors in the UAE is as high as 94%1. During the pandemic, many investors in the Middle East sought safety in Islamic investing, with its bias to quality companies with solid fundamentals and strong balance sheets. By a natural extension, given many shared values, the trend towards sustainable investing also accelerated. We also see investors’ understanding of the sustainable investment field deepening. Demand is now rising for an investment approach that goes beyond just backward-looking ESG metrics, to a forward-looking methodology that assesses future climate risks and embraces all aspects of sustainability. This might include an assessment of a company’s decarbonisation pathway, and its alignment with the goals of the Paris Agreement to limit the global temperature rise to 1.5°C above pre-industrial levels. The recent Intergovernmental Panel on Climate Change (IPCC) report2 on the climate crisis, with its ‘code red’ warning for humanity, has only sharpened this focus. Sustainability has also climbed to the top of policy agendas in the GCC region, spurred the 2020 slump in oil prices, as well as growing populations and high exposure to the risks of climate change. Economic ‘Visions’ for the region’s main
economies have sustainability at their heart3; Saudi Arabia talks about being “another Germany4” when it comes to renewables. In the UAE, the giant solar park built in the desert aims to provide 75% of Dubai’s total power capacity from clean energy by 20505 . Investment opportunities are rising. Sharia-compliant green bond issuance rose to USD6bn in the first half of 2021, double 2020’s entire issuance, according to ratings agency Fitch6. Dubai launched a UAE ESG Index in April 2020, and Saudi Arabia plans to follow suit this year. Amid fears of ‘greenwashing’, regulators are strengthening oversight of the ESG and sustainable investment market, while investor and consumer pressure, particularly from younger generations, are advancing the shift to sustainable investing at pace.
How is the range of ESG investment opportunities you offer clients expanding?
Stephane Monier: At Lombard Odier we have a long tradition of sustainable investing, and we are convinced that sustainability is a key driver of portfolio performance. The global economy is in the midst of an unprecedented transition to a net zero emissions model, unlocking new investment opportunities. Our role is to help clients’ portfolios navigate the risks and seize these opportunities for superior risk-adjusted returns.
Stéphane Monier, CIO Private Bank at Lombard Odier
We constantly work to expand and enhance our offering. Today, we use a rigorous, science-based framework to help clients invest in line with the need to transition to a net zero world.
Our approach goes far beyond the backward-looking view of ESG approaches, which assess historical business practices. Instead, as far as climate change is concerned for instance, we use proprietary tools to assess the Climate Value Impact that portfolios will be exposed to. Climate Value Impact encapsulates exposure to transitional risks and opportunities, physical risks, and liability risks. At Lombard Odier, we have already integrated a proprietary temperature alignment methodology that seeks to assess company’s alignment to the transition to a net zero economy. Our methodology remains among the best aligned to the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD) on this topic. We have launched a number of investment solutions that may help improve investors’ exposure to the transition ahead as we further advance our work on the different dimensions of Climate Value Impact.
As well as incorporating Climate Value Impact analysis, we also offer clients
Christophe Lalandre, Senior Executive Officer, Lombard Odier Abu Dhabi Global Market Branch
personalised sustainable portfolios, based around their individual values and investment preferences.
How do you decide what causes your ESG programmes will encompass?
Stephane Monier: Fundamentally, our fiduciary duty to preserve and grow clients’ wealth means that we constantly seek sources of superior risk-adjusted returns for their portfolios. Our research teams define our areas of focus within the sustainability field and have developed a rigorous methodology and scientific framework that underpins our investment decisions. Our partnerships with Oxford University and consultancy SystemIQ feed into our sustainable investment research, providing a platform to review our scientific assumptions and stress test our models.
Our current focus is the transition to a net zero economy, as it is beginning to create real financial exposure for companies. In November, the COP26 Climate Conference in Glasgow will further advance efforts to limit global warming to 1.5°C. Yet we believe the approach adopted by many investors to reach this goal – which is to focus
on low-carbon companies – is a flawed one. It fails to spur change in today’s high-emitting sectors, including cement and steel for example, which we will still need in tomorrow’s economy. So, in addition to investing in low emitters, and ‘solution providers’ to carbon challenges, we also invest in what we call ‘ice cubes.’ These are high-emitting companies that are on the right decarbonisation pathway. As they change their business model, we believe these ‘ice cubes’ have significant potential to cool our economy and shift the dial in the transition to a net zero world. We seek to avoid exposures to ‘burning logs’, those businesses in high-emitting sectors that are taking insufficient action to decarbonise and that are therefore most exposed to transitional risks.
Please describe your own ESG initiatives?
Christophe Lalandre: We believe there is a natural link between an Islamic approach to investing and a sustainable approach. Islamic finance embraces some of the socially responsible metrics that are inherent to sustainable investing and can offer investors a gateway into thinking about broader sustainable investing. At Lombard Odier, we have been offering clients investment strategies in lWWWine with Islamic principles since 2012, and Shariah-compliant investment mandates since 2018. We are currently developing new Shariahcompliant investment strategies for our clients, including one that marries our sustainable investment expertise with the long-standing Shariah investment credentials of a regional player. Stephane Monier: The constant interactions with our clients have helped us to understand and meet their needs and expectations through highly personalised sustainable investing solutions. We have built new impact solutions that reflect clients’ increasing appetite to invest in a way that can deliver tangible social and environmental impact, whilst delivering financial performance. In this context, we partnered with ReforestAction in 2019, to help finance the planting of 20,000 trees in Tanzania and Peru and
collaborated with Plastic Bank in 2020 to fund the collection of more than 1,100 tonnes of ocean-bound plastic, whilst directly supporting over 3,500 children in collector communities with educational bursaries. Most recently, we joined forces with Access To Water, a Swiss foundation, to support water accessibility and quality in Senegal. investments. It pushed investors and markets to question how they assess risks and deploy capital. It reminded the global community of the link between the environment and human health, and it showed our vulnerability. In many ways, it put a spotlight on the larger, looming climate crisis, and prompted the governments to commit to rebuilding infrastructure in line with net zero goals. These shifts in the economic model
and market opportunities inform both our tactical portfolio decision making as well as the strategic vision for our offering. Crucially, they reinforce our conviction that sustainability is a core driver of portfolio performance.
In addition to the pandemic, we’ve seen a rise in extreme weather-related events over the last 18 months, including flash flooding, droughts and wildfires, and investors are seeking better protection against these risks. Our assessment of investments’ Climate Value Impact described above aims to calculate the valuation implications of these risks for the companies in our coverage. At the portfolio level, it assesses the net exposure to positively- and adverselyexposed companies. With this approach, we hope to gain a clear focus on their financial exposure and deploy capital accordingly.
Has the COVID-19 Pandemic changed your ESG programmes and products and if so, then how?
Stephane Monier: The pandemic was a watershed moment for the world of
1. CFA Institute, Future of sustainability in investment management: from ideas to reality 2. IPCC, Sixth Assessment Report 3. Saudi Arabia Vision 2030, United Arab Emirates Vision 2021 4. “We will be another Germany when it comes to renewables,” Saudi Energy Minister Prince Abdulaziz bi Salman,
Future Investment Initiative Conference, January 2021 5. Dubai Clean Energy Strategy 2050 6. Green sukuk market won’t ignite without Gulf governments backing,” Arab News September 2021
