Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
Speaker: Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
Speaker: Thank you for listening.
Speaker: Good morning, good afternoon, and welcome to this Global Emerging Markets Forum panel on HSBC perspectives on COP26.
Speaker: My name is Weishin Chan, head of HSBC's Climate Change Centre of Excellence.
Speaker: We have brought you the foremost climate experts at HSBC to talk us through how COP26 could affect various aspects of banking and finance.
Speaker: I am delighted to be joined by my friends and colleagues.
Speaker: Firstly, Leila Camden, head of climate risk at HSBC,
Speaker: And also Stuart Kirk, Global Head of Responsible Investments at HSBC Global Asset Management.
Speaker: And last and certainly not least, Zoe Knight, Group Head of Centre of Sustainable Finance at HSBC.
Speaker: Okay, let's get into this.
Speaker: So COP26 and HSBC.
Speaker: COP26 has been billed as the most important climate negotiation since the Paris Agreement was adopted in 2015.
Speaker: It has implications for the economy, for business, for investors, and so on.
Speaker: So let's see how far we get in discussing climate finance, mitigation, adaptation, as well as carbon markets.
Speaker: So let's get into some specifics then, if we could.
Speaker: So banks all face climate risks.
Speaker: But what does that actually mean?
Speaker: I mean, Leila, could you describe for us the climate risks faced by banks?
Speaker: How does this manifest in day-to-day activities?
Speaker: Will these risks increase or decrease as a result of COP26, for example?
Speaker: Thank you, Leila.
Speaker: Yeah, sure.
Speaker: So traditionally, we look at climate risk through two key drivers.
Speaker: So the first one is physical risk and the second one is transition risk.
Speaker: So physical risk is the result from increased severity and frequency in climate-related events.
Speaker: And transition risk is driven by changes in policies, in technologies and consumer behaviors as we transition to a net zero economy.
Speaker: So these risk drivers have the potential to manifest to each of our traditional risk types, both financial and non-financial.
Speaker: So COP26 has the potential to accelerate transition risk if we see, you know, bold climate commitments made and policies being adopted to try and put us on track to net zero by 2050.
Speaker: However, I think the earlier we start making these changes, the more chance we have to see these transition risks being outweighed by reduced physical risks.
Speaker: and also significant business opportunities driven by the decarbonisation of our economies.
Speaker: And I think importantly, the risk of missing out on the greatest commercial opportunity of our time is also one that we are very much interested in identifying and managing as a risk function.
Speaker: Thank you.
Speaker: Wow, the greatest commercial opportunity of our time.
Speaker: That is definitely quotable.
Speaker: Thank you, Leila.
Speaker: What about our involvement in external activities, Zoe, especially in the run up to COP26?
Speaker: How is HSBC working to shape these plans?
Speaker: Thanks, Woh-Shin.
Speaker: Well, there are a deluge of different initiatives and events and general alliances that are forming in order to support the COP motion.
Speaker: But what we're doing specifically is chairing a group of banks under the auspices of the Financial Services Task Force,
Speaker: a task force set up by the Prince of Wales here in the UK to really look at how banks can collaborate effectively on moving the climate agenda forward.
Speaker: As we know, and as Leila's described, we can do a lot of things to manage our own risk profile.
Speaker: We can do a lot of things to consider what direction we might like to set out.
Speaker: So by looking at our operational footprints, by looking at how we manage our financed emissions,
Speaker: But this point about financed emissions really needs others to come along with us.
Speaker: And we don't have all of the frameworks and methodologies and data availability yet in place for the system as a whole to really figure out what alignment to financed emissions means.
Speaker: So HSBC has been chairing a task force that looks exactly at this.
Speaker: And what it does, it brings together 11 banks, and we're all setting out the processes and approach that we've taken to translate our net zero ambition into operational reality.
Speaker: The second thing, and this is important for COP as well, is that the COP agenda is all about finance, and we need to mobilise more capital into infrastructure projects and generally building resilience in the economy.
Speaker: One of the main initiatives that the former governor of the Bank of England, Mark Carney, is working on is the Glasgow Financial Alliance for Net Zero.
Speaker: And this is really bringing together an umbrella of asset managers, asset owners, insurers and banks and working on how to capture climate into every single financial decision that we're taking.
Speaker: And HSBC is one of the key principles on that GFAN's Glasgow Financial Alliance for Net Zero group.
Speaker: Thank you, Zoe.
Speaker: Slightly differently then, on to Stuart.
Speaker: We get to read about what teenagers think about COP26.
Speaker: Sometimes we get to hear about what world leaders think.
Speaker: But what are asset managers thinking about COP26?
Speaker: Will climate negotiations influence your portfolios over the short, medium, or long term?
Speaker: Grateful for your thoughts, please, Stuart.
Speaker: Yeah, I appreciate the media.
Speaker: We don't quite have the same cachet as a teenager, but I'll give you the asset management perspective.
Speaker: Obviously, a lot of people talk about risk when they talk about a transition.
Speaker: I've already written many times about the transition being a once in a generation investment opportunity.
Speaker: I'm going to have to up my hyperbole even further.
Speaker: We are very optimistic about what the transition means.
Speaker: I mean, if you pull up a long term chart of the S&P 500 over 100 years, transitions are good for investors, whether they are
Speaker: Walls, technology, pandemics, whether it's climate change, humans are incredibly ingenious at adapting and gaining prosperity from transition.
Speaker: There'll be companies we've never heard of.
Speaker: There'll be trillion-dollar sectors that we can't even imagine today.
Speaker: It's a real, real opportunity.
Speaker: Zoe earlier mentioned about finance and how that's a key part of the agenda at COP26.
Speaker: Climate finance, in my understanding, is broadly described as the flow of capital from developed to developing economies for climate purposes.
Speaker: But climate finance is not actually defined by the UN.
Speaker: Fancy that.
Speaker: It could probably come from switching on as well as switching off.
Speaker: finance, for example, not funding or channeling finance elsewhere.
Speaker: Stuart, maybe we could start with you on this topic.
Speaker: I mean, more countries have committed to stop financing coal across the world.
Speaker: Is that something that all investors should be prepared for or to do?
Speaker: And if so, how would they go about it?
Speaker: I would completely agree that with coal, for example, we've already made commitments in line with the group about reducing financing to coal.
Speaker: Now, that
Speaker: Whether we decide to underweight or to exclude a secondary market security is a completely different debate.
Speaker: And we would argue we're far better off engaging with all sorts of companies than to exclude, because even on the cold, you can see that if I sell my shares down to zero,
Speaker: They will just be bought by a hedge fund or retail and they don't vote.
Speaker: So there's almost a sort of ethical problem there.
Speaker: Or even worse, if those companies or assets are taken private, which you're seeing a lot in coal, anything can happen after that.
Speaker: So we prefer that things stay in public markets where we can see them, interact with them, engage with them and actually try to evoke change directly.
Speaker: So only if one has a seat at the table can you influence somehow and exercise the vote that you have.
Speaker: Take that away and it's anyone's game.
Speaker: And we hear of public pledges by world leaders.
Speaker: What are some of the challenges to actually mobilize the private capital to fund climate solutions in general?
Speaker: Zoe, if I could ask you that and maybe talk about emerging markets and trade.
Speaker: Thank you.
Speaker: Yeah.
Speaker: This piece around how the financial system works and the levers that it has at its disposal for influence is really important.
Speaker: And it's one area that the Glasgow Financial Alliance for Net Zero, GFANS, that I mentioned earlier, is looking at.
Speaker: And it's important because in order to facilitate the changes that we need at the speed that we need,
Speaker: All actors in the system need to be thinking about decarbonisation pathways and how they play out on a credible basis.
Speaker: So what does it make sense for a steel company to do versus a cement company versus a power utility versus oil and gas?
Speaker: and how can the companies themselves help investors understand whether their transition pathway is credible or not.
Speaker: And particularly in some emerging markets, we might not know whether a railway that we're building today is really going to be resilient to climate factors, the physical impacts that Leila talked about earlier in the future.
Speaker: So there's a little bit of a kind of a disconnect between knowledge of exactly what sustainable and climate aligned means versus the kind of risk return trade off that is really going to enable the commercial viability of the project.
Speaker: Now, several things are in train to be able to counter this.
Speaker: One of the initiatives that HSBC is part of and that we're hoping is going to be quite big at COP is Fast Infra.
Speaker: Now, finance to accelerate a sustainable transition infrastructure.
Speaker: And this is all about trying to create infrastructure as an asset class
Speaker: By enabling a label around particular projects, that means it's much easier for investors to see whether or not the investment is aligned to their own mandate and their own preferences around how they deal with climate.
Speaker: So there are these unblockers that are coming into being to try and solve this problem of scaling up capital.
Speaker: But we need to try and act a little bit faster.
Speaker: Some of the areas that are helping with this are the likes of the EU taxonomy and then we're seeing some ASEAN markets taxonomies as well, which talk about thresholds for projects that really then differentiate what makes sense in terms of credible emissions reduction.
Speaker: We really need to see the shift of our power system to get to renewables as fast as possible.
Speaker: But we need to bring everybody along in doing that.
Speaker: We need to create the financing infrastructure that means communities aren't left behind and people have jobs.
Speaker: So we're seeing a shift in the way that finance talks about these issues.
Speaker: And we expect to see more of that at COP.
Speaker: Thank you Zoe.
Speaker: So it's a much more rounded and holistic approach that includes, as you say, just transition and thinking about what will happen to jobs and the rest of the economy.
Speaker: It's not just a case of getting something off of someone's book.
Speaker: So it's a very, very complicated process indeed.
Speaker: Do we think that ESG, and I'm going to say climate here, just to keep the conversation on climate, do we think that climate is embedded as part of the culture of HSBC or is it just seen as another strategy or theme?
Speaker: Thanks, Wai-Tin.
Speaker: And the transition to net zero is the fourth part of our overarching strategy.
Speaker: So climate really is embedded from the top down.
Speaker: There is a regular cycle of knowledge building and thinking through how, as a bank, we best need to manage the climate factors, both on the risk and opportunity side.
Speaker: And not least, we've just hired a new chief sustainability officer whose job it is to embed sustainability throughout the bank as a whole.
Speaker: So I think that's a testament to how seriously we are taking this as a bank.
Speaker: And most critically, it's going back to Leila's point about the opportunity.
Speaker: It is the opportunity side.
Speaker: but it's also about this alignment factor and how we operate across all of our markets.
Speaker: We've got a massive footprint both geographically and in end sectors and our role in terms of bridging the financing that suppliers need in terms of decarbonise plus the end market demand for low carbon products and services
Speaker: the ability of us to be able to facilitate those financial flows is second to none.
Speaker: So it completely makes sense to embed it throughout everything that we do.
Speaker: So very much embedded into strategy and as you say, a fourth pillar.
Speaker: So it doesn't get more embedded than that.
Speaker: One of our panelists mentioned private financing is replacing public investment for coal.
Speaker: Why does private capital have a higher tolerance for transition risk?
Speaker: Maybe one for either Leila or Stuart.
Speaker: Well, I mean, in theory, it shouldn't.
Speaker: And I suspect the arbitrage that allows that to happen will close over time.
Speaker: So as more countries take control over their Paris commitments and include private capital,
Speaker: companies in scope, those windows of opportunity will be closed.
Speaker: And so we just happen to be in this space at the moment where me as a public company who have signed up to various Net Zero initiatives have a much higher level of scrutiny and a higher bar than private sector.
Speaker: And I suspect over time that will not be allowed.
Speaker: But at the moment, that just happens to be a sort of regulatory and oversight arbitrage that the private sector is playing.
Speaker: Thank you.
Speaker: And I think that's a very good point, Stuart.
Speaker: If some countries and their private capital is hidden, then the scrutiny is just not there and the tolerance for coal is definitely higher.
Speaker: And we've seen that sort of change throughout the years, especially as we saw the announcement a couple of weeks ago at the UN when President Xi Jinping of China said they're not financing coal anymore.
Speaker: And that marks a big change because China used to be one of the last coal funders of last resort.
Speaker: If we could talk about mitigation and adaptation, that's an interesting topic.
Speaker: Leila, you mentioned earlier the transition risks and the physical risks.
Speaker: It's been said that mitigation is global whilst adaptation is local.
Speaker: So maybe the benefits of mitigation are more tangible or visible for developed economies, but most developing economies are looking for adaptation given their vulnerability to climate change.
Speaker: Do banks consider the differences between mitigation and adaptation in their policies, maybe one for Zoe, and how does that differ across various banking activities, I don't know, lending, underwriting, advising, etc.?
Speaker: So one of the ways that we can think about mitigation and adaptation is through emissions profiles.
Speaker: So as we move forward with our net zero ambition to look at our financed emissions, so our lending activities,
Speaker: We're looking at how they are, how they themselves are transitioning.
Speaker: So what the emissions roadmap is for an individual sector and where the companies within that sector sit on that emissions roadmap.
Speaker: So that is straightforward in one way because we can identify the solutions, but really difficult from another perspective because there are a lot of data gaps.
Speaker: So it's really hard to make a fair comparison of where one company is in its transition pathway right now.
Speaker: But that said, it's an easier ask than the physical side because we don't know exactly how those issues are being managed.
Speaker: And one way that we've looked at to think about this is supply chain and supply chain financing in particular, where we'll work with a large corporate that has got suppliers in a variety of different countries and taken a deep dive into where they're sourcing from and thinking a little bit about the physical risks that might play out in those geographic locations.
Speaker: For us on the asset management side, I mean, we would very much welcome more capital being directed towards adaptation.
Speaker: And we think this is very much an attitudinal problem.
Speaker: There's a sense that adaptation is defeatist, whereas mitigation is a more worthy channel through which to tackle climate change.
Speaker: Something like 90% of all funding, I believe, goes through the mitigation channel.
Speaker: For us, there's a just transition element to this as well as a way of promoting jobs and work and capital spending in local communities in emerging markets, for example, which tend to bear the brunt of a lot of the climate change issues.
Speaker: But I think we need to just recognise that adaptation isn't at all defeatist.
Speaker: I sometimes hear people say, wouldn't it be horrendous if Miami was eight metres underwater?
Speaker: Well,
Speaker: You know, the Netherlands has been eight metres underwater for 400 years.
Speaker: And you can imagine the amount of jobs that were created and the money that was spent, you know, through that time.
Speaker: And, you know, it's a perfectly lovely city, Amsterdam, right now.
Speaker: Now, no one's wanting that to happen to Miami, but it's not a disaster if we spend money on adaptation.
Speaker: It's not necessarily an admission of defeat.
Speaker: And I think it needs to be balanced with what we're doing on mitigations.
Speaker: Thank you.
Speaker: If I could follow up with you again, Leila, do you think that managing this climate risk internally, for example, our own operations for HSBC, is more challenging than managing it externally, considering the risk exposure of our clients or not?
Speaker: I'd be interested to hear your thoughts on that.
Speaker: I think, I mean, clearly for a financial organization like HSBC, managing our clients' risk exposure is definitely the biggest challenge, not least because of the data gaps that we mentioned, that we have to find solutions to bridge and resolve.
Speaker: But I think also it's the most significant opportunity we have to contribute to positive climate outcomes for our society.
Speaker: So it's really fair that we, I think, spend a bit more time thinking about them than our own operations.
Speaker: Thank you.
Speaker: That's very, very fair.
Speaker: We definitely care about our customers and clients in that sense, but we have to keep our own house in order as well.
Speaker: Absolutely.
Speaker: We have to lead by example.
Speaker: Absolutely.
Speaker: Now, this gets into one of my favorite topics of late, Article 6 of the Paris Agreement.
Speaker: I enjoy reading all the different parts of how trading could work bilaterally or collectively, the different viewpoints, what activities could be included and shouldn't be included and accounted for.
Speaker: But when I come back to the real world, I have a lot of questions.
Speaker: So Stuart, maybe I could ask you, what type of hedging or diversification does participation in carbon trading markets offer for investors?
Speaker: At the moment, very little.
Speaker: And it's amazing how little activity or interest that we have from clients.
Speaker: And I think that's understandable given whatever it is, the 60 different markets that are out there in the world at the moment, the lack of transparency, the lack of
Speaker: comparability between data and pricing.
Speaker: But I do think this is, like you, absolutely key to solving many of the problems that we have with climate change and the transition.
Speaker: But at the moment, it's just not at a place where we can get involved to any meaningful extent.
Speaker: And so if I was to hope for one thing from COP26, it would absolutely be in this area because you can imagine the
Speaker: the new products, services, derivatives, and everything else that smart, clever people in finance will come up with in order to help our clients.
Speaker: But at the moment, I'm afraid on the asset management side, it really is a non-event.
Speaker: Okay, interesting.
Speaker: What about carbon trading?
Speaker: Does it affect...
Speaker: the potential climate risk for a bank like ours, maybe just in very broad terms, Leila, I'm just thinking, would the increased projects, the challenging accreditation, the fulfillment of net zero strategies, how would that affect climate risk?
Speaker: I think offsets and carbon trading have a role to play as a supplement to the carbonization efforts.
Speaker: We obviously we have we can see those companies making net zero commitments have the ability to provide capital to those who are maybe in an easier position to reduce and remove carbon.
Speaker: However, I think we also need to recognize some of the concerns associated with offsets and carbon trading, including the concern that use of offset is sometimes perceived as an indicator of greenwashing or lack of ambition.
Speaker: So this is an important consideration for us in risk, clearly, in the management of climate-related reputation and litigation risk as well.
Speaker: Hence the importance of having clear and common principles agreed around
Speaker: the use of offset and also having strong due diligence processes.
Speaker: So very much doing it properly and ensuring that we're not buying, shall we say, dodgy offsets and that we're actually paying for a proper removal of carbon dioxide equivalent from the atmosphere when that happens.
Speaker: But I mean, many of the projects that could feed into the UN's carbon trading mechanism are likely to be based in emerging markets.
Speaker: Zoe, I'd like to ask you what potential opportunities are there for banks in general, maybe trading infrastructure, advisory and so on?
Speaker: Yeah, exactly.
Speaker: And just to build on a few points from Stuart and Leila, this is one of the most contentious areas that we're talking about across the banks.
Speaker: It's the role of carbon offsets or carbon credits.
Speaker: So we really need to get a framework where it's acceptable to be part of that market so as to provide the financing for it.
Speaker: But we're just really struggling with how to create that mechanism, how to create that framework.
Speaker: And particularly in emerging markets where, well, in fact, in all markets where it's just really difficult to verify,
Speaker: how the ton of CO2 is really being protected or how it's being generated, how it's being ring-fenced for one purchaser versus another purchaser.
Speaker: But it's a really tricky contentious area that actually needs transparency and integrity around it for it to be a success.
Speaker: So, you know, the work is happening fast.
Speaker: We hope to get some progress at COP26 on the country positioning around this.
Speaker: But banks and institutional investors can also look at how to support their own strategies through the use of carbon markets.
Speaker: So there's clearly a lot of areas that need work to make a sort of global carbon market actually work.
Speaker: But I'll bring that to climate standards, if I may, and climate disclosures just to change track a little.
Speaker: One thing that isn't mentioned as often but seems to be discussed vigorously at climate negotiations is reporting formats.
Speaker: how they report, who reports what.
Speaker: And we've discussed in the past about the bifurcation.
Speaker: Is there a reporting format for developed economies versus developing economies?
Speaker: How important, maybe I could ask Leila this, how important is clear disclosure by companies from a climate point of view in helping you assess their risk?
Speaker: Or is it so confusing that you have to untangle everything and it takes a long time to do that?
Speaker: I mean, I think it's absolutely critical, Wieshyn, to have standardized disclosure from our customers and counterparties.
Speaker: It would certainly make our lives easier if we had a standardized format of information from companies on how much emissions they are, how much greenhouse gas emissions they are emitting, how they are planning to transition to a cleaner business model.
Speaker: and what progress they are making against these targets.
Speaker: So that's really the challenge we're having to deal with on a daily basis and any sort of progress on that would be welcome.
Speaker: Thank you, Leila.
Speaker: So the challenge remains.
Speaker: Okay, success or failure at COP?
Speaker: It's probably not binary, and what is deemed successful will fall A, across the spectrum, and B, be different depending on your perspective.
Speaker: You're the civil society, you're the teenagers of this world, you're the politicians, etc.
Speaker: Broadly speaking, developed economies are looking for increased global ambition.
Speaker: Developing economies, success will probably hinge on the finance that we've been discussing here.
Speaker: Zoe, from a bank's perspective, how would the outcome of COP26 affect policies, strategy?
Speaker: And does the climate issue have so much momentum that we just keep moving regardless?
Speaker: Actually, it doesn't matter.
Speaker: Or is that not true?
Speaker: Well, I think the UK presidency have come out with their strapline, which is coals, cars, trees and cash, which really sort of sums up the essence of what needs to happen around
Speaker: the power sector, electrification for all industries, building up the nature-based solution side, natural capital, and getting finance into the system.
Speaker: So from an outcome perspective, though, we have our net zero ambition by 2050.
Speaker: We've promised shareholders that we're going to look at setting, or that we are going to set targets against certain sectors for emissions reduction.
Speaker: So we
Speaker: It's in train.
Speaker: The climate conversation is in train and it's now about the speed of delivery.
Speaker: COP for sure helps with the speed of delivery because the signals that governments are giving in relation to their own nationally determined contributions and their own climate planning are
Speaker: helps us sort of steer capital in a prioritized fashion for change.
Speaker: Now, I'm not saying that it's straightforward or that it is a direct link between COP and finance, but it definitely adds to the mix of signals, whether that's
Speaker: government signals, civil society asks, or corporate signals that are really driving us to look at, to look more closely at issues like our risk appetite in certain sectors, and delivering our mobilisation target of 750 billion to a trillion of financing over the next eight years now.
Speaker: So, you know, it's
Speaker: The COP process itself is crucial at bringing together different actors to talk through the plans that they are implementing and the ambition that they want to take on the climate problem.
Speaker: Thank you Zoe.
Speaker: Leila, which outcome, success or failure at COP26 would make your job easier?
Speaker: or more difficult as head of climate risk?
Speaker: Clearly, I think success at COP would be a positive outcome, not just for us, all of us as a society, but also more selfishly for my role as a climate risk manager.
Speaker: There's so much uncertainty around the
Speaker: the evolution of climate risk drivers.
Speaker: So more visibility and clarity on climate policies on issues such as phasing out of coal, switch to electric vehicles, switch to renewables would be much welcome, both for climate financial risk management and obviously for climate outcomes and zero alignment more broadly.
Speaker: So I think more visibility would help companies articulate their transition plans.
Speaker: I think more companies would be able to do that.
Speaker: And which I think would in turn enable the financial sector, one, to better support the transition with financing and also to better manage transition risks.
Speaker: So for me personally, clearly, no doubt, I think the success of COP would be the preferred outcome.
Speaker: Okay, and then maybe final comments.
Speaker: Just, Stuart, what is the one single issue that you will be looking out for or following most closely during the two weeks in November at COP26?
Speaker: And why is that important to you?
Speaker: Article 6, carbon trading, will be where I probably focus my attention the most.
Speaker: Yeah.
Speaker: Leila, what about yourself?
Speaker: The one single issue that you'll be looking most closely at?
Speaker: I think we mentioned this before, which in adaptation and resilience clearly has been, I think, kind of unloved sibling in the climate debate until now.
Speaker: So I think it would be a very powerful outcome to see an agreement on a global goal on adaptation in a similar manner as we have in the 1.5 degree goal on the mitigation side.
Speaker: Thank you very much.
Speaker: And Zoe?
Speaker: For me, it's the rule book and the country emphasis around
Speaker: consistency because through that then for HSBC we can engage with our country management teams and their networks on how to deliver those NDC outcomes that that we're looking for and it really helps with the credible transition planning piece so so yeah I'm all about the rule book this this time around
Speaker: So it's going to keep all of us very, very busy.
Speaker: And I think that's important to highlight the capacity building aspects.
Speaker: The more different parts of HSBC follow, we can implement that through the various activities that we do.
Speaker: So thank you very much to Leila, Stewart, and Zuri for your insights.
Speaker: It's very, very interesting to hear what happens on the rest of the group at HSBC.
Speaker: And thank you to our panelists once again.
Speaker: Thank you.
Speaker: Bye.
Speaker: Thank you.
Speaker: Thank you for listening today.
Speaker: This has been HSBC Global Viewpoint, Banking and Markets.
Speaker: For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.
