Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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Speaker: Hello and welcome to our discussion exploring the HSBC Sustainable Financing and Investing Survey with a focus on results that may be of particular interest to issuers.
Speaker: Joining us for the conversation from HSBC, we have Daniel Clear, Group Head of Sustainable Financing, Christian Desiglise, Head of Sustainable Finance and Investments, Jonathan Drew, Head of ESG Solutions Group, Farnam Biggoli, Head of Sustainable Bonds, Julie Bennett, Managing Director for Corporate Risk Solutions
Speaker: and Julian Lewis, our editorial consultant from Euromine.
Speaker: Welcome and thank you for joining the launch of this year's HSBC Sustainable Finance Survey.
Speaker: This year's survey comes at a particularly interesting time.
Speaker: I think we all know that the pandemic accelerated a decade of change.
Speaker: And I think we observed that investors are clearly stepping up into this change.
Speaker: Companies are leaning in across all different sectors.
Speaker: We have seen large oil and gas companies, technology firms, automotive companies materially changing their strategy and leaning into a net zero world.
Speaker: And we have seen governments and policymakers stepping up.
Speaker: So this survey, I think, is particularly interesting because it puts
Speaker: facts to beliefs.
Speaker: It's the fourth year of our survey, and I think it allows us to show long-term trends, and we observe a material increase in appetite from investors and issuers in sustainable finance.
Speaker: The survey covered 2,000 respondents across 34 territories in four regions.
Speaker: It covered respondents from governments, banks, issuers, oil and gas companies, agriculture, transportation, and many other sectors.
Speaker: So I think it gives you
Speaker: very broad view of what's actually happening in the space and I hope you will find the results as insightful as I do.
Speaker: With that I would love to hand you over to Julian Lewis who is an editorial consultant at Euromoney.
Speaker: He will give you a quick run through the results and then my colleagues will moderate a discussion.
Speaker: Julian over to you and thank you everyone.
Speaker: Thank you so much, Daniel.
Speaker: And with that, I'd like to quickly highlight some of the most interesting and important points.
Speaker: The first of these are mental and social issues are now extremely important in the capital markets.
Speaker: An overwhelming majority of market participants on both the buy and sell sides say that environmental and social issues are either very important to their organization or somewhat important.
Speaker: And as many as 93% of issuers
Speaker: and 86% of investors say this.
Speaker: One of the strongest themes in last year's survey was the importance of values.
Speaker: The biggest single reason that both issuers and investors gave for caring about environmental and social issues was that they thought it was right to do so.
Speaker: So we asked the same question this year and found that the results have changed quite a lot.
Speaker: For issuers, values are still the most important driver.
Speaker: for caring about ENS, with 55% saying so, but that's a lower share than last year, while pressure from NGOs is a more common reason this year than last.
Speaker: Meanwhile, on the investor side, values are no longer the top reason.
Speaker: They've been overtaken in popularity by as many as three other factors.
Speaker: The biggest of these is that investors say caring about ENS can improve their investment returns and or reduce risk
Speaker: 49% answered that.
Speaker: We asked about barriers to ESG investing.
Speaker: And one of the most important aspects of ESG is that investors find it difficult.
Speaker: It's a new field they haven't necessarily been trained for.
Speaker: And the world as a whole is still working out how to take these issues into account.
Speaker: So like last year, we asked investors, is anything holding you back from pursuing ESG investing more fully and broadly?
Speaker: And the results are very encouraging.
Speaker: In 2019, well above half the investors in all regions except Asia did feel held back by different obstacles.
Speaker: This year, those percentages have fallen dramatically.
Speaker: For example, in the Americas, last year, 76% of investors felt impeded.
Speaker: This year, it's only 51%.
Speaker: In Europe, it's almost halved from 66% to 34%.
Speaker: It's true that Asia's level hasn't changed much at about 40%.
Speaker: But again, in the Middle East, it's come down from 77% to 69%.
Speaker: So we asked investors, do you need more advice and information on aspects of ESG investing?
Speaker: For most categories of investor, about half of them do.
Speaker: Interestingly, the one that they want, or the fewest of them want advice on is green social and sustainable bonds, which suggests that this
Speaker: product is increasingly well understood in the market.
Speaker: What they especially want advice on are the really big, difficult, real world problems, how to invest so as to promote the sustainable development goals, how to measure the impact of their investments, and how to understand the most fundamental risks and problems such as how climate change will affect the world and the global economy.
Speaker: And one of the most important pieces of research in the survey is about issuers' expectations of when climate change will begin to affect their businesses.
Speaker: And the major change since last year is that now only 18% of issuers think it will begin to affect them in the medium term, by which we mean up to 10 years from now.
Speaker: And this was 30% last year.
Speaker: But the really important point
Speaker: is that over 90% of issuers expect to be impacted by climate change at some point.
Speaker: 80% of them expect this to take place in the next 30 years, and 37% say it's already affecting them.
Speaker: We'll finish with what is arguably the most significant question of all.
Speaker: We asked issuers whether in the next five years they expect to change how they allocate capital, whether away from activities challenged by environmental
Speaker: and social issues and or towards that is the promote positive outcomes.
Speaker: It's the second year that we've run this question and the results are impressive.
Speaker: Last year, 65% of issuers said they expect to make such changes to a notable extent or substantially.
Speaker: This year, it's 77%.
Speaker: And the share who don't expect to do this at all has halved to just 3%.
Speaker: What this means is that virtually the whole corporate sector is planning to change where it puts its capital for environmental and social reasons.
Speaker: And for anyone who doubts that environmental and social questions are relevant to investing and financing, perhaps even central to these activities, there's your answer.
Speaker: And Julian, thank you very much.
Speaker: So yes, I'm Jonathan Drew, lead our ESG Solutions Group based here in Hong Kong.
Speaker: But the first question I wanted to ask you, Julian, was just to sort of one of the areas you mentioned, it was in respect to the thing through on the time horizon within which investors and issuers thought that ESG would impact them.
Speaker: And that sort of seemingly on the surface, slightly anomalous result that, you know, people were somehow seeing the impacts to be further into the future than they did
Speaker: Do you think that's impacted by this and do you see differences?
Speaker: Are the big corporates just more short-term focused, do you think?
Speaker: Or is there a difference across investor perspectives that you think is driven or is a function of just size of the corporate or the investor?
Speaker: This particularly comes out in the question on climate change, where quite a significant body of respondents have, as it were, put the potential impact
Speaker: further out in time, where there was a very significant body who thought that the medium term was where they would expect the impact that has fallen and the proportion who put it out between 10 and 30 years' time, so beyond their working careers potentially, has gone up.
Speaker: I'm not sure that we found statistically significant differences in the underlying constituencies to that response.
Speaker: It seems to be more to do
Speaker: with the extent to which you feel that the pandemic is such an immediate emergency that all other issues, climate change included, have become somewhat secondary.
Speaker: But of course, it remains the case that the single largest block of issuers asked about climate change is the one that say already affirm that it's affecting their businesses now.
Speaker: So in that sense, we're perhaps talking about a secondary effect rather than a change in the core response.
Speaker: to that challenge.
Speaker: That's really interesting, Gillian.
Speaker: That was one of the points that I found really interesting about the survey.
Speaker: The other one that I wondered if you could comment a little bit more on is the change in responses when it comes to the importance of ESG because of values and the fact that that dropped year on year and participants seem to be moving towards other reasons for attributing importance to ESG.
Speaker: That does appear to be linked in some way to the pandemic.
Speaker: In particular, it's investors taking that stance.
Speaker: For issuers, it is still the single most important driver of their engagement with sustainability, albeit that it's come down 10 points year on year.
Speaker: But for investors, it has actually been superseded as a driver by as many as three other elements.
Speaker: That would suggest either that investors are in some sense distracted by their nearer term
Speaker: challenges, or perhaps it's possible at the same time that there's a kind of a maturing of their perspective on these issues.
Speaker: In a sense, a kind of a hardening of what they have to say about why ESG is important.
Speaker: It's not that it's something soft and fuzzy that we ought to do this because it's intrinsically important.
Speaker: But in fact, they see tangible benefits, particularly in the area of risk reduction,
Speaker: And that may be the point of linkage to the pandemic, because clearly risk has been front and center for them all year long.
Speaker: Absolutely.
Speaker: And then maybe also a link to some of the challenges that were mentioned by investors this year as well.
Speaker: The fact that the challenges have grown to be more on the technical front, the lack of comparability of data.
Speaker: It seems like they are engaging more with the topic.
Speaker: And so the challenge isn't so much a philosophical challenge, but rather a
Speaker: an implementation challenge.
Speaker: And on the investor side, so I was a little surprised to see that some investors are actually growing more cautious about the outlook for returns, especially because a lot of academic research and studies have shown that there is a positive correlation between the ESG scores and performance.
Speaker: We've also shown that ESG stocks, well, the better rated ESG stocks are actually performing better than the wider markets.
Speaker: Okay, can you expand a little bit on that?
Speaker: I think that's one of the more challenging findings of the survey, actually.
Speaker: So we see both a doubling down from one tranche of the investor community who are saying, actually, the pandemic makes us believe even more strongly that we need to take these issues into account.
Speaker: We need to rethink how we assign risk premia.
Speaker: And another cohort within the investor community
Speaker: who appear to have lost some faith in that notion.
Speaker: I think how we've understood that is that those may be faster money type investors, investors judged on rather shorter timescales and who found the market gyrations of this spring in particular sufficiently challenging that they had less bandwidth for these considerations.
Speaker: Yeah, just wanted to pick up a point you were saying, how do you think about and more incorporation of ESG into the credit appetite and rating of them from the lender side?
Speaker: How have you seen, I believe part of the survey also covered disclosure?
Speaker: How do you, if you want more
Speaker: credit for your and benefit from your ESG factors and favorable sustainability metrics.
Speaker: Certainly disclosure has to be part of that, but that might also be a gap for investors and lenders when looking at the issuers.
Speaker: Were there any conclusions around how disclosure is occurring today and what needs to be remedied?
Speaker: I think that's a great question.
Speaker: Thank you, Julie.
Speaker: And I think it's interesting to reflect that
Speaker: issuers essentially say they're doing a great job on disclosure and they're happy with the direction of travel.
Speaker: There's a sort of a grumpy residue of about 10% who don't like the direction of travel, but everyone else is on board and quite a significant proportion of them are quite, I don't want to say self-congratulatory, but are enthusiastic about that.
Speaker: And yet, at the same time, investors are saying,
Speaker: that the quality and the consistency of issuers' disclosures isn't good enough from their perspectives.
Speaker: So clearly, that disconnect needs to be tied up.
Speaker: And maybe this is further evidence for some of the very recent momentum we're seeing, whether it's in the World Economic Forum in partnership with some major reporting organizations, but also IFRS, the IFRS Foundation, launching a consultation around
Speaker: all focused on the effort of can we get more consistency on the reporting and the disclosure.
Speaker: And this certainly supports the need for that from both sides.
Speaker: Perhaps even that grumpy 10% that doesn't like the disclosure required, at least if it was you knew what you had to share to get good benefit from it, it would be worthwhile.
Speaker: You know, it's clear that we also don't have consistency between how they're trying to factor ESG into
Speaker: the traditional notion of credit.
Speaker: And we see new initiatives of that sort almost weekly.
Speaker: I think Fitch had a new one just last week, a long-term sustainability risk assessment, which seems a super interesting development, but that both offers the promise of wide take up and the risk that it's confined to the narrow group of issuers who solicit
Speaker: ratings from Fitch.
Speaker: So again, consistency on the rating side will be important here.
Speaker: The other thing that jumped out to me was how seemingly and certainly for the issuers and maybe for investors as well, that regulatory pressures had sort of receded a little bit in the relative ranking.
Speaker: And it sort of suggests, and to Farnam's earlier comment, that this is the sort of the private sector and an ever-growing private sector
Speaker: as a proportion of overall economic activity, taking more responsibility.
Speaker: So it's a sort of an indicator of perhaps a turning point in the markets.
Speaker: I think that's a very interesting point.
Speaker: And at the top level, I definitely agree with it.
Speaker: I would, in some regions and some individual national markets, regulators are still feeling the need to wield a big stick.
Speaker: But that isn't consistent by any means.
Speaker: So it may be that this is one of the indices of inconsistent progress globally, you know, albeit that the big picture is one of, as you say, forward momentum.
Speaker: Yeah, on that point, it was interesting to me looking through the responses and trying to see how much the forthcoming EU taxonomy and the enormous amount of, I think, regulatory change that we are headed for in Europe
Speaker: was reflected in the responses.
Speaker: I don't know if you felt differently, Gillian, but I actually don't think it necessarily is there, especially looking, for instance, at how European issuers responded to the question around disclosure and a majority saying, we already disclose enough and we don't plan to disclose anymore.
Speaker: Whereas, of course, with the regulatory changes here in Europe, they are going to have to be disclosing a lot more.
Speaker: I think generally, European responses in the survey
Speaker: are very striking and very interesting.
Speaker: They clearly reflect the maturity of the market, you know, compared to some other regions, the length of time that some market participants have spent on these questions already, you know, which can make sort of intra-regional comparisons a bit unfair because everybody isn't starting from the same point.
Speaker: It may also be that pressure from consumers
Speaker: particularly powerful in Europe.
Speaker: That was one of the senses that I had reading the survey where, you know, the level of engagement from issuers in particular is so tremendous.
Speaker: You also see this in the Americas.
Speaker: That seems to speak to a very strong pull from important constituencies to them, you know, which would, on the issuer side, would appear to be
Speaker: you know, consumers slash taxpayers.
Speaker: And, you know, conversely, European investors seemed especially representative of this, you know, this new theme of focus on risk and return, you know, where some investors are telling us very clearly that paying attention to ESG can reduce their investment risk.
Speaker: And other investors are clearly fretting
Speaker: that they're sacrificing some return, there's, I think probably an important divergence of views there in the investor community, you know, and it would be interesting to see further work with investors on that.
Speaker: Talking to sort of what's very much sort of Farnham and my world around finance products, which came up later on, but then looking at issuers, I think 60 something percent was sort of
Speaker: seemed to be satisfied that there were the financial products there.
Speaker: And there was still a significant proportion who were saying there weren't enough financial products to meet needs.
Speaker: Yes.
Speaker: And I think one of the striking elements at the product level is how engaged issuers are with this whole area of sustainability-linked products.
Speaker: We didn't ask about the new generation sustainability-linked bonds.
Speaker: It'll be very interesting to hear views on those next year, but sustainability-linked loans and, you know, seem to tap into a strong belief in the issuer community that certainly the part of the issuer community that, you know, that looks to bank lending as its primary financing channel, that there needs to be a close, a very close and tight link between broad sustainability efforts and their borrowing.
Speaker: So actually they were,
Speaker: they were saying that they would like to be rewarded more as lower risk credits if they're particularly advanced on the sustainability front.
Speaker: And in that sense, the kind of classical ratchet that we're seeing on sustainability-linked lending and sustainability-linked bonds is a first step of that.
Speaker: But the issue was a saying, actually,
Speaker: you know, we'd like to be rewarded more.
Speaker: You know, they're asking their lenders to reconceive the notion of credit, you know, that a very highly advanced issuer on a sustainability, from a sustainability perspective, is a better credit than a higher rated, less advanced peer.
Speaker: I think that's a very provocative and interesting signal that issuers are sending.
Speaker: I guess, Julianne, I'm interested to see, to hear from you, I guess, looking forward to next year, what you think the big trends are going to be in sustainable finance, either among issuers or investors, based on the responses that you've seen.
Speaker: I mean, you've touched on one just now, which is that there does seem to be this appetite for greater rewards.
Speaker: So maybe we'll see more sustainability-linked bonds.
Speaker: But any other predictions?
Speaker: I guess at the highest level, the question is, does this strong momentum that we're seeing, does that continue even further?
Speaker: Will issuers and investors get to the point where disclosure isn't even a question worth asking because it's just automatic?
Speaker: That's probably not a question for next year, but that's the direction of travel, the divergence,
Speaker: between different investors on the risk and return spectrum is very important to see.
Speaker: But obviously the context in which we'll be posing the survey is so dependent on how the pandemic plays out, you know, and what that means for engagement and in particular, whether it remains the case that despite all of the incredible challenges that issuers and investors have faced this year,
Speaker: they have been willing to double down on their sustainability efforts.
Speaker: Is that the case next year?
Speaker: I guess that is the ultimate question for the 21 survey.
Speaker: So we are just out of time now today, but thank you very much for everybody joining us today.
Speaker: And thank you to all of our guests today who have covered this very interesting subject on ESG.
Speaker: Thank you, everybody.
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.
