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 investors.
Speaker: Joining us for the conversation from HSBC, we have Daniel Clear, Head of Sustainable Financing, Patrick Kondagian, Head of Structured Institutional Sales, Alex Lupis, Head of Client Engagement, Jonathan Drew, Head of ESG Solutions Group, and Julian Lewis, our editorial consultant from Euromoney.
Speaker: Thank you for joining the launch of this year's HSBC Sustainable Finance Survey.
Speaker: I think this year's survey comes at a particularly interesting time.
Speaker: We all know that we're living through quite unprecedented times, and we all feel that change around us is accelerating.
Speaker: And they come from many, many different directions.
Speaker: I think we all see investors stepping up their engagement, both on environmental and social issues.
Speaker: We've evidenced through the pandemic that ESG-aligned companies and climate-aligned companies have outperformed the market.
Speaker: We also see companies leaning in.
Speaker: We have seen some of the big oil and gas companies, transportation companies, technology firms actually using this crisis to accelerate change in their business models.
Speaker: And we have certainly seen policymakers, governments and regulators actually using this as a stimulus for further change.
Speaker: So I think many of us believe that this will be a decade of change and that change have been brought forward to 2020.
Speaker: And I think for me, it was very interesting to see that there is an overwhelming push from investors
Speaker: to accelerate change and to put more resources and emphasis into sustainable finance.
Speaker: Also that risk return is now the main driver.
Speaker: It's no longer a question of belief.
Speaker: It's a question of risk and return.
Speaker: We also saw that barriers that were perceived of holding back investments are actually reducing.
Speaker: There's still concern around disclosure and inconsistency, but those barriers are coming down.
Speaker: And then finally, what I thought particularly interesting is a lot of companies, majority of companies and investors already say today,
Speaker: that climate change is impacting their business models.
Speaker: Julian, over to you, and thank you everyone for joining.
Speaker: Julian Welsenberg- Thanks very much, Daniel.
Speaker: And hello, everyone.
Speaker: It's good to be talking to you about the second sustainable financing and investing survey we've worked on with HSBC.
Speaker: Julian Welsenberg- And now I'd like to quickly highlight some of the most interesting and important points across our findings.
Speaker: Julian Welsenberg- The first is that environmental and social issues are now highly important in the capital markets.
Speaker: There are some slight differences from last year, but the key point is that an overwhelming majority of market participants now say that environmental and social issues are either very important to their organization or somewhat important.
Speaker: As many as 93% of issuers say this and 86% of investors.
Speaker: We asked them questions directly about this.
Speaker: We asked investors,
Speaker: Has the pandemic changed how you consider ESG issues when you invest?
Speaker: And strikingly, only 1% said it had made them attach less importance to ESG permanently.
Speaker: Another 9% did say that they had reduced focus on ESG temporarily because other issues have become more important.
Speaker: But the most common answer from as many as 29% of investors was that it had made them believe even more strongly that considering ESG issues is important.
Speaker: Now, one of the strongest themes that came out of last year's survey was the importance of values.
Speaker: The biggest single reason issuers and investors gave for caring about environmental and social issues was that they think it's right to do so.
Speaker: So we asked the same question this year, and the results have changed quite a lot.
Speaker: For issuers, values are still the most important driver, with 55% saying this, but that's quite a lower share than last year.
Speaker: And meanwhile, pressure from NGOs has increased year on year as a factor.
Speaker: And on the investor side, values are no longer the top reason.
Speaker: They've been overtaken by as many as three other factors.
Speaker: The biggest of these is that 49% of investors say they care about ENS because this can improve their investment returns and or reduce risk.
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 here are very encouraging.
Speaker: In 2019, well above half of investors in all regions except Asia did feel held back by 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: And while it's true that Asia's level hasn't changed much from about 40%, in the Middle East too, it's come down from 77% to 69%.
Speaker: Of course, if investors are to invest sustainably, they need the right information from issuers.
Speaker: And there's good news here.
Speaker: In 2019, 17% of issuers said they don't disclose information about their environmental and social performance.
Speaker: This proportion has fallen to just 6%.
Speaker: around 11% of issuers believe they disclose too much information, but 46% expect to increase their disclosures, and about half of those think that this is a good thing.
Speaker: Investors have also improved disclosure in the past year.
Speaker: Now, one of the most important aspects of the survey is issuers' expectations of when climate change will begin to affect their businesses.
Speaker: Over 90% of issuers expect to be affected by climate change at some point.
Speaker: 80% expect this to happen in the next 30 years, and as many as 37% say it's already affecting them.
Speaker: We'll finish with 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 away from activities challenged by environmental and social issues and or towards activities that promote positive outcomes.
Speaker: It's the second year that we've run this question.
Speaker: And the results are impressive.
Speaker: Last year, 65% of issuers said they expect to make such changes to a noticeable extent or even substantially.
Speaker: This year, it's 77%.
Speaker: And the share who don't expect to take action has halved to just 3%.
Speaker: And what this means is that virtually the entire corporate sector is planning to change where it puts its capital in the near term for environmental and social reasons.
Speaker: For anyone who still doubts that environmental and social questions are relevant to investing and financing, we think this is the answer.
Speaker: Brilliant, thank you very much.
Speaker: That was extremely useful.
Speaker: I think there is a wealth of information in there.
Speaker: It's extremely valuable.
Speaker: I would like to ask you a few questions.
Speaker: What is holding back investors from implementing the ESG strategies?
Speaker: And I remember last year the number of investors that saw obstacles towards investing.
Speaker: was 61% and this year this number is down to 46%, which is a massive shift.
Speaker: Could you give us a bit of insight about this change and especially, you know, the 46 remaining percent, what are the key blockages they see?
Speaker: So that will help us obviously to unlock that, you know, as providers, market participants.
Speaker: Yes, thank you.
Speaker: I think there's two halves to that question.
Speaker: We asked them specifically about obstacles, and I think obstacles are also implicit in the question that we asked about the kind of advice and information they're seeking.
Speaker: And I think there's a really interesting sort of barbell combination going on there.
Speaker: So in terms of the specifically identified obstacles, it's quite nuts and bolts issues.
Speaker: For example, a lack of skills and experience.
Speaker: This is a new field and there aren't a huge number of experienced practitioners around.
Speaker: So that is clearly a pain point for the buy side on this.
Speaker: At the same time, I think it's implicit in that answer that what investors most want advice on is the big picture, how they measure the impact of their investments, how they align with the SDGs, how will climate change play out on the economy and on markets over time
Speaker: That suggests that there's also an opportunity for intermediaries to think very big and very long term about these issues and kind of provide very creative analysis and research, you know, that can enable investors to picture a future, a future involving a transition to a lower carbon economy, which will be a very profound transition and, you know, which will require extremely deft
Speaker: positioning by investors.
Speaker: And effectively that talks to the advice partner as well.
Speaker: So there are obstacles and clearly getting more advice from various people in the ecosystem will help unlock this.
Speaker: In terms of the results that you see this year and maybe compared to last year, is there anything that stands out as a surprise or maybe not so intuitive compared to what we can read or what we can see?
Speaker: Some of the trends are pretty obvious.
Speaker: Some of the information is extremely valuable, as you just discussed about the obstacles, about the incentives, etc.
Speaker: Is there anything that stands out or you find surprising in the overall survey?
Speaker: Clearly, the biggest surprise is that having gone through a profound shock, the market as a whole is not dissuaded from treating ESG and sustainability as a priority.
Speaker: I don't think that was an obvious outcome.
Speaker: That tranche of investor, not capitulation, but of slowing of momentum in this direction probably speaks to the fact that there was a possibility of it impacting the speed and direction of travel.
Speaker: The fact that 30% of investors, 40% of investors in Asia say that the pandemic has made them
Speaker: put more emphasis on ESG is a really strong affirmation that increasingly this is a core element of the risk matrix that investors are applying.
Speaker: That's both somewhat surprising and enormously encouraging.
Speaker: One question I think performance concerns are still a little concerning.
Speaker: That is still a factor.
Speaker: Could you go into a little bit more detail which regions and even in this region, I know we have quite a few people on from Asia.
Speaker: Within the region, how does that compare between, say, China, Hong Kong, Singapore, some of the major markets in terms of that fear of performance, of having to give up some performance for this ESG considerations?
Speaker: For sure.
Speaker: Thanks, Alex.
Speaker: I think there's two things to say about that.
Speaker: I think the first is a very striking disparity within the investor community as a whole.
Speaker: between that very important and substantial proportion who are saying that notwithstanding all of the volatility that we've endured this year, we nonetheless think that ESG as a filter and as a driver for what we do is even more important than it was before.
Speaker: And a second, somewhat smaller, but still significant body of opinion
Speaker: that appears to be more concerned about risk and performance than it was before.
Speaker: So there's a tension between those two responses.
Speaker: What's interesting from an Asian perspective is that there is clearly more of a tilt towards the positive stance there.
Speaker: So we saw, for example, that only 12% of investors in Singapore and in the higher teens in China and Hong Kong
Speaker: accept the notion that ESG investing always involves giving up some performance.
Speaker: That's a more constructive response than the global average.
Speaker: It's a more bullish response on ESG than you find in Europe, for example, where there's a longer tradition of ESG investing and thinking around those issues.
Speaker: That seems very positive.
Speaker: In fact, it's in Europe that you see the tension that I described
Speaker: between these two schools of thought within the investor community at its most extreme.
Speaker: So there's been something of a revisionism among some European investors that we don't see in Asia in particular.
Speaker: On that point, Julian, did anything come out of the survey around the lack of experience and talent in the field, given that it is relatively newer, and that's perhaps leading to some of this?
Speaker: Yes, and in fact, in some regions, they complained publicly
Speaker: more this year than they did last, that there is a bottleneck around talent and skills and experience.
Speaker: So I guess clearly the positive message for those who work in this field is that there's a premium attaching to your experience because the industry as a whole is short.
Speaker: And I think for active fund managers, this is where they can excel because there is inconsistency of data.
Speaker: It does require more skill.
Speaker: However, on the passive side or the
Speaker: More quantified, it's more difficult to do that, given that there is inconsistency of the data and more difficult to interpret that without some human elements and a human overlay.
Speaker: It actually connects with one of the most interesting findings on the issuer side of the survey, which also has very clear implications for all credit investors at the same time.
Speaker: which is that issuers are saying not just that they're excited by the new generation of sustainability-linked structures, both loans and, more recently, bonds, though they are saying that, but they're also saying they would like to see a kind of reimagining of credit as a whole.
Speaker: I found this a really fascinating dimension of the survey's findings, that they would like to be rewarded by bank lenders and by investors
Speaker: for their sustainability efforts.
Speaker: They were saying, for example, that if we're measured only on traditional financial metrics, you're not giving us credit for these efforts and these investments that we're making.
Speaker: And actually, you're not assessing risk properly.
Speaker: When we look forward to next year and future surveys in the field, it will be extremely interesting to see how this plays out.
Speaker: Are we going to reimagine
Speaker: credit whereby ESG factors become as important an element to the analysis as traditional financial metrics, just as we're seeing, you know, most starkly fossil fuel companies increasingly punished, you know, with the allocation of an ever greater risk premium by markets, we may start to see more sustainable companies rewarded in the credit markets as well as the equity markets.
Speaker: That does seem to be a strong
Speaker: consistency there and messages that are coming out of the survey.
Speaker: And for example, what we're seeing in the markets recently, I mean, noting the extraordinary high volumes of green GSS issuance last week, which touched 19 billion in one week.
Speaker: And if you extrapolate that to 52 weeks, you've got nearly a trillion dollar market and it was about 20% of total fixed income issuance.
Speaker: So clearly that product is survey is showing the market data suggests is
Speaker: is maturing and this same time, this sort of shift to saying, actually, now we start need to look at the real fundamental values of drivers of value, scenario analysis, risk analysis, and interesting in your table to see, to see those going up dramatically.
Speaker: For sure.
Speaker: And it's probably worth saying in the green bond area that it may not be sustainable for that third of investors who say they're not going to buy the product.
Speaker: At a time when, as you've mentioned, in some weeks we're seeing more issuance of labelled bonds than of traditional bonds in some sectors.
Speaker: And now we've got a colossus coming into the market to do 100 billion of sure and 225 of green EU bonds.
Speaker: It may actually not be sustainable for that third of investors who say they won't buy this product to keep shunning it.
Speaker: You know, it may be that one of the leading indicators to look to next year survey for is whether there's a capitulation from the refuse NICs there, because suddenly, you know, the whole supply dynamic is changing so dramatically.
Speaker: Investor expectations or preferences that somehow aren't getting through to the sell side and to the issuers.
Speaker: How would you summarize some of those and perhaps sort of give
Speaker: investors some hints as it were as to what they should be focusing on in their demands for the missing piece because sometimes you know what you want but you don't quite know what you've communicated well or not communicated so well to the other side.
Speaker: I think it's very telling that the advice investors say they most want is the big picture stuff.
Speaker: So yes there are pain points around disclosures, there are pain points around the supply of skills
Speaker: But these are quite nuts and bolts issues that you would expect over not perhaps one year to the next, but over two to three years, will find a fairly kind of natural resolution.
Speaker: But supply of the kind of big picture analysis that they say they most need, that strikes me as a very loud and compelling call.
Speaker: They are saying that the industry is not yet capable of thinking at the ultra macro level that they most need to kind of conceive conceptually of a new kind of risk universe.
Speaker: And obviously that's also a tremendous opportunity for the sell side.
Speaker: Okay.
Speaker: I think in the interest of time, we probably need to let you go, Julian, but thank you very much for your insightful comments and the survey, which we've certainly taken a lot away from and
Speaker: Hope that our clients also do so.
Speaker: Yeah, no doubt.
Speaker: And thank you both, Jonathan and Alex.
Speaker: I've appreciated the opportunity to share some of the insights from the survey today.
Speaker: Thank you for listening today.
Speaker: This has been HSBC Global Viewpoint Banking and Markets.
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