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: A heads up to our listeners that this episode has been recorded remotely, therefore the sound quality may vary.
Speaker: Thank you for listening.
Speaker: Welcome to the Business Plan for the Planet podcast, a series centered around ESG insights.
Speaker: In these episodes, you'll hear from experts whose work is at the heart of sustainability-linked trends and opportunities, as well as from businesses that are delivering change for a better future for us all.
Speaker: Join us as we shine a spotlight on their commitment to a sustainable future.
Speaker: We're going to be discussing transitioning investment portfolios, how to build those portfolios to net zero, how to identify priority investments to scale up climate solutions and technologies of tomorrow.
Speaker: Our two guests who are on my right immediately, Mort Nilsson, who is CEO of the BT Pension Scheme, and also Nicolas Moreau.
Speaker: Welcome.
Speaker: who is chief executive of HSBC Global Asset Management.
Speaker: So let me pick up.
Speaker: How much are you changing?
Speaker: We're hearing a high degree of positivity, that things are changing.
Speaker: There's a dramatic change of mindset.
Speaker: Morton, what's your view?
Speaker: I mean, we're changing.
Speaker: Last year in October, we set a net zero target of 2035.
Speaker: And that means we are changing and we're changing very fast.
Speaker: I think it is very ambitious and I think it's soon enough.
Speaker: I think the thing that's important in my view is that other institutions like us set their targets, their individual targets and get on with it.
Speaker: What about your ambitions, Nikola?
Speaker: I think the industry is moving very fast.
Speaker: There's a very strong momentum.
Speaker: Are you surprised by the speed?
Speaker: Yes.
Speaker: Since COVID, we've seen a huge pace.
Speaker: Before, it was okay.
Speaker: It was a matter of interest.
Speaker: But now you see...
Speaker: that everyone is feeling concerned.
Speaker: There's a lot of recruitment, new product, new push.
Speaker: I'm very amazed by the pace that we see today in the industry, whether that's asset owner or whether this is asset managers.
Speaker: Especially in Europe, a lot of asset managers are now pushing a green agenda.
Speaker: I mean, where are you feeling the pressure?
Speaker: Is it self-generating or is it the board saying, you've got to do this now?
Speaker: Who is it?
Speaker: What is it that's driving you at the moment?
Speaker: I think the thing that, I mean, we've been monitoring climate change for many years.
Speaker: Yeah, but slowly.
Speaker: Yeah, and I think what really changed for us was it moved from a potential future risk to what we deem as an actual immediate risk to our ability to deliver on our long-term promises.
Speaker: And that means that it's no longer something we can just postpone.
Speaker: It's actually core to the way we see our ability to deliver on the pension promises we have to deliver on to our members.
Speaker: When you see what happened recently in ExxonMobil, where big pension funds essentially achieved a dramatic change on the board, are you feeling, are you acting in that kind of way, with that kind of power and that kind of influence to change where you're investing?
Speaker: Yeah, and I think for actually on just following on that point, I think we see a huge appetite for green investments.
Speaker: But actually, those
Speaker: investments that need to transition their current business models to a low-carbon economy, they need that push.
Speaker: And if we can support that, I think we can be very much part of the solution.
Speaker: So we think we support things like that and believe that's the way to really get there for all of us.
Speaker: But you're being an active investor as a pension fund in a rather different way now, not necessarily on returns, but instead of which there is what they are doing, what the companies are doing and how they're achieving whatever profit they're making.
Speaker: Yeah, and I think that becomes, I mean, we act via investment managers, but I think for us, the way we see it is that that becomes more and more integrated because if they are not acting prudently and if they're not on transition path, then the risks are very high with those companies and then they
Speaker: that doesn't quite suit us.
Speaker: So we see it as not an either or, but actually both elements of this have to work to satisfy our investment needs.
Speaker: Nicola, the same questions to you in terms of how active you are in making sure that the returns are produced in a sustainable way.
Speaker: I think until recently we were valuing security stocks with a free carbon cost.
Speaker: So we were not taking into account the cost of carbon for corporates.
Speaker: I think what we're doing now is taking into account the fact that carbon will have a cost
Speaker: and that we cannot look at securities the way we used to do that.
Speaker: You have good data which allows you to make that judgment.
Speaker: No, not yet, but we are getting there.
Speaker: At least sector by sector, we can consider what is the carbon costs, whether this is a cost-intensive industry and how the transition plan
Speaker: of this company is adequate.
Speaker: So it allows us to take into account today the impact of carbon in the way we price a debt or we price a security.
Speaker: In the case of a debt in 10 years, if we don't take into account carbon cost in the cash flow of a company, this is wrong.
Speaker: So integration in the valuation of securities is essential.
Speaker: But let me ask both of you, are you creating a conditionality for your investment?
Speaker: Nicolas, in other words, we will only invest or we will maintain our investments only if you do this.
Speaker: For some companies, yes.
Speaker: Some companies need to go through a transition.
Speaker: For example, in emerging markets, it would be unfair and we are pushing for a fair transition to cut the
Speaker: some developing countries from access to carbon-led energy that they cannot transition so fast.
Speaker: So in Indonesia, India, China that are relying heavily on coal, for example, we need to help them to move from coal to gas to greener energy.
Speaker: So for this company, we are taking more time and we are supporting a fair transition.
Speaker: For some other companies, we will try to force through stewardship a transition.
Speaker: That was the case for ExxonMobil, for example.
Speaker: But that could be also the case that we decide to disinvest because we believe this company is not serious about the transition.
Speaker: Again, conditionality more.
Speaker: I mean, we see engagement sometimes take a bit of time and engagement is critical.
Speaker: But of course, if we can't... What do you mean by engagement?
Speaker: Engagement with companies on their plans and ensuring that they start to get these transition plans in place.
Speaker: And I think if... And sometimes that take time.
Speaker: But if it's fruitless, we will disinvest.
Speaker: We have no other option.
Speaker: Do you warn them?
Speaker: Yeah, and again, we work via managers.
Speaker: They have to deliver this because we have our goals we are assessing against, which we are quite keen on.
Speaker: And also, as I said earlier, I think if companies don't have these plans and if these plans are not solid and have enough depth in them, then there's a very high risk with those companies in refinancing their businesses or in their future.
Speaker: And we're concerned about that.
Speaker: But I would also say to that engagement part,
Speaker: is we also have to be careful that good investors are not just throwing assets to bad investors that have no care for this.
Speaker: So I think there's a duty for us to try to make our influence heard and try to make the changes we'd like to see, but not just give up straight away.
Speaker: So I think we do have a duty to engage.
Speaker: But if it's fruitless... I would add that, in fact, it's when a company is looking for new capital that we can have the biggest impact.
Speaker: Yeah.
Speaker: because selling equities at the end someone will buy it, it will not change anything to the company itself.
Speaker: But when a company issue debt, then if the fixed income market is closed because we consider that this debt will finance bad assets or browned assets, then that's where in fact we can have the biggest impact.
Speaker: It's in the debt market for the new issues.
Speaker: and for the capital raise of this company.
Speaker: But of course there's an important question there.
Speaker: If they come to you thinking they can get raised debt in the way they've always up to now, they are misjudging the way the market's moving and what you're likely to say.
Speaker: Yeah, but through engagement, it's not, you know, companies are being told.
Speaker: And that's why also the green bond market is exploding right now, because more and more companies are moving to green bonds because they want to finance the transition.
Speaker: And I think we've got a role here to play, which is to channel assets, money to good investments, to sustainable investments.
Speaker: What's both your attitude on stranded assets?
Speaker: Because you mentioned coal.
Speaker: We know what stranded assets, what the potential is.
Speaker: What's your attitude about what you do, given that those companies, mainly in the developing world, still have to function?
Speaker: They still need capital.
Speaker: They still need to produce electricity at a speed which India and so many other countries expect.
Speaker: It actually, for you, potentially in the market, it's a stranded asset which becomes a liability.
Speaker: And again, I think that if we go back to our core investment belief is that we want to invest in long-term sustainable value creation.
Speaker: That's what we're trying to do.
Speaker: And of course, if something is at risk of stranding or being a stranded asset, that's not long-term sustainable.
Speaker: But again, I think we haven't chosen to exclude companies or exclude industries or sectors.
Speaker: We've chosen to say if they can deliver long term sustainable value creation, we would be happy to invest.
Speaker: And that's that engagement back to the engagement point.
Speaker: But it is something to be aware of and also something where we see this again, this net zero target as a way of limiting our exposure to those types of assets.
Speaker: What about stranded assets for you, Nicola?
Speaker: I think one of the issues of stranded assets is that we need to control how companies are transitioning because we want them to transition in a phased and organized way.
Speaker: We don't want them to sell, you know, it's like...
Speaker: tax even.
Speaker: We don't want them to exit their stranded assets to sort of tax even of the brown assets.
Speaker: This will not solve the problems of the world.
Speaker: What we want is really to help companies to transition.
Speaker: Because, you know, if you are an oil company, you can sell all your oil business, go into the green wind and solar farms.
Speaker: This would be good for you.
Speaker: This would not be good for the world.
Speaker: It's better to take them through the transition.
Speaker: So supporting the transition is very important.
Speaker: There's a question underpinning everything that we're talking about.
Speaker: Do you think you're acting quickly enough and effectively enough?
Speaker: Which leads me to ask the question, how much are you under pressure now from those with pensions, those who are part of the pension fund who you're acting on behalf of?
Speaker: How much are you under pressure now from those you are investing on behalf of?
Speaker: I mean, we've surveyed our members twice now on this question, and there's a clear, I mean, 74% of our members are saying that they expect us to take environmental consideration into account.
Speaker: And it's a shift.
Speaker: It's a big shift, is it?
Speaker: Yeah, I mean, we haven't measured it like that before, but I believe it is a shift.
Speaker: And I think that's back to this momentum that is gathering also in the public, in the general public, that this is a really important topic.
Speaker: And people are realizing that something needs to change and it needs to change fast.
Speaker: So I think there is an increasing pressure on getting on with it.
Speaker: Nikola?
Speaker: Yeah, I think the pressure from clients is there, whether this is Nordics, whether this is pension fund in the UK or in France.
Speaker: We've seen this pressure growing with the momentum.
Speaker: The retail investors are not yet completely there, but we see a big push from retail investors to move on the ESG and sustainable space or impact.
Speaker: even impact.
Speaker: So we see this push.
Speaker: We now integrate the cost of carbon in nearly all our liquid portfolios.
Speaker: That's an integration.
Speaker: So we take that into account.
Speaker: And after we are an agent, so we are led by our clients.
Speaker: But this is clear that there is a big, big demand and push for.
Speaker: Let me put this question to you.
Speaker: What would it take to integrate nature-positive incentives into your evaluation of investments now?
Speaker: For example, there are more biologically beneficial decarbonisation investments than others.
Speaker: What data, and it picks up your point already, Nicola, what data do you need to integrate biodiversity into your accounting and prioritisation of investments?
Speaker: So we have developed a company called Climate Asset Management that is investing exactly in this type of assets, buying farms, land or timberlands and increasing biodiversity and carbon offset capabilities of these lands.
Speaker: So that's exactly what we are trying to do through this company.
Speaker: Now to come back to your
Speaker: Did you buy another company or did you create it?
Speaker: No, we are creating it.
Speaker: We are creating it with a partner called Poly Nation.
Speaker: So we clearly believe in biodiversity.
Speaker: The issue we have today is that carbon...
Speaker: is not easy to measure, but we begin to have science backing us in the measurement of carbon consumption or carbon assumptions.
Speaker: But the science is more in advance on carbon than it is on biodiversity.
Speaker: Today it's very difficult to have a quantitative approach to biodiversity.
Speaker: And so I believe that science will help.
Speaker: But today it's very, very difficult to integrate that into our investments.
Speaker: So we can do assets that invest in biodiversity, but including biodiversity in our current investment today, general investment, I mean, is very difficult because we don't have really the tool, the quantitative tools that help us to integrate it and to measure it.
Speaker: But science is working on it, and I'm sure that...
Speaker: We'll see developments there as we have seen development on carbon measurement in the past years.
Speaker: Well, one of the supporters of this forum is Persephone, which does exactly that.
Speaker: So maybe you need to be put in touch with them for the data.
Speaker: Again, the same question to you, Morten.
Speaker: I mean, I...
Speaker: But our answer is a little bit similarly, that we still need quite a lot of data on carbon emissions to be able to do a better job there.
Speaker: And I think we are really in the request of better data, more data.
Speaker: Again, does that become conditional then?
Speaker: Do you say we're only prepared to invest if...
Speaker: Yeah, but I think the point really is also that it needs to be standardized.
Speaker: And I think government has quite a big role to play and global collaboration has quite a big role to play because it's quite hard to assess all sorts of different standards.
Speaker: So if it can be standardized, that would be very helpful.
Speaker: On biodiversity, that's quite new.
Speaker: It's coming through.
Speaker: There's an initiative there also.
Speaker: But again, I think it's how we can integrate it into our investment processes, as you also said.
Speaker: So it becomes climate change is now, and net zero is now an integrated part of how we think and how we assess all our investments.
Speaker: And we need to get to the same point on biodiversity.
Speaker: But I think there's a bit longer to go on that.
Speaker: What about the people you're working with?
Speaker: Because in the end, as the chief executive of the Global Finance Initiative said, many of them have been in the business a long time and are finding it quite difficult to make the adaptation, to make the changes of mindset that are needed.
Speaker: How much have you had to work pretty hard among your colleagues at every level within the investment community?
Speaker: I think people are happy to do good things.
Speaker: in average people are good people.
Speaker: And coming from the finance industry where in the past 10 years they have been put, I think, in the doghouse a little bit, they are quite happy to... What do you mean by that?
Speaker: I think the last crisis, you know, 2007, 2008, 2009, 2010, have been difficult for the finance industry and for the people that are working there.
Speaker: And I think today, giving some sense to what they do, having the feeling that they are doing the right thing in directing investments in the proper direction, they are quite proud of it.
Speaker: So, at least in HSBC,
Speaker: I don't see any resistance.
Speaker: But you're giving them absolute clarity on that, are you?
Speaker: This is the way we want you to work and this is what you've got to do.
Speaker: Oh yeah, of course.
Speaker: I think everyone is very aligned and we've got some cultural stream of work in our sustainability programs so that everyone is aligned.
Speaker: And that's very important, but I see no resistance.
Speaker: On the contrary.
Speaker: That's right across 60 countries where you're operating at the moment.
Speaker: My oppression is more limited, but I would say, yes, people are happy to do the right thing.
Speaker: Morten, your reflection on that.
Speaker: In the end, you're dealing with presumably people in your departments who've been doing it for quite a long time, who've been doing investing in a certain way.
Speaker: How easy or difficult have they found it?
Speaker: How challenging have they found it to change the way they've got to invest in future?
Speaker: I think the interesting thing for us was when we announced this internally, people were so excited.
Speaker: This is the most exciting thing we've done internally and people have gathered together.
Speaker: Were you surprised?
Speaker: I was actually surprised how deep-filled that was and how many new initiatives, also internal things.
Speaker: What can we do to reduce our own carbon footprint and how can we change that?
Speaker: That was really pleasant to see.
Speaker: And I think that's part of this great momentum of being part of something positive.
Speaker: And actually also that, as I said earlier, the general public is more and more feeling this is really an important topic.
Speaker: And I think the other thing that we found quite interesting when we were looking at setting this net zero target was some of the asset managers were used all to commercial businesses.
Speaker: And they were on it immediately, most of them, and engaged with us on how we could, you know, whether 2035 was achievable and what they could do to support that.
Speaker: So I think we haven't had an issue in integrating it.
Speaker: I think where we have challenges is because the data is so bad and the direction is not clear, we need to do something about that.
Speaker: But also we need to accept that there's a lot of uncertainty here.
Speaker: And in our case, we have to accept we can't achieve our goal alone.
Speaker: We need governments and regulators and consumers and this momentum to continue.
Speaker: And I think that creates a bit of uncertainty and nervousness.
Speaker: When you say data is bad, probably I suspect you mean incomplete at the moment.
Speaker: Yeah, I mean incomplete.
Speaker: Nicola, your final word about this, about the change that you've seen.
Speaker: I'm very happy to see this momentum because this is exciting when you see this enthusiasm, this energy that is going forward, you know, towards this goal, which is to get a better planet.
Speaker: And when I talk to my young daughter who is 14, she's very proud of what we do, of what I do.
Speaker: And I think that's, you know, gratifying.
Speaker: And I'm sure that's the case of all my colleagues and all your colleagues.
Speaker: Nicolas Moreau, Chief Executive of HSBC, Global Asset Management, and Mort Nilsson, Chief Executive of the BT Pension Scheme.
Speaker: Thanks for sparing time to be with us, to enlighten us on the kind of massive changes.
Speaker: And I hope we can meet again and you'll be reporting even greater, more significant changes, maybe in a few months' time.
Speaker: Thank you both.
Speaker: Thank you.
Speaker: This has been a special podcast in the Business Plan for the Planet series.
Speaker: More episodes will follow shortly, so please do keep an eye out for those.
Speaker: For more information on the programme, visit business.hsbc.com forward slash sustainability.
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.
