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Transitioning Investment Portfolios to Net Zero - Climate Leaders Live
25 Plays4 years ago
Listen to Nicolas Moreau, CEO, HSBC Global Asset Management and Martin Nilsson, CEO, BT Pensions Scheme as they discuss aligning portfolios to net zero and identifying investment opportunities to scale up climate solutions, using new technologies to accelerate decarbonisation. This clip was recorded at the Climate Innovation Forum. organised by Climate Action in June 2021.
This episode is part of HSBC’s Business Plan for the Planet podcast mini-series, which focuses on ESG insights. 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.
To find out more about HSBC’s Business Plan for the Planet programme, click here.
Hosted on Acast. See acast.com/privacy for more information.
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Transcript
00:00:00
Speaker
This
Introduction to HSBC Global Viewpoint and Podcast Series
00:00:01
Speaker
is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
00:00:09
Speaker
Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
00:00:18
Speaker
A heads up to our listeners that this episode has been recorded remotely, therefore the sound quality may vary.
00:00:24
Speaker
Thank you for listening.
00:00:32
Speaker
Welcome to the Business Plan for the Planet podcast, a series centered around ESG insights.
00:00:37
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.
00:00:47
Speaker
Join us as we shine a spotlight on their commitment to a sustainable future.
Building Net Zero Investment Portfolios
00:00:54
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.
00:01:06
Speaker
Our two guests who are on my right immediately, Mort Nilsson, who is CEO of the BT Pension Scheme, and also Nicolas Moreau.
00:01:15
Speaker
Welcome.
00:01:16
Speaker
who is chief executive of HSBC Global Asset Management.
00:01:21
Speaker
So let me pick up.
00:01:22
Speaker
How much are you changing?
00:01:23
Speaker
We're hearing a high degree of positivity, that things are changing.
00:01:28
Speaker
There's a dramatic change of mindset.
00:01:29
Speaker
Morton, what's your view?
00:01:31
Speaker
I mean, we're changing.
00:01:32
Speaker
Last year in October, we set a net zero target of 2035.
00:01:37
Speaker
And that means we are changing and we're changing very fast.
00:01:40
Speaker
I think it is very ambitious and I think it's soon enough.
00:01:43
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.
00:01:52
Speaker
What about your ambitions, Nikola?
00:01:53
Speaker
I think the industry is moving very fast.
00:01:56
Speaker
There's a very strong momentum.
00:01:58
Speaker
Are you surprised by the speed?
00:02:00
Speaker
Yes.
00:02:00
Speaker
Since COVID, we've seen a huge pace.
00:02:05
Speaker
Before, it was okay.
00:02:08
Speaker
It was a matter of interest.
00:02:09
Speaker
But now you see...
00:02:11
Speaker
that everyone is feeling concerned.
00:02:14
Speaker
There's a lot of recruitment, new product, new push.
00:02:18
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.
00:02:27
Speaker
Especially in Europe, a lot of asset managers are now pushing a green agenda.
Institutions Recognize Climate Change as Immediate Risk
00:02:34
Speaker
I mean, where are you feeling the pressure?
00:02:36
Speaker
Is it self-generating or is it the board saying, you've got to do this now?
00:02:40
Speaker
Who is it?
00:02:41
Speaker
What is it that's driving you at the moment?
00:02:44
Speaker
I think the thing that, I mean, we've been monitoring climate change for many years.
00:02:47
Speaker
Yeah, but slowly.
00:02:49
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.
00:03:02
Speaker
And that means that it's no longer something we can just postpone.
00:03:06
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.
00:03:14
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?
00:03:30
Speaker
Yeah, and I think for actually on just following on that point, I think we see a huge appetite for green investments.
00:03:37
Speaker
But actually, those
00:03:39
Speaker
investments that need to transition their current business models to a low-carbon economy, they need that push.
00:03:46
Speaker
And if we can support that, I think we can be very much part of the solution.
00:03:50
Speaker
So we think we support things like that and believe that's the way to really get there for all of us.
00:03:56
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.
00:04:08
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
00:04:24
Speaker
that doesn't quite suit us.
00:04:25
Speaker
So we see it as not an either or, but actually both elements of this have to work to satisfy our investment needs.
00:04:33
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.
00:04:40
Speaker
I think until recently we were valuing security stocks with a free carbon cost.
00:04:46
Speaker
So we were not taking into account the cost of carbon for corporates.
00:04:50
Speaker
I think what we're doing now is taking into account the fact that carbon will have a cost
00:04:55
Speaker
and that we cannot look at securities the way we used to do that.
00:04:58
Speaker
You have good data which allows you to make that judgment.
00:05:01
Speaker
No, not yet, but we are getting there.
00:05:03
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
00:05:16
Speaker
of this company is adequate.
00:05:17
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.
00:05:25
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.
Creating Conditionalities for Emerging Market Investments
00:05:33
Speaker
So integration in the valuation of securities is essential.
00:05:37
Speaker
But let me ask both of you, are you creating a conditionality for your investment?
00:05:41
Speaker
Nicolas, in other words, we will only invest or we will maintain our investments only if you do this.
00:05:47
Speaker
For some companies, yes.
00:05:49
Speaker
Some companies need to go through a transition.
00:05:52
Speaker
For example, in emerging markets, it would be unfair and we are pushing for a fair transition to cut the
00:06:01
Speaker
some developing countries from access to carbon-led energy that they cannot transition so fast.
00:06:08
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.
00:06:22
Speaker
So for this company, we are taking more time and we are supporting a fair transition.
00:06:27
Speaker
For some other companies, we will try to force through stewardship a transition.
00:06:33
Speaker
That was the case for ExxonMobil, for example.
00:06:36
Speaker
But that could be also the case that we decide to disinvest because we believe this company is not serious about the transition.
00:06:44
Speaker
Again, conditionality more.
00:06:45
Speaker
I mean, we see engagement sometimes take a bit of time and engagement is critical.
00:06:50
Speaker
But of course, if we can't... What do you mean by engagement?
00:06:53
Speaker
Engagement with companies on their plans and ensuring that they start to get these transition plans in place.
00:07:00
Speaker
And I think if... And sometimes that take time.
00:07:02
Speaker
But if it's fruitless, we will disinvest.
00:07:04
Speaker
We have no other option.
00:07:05
Speaker
Do you warn them?
00:07:07
Speaker
Yeah, and again, we work via managers.
00:07:09
Speaker
They have to deliver this because we have our goals we are assessing against, which we are quite keen on.
00:07:16
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.
00:07:30
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And we're concerned about that.
00:07:32
Speaker
But I would also say to that engagement part,
00:07:35
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.
00:07:44
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.
00:07:54
Speaker
So I think we do have a duty to engage.
00:07:57
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.
00:08:03
Speaker
Yeah.
00:08:03
Speaker
because selling equities at the end someone will buy it, it will not change anything to the company itself.
00:08:09
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.
Growth of the Green Bond Market
00:08:22
Speaker
It's in the debt market for the new issues.
00:08:26
Speaker
and for the capital raise of this company.
00:08:28
Speaker
But of course there's an important question there.
00:08:30
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.
00:08:37
Speaker
Yeah, but through engagement, it's not, you know, companies are being told.
00:08:44
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.
00:08:56
Speaker
And I think we've got a role here to play, which is to channel assets, money to good investments, to sustainable investments.
00:09:05
Speaker
What's both your attitude on stranded assets?
00:09:07
Speaker
Because you mentioned coal.
00:09:10
Speaker
We know what stranded assets, what the potential is.
00:09:12
Speaker
What's your attitude about what you do, given that those companies, mainly in the developing world, still have to function?
00:09:19
Speaker
They still need capital.
00:09:20
Speaker
They still need to produce electricity at a speed which India and so many other countries expect.
00:09:25
Speaker
It actually, for you, potentially in the market, it's a stranded asset which becomes a liability.
00:09:29
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.
00:09:37
Speaker
That's what we're trying to do.
00:09:39
Speaker
And of course, if something is at risk of stranding or being a stranded asset, that's not long-term sustainable.
00:09:46
Speaker
But again, I think we haven't chosen to exclude companies or exclude industries or sectors.
00:09:52
Speaker
We've chosen to say if they can deliver long term sustainable value creation, we would be happy to invest.
00:09:58
Speaker
And that's that engagement back to the engagement point.
00:10:01
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.
00:10:11
Speaker
What about stranded assets for you, Nicola?
00:10:13
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.
00:10:25
Speaker
We don't want them to sell, you know, it's like...
00:10:29
Speaker
tax even.
00:10:32
Speaker
We don't want them to exit their stranded assets to sort of tax even of the brown assets.
00:10:41
Speaker
This will not solve the problems of the world.
00:10:44
Speaker
What we want is really to help companies to transition.
00:10:48
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.
00:10:56
Speaker
This would be good for you.
00:10:57
Speaker
This would not be good for the world.
00:10:59
Speaker
It's better to take them through the transition.
00:11:02
Speaker
So supporting the transition is very important.
00:11:05
Speaker
There's a question underpinning everything that we're talking about.
00:11:08
Speaker
Do you think you're acting quickly enough and effectively enough?
00:11:12
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?
00:11:22
Speaker
How much are you under pressure now from those you are investing on behalf of?
00:11:26
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.
00:11:39
Speaker
And it's a shift.
00:11:40
Speaker
It's a big shift, is it?
00:11:41
Speaker
Yeah, I mean, we haven't measured it like that before, but I believe it is a shift.
00:11:47
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.
00:11:56
Speaker
And people are realizing that something needs to change and it needs to change fast.
00:12:02
Speaker
So
Client Pressure and Biodiversity in Investments
00:12:02
Speaker
I think there is an increasing pressure on getting on with it.
00:12:04
Speaker
Nikola?
00:12:05
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.
00:12:14
Speaker
We've seen this pressure growing with the momentum.
00:12:17
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.
00:12:29
Speaker
even impact.
00:12:32
Speaker
So we see this push.
00:12:34
Speaker
We now integrate the cost of carbon in nearly all our liquid portfolios.
00:12:39
Speaker
That's an integration.
00:12:41
Speaker
So we take that into account.
00:12:44
Speaker
And after we are an agent, so we are led by our clients.
00:12:47
Speaker
But this is clear that there is a big, big demand and push for.
00:12:50
Speaker
Let me put this question to you.
00:12:53
Speaker
What would it take to integrate nature-positive incentives into your evaluation of investments now?
00:12:59
Speaker
For example, there are more biologically beneficial decarbonisation investments than others.
00:13:05
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?
00:13:14
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.
00:13:32
Speaker
So that's exactly what we are trying to do through this company.
00:13:36
Speaker
Now to come back to your
00:13:38
Speaker
Did you buy another company or did you create it?
00:13:39
Speaker
No, we are creating it.
00:13:41
Speaker
We are creating it with a partner called Poly Nation.
00:13:44
Speaker
So we clearly believe in biodiversity.
00:13:49
Speaker
The issue we have today is that carbon...
00:13:53
Speaker
is not easy to measure, but we begin to have science backing us in the measurement of carbon consumption or carbon assumptions.
00:14:01
Speaker
But the science is more in advance on carbon than it is on biodiversity.
00:14:07
Speaker
Today it's very difficult to have a quantitative approach to biodiversity.
00:14:12
Speaker
And so I believe that science will help.
00:14:16
Speaker
But today it's very, very difficult to integrate that into our investments.
00:14:21
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.
00:14:39
Speaker
But science is working on it, and I'm sure that...
00:14:42
Speaker
We'll see developments there as we have seen development on carbon measurement in the past years.
00:14:48
Speaker
Well, one of the supporters of this forum is Persephone, which does exactly that.
00:14:51
Speaker
So maybe you need to be put in touch with them for the data.
00:14:54
Speaker
Again, the same question to you, Morten.
00:14:57
Speaker
I mean, I...
00:14:57
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.
00:15:05
Speaker
And I think we are really in the request of better data, more data.
00:15:10
Speaker
Again, does that become conditional then?
00:15:12
Speaker
Do you say we're only prepared to invest if...
00:15:15
Speaker
Yeah, but I think the point really is also that it needs to be standardized.
00:15:19
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.
00:15:27
Speaker
So if it can be standardized, that would be very helpful.
00:15:31
Speaker
On biodiversity, that's quite new.
00:15:33
Speaker
It's coming through.
00:15:34
Speaker
There's an initiative there also.
00:15:37
Speaker
But again, I think it's how we can integrate it into our investment processes, as you also said.
00:15:42
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.
00:15:49
Speaker
And we need to get to the same point on biodiversity.
00:15:52
Speaker
But I think there's a bit longer to go on that.
00:15:55
Speaker
What about the people you're working with?
00:15:57
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.
00:16:10
Speaker
How much have you had to work pretty hard among your colleagues at every level within the investment community?
00:16:16
Speaker
I think people are happy to do good things.
00:16:20
Speaker
in average people are good people.
00:16:22
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?
00:16:36
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.
00:16:45
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.
00:16:57
Speaker
So, at least in HSBC,
00:17:02
Speaker
I don't see any resistance.
00:17:03
Speaker
But you're giving them absolute clarity on that, are you?
00:17:06
Speaker
This is the way we want you to work and this is what you've got to do.
00:17:08
Speaker
Oh yeah, of course.
00:17:09
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.
00:17:21
Speaker
And that's very important, but I see no resistance.
00:17:24
Speaker
On the contrary.
00:17:25
Speaker
That's right across 60 countries where you're operating at the moment.
00:17:28
Speaker
My oppression is more limited, but I would say, yes, people are happy to do the right thing.
00:17:34
Speaker
Morten, your reflection on that.
00:17:36
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.
Driving Internal Initiative for Sustainable Investments
00:17:43
Speaker
How easy or difficult have they found it?
00:17:46
Speaker
How challenging have they found it to change the way they've got to invest in future?
00:17:51
Speaker
I think the interesting thing for us was when we announced this internally, people were so excited.
00:17:56
Speaker
This is the most exciting thing we've done internally and people have gathered together.
00:18:01
Speaker
Were you surprised?
00:18:03
Speaker
I was actually surprised how deep-filled that was and how many new initiatives, also internal things.
00:18:08
Speaker
What can we do to reduce our own carbon footprint and how can we change that?
00:18:13
Speaker
That was really pleasant to see.
00:18:15
Speaker
And I think that's part of this great momentum of being part of something positive.
00:18:20
Speaker
And actually also that, as I said earlier, the general public is more and more feeling this is really an important topic.
00:18:27
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.
00:18:38
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.
00:18:50
Speaker
So I think we haven't had an issue in integrating it.
00:18:54
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.
00:19:04
Speaker
But also we need to accept that there's a lot of uncertainty here.
00:19:09
Speaker
And in our case, we have to accept we can't achieve our goal alone.
00:19:13
Speaker
We need governments and regulators and consumers and this momentum to continue.
00:19:20
Speaker
And I think that creates a bit of uncertainty and nervousness.
00:19:23
Speaker
When you say data is bad, probably I suspect you mean incomplete at the moment.
00:19:26
Speaker
Yeah, I mean incomplete.
00:19:29
Speaker
Nicola, your final word about this, about the change that you've seen.
00:19:33
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.
00:19:50
Speaker
And when I talk to my young daughter who is 14, she's very proud of what we do, of what I do.
00:19:57
Speaker
And I think that's, you know, gratifying.
00:20:00
Speaker
And I'm sure that's the case of all my colleagues and all your colleagues.
00:20:03
Speaker
Nicolas Moreau, Chief Executive of HSBC, Global Asset Management, and Mort Nilsson, Chief Executive of the BT Pension Scheme.
00:20:10
Speaker
Thanks for sparing time to be with us, to enlighten us on the kind of massive changes.
00:20:14
Speaker
And I hope we can meet again and you'll be reporting even greater, more significant changes, maybe in a few months' time.
00:20:20
Speaker
Thank you both.
00:20:21
Speaker
Thank you.
00:20:24
Speaker
This has been a special podcast in the Business Plan for the Planet series.
00:20:28
Speaker
More episodes will follow shortly, so please do keep an eye out for those.
00:20:32
Speaker
For more information on the programme, visit business.hsbc.com forward slash sustainability.
00:20:46
Speaker
Thank you for listening today.
00:20:47
Speaker
This has been HSBC Global Viewpoint Banking and Markets.
00:20:51
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.