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: 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 TMI's TreasuryCast and HSBC's CYBOS Spotlight.
Speaker: I'm Eleanor Hill, Editor of TMI, and I'm delighted to be working with HSBC to bring you an in-depth look at the events from this year's CYBOS.
Speaker: So throughout this series, we'll explore the critical topics on the CYBOS 2021 agenda, those which are shaping our industry in the next decade, including sustainability, digital acceleration, and technological innovation.
Speaker: We'll also examine the opportunities and challenges in the areas of payments, securities, cash management and trade.
Speaker: I'm delighted to be joined in the studio today
Speaker: by Farnam Bidgoli, Head of ESG Solutions EMEA at HSBC to talk us through building a credible sustainability strategy and navigating regulatory complexity in the ESG space.
Speaker: Farnam, welcome.
Speaker: Thank you so much for joining us ahead of Cybos 2021.
Speaker: Great to have you here and have a good chat about ESG, which is obviously
Speaker: One of the key themes running throughout this year is Cyboss, and there's a lot of excitement around ESG, but from the corporates that we speak to, there's also maybe a little bit of trepidation or confusion around getting it right.
Speaker: So from your experiences with clients looking to build that sort of credible sustainability strategy that I mentioned, how challenging is it for them to discern how to mitigate necessary ESG risks while actually complying with the various reporting standards that are out there?
Speaker: I think it's quite overwhelming for many.
Speaker: I mean, the reality is it isn't really a compliance problem, right?
Speaker: There's no fixed kind of endpoint at which point you sort of become ESG compliant.
Speaker: It's a strategic consideration that we're talking about that needs to be integrated across the business.
Speaker: Our clients are grappling with increasing ambition on the part of investors.
Speaker: Over the course of the past few years, we've seen a number of investors set their own net zero expectations.
Speaker: targets and start to come out now with short and medium term targets.
Speaker: So they're looking for more on the part of companies to be able to align to that.
Speaker: I think globally, there's sort of changing needs in terms of stakeholders.
Speaker: We're seeing a lot more by way of, you know, customer engagement on sustainability issues, on broader stakeholder engagement on sustainability issues.
Speaker: And then as you rightly point out, you know, there's a lot by way of new standards and regulations that companies need to be aware of as well.
Speaker: So the goal posts are constantly moving and that's really a challenge for a lot of clients.
Speaker: Yeah, absolutely.
Speaker: There's a whole wave of momentum behind them and they've got a lot of other priorities to attend to at the same time.
Speaker: And with that in mind, for our listeners who don't necessarily have the time to keep up with all of that regulation,
Speaker: Tell us a little bit about what the latest regulation is in the ESG space, how far advanced are things like the EU taxonomy, for example, and what will actually change when that comes into effect next year?
Speaker: So there are a lot of moving parts on the European taxonomy and actually the broader European Sustainable Finance Action Plan.
Speaker: The taxonomy, for those who don't know, is a classification system that the EU has been developing on what is sustainable and what is not.
Speaker: And it is built around six major environmental objectives.
Speaker: And the first two of those, climate mitigation and adaptation, have been under development over the course of the past two years and will come into effect at the beginning of 2022.
Speaker: When those they come into effect, that means that companies will be disclosing the proportion of their turnover, CapEx and OpEx that aligns to the technical screening criteria and the do no significant harm criteria under the taxonomy.
Speaker: Alongside that work, there's still the drafting of four remaining environmental objectives around water, circular economy,
Speaker: pollution and biodiversity.
Speaker: The first sort of drafted proposals on those four objectives were published this summer and they're currently under consultation.
Speaker: The goal is to have those implemented by the beginning of 2023.
Speaker: And we're already talking now also about expanding the taxonomy.
Speaker: So over the course of the summer, we've seen proposals come forward for a social taxonomy, as well as potentially a taxonomy to support transition in areas or sectors that are in sort of hard to abate sectors.
Speaker: So, I mean, that's just on the taxonomy, but the European Sustainable Finance Action Plan has a lot of other implications for corporates and financial institutions beyond just taxonomy reporting.
Speaker: Since the beginning of this year, we've seen the implementation of the sustainable finance disclosure regulation, which is regulation for funds that are marketed into Europe.
Speaker: But effectively, that means providers of capital to companies.
Speaker: And what investors have to report on effectively is trickling down already to companies.
Speaker: So investors are reporting on the taxonomy alignment of their portfolios, of the ways in which they're mitigating what are called principal adverse impacts in their portfolios.
Speaker: And in addition to all that, we also have work happening around the banking and financial system, thinking through sort of prudential requirements when it comes to incentivizing green lending or potentially addressing climate risk and prudential requirements.
Speaker: So there's a lot of other moving pieces to the Sustainable Finance Action Plan as well that have implications for corporates and financial institutions.
Speaker: And as if that weren't enough to think about, just another acronym to throw into the mix is the TCFD.
Speaker: What was happening there?
Speaker: Because it's a little while since the recommendations were released.
Speaker: How's adoption faring and how can organizations prepare for that?
Speaker: So, I mean, the good news on TCFD is that I think it's one of the rare cases where we are indeed seeing widespread adoption globally.
Speaker: There's about 1500 companies, financial institutions and governments.
Speaker: There's also a number of investors, assets under management of about 150 trillion.
Speaker: And we are indeed also now seeing it embedded into regulation here in the UK, as well as Switzerland and New Zealand.
Speaker: And earlier this year, the G7 agreed to mandate climate-related financial reporting aligned to TCFD.
Speaker: The TCFD is a disclosure framework, right?
Speaker: It's a series of requirements on information that companies should be disclosing on governance, strategy, risk management, and metrics and targets to address climate-related risks.
Speaker: So I think what companies are struggling with a little bit is it's sort of deceptively simple.
Speaker: Disclosure under TCFD, particularly when it comes to that point around risk management, which is really around kind of scenario analysis and setting metrics and targets can be quite challenging.
Speaker: So I think our recommendation to our clients is always that TCFD is a multi-year implementation.
Speaker: Many companies will become supporters
Speaker: But sort of full full some disclosure will take a couple of years as you build out your your monitoring and measurement systems and start to think about that kind of integration into the business model.
Speaker: Yeah, that makes sense.
Speaker: And against that backdrop that you've described there, Farnham,
Speaker: What would you say should be the first step in building a credible ESG strategy?
Speaker: So I think if we take a step back and we think about effectively how a credible ESG strategy is going to be evaluated by stakeholders and primarily by investors,
Speaker: It really is around that alignment to your business model.
Speaker: And so our recommendation is to always start by identifying and understanding the ESG risks that you face, the opportunities also that are available to you.
Speaker: This isn't only a negative.
Speaker: And then to take that risk and opportunity identification and to assess and benchmark your maturity and think about your priorities as a business.
Speaker: And once you've done that priority exercise, then you can develop a program that addresses governance, milestones, and targets to address each of those risks and opportunities.
Speaker: And the benefit of doing it that way is that that allows you to be more selective about what you are reporting on, you know, whether it be topics or against certain standards, because there's a very clear kind of why that you can explain to investors.
Speaker: And so if you start with that, you know, we started with our business model and here are our risks and opportunities, then it becomes easier for you to address to investors why a certain standard may not be, you know, applicable to you, may not be material to you and defend that to stakeholders.
Speaker: Yeah, that makes sense.
Speaker: And where do specific ESG related KPIs go?
Speaker: sit within that journey and how can our listeners so treasurers get involved in that so as mentioned i think you know for a credible esg strategy there does really need to be a program that a has governance and ownership but also has you know set long-term ambitions and and short and medium-term targets and that as mentioned shouldn't emanate from from the business but treasury can get involved by embedding that into financing and that
Speaker: you know, it's a signal to your investors and other stakeholders about the accountability that lies within the business to actually meet those targets.
Speaker: So we've seen a lot by way of adoption of sustainability linked
Speaker: Loans and sustainability bonds over the course of the past few years.
Speaker: Sustainability bond issuance in 2021 is currently sitting at about $55 billion.
Speaker: And that's run the gambit from corporates involved in various sectors that have set environmental and social KPIs and then tied the coupon of a bond to the achievement of KPIs.
Speaker: And similarly in the loan market, we see the ratchet on a loan tied to the achievement or non-achievement of sustainability targets.
Speaker: Yeah, yeah.
Speaker: I'm glad that you mentioned social there, because when we talk about ESG, it does tend to be quite a heavy focus on the green elements.
Speaker: Tell us a little bit more about how some of those social causes can be prioritized.
Speaker: It's important to always go back to the idea of materiality.
Speaker: And here we're really in line with what the European Union has said, thinking about double materiality, the ESG impacts on the business, but also the impact that business has on society.
Speaker: And with that lens in mind, I think the social in ESG is hugely important.
Speaker: You can think about it in terms of workforce requirements, human capital development, so sort of internal to the company, how a company is thinking about diversity and inclusion, how it's thinking about growing talent.
Speaker: Clearly, that has
Speaker: both an impact on society, but also an impact effectively on, you know, the productivity of the company itself.
Speaker: There's also the social in terms of the safety implications of a product, as well as the human rights implications of a company's supply chain.
Speaker: So there's a number of social issues that I think are really critical to both the bottom and top line and also have a significant impact on society that should, of course, be integrated into any credible ESG strategy.
Speaker: It's very fun.
Speaker: And we've talked quite a bit about what companies might want to be thinking about.
Speaker: But what about HSBC itself?
Speaker: How is the bank setting a leading example around the transition towards an ESG led approach and
Speaker: How are you preparing for what is essentially the future of ESG, if you like?
Speaker: I mean, we are in the same boat as all of our clients, right?
Speaker: We are also, you know, on a transition towards net zero.
Speaker: We set out our own climate ambition statement last year, which had three key pillars, you know, becoming a net zero bank and the primary objective under that.
Speaker: Pillar being the fact that we want to align our finance emissions to net zero by 2050 or sooner.
Speaker: And we'll be setting short-term targets on that later on this year.
Speaker: We're also working with our customers to embed sustainability into the way that we work with our customers, be it by providing sustainability financing.
Speaker: So we have a target to facilitate or provide sustainability.
Speaker: between 750 billion to a trillion of sustainable finance over the course of the next 10 years.
Speaker: We're also working very closely with our portfolio of heavy emitters to increase our transition solutions.
Speaker: And we are also, as a third pillar of our climate ambition statement,
Speaker: and this is where I think we are showing a lot of leadership, is HSBC Pollination Climate Asset Management, which is a joint venture that we formed last year, under which we hope to establish a series of natural capital funds that will invest in activities that preserve, protect, and enhance nature over the long term.
Speaker: We have also committed $100 million in cleantech investment to support cleantech innovation.
Speaker: And we've also developed a 100 million philanthropic program to bring emerging climate solutions to scale between now and 2025.
Speaker: So under that third pillar of unlocking new climate solutions, I think we're really trying to lead on some of the areas that will require early stage investment because they're really around research and development and innovation in order to meet the goals of the Paris Agreement.
Speaker: Oh, exciting stuff, especially that natural capital sounds really interesting.
Speaker: So I look forward to hearing a little bit more about that in due course.
Speaker: Arnum, in terms of our listeners becoming leaders in this space, what would be your parting words of wisdom from this chat?
Speaker: Because we've covered quite a lot of ground around how treasurers can actually successfully embed ESG into all of their operations, you know, day to day, while actually being compliant with those necessary regulations that we've spoken about.
Speaker: So, I mean, I think the most important thing is that this isn't something that Treasury leads on their own, right?
Speaker: This is something around collaboration with other stakeholders across the business.
Speaker: And so working alongside sustainability teams, operations teams to address the sustainability challenges that are inherent to the business is the way in which really a company can successfully embed ESG in daily operations.
Speaker: Varnham, thank you so much for joining us today.
Speaker: It's been a genuine pleasure having you here and hearing your insights.
Speaker: So much appreciate you giving up your time to be with us.
Speaker: Thank you so much, Alan Arthur.
Speaker: This has been HSBC's Cyboss Spotlight, a podcast mini-series produced especially by TMI for HSBC Global Viewpoint.
Speaker: To discover other episodes in this series, head to HSBC's Globe at treasury-4-0.com or search for HSBC Global Viewpoint on Apple and Spotify.
Speaker: And to find out more about HSBC's presence at Cyboss, visit gbm.hsbc.com forward slash cyboss.
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.
