On 12 September, London played host to HSBC’s annual sustainable finance conference. The conference highlighted the findings from our 2017 sustainable finance survey. The survey, conducted globally with 507 CFOs and Group Treasurers and 497 CIO, Heads of Portfolio and Heads of Investment Strategy in investment houses, highlights how the global transition to a low-carbon, clean energy economy is now firmly underway, yet companies and investors are clearly travelling at different speeds. The conference provided an opportunity to consider the survey findings while taking views on the current market conditions among investors and corporate issuers in the green and social bond market. The discussion focused on the need to improve market transparency and disclosure as a key prerequisite for future market development.
Growing a deeper market for sustainable finance
Daniel Klier, HSBC’s Group Head of Strategy and Global Head of Sustainable Finance
2017 has been a landmark year in the nascent sustainable finance market. The green bond market totalled USD82bn in 2016 and is set to surpass USD130bn in 2017 according to the Climate Bond Initiative.
Many factors are shaping this market transformation. The political impetus provided by COP 21 in December 2015 is recognised as a turning point. But it is not purely, or even mainly, a top-down governmental shift. The market too is responding to the green investment challenge with increasing investor pressure placed on corporates to adopt strategies to reduce their carbon footprint and develop more sustainable business models. This expansion has been driven by a major transition over the last 3-4 years in corporate behaviour which is being reflected in the rapid growth in green bond issuance. We can see these trends in the 2017 results for HSBC’s sustainable finance survey below.
The HSBC 2017 sustainable finance survey highlights the growing investor appetite for green assets with 68 per cent of investors planning to increase their climate-related investment. Growing investor demand is also shining a spotlight on corporate behaviour with senior managers having to report on and explain their corporate strategies. At the same time, 59 per cent of companies now have investment plans to make their business more operationally sustainable.
The shift towards a green economy brings with it both opportunities and risks. If we are to achieve a 2-degree compatible pathway, it has been suggested that up to half of the world’s known oil reserves would be left in the ground. In the case of transport, many governments have already adopted targets to ban the sale of petrol and diesel vehicles from the roads in favour of electric vehicles. For example, France and the UK aim to do so by 2040, the Netherlands has a more ambitious target of transitioning by 2030. Yet across the EU less than one per cent of new car registrations last year were pure electric vehicles. The political push towards electric vehicles is hugely welcome but it needs infrastructure; a national network of charging points in place of current petrol filling stations. This shift requires not just time and a fair political wind, but also massive private investment.
Investors are very much in the driving seat in making this shift a reality. 68 per cent of corporates believe that it is investors, not regulators nor governments, who are the most influential players in shaping the green investment market. Yet the consensus view remains that the market remains too narrow. 84 per cent of investors believe that there is currently a lack of credible investments available in the market.
This highlights a significant opportunity for financial markets and institutions to help develop a deeper more liquid market with a wider range of financial instruments available. Long-term success means building a sustainable finance market which goes beyond green bonds to include equities, corporate loans and mortgage markets as well as clients ranging from “pure green” to companies undergoing a transition towards a low carbon world. Banks like HSBC are already helping to bring corporate clients into the market for sustainable finance. This is demonstrated by the issuance of HSBC’s first Green Bond in 2015 which raised EUR500mn which is currently financing 17 projects, to support renewable energy, energy efficiency and sustainable waste management across Europe and Africa. During 2017, HSBC’s Green Bond has further diversified from investing in project finance assets into the corporate loan market expanding access to green finance among mid-cap businesses. In this way, we can already see how financial institutions are playing a pivotal role in creating market liquidity for green investments across a wide range of clients.
Green reporting: making sense of ESG investing
Encouraging more firms to adopt sustainability strategies is one challenge. Making sense of those investments and being able to evaluate the outcomes and judge their effectiveness in reducing a corporate’s environmental impact is another. End investors want to know what impact their ESG investment is making. But having investors who can ask the right questions depends on corporates collecting and reporting appropriate data. Enhanced disclosure will play a critical role in ensuring an efficient market place for sustainable finance.
Currently, market data is neither standardised across geographies nor industries. HSBC’s 2017 survey revealed that 56 per cent of investors think that climate-related risk disclosure is highly inadequate. In addition, poor availability of research and analysis and a lack of standardised sector definitions are also seen as key barriers to future market growth. So, while investors have the power to make a difference, they need better disclosure to tap into that potential. Several initiatives have been put in place which aim to change the market landscape.
The UN Principles on Responsible Investing, launched back in 2006, highlight the role for Environmental, Social and Governance (ESG) issues for investors and corporates; this includes integrating ESG into investment analysis and decision-making processes, and seeking appropriate disclosure on ESG issues by corporates when raising capital. Through this process, ESG reporting has becoming more and more part of the everyday corporate agenda. HSBC first set out its strategy to reduce the environmental impact of its operations in 2012, putting in place targets to reduce its carbon emissions, boost its use of renewable energy (currently accounting for 23 per cent of all electricity) and use resources more efficiently (waste has been cut by 57 per cent).
In addition, the Task Force on Climate-related Financial Disclosures, has gained the support of over 100 CEOs from the world’s leading businesses including HSBC. This initiative supports the voluntary adoption of reporting standards to help deliver greater market transparency around climate-related business risks and opportunities. Encouraging behaviour change – even on a voluntary basis – among the very largest companies in the world potentially offers the largest environmental impact as it is these companies which often have the largest carbon footprint. However, some countries are already moving towards a statutory approach. In 2015, France created new reporting obligations under Article 173 of France’s law on energy transition for green growth. Market practitioners broadly welcome this approach in helping to create greater clarity as everyone knows what is expected of them. This in turn is helping to build market momentum for sustainable finance.
A central element in developing any new reporting requirements is time. We are dealing with a new and emerging market place. New rules should guard against stifling the market place. We also need to be pragmatic in developing common sense metrics for evaluating the green impact of investments. When it comes to corporates scaling up their low-carbon investment, we need to measure firms based on their overall progress in transitioning towards a green business model. How do you finance large corporates shifting from coal-fired to gas-powered? While gas might not be considered a ‘green’ investment, it is nonetheless a significant energy transition and it makes a big transformation in reducing CO² emissions when replacing coal. It is important that we do not bucket companies into good and bad but measure where firms are on their journey in transitioning towards low-carbon.
If we are to direct the world’s capital towards low-carbon investment opportunities then we need to break through the barriers currently inhibiting its flows. This will require improvements in the availability, reliability and comparability of climate-related information. This demand will only get louder as the market gains a better understanding of how to use these metrics effectively.
A growing role for Emerging Markets
HSBC’s sustainable finance survey reveals that Europe continues to lead the way in growing the green bond market. While only 53 per cent of corporates globally have strategies in place to reduce the environmental impact of their organisation, the figure increases to 84 per cent in Europe. However, the findings also reveal that Asia presents huge investment opportunities with a strong and growing public sentiment to shift the market.
According to the 2017 survey findings, Asian corporates and investors are rapidly playing catch up with their European and North American counterparts. Asia has notched up the most significant year-on-year increase since 2016 in the number of corporates adopting strategies to reduce the environmental impact of their organisation, having increased by 18 per cent to 43 per cent. Asia is sending a clear message around the world that sustainable development and finance will be central to future economic growth in the region.
This rapidly shifting behaviour reflects the environmental realities in many Asian countries. Asia finds itself in the forefront of one of the world’s most immediate environmental challenges as its large and rapidly growing urban populations combine with rapid industrialisation. As a result, air and water pollution now constitute major public health risks. Cities create a lot of waste, particularly older cities with ageing infrastructure. According to the World Health Organisation (WHO) which has compiled data on more than 3,000 cities globally, outdoor pollution as grown by eight per cent in the five years between 2011 and 2016. All around the world, but particularly in Asia, governments are faced with a common challenge: the need to make our cities liveable though the use of renewable energy, water and waste management, green transport and housing.
Growing urban populations are driving the need for cleaner ‘smart’ cities. This new model of urban development harnesses the Internet of Things (IoT) to help cities manage the growing demand for finite resources in the most efficient way possible. This enables national and municipal governments to protect the environment, minimise waste and enhance the quality of life in our growing urban centres. This is prompting a big need for investment in Asian cities to which national governments have responded. According to the WHO, China has improved its air quality since 2011 going against the global trend, during which time China has also invested heavily in green technology becoming the world leader in renewable energy.
The emergence of green investments in China and other markets is not only helping to address environmental issues at home, but this green-tech is now being exported to help address issues on a global scale. For example, within just a few years, London’s iconic black cabs will be replaced by a fleet of electric vehicles, with the Chinese automotive company Geely already developing the next generation. Thanks to Chinese investment and technology, London’s diesel black cabs will be a thing of the past.