Having witnessed first-hand the disruption and economic turmoil being inflicted by the pandemic, market participants are accelerating their climate change action plans as they look to transition to net zero. Sustainability was a major theme at Sibos 2021, but what were the main talking points?

    Issuers adopt sustainability

    With the growing emphasis on sustainability – and as we approach the COP26 UN Climate Change Conference in Glasgow - issuers globally are looking to transition away from fossil fuels towards net zero. According to a recent report by HSBC – ‘The Sustainable Financing and Investing Survey 2021 (SF&I) – 94 per cent of companies said they expected to move away from environmentally and socially challenged business models in the next five years1. Half of all issuers also told HSBC that climate change is affecting their business or activity, an increase from 37 per cent in 20202 - further underscoring the seriousness of the challenges facing the corporate and banking world. Speaking at Sibos, Noel Quinn, Group Chief Executive at HSBC, notes that positive changes are already underway in sectors such as automotive, oil and gas, and aviation. In the case of the latter, Quinn told Sibos that airline companies are trialling the use of sustainable aviation fuel on long-haul flights which could help them reduce their carbon emissions on such journeys by upwards of 80 per cent. However, the refineries to process and produce sustainable aviation fuel are yet to reach scale, mainly because there is no legislation obliging airline groups to use sustainable aviation fuel.

    Catalysts for change – investors and regulators in alignment

    Panellists at Sibos say investors and issuers alike are increasingly recognising the strategic benefits of embracing ESG [environment, social, governance] in their businesses – something which is evidenced in the HSBC SF&I Survey. Fifty-one percent of issuers and investors told HSBC that focusing on ESG was an effective way by which to strengthen returns and reduce risk. Elsewhere, regulatory pressure is also a catalyst behind the pivot towards sustainability. Sibos panellists highlight markets – including those in Europe, Asia and North America – are requiring institutional investors to publicly disclose how they integrate ESG in their portfolios. These regulatory interventions are prompting more investors to scrutinise issuers about how they incorporate ESG into their businesses.

    Central banks are also examining climate change from a systemic risk perspective. One speaker warns that the potential impact of climate change on banking stability is likely to be much greater than the challenges faced by the industry during the subprime mortgage crisis. Central bankers say that financial institutions face two main threats from climate change, principally physical risks arising from climate-related natural disasters, and transitionary risks – whereby policies designed to reduce carbon emissions result in rising costs for companies - thereby denting their profits3.

    In response, a number of Central Banks are now actively exploring whether to impose tough green capital requirements on banks and insurers with exposures to carbon-intensive industries. Other Central Banks - including the European Central Bank [ECB] along with regulators in the UK - are already conducting climate-related stress tests on financial institutions. Georges Elhedery, Co-Chief Executive of Global Banking and Markets at HSBC, says Central Banks need to strike the right chord on climate change stress testing and capital requirements. He notes that if non-green assets are subject to lax treatment by Central Banks, then financial institutions will have fewer incentives to support the transition to a global net zero economy. Conversely, he warns that if the rules are too strict, it risks forcing banks to withdraw funding altogether – something that could prompt organisations to seek financing from the less regulated shadow banking market and remove incentives to work with banks on undertaking their transition.

    Financing change: how Banks are driving sustainability

    Speakers at Sibos stress that banks are playing an integral role in supporting companies with their transition towards net zero. A number of financial institutions have developed innovative financing tools such as green bonds, green loans, green project financing and green securitisations, where the use of proceeds from such instruments are earmarked exclusively for green projects. Green bond investments have become more ubiquitous over the last few years and are projected to accumulate USD500 billion in 2021, with experts anticipating the market could grow to USD1 trillion by 20234.

    Elsewhere, Sibos panellists add that a number of banks are also offering sustainability-linked loans [SLL] and sustainability linked bonds [SLB]. In contrast to green bonds and green loans, SLLs and SLBs do not leverage the use of proceeds model, but instead impose a set of pre-agreed and independently reviewed sustainability KPIs [key performance indicators] on borrowers. The terms of these transactions require borrowers to meet a set of KPIs and if they do, then the amount of interest paid on the loans is reduced. Activity in the global SLL market has been buoyant recently, with USD350 billion of issuances in the first six months of 20215 - a sum total which is significantly higher than the supply of green loans. Such financing tools will be essential in helping corporates transition towards a greener future.

    Standards and data are key

    If companies and banks are to achieve net zero, then the standards and data underpinning ESG and sustainability needs to be robust. Speakers at Sibos say this is an ongoing problem, not least because there are so many competing standards. Notable examples of ESG standards include the proposed EU taxonomy; the Financial Stability Board’s Task Force on Climate Related Financial Disclosures; the UN’s Sustainable Development Goals; and the Greenhouse Gas Protocol to name but a few. Efforts to homogenise all of these standards should be enacted if progress is to be made, according to experts at Sibos.

    In addition to the abundance of standards, the absence of quality ESG data is also a barrier to wider ESG adoption. According to the HSBC SF&I Survey, 32 per cent of investors said the lack of comparable data across issuers is their biggest ESG challenge. Efforts to tackle obstacles like this are in train. In his role as chair of the SMI [Sustainable Markets Initiative] Financial Services Taskforce [FSTF], Quinn is working with other global banks to identify practical solutions and to provide greater clarity and transparency around sustainability initiatives. If net zero pledges are to carry any weight in the banking sector, Quinn says the industry needs to develop a science-based definition about what they mean in practice and how they will be measured and achieved – something which is being enabled through the FSTF’s work.

    Safeguarding the future

    • Investor and regulatory pressure is likely to force issuers into ramping up their ESG efforts
    • Through intelligent financing solutions, banks can play a vital role in promoting sustainability across their corporate client base
    • Comprehensive standards and quality data will be essential if ESG targets are to be met

     

    References:
    1 HSBC - Sustainable Financing and Investing Survey 2021
    2 HSBC - Sustainable Financing and Investing Survey 2021
    3 Financial Times [March 18, 2021] ECB stress test reveals economic impact of climate change
    4 Climate Bonds [ August 31, 2021] 2021 green forecast updated to half a trillion
    5 S&P [July 27, 2021] Sustainability linked loan supply outpaces green bonds and loans amid US surge

    Quality pays for green bonds
    Oversubscription reflects investor demand for labelled bonds – but some sectors are especially popular
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