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Sophie Ward: The rise of 'S' in ESG

03 May 2022 Expert insight

With stark inequalities in focus, charities can seek solutions with engagement.

This content has been supplied by a commercial partner.

How did Covid-19 impact ESG considerations?

During the pandemic, we saw a range of stark inequalities highlighted around the world. Inequitable healthcare came to the fore, the Black Lives Matter movement focused attention on racial inequality, and we have become much more aware of social issues such as nutrition, education and access to water.

Investors want to understand how these are being addressed in portfolios and how asset managers engage with portfolio companies on these topics, as well as how they can begin to contribute to solutions. For example, at HSBC we have themes such as access to healthcare – and our clients and prospects want to know how you can improve healthcare access through more equitable pricing and digital capabilities. They don’t want surface-level knowledge; they want to get under the skin of these problems.

We are now also seeing a greater concern about climate impact from a financial perspective, owing to the fact that climate change is the number one long-term fiduciary risk in investments. For our charity clients, we start by looking at this through a lens of voting and engagement to try and change corporate behaviour, and through tilting portfolios to reduce overall carbon emissions. We then work with them on climate solutions, through green bonds and green structured products.

What emerging trends are you seeing?

Covid fanned the flames of many existing sustainable investment trends. Early in the crisis, many people were concerned that sustainable investment would fall by the wayside, but the pandemic served as a proof point, as investors increasingly began to think about the purpose of their wealth.

There are two kinds of responsible investment. The first is investing sustainably in order to achieve positive real-world outcomes. The second incorporates sustainability into decision-making in order to generate superior risk-adjusted returns. We are seeing that charitable investors have shifted away from a focus on ethical investment – essentially negative screening – to focus on both of these fiduciary and impact strands. In fact, research carried out by of HSBC Asset Management found that almost half (46%) of those surveyed in the UK, Hong Kong, mainland China and Singapore believe their portfolios will be entirely made up of sustainable investments in the next three to five years.

The pandemic very much highlighted the need for enhanced diversity and inclusion, as well as social responsibility in local communities. We think this will result in a stronger focus on the “S” in environmental, social and governance (ESG), and so our investment themes include looking at how companies integrate diversity and inclusion in their workforce, and on solutions to broader social issues.

What impact did COP26 have on the ‘E’ element?

COP26 really brought environmental aspects into the public domain, which is fantastic. We saw a lot of really big pledges, and biodiversity and natural capital gained prominence. Natural capital is, in its simplest terms, the assets of nature. This includes the land and sea, along with the biodiversity of ecosystems within them. Biodiversity is vital for maintaining natural cycles of weather, the food chain and life on earth. As we see natural capital being destroyed, we are witnessing negative consequences such as climate change, biodiversity collapse, local temperature rises, soil loss and the spread of diseases.

As an asset class, natural capital provides exposure to projects focused on nature including sustainable forestry, regenerative and sustainable agriculture, blue carbon (carbon captured by oceans and coastal ecosystems), or nature-based projects that generate returns from reducing greenhouse emissions. COP26 saw pledges around stopping and reversing deforestation by 2030 by over 100 world leaders and more than 30 financial firms. These in turn create new types of investment. For example, HSBC Asset Management has a joint venture with Pollination to create Climate Asset Management, which will rejuvenate land to increase biodiversity and carbon capture.

What do charities need to consider in the new era?

Firstly, it’s key for charities to understand what they want from this space. If they are long-term investors, are they coming at climate change from a fiduciary perspective? Or are they looking to fully align portfolios with their charitable objectives and focus on specific impact areas? Because these could produce two very different outcomes in terms of what a portfolio could look like. This means that charities need to dig deep and ascertain the reasons that they want to invest in this way.

This links to the fact that, with a sustainable portfolio, you might see different short-term market performance. Our research shows that in the long term, sustainable portfolios should align with standard market performance, but investors should be mindful of the fact there might be a shorter-term differential. We’ve seen this particularly with energy stocks, which some investors choose to exclude on a climate basis, but which have performed very strongly since the lows of 2020.

Please remember that for investments capital is at risk.

What we do

HSBC Private Banking manages £310bn of investment assets globally and £13.2bn in UK, including £800m for UK Charities. We work with charities, schools and universities on their investment management, providing multi-asset and single asset class discretionary portfolios which can encompass the organisation’s ethical and sustainable investment requirements. Additionally, we provide liquidity lending, using portfolios as collateral to allow organisations flexibility with their balance sheets. We provide investment education and cashflow planning, which enables our clients to understand the long-term impact of drawing funds from portfolios. This is in addition to support with writing investment policies and access to thought provoking investment and charity-specific events, as well as industry-leading knowledge from the broader HSBC network.

Fast facts

  • £22bn of sustainable investment managed by HSBC Asset Management*
  • Improved MSCI ESG rating to AA (‘ESG leader’) 2021
  • World’s Best Bank for Sustainable Finance (Euromoney 2019, 2020)
  • Award winning Climate Change Centre of Excellence at HSBC Global Research

* As at 31 December 2021

Sophie Ward is the Head of Charities and Education at HSBC Private Banking

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