Keesa Schreane [00:00:00] Large financial services firms who build ESG plans, especially ones that outline a clear strategy around climate change, are gaining reputations as sustainability powerhouses. But how are banks driving today's green agenda while also helping to combat the COVID-19 crisis? And what should institutional investors look for in banks' sustainability targets? Joining us for insight into this is Christian Deseglise, the head of sustainable finance and investments, global banking and markets at HSBC. Christian, thank you for joining us. Let's talk about the role of banks in supporting and promoting sustainable finance. Where are they now and where is the plan in terms of where they could be in the next couple of years?
Christian Deseglise [00:00:51] Sure. So, look, COVID-19 to a certain extent, could be a foretaste of things to come with abrupt climate change. So we know today we are heading towards a pretty substantial degree of a level of warming within our climate. And this has some potentially major consequences in terms of crop failure, in terms of flooding, in terms of extreme weather events, hurricanes and so on and so forth. But also with sea levels rising, potential massive displacement of the population. So something here, you know, as with the pandemic, we have been warned about those risks. And the scientists have been drawing our attention to that. And the financial system is not fully prepared. So central banks, supervisors are now and for the last couple of years have been quite engaged, I would say, with pushing the green agenda. And when I'm saying, the green agenda, I don't mean they want to necessarily to green everything, but they want the financial institutions that they are supervising to take into consideration climate-related risks and to make sure that this is in the way they assess credit. They can take into consideration the risk of stranded assets, risk of changes in business models. So there is a very broad international coalition called a Network for Greening the Financial System, which now comprises more than 60 central bank and supervisors that are together trying to make sure that the financial institutions are taking those risks into consideration and are prepared and are resilient to face potential climate risks.
Christian Deseglise [00:02:52] Now, the banks also are pushing the sustainability agenda with their clients because not only the banks are subject to potential climate risk, but also, you know, every single company, whether they operate in high carbon sectors or in low carbon sectors. So the banks are prepared and preparing themselves to provide advice, to provide solutions and services to these clients so they can better adjust to the transition to a low carbon economy.
Keesa Schreane [00:03:22] So what should be top of mind for institutional investors as it relates to sustainable finance targets? We talked about climate risk, high carbon versus low carbon. Those things sounds like sound like they should really top the list. But if we're looking at, say, the top three to five priorities, what priority should institutional investors have as it relates to sustainable finance targets and those green themes?
Christian Deseglise [00:03:49] So I think what's really important to understand is that for all the themes related to ESG, I would say environment, social, and governance aspects. There are some risks associated with that thinking - thinking about stranted assets or changes in business models or new regulations, carbon price, for instance. But there are also some opportunities. So the companies that are providing services towards the green economy, energy efficiency, cleantech, hydrogen, maybe. So there are a lot of opportunities and new sectors which are going to be emerging, which are emerging in the health sector as well as in the environmental sector. So for an investor, it's extremely important to be able to appraise, evaluate and analyze the data coming from the companies in which to invest. So having proper disclosure, I think, proper transparency and visibility on the activities within a company which is linked to, let's say, climate change or health-related topics, to be able to assess the risks and opportunities; And being able to do that will deliver outperformance and is delivering outperformance. We've done some analysis, for instance, of the relative performance of the highly rated ESG stocks against the rest of the market, against the benchmark. And there is very clear outperformance in all regions throughout all periods. Very clear. The outperformance of the highest ESG rated companies, very clear performance from the stocks that are leading to climate change, visibility, the rest of the market. And investors are seeing that. Investors are noticing that the flows going to ESG funds continue to be steady. Money is stickier in ESG funds.
Keesa Schreane [00:05:58] So if we go through the rig or say, an institutional investor goes through the rigor of assessing the risks and the opportunities, they may find a huge sustainability strategy, but they may also find that fossil fuel is still in the picture. What types of inherent conflicts does this present? And how should institutional investors who focus on ESG portfolios handle these types of conflicts? Is that a conflict in itself?
Christian Deseglise [00:06:28] We think it's a very good question. So there are several ways you can deal with that. You can choose, I would say, the old way, which is exclusion. So you're not going to be investing that scene in high carbon stocks. I'm not sure that this is the best way because you're giving up your rights and you're giving up your power as a shareholder. So I think it's important to engage and move towards stewardship. And there are some really important associations and coalitions that have been put together, one called Climate Action 100+, for instance, which represent a very, very large number of extremely important investors. BlackRock joined recently that coalition. It is systematically engaging with the 100 and plus public companies that are the highest emitters of greenhouse gases, the highest emitters of CO2. So you create a relationship with these oil and gas companies, for instance, or other companies that are the largest CO2 emitters to help them, to steward them, to guide them in the direction of the transition to a low carbon economy. And you see more and more companies taking and making some really important commitments with. So Shell, we saw Total recently make commitments that they are going to be net zero by 2050 and in alignment with the Paris agreement. So they are there are various stakeholders which are pushing them in this direction and investors have a huge role to play.
Keesa Schreane [00:08:13] So with that being said, if we look at and refocusing back on banks if we look at the Paris agreement and the temperature goals that were set there, we know that global emissions need to be cut. What type of work is needed in financial services for that sector, specifically for the banking sector specifically to make the changes needed to meet the goal?
Christian Deseglise [00:08:36] Well, I mean, the banks have a very important role to play. The banks have to accompany those clients that are not in line with the Paris agreement to steer them in the right direction, providing new services, providing products. We've put in place, for instance, green bonds, which are essentially bonds for which the use of proceeds is going to green activities, whether it's renewable, whether it's water treatment, pollution, and so on, and so forth. We see the development of sustainability linked loans and sustainability linked bonds, which have very clear objective targets, KPIs for a company to follow in order to benefit, for instance, from a reduction of the interest rate or a step up. Or if they don't meet the criteria that they have set, which are sustainability goals, then we see a step up in the coupon. So there are a variety of new instruments the market and banks are developing to nudge those companies into a pathway which is compliant with the Paris agreement. And we've seen a significant step up in commitments from all the large banks. You know, Citi, Goldman, HSBC, Bank of America, and so on and so forth.
Keesa Schreane [00:09:58] So let's talk a bit about COVID-19 and banks. We know that the banks are having a huge impact as it relates to COVID bonds, et cetera, in the past during crises, not just pandemics of this nature, but even if we look at 2008, the global financial crisis, we see banks had quite a different role. Well, a hugely different role. So let's talk about the impact that banks are having now and where you see banks in terms of their position moving forward with various types of crises that may hit the market. Even with these types of pandemics that may come in the future, what will be banks' role in terms of how they will make a difference.
Christian Deseglise [00:10:40] Banks are, I think, playing a very important role today. And on the capital market side, I mean, we've seen a really impressive rise of what we call the COVID bonds. The response, social bond with an impact on the alleviation of the macroeconomic and social consequences of the coronavirus crisis. We've seen very, very impressive issuance from agencies, multilateral development, banks, governments. Those new social bonds have been done, I would say, with the same type of framework as the green bonds. So, you know, we call them "use of proceeds bonds" where the money is raised to provide specific support for SMEs, for the health system, for support of small businesses or alleviation in general of the macroeconomic impact. But it's interesting to see, how this green bond market has been evolving into a wider variety, to a larger family of socially oriented bonds.
Keesa Schreane [00:12:14] Great. And finally, Christiane, let's talk about greenwashing and what that concept means. And we want to know what types of activities do you see as hindering banks sustainability efforts? I guess we can look at the concept of greenwashing as being more reputational.. But what actual activities, as well as reputational constructs, might be hindering bank sustainability efforts?
Christian Deseglise [00:12:44] There is always, I would say, some reputational risk in any type of activity. So there have been some significant safeguards put in place in order to try and manage and reduce and avoid as much as possible this risk of greenwashing. So that was particularly present. I would say at the beginning when the Green Bond market started to develop. But over the last few years with. We've seen the development of a cottage industry around the Green Bond market to try and reduce that risk to the mix the maximum. So first of all, we've got now green bond principles which are pretty broadly accepted and which clearly specified which activity the proceeds of a bond must be invested. Not only does specify that, but it forces the issuer to prove that indeed the bond of the proceeds that were earmarked to a certain activity were used for that activity. So so I think there is there is less greenwashing, but you cannot reduce it to zero. And when a bond does get reclassified or is not classified as green, then there are some potential reputational risk for the issuer and also for other banks that have been participating. But I think over time, this risk is becoming better and better managed.
Keesa Schreane [00:14:21] Well, thank you very much, Christian. Thank you so much for your time.
