HSBC Global Asset Management (GAM) has been quietly pushing the corporates in which it invests to include environmental, social and governance (ESG) factors into their investment strategies as part of a global effort to enhance its own ESG investments.
“We signed up to the Montreal Carbon Pledge in 2015, and the reason we did that was to show our intent and focus on transparency. We thought if we report on what we’re doing it gives us more leverage with the companies which we invest in, and encourage them to report on what they’re doing so that our reports are more accurate,” says Melissa McDonald, global head of product, equity & responsible investment, at HSBC Global Asset Management, in an interview with The Asset.
HSBC's embrace of ESG comes at a time when other institutions are also encouraging ESG investing. BNP Paribas launched their ESG Risk Analytics in June 2016. “We are seeing a strong response for SRI (socially responsible investing). When you show investors and demonstrate that you can get the same results while being SRI compliant, that’s even better,” says Florent Bronès, CIO at BNP Paribas Wealth Management. “This SRI mood is really increasing in Europe and we have a big proportion of new investments which are going in that direction. In Europe we are rating the companies in terms of SRI.”
Similarly, State Street Corporation recently signed an agreement with TruValue Labs, a provider of artificial intelligence-driven environmental, social and governance (ESG) data, to promote the adoption of industry-standard ESG data according to the Sustainability Accounting Standards Board (SASB) framework.
HSBC has plans to launch ESG-focused funds in Asia later this year as part of a global effort to push ESG investing. HSBC has declined to reveal further details of the funds pending regulatory approval.
HSBC has recently published the Responsible Investing (RI) Transparency Report 2017 as part of the global Principles for Responsible Investment (PRI) framework which is intended to build a common language and industry standard for reporting responsible investment activities.
At present, HSBC GAM is in a position to push transparency and ESG investing because all of its equity portfolio, amounting to US$69 billion, as well as all of its fixed income portfolio, amounting to US$177 billion (as of December 31 2016), are managed through its ESG methodology.
Recently, HSBC GAM has adopted an inclusion-based approach to ESG investing, which is different from the exclusion-based approach that has been traditionally used for ESG investments. Under the inclusion-based approach, the portfolio manager takes a more wholistic/integrated view of the ESG component of a company in addition to other factors when making an investment decision.
“If you exclude big sectors from your portfolio of course you’re going to have performance differentials. Whereas when you look at ESG integration, you’re actually taking a wholistic view of a company’s environmental, social and governance [policies], as well as everything else into account, when you’re making investment decisions. We believe that this is a better way to manage money. It gives you better investment returns,” says McDonald.
McDonald heads a global team based in London that has been spearheading HSBC GAM’s push to enhance its ESG investment strategy.
Since investor education still plays a large part in pushing ESG investment, particularly in Asia, HSBC has been investing heavily in building up its ESG capabilities.
On May 22 it announced the hiring of three highly-experienced investment professionals as part of its commitment to educating and informing its clients about sustainable and responsible investments, and to provide client solutions to address long-term investment issues including climate change. The experts include Sandra Carlisle, Stephanie Maier and Helene Winch, who will all report to the London-based McDonald.
“While Asia has been slower on the uptake of ESG integration it might not necessarily be a bad thing because historically the industry was based on a sort of exclusions-based approach, based largely on ethical investing, and that has somewhat caused a problem with variability in returns. And so there’s still a bit of a hang-over from that,” McDonald says.
HSBC’s inclusion-based approach, outlined in its ESG methodology, involves giving each company in its investment universe an ESG rating.
“The ratings enable a quick identification of the riskiest stocks/bonds based on the assessment of their ESG credentials. Each company’s rating is a simple weighted combination of three ESG ratings. HSBC weighs ESG coefficients X, Y, and Z according to the industry, depending on the nature of the activity. HSBC has created 30 ESG sector combinations derived from MSCI ESG/GICS (Global Industry Classification Standard),” McDonald says.
HSBC launched its first SRI fund in 2001 and was an early signatory of the PRI agreement in 2006.
“Our focus has been predominantly on ESG integration. We started off within equities but then we also do that with global corporate bonds now. More recently we’ve been stepping up our efforts to be more public about our activities and engagement. We’ve recently joined the investment leaders group, which is a small group of asset owners and asset managers run by Cambridge University’s Institute of Sustainability Leadership,” McDonald says.
