34 (129) 2018
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Finance & Financial Services

Sustainable financing: corporates’ changing attitude, investors’ growing appetite

By, Zoë Knight, group head, HSBC Centre of Sustainable Finance
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Governments, corporations, the financial system and civil society are all key stakeholders of how climate change and sustainability challenges play out.

They also enable solution by the way they allocate capital. The financial decisions that corporates make today will shape the speed of low-carbon transition and prosperous growth.

Historically, we think that much of the corporate response to climate and broader environmental, social and governance (ESG) factors has been based on becoming operationally efficient. Companies have been focused on minimising their contribution to climate change by setting CO2 reduction goals, scaling up energy efficiency and implementing broad sustainability initiatives through in-house and supply chain operational processes. This made sense because all companies will be affected by climate change factors in some shape or form, either directly from regulation or indirectly through energy prices and supply-chain risks.

However, as investment professionals are clearly reporting appetite for climate-related investments, and social impact-related investments, the demands on corporates to improve reporting and disclosure practices will increase – I expect an iterative process between companies and investors as thinking evolves on the ‘right data’ to disclose to assess climate risks and opportunities.

To gain an independent snapshot of how corporates and investors are positioned, HSBC commissioned industry research firm East & Partners to survey corporate issuers and institutional investors globally on their attitudes to sustainable finance. They surveyed the group treasurers and CFOs of 507 corporates globally, asking 15 questions around the key themes of environmental impact, sustainable financing strategies and disclosure. They also surveyed the chief investment officers, heads of portfolio and heads of investment strategy of 497 investment houses globally, with 32 questions looking at the key themes of ESG integration into investments, plans for scaling up low-carbon investment, green-bond ownership and disclosure. The samples were distributed across Europe, the Americas, Asia and the Middle East.

The corporate issuer’s view

Of the companies surveyed, 53% say they have a strategy to reduce their environmental impact. The regional differences are significant here. European corporates were the most active with 84% of them saying that they have a strategy to reduce environmental impact, compared with only 28% of Middle East responses. And Asia has seen the most significant year-on-year increase, up 18.1% to 42.5%.

Of the companies that have a strategy on reducing environmental impact, only 43% of the 'yes' responses disclose the strategy. We expect this to change as a result of investor and regulatory pressure, such as the Financial Stability Board task force on climate related financial disclosures.

Increasingly corporates are thinking about how to adopt financing strategies related to improving environmental impact. 59% of surveyed companies have investment plans to make their business more operationally sustainable. With the exception of Europe, there is a higher response in this category than for companies that have an environmental impact strategy. This makes sense, because more corporates have been assessing what an environmental impact strategy looks like, and how to implement it. In many cases this means investing in new plants and equipment or other solutions to reduce resource use to minimise environmental footprints. Some 36% of companies with an environmental strategy are also thinking about the environmental impact of the supply chain.

Corporates were also asked what sort of incentives would encourage them to be more transparent on green finance. The biggest incentive by far is the premium applied by the market to project value. However, investor pressure is a close second. And corporates recognise that reducing climate impact has a competitive advantage, as well as by disclosing the firm's climate impact.

61% of respondents said they are increasing the level of disclosure around climate risk, but interestingly, overall only 8% of respondents said that the reason for this was related to the Financial Stability Board task force on climate-related financial disclosure. Here, there are regional differences, but even in Europe, where I would argue that there has been much coverage of the task force's work, only 23% of respondents said that the task force was a key driver.

Lastly, East and Partners asked corporate issuers where they thought the leadership would come from on ESG strategies. Here, 33% voted ‘ourselves’, with industry-based groups and the investment community coming next.

The institutional investor’s view

From a climate change perspective, there is a clear trend of increasing investment into the area, with 68% of all surveyed investors highlighting that they plan to increase their climate-related, or low-carbon investments. In Europe and the US the picture is even more conclusive, with 97% of European, and 85% of US investors saying that they will increase investment.

On the flip side, investors overwhelmingly think that there are barriers to increasing climate related and low-carbon investment, with a lack of credible investment opportunities available the most frequently cited reason. 79% of all surveyed investors that think there are barriers to increasing climate-related investment.

In addition, poor availability of research and analysis and a lack of standardised sector definitions are also barriers. This investor sentiment that there is a lack of credible investment opportunities is backed up by the point that 66% of the investor respondents do not hold any green bonds in their portfolios. Since the green bond market is relatively small, at $232.2 billion issuance outstanding (July 2017), it is unsurprising that many respondents don’t hold any.

All respondents, however, felt that investment institutions were ‘quite’ to ‘very’ important for driving low-carbon transition. Climate related-risk disclosure remains a problem for investors. When asked about the adequacy of risk disclosure, 56% said that disclosure is ‘highly inadequate’. The survey reveals even higher momentum for social impact investing than for climate related investment, with 73% of respondents citing that they will increase social impact-related investments. This could be because investors are increasingly thinking about what the sustainable development goals mean for them, and how they can address these challenges. Social impact assessment is the natural response.

There are challenges here however, as 84% of investors see lack of credible investment, regulatory frameworks and poor available research as barriers. The good news for the corporates that are beginning to disclose more on their environmental impact is that all investors in our sample said that the mitigation of environmental impact through their investment portfolio is more important than average. About 20% of the investors said that they will follow the recommendations of the Financial Stability Board task force of climate-related disclosures.

In our sample, only 37% of investors indicated that they integrate companies' environmental, social and governance performance as an investment factor into their portfolios, but this hides significant variation in regional attitudes. In Asia and the Middle East for example, only around a quarter of investors integrate ESG analysis. We expect this proportion to increase in the future as asset owners are increasingly adopting ESG approaches, and many have global mandates. In 2016 $22.9 trillion of assets were managed under responsible investment strategies, a 25% increase from 2014.

Lastly, when East and Partners asked investors where they thought the leadership would come from on ESG strategies, similarly to issuers, they felt that they, from an industry perspective, would provide leadership. An overwhelming 58% of all investors voted that the investment industry would be the leaders on sustainable investment. Companies are also stepping up by planning on improving climate related risk disclosure and scaling up investment plans.

The data from the survey reveals that investors are quite comprehensive in their thinking for addressing climate and sustainability challenges. As yet, however, they are ill-equipped to make good decisions on the relative strengths of individual holdings in relation to these factors because of inadequate disclosure.

The role of the financial sector

Climate change represents an urgent and irreversible threat to human society in all its forms. The financial sector has a pivotal role to play in combating that threat. Major injections of capital are needed to pay for more efficient and less carbon-intensive technologies and infrastructure, to reduce the carbon footprint of established companies and industries, and to cover the costs of climate adaptation.

While this represents an enormous challenge, it also presents big opportunities for investors, businesses, and financial institutions around the globe. HSBC was one of the first financial institutions to make this a global priority; we are uniquely positioned to be the leading bank for green and sustainable finance.

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