Driving your eco-consciousness from strategy to action through Sustainable Finance

Over the last few decades, we have come to realise that finance, when harnessed perfectly can influence economies to do more good and help shape the world to be a better place.

We are living in a world that faces ever-increasing challenges including environmental, social and political. So, when it comes to the health of our planet, it’s crucial for us to be mindful of the actions we take today for a better tomorrow.

But how is being sustainable important for the evolution of business?

In the last decade, ‘Sustainability’ has emerged as a key strategy for businesses around the world. But there’s more to it. Investing in greener, sustainable and eco-conscious initiatives is more than just a trend or strategy; what is critical is – action.

Sustainable Finance helps businesses act responsibly in day-to-day operations and build a stronger, low carbon and an environmentally-resilient economy.

Today, globally, we see two key interlinked themes on the rise in sustainable financing:

• Transition risk management
• Net zero emissions

Let’s take a look at how these themes are shaping the Sustainable Financing future in India.

Sustainable financing is becoming bigger & mainstream

Over the years, HSBC has been able to successfully establish itself as a thought leader through our unique approach and capabilities in this space. Transition Risk Management forms the core of our Sustainable Financing blueprint. We strive to make our credit portfolio robust with transition risk filters over and above the traditional credit appraisal framework, which has led us to be more proactive rather than be reactive.

Sustainable Financing is not about ‘Public Value’ or the fear of being left behind – it’s about core risk management. While there’s always the added ‘feel-good’ benefit it creates for the organisation, commercially too, such financing is of sizable importance.

Businesses are looking at Sustainable Financing as their responsibility, with over USD 460 Billion raised in 2019 (as per Bloomberg), with most C-suite decision makers actively considering this as way forward.

In India, we are already building good momentum with our clients and have an extensive asset base on our India balance sheet. We have also been able to facilitate debt market issuances in the country.

Doing better, while doing good

The climate change clock is ticking faster – now more than ever. For most global corporation boards and businesses, targeting time-bound net zero emissions is already on the agenda for Sustainable Financing. But as per a recent Bloomberg report, only 754 companies have so far taken science-based targets to keep their emissions within a 2-degree global warming scenario.

A Stanford University study suggests that phasing out fossil fuels and running the world on clean energy will cost USD 73 Trillion, but will pay for itself in 7 years.

Undoubtedly, traditional fossil fuel-based energy companies are witnessing a shift in capital allocation preference, from both equity and debt markets.

HSBC is playing a pivotal role in the evolution of Sustainable Finance. We have committed USD 100 billion for it by 2025 (facilitated USD 52.4 billion in sustainable financing and investments since the start of 2017) and some of our key achievements in the last couple of years are a nod to our dedication in this space.

Globally, HSBC has been recognised as the World’s Best Bank for Sustainable Finance by the Euromoney Awards. Be it enabling the first execution of the Green Bonds, launching its first Green Deposits account or transforming industries; while working with giants such as Walmart and Puma, HSBC has been ahead of the curve.

Even in Asia, we are venturing into initiatives such as sustainable palm oil alliance and creating better practices in the fashion sector.

Taking a closer look at India, you can see the story is no different. We have been able to make a space for ourselves across industries – from executing first-ever Green Loan to playing the role of a lead arranger for USD Bonds.

We are also trying to promote more LEED Certified Green buildings in the CRE space by financing clients who are aligned with our vision of a Green World.

Considering the negligible pricing differential with conventional bonds, here’s how we can get more issuers out of India to consider Green Bonds.

The change starts from the beginning – we need a mind shift. We need more Corporate Boards to consider Environmental, Social and Governance (ESG) policies at the heart of their operations and financial decision-making.

Green Bonds will act as a catalyst for change towards adopting more sustainable practices – simply because its compliance auditing will require proof of action towards pre-set sustainability goals.

However, interest cost savings, a key deliverable for the CFO, should not be the sole criteria for issuance of such instruments. The long-term value these instruments create in changing the ESG policies, and compliance of firms is crucial, in excess of the negligible yield differential (vis-a-vis conventional bonds). Besides, of course, further broad basing the investor pool.

Taking the leap of faith: Promoting sustainable financing in India

In India, the Reserve Bank of India (RBI) and the Government of India (GoI) are taking measures to encourage sustainable financing.

However, a pick-up in momentum happens when some incentives are offered, at least for a defined timeframe.

The 2 accelerators that could infuse more energy in this sector (and have no fiscal cost for the Government) are:

1.Priority Sector Loan (PSL) benefit for all categories of sustainable financing (the RBI may consider defining the qualifying metrics for such assets)

2.Considering the country's requirement to build substantial infrastructure assets. It would add merit to build in the Green Principles from the outset and use the Green Loan/Green Bond Financing criteria to approach financial closure. We need some of the large multi-lateral financial institutions and international credit guarantee providers to come together and offer long term credit wraps thereby encouraging commercial banks to look at financing these projects.

Shifting focus: Finding the phenomena that has the power to change the industry in next 10, 20 or 30 years

ESG Push: Shareholders are now increasingly pushing companies to adopt more ESG-friendly policies and operations.

An irreversible journey has commenced and this will cause a tectonic shift in the way Regulators, Customers, Investors and even Employees evaluate a company. ESG reporting is becoming mainstream in increasing number of Annual Reports and Enterprise Value (EV) computations which are beginning to factor in the ESG impact for long term value creation/destruction (as the case may be).

Table from Bloomberg exhibits the dominance of ESG proposals in Annual Shareholders Meetings since 2017.

Impact Investing: 2019 was truly the coming of age for ESG issuances, hauling over USD 8 Billion (as per Bloomberg report). We expect this trend to return strongly by 2021 again.

Including ESG and Impact Investing, socially responsible investing is gaining mainstream attention and more retail participation is already visible in ESG-focused investment vehicles such as ETFs. We will see this trend increasingly build momentum in emerging markets.

In the light of the coronavirus pandemic, businesses and economies across the world are scrambling to start-off where they paused.

This brings an equally important opportunity for a greater global response. HSBC is at the forefront to help businesses build back better – for a greener, more sustainable world.