Investment Strategies
ESG In Extraordinary Times - The View From HSBC Private Banking

As part of this news service's continuing examination of the ESG agenda, we talk to HSBC Private Banking about its approach.
This news service has been writing recently about
environmental, social and governance-themed approaches to
managing money. It might be tempting to suppose that this
discipline looks irrelevant in an age of lockdowns and massive
disruption to economic activity caused by a virus. But not so
fast, maybe? Lockdowns have big social effects, such as how
different people are affected – some losing their jobs and their
business, while others continue to work, although now hunched in
front of a laptop at home rather than in an office. And the “G”
of ESG is certainly in view, with AGMs held virtually, or
shareholder voting done remotely rather than in packed rooms. And
the virus has thrown up issues of accountability and transparency
of companies and governments.
ESG then, is very much a live topic. But we have read the hype
and the party line about how ESG is good for the Earth, good for
society and good for how we run our lives. What wealth managers
want to know, of course, is the nitty gritty: What returns look
like, what happens to volatility of returns and how easy is it to
measure the supposed “Alpha” that ESG generates? There are
concerns about “greenwashing” and inevitably, some scepticism
about whether ESG investing can deliver, and make a real dent in
the universe.
To consider some of these ideas is HSBC Private
Banking. This news service recently interviewed Sophie Haas,
CFA, who is head of sustainable product offering at the
firm.
Introductory remarks:
The term “ESG” is now as familiar as any other in the financial
sector. A lot of wealth and investment firms, as well as banks
and insurers, use it when promoting investments, new products,
etc.
Regardless of what happens with the global markets and economy
this year, the focus on more supposedly sustainable energy
production, and for more open governance and accountability, will
continue. In fact, some might see geopolitical/medical and
related crises as making it more, not less, important to follow
ESG approaches.
We hear from the industry that there is a need, still, for
several things to make ESG more credible and robust, such as
high-quality, digestible data for the clients; more clarity about
products and services; proof of real impact; avoidance of worries
about “greenwashing”; clarity on whether there are capacity
constraints with ESG that require funds/other to be capped to
avoid diluting returns. Other questions relate to whether
wealth advisors are sufficiently clued up about the space; does
the wealth industry train and guide people well enough? And will
ESG survive a bear market or further adverse economic
developments?
From your point of view, what is the best, most succinct
description of what ESG is, and is this the one you show to
clients?
Sustainable investment aims to allocate capital to enable the
economy to prosper with due regard to financial returns, the
environment and society. ESG is the integration of environmental,
social and governance factors in the investment decision-making
process. We look at ESG from both a risk and an opportunity
perspective.
But we also take a step back and look at the whole spectrum of
capital, from responsible to impact investments, depending on the
level of financial returns and environmental or social impact the
client is keen to make through their investment portfolio.
Sustainable investing is everything between traditional finance
and philanthropy.
Are you seeing a change in whether clients/advisors are
the first to initiate a conversation about ESG?
ESG integration has been gaining prominence for institutional
investors ever since the launch of the PRI Principles back in
2006. In the past only the most sophisticated clients initiated
the conversation on sustainable investing. Now, as we see more
headlines about climate change, poor corporate behaviour and
issues of labour rights in supply chains, most investors are
aware of these matters and want to understand how their
investments can make a difference.
What was once a differentiating factor is increasingly becoming
the norm and is expected by a growing number of
investors.
As far as the ESG acronym is concerned, where do you see
the most potential for interest: environmentalism, society, or
governance?
In the past we have seen more interest for environmental issues.
The E of ESG is easier to understand and measure and has been
more prominent in the media than the S and the G. Social aspects
were perhaps harder to define or grasp for investors and their
materiality not as well understood.
However, with COVID-19, there will undoubtedly be an increasing
focus on the social aspects. We have seen some good corporate
behaviour emerge, with many employers offering health and job
protection to employees, while others have behaved rather
disappointingly in the eyes of many, furloughing their employees
when some had the cash reserves to keep them on.
In our view, ESG integration is the simple idea that companies
which succeed long term, and hence deliver shareholder returns,
are those which create value for all stakeholders - employees,
customers, suppliers, the environment and wider society. (1)
Going forward, as an investor, we need to put more of an emphasis
on social issues. For instance, are workers’ rights being
respected? Is the lack of health benefits, paid holidays and sick
leave putting employees in harm’s way? What policies should
companies have to protect their workers in this challenging
environment? Investors need to demand more from companies on
social issues because consumers will also be asking themselves
these questions and behave accordingly. It makes sense from a
long-term return perspective and a societal well-being
perspective. It seems as though COVID-19 is increasing the
focus on the social aspect of the ESG equation.
How much choice do you see clients having in being able
to carry out their ESG ideas in various asset classes (stocks,
bonds, real estate, infrastructure, private equity, hedge funds,
other)? Are you seeing investor preferences skewing in one
direction or another?
ESG integration into equity and fixed income by asset managers
and asset owners is now well established. ESG is also looked at
when it comes to alternative asset classes, with PRI setting new
standards for private equity and hedge funds. Disclosure and
reporting are far from standardised in alternative asset classes
and remain voluntary, making it hard to compare one private
equity fund manager with another for instance.
What is your view of criticisms that too much ESG
investing is tilted towards large cap equities because publicly
quoted firms disclose more data and are easier to analyse? What
are the drawbacks to that for investors, perhaps notably younger
investors coming in, and how do you see it evolving?
On one hand, large cap companies do have more resources to put
towards ESG disclosure and transparency. On the other, this means
they are under more scrutiny in the public eye and under greater
pressure from activist shareholders to make a change.
Younger investors like our NextGen clients expect more from their
investments than just generating financial returns. They want to
do something meaningful with their investments, they understand
that their investments can shape the society and environment we
are all living in. We have seen a lot of reports of students
lobbying their universities to divest their endowments from
fossil fuels, for example. We need to offer investment solutions
for their personal wealth that reflect their sense of purpose in
a meaningful way, not in a cosmetic way.
With more firms going private, what tools exist to
analyse such firms from an ESG point of view? And from your
vantage point, what can public markets learn from private markets
on how to screen companies’ ESG practices?
Sustainability and ESG integration rely on disclosure and
transparency, which are more easily achieved in publically listed
companies than in private ones.
We already see this as being a challenge when integrating ESG
into fixed income. Some private companies issuing debt are less
transparent than listed ones, often because they are simply not
required to do so.
For private markets, I would focus rather on impact than ESG
integration. Private markets have more flexibility to have impact
targets as part of what investors expect from them. Additionally,
they require new capital. Different objectives can be set more
easily beyond maximising shareholder returns.
MiFID II and other regulations have, so industry figures
say, squeezed available sell-side research and there is not yet
enough new research to fill the gaps. Does this research squeeze
create an issue for executing ESG strategies consistently? What
can be done about this?
Research from top ESG research houses can be expensive. Given the
subjectivity of the materiality of some elements of ESG analysis
and different methodologies, it is also important to source that
information from several providers to get a balanced
perspective.
We have seen a lot of consolidation of ESG research providers in
the past few years. We hope this will make ESG data more
consistent, widely available and affordable.
Do you see the discipline of behavioural finance, which
seeks to understand how human habits influence investment, as
being useful in thinking about ESG, such as how people can allow
biases to influence their views of certain business sectors and
countries?
Sustainable investing is somewhat subjective because there are as
many clients as there are sustainability preferences and biases.
This is particularly true regarding negative screening and
ethical investing. While some clients want to exclude alcohol or
tobacco, others prefer to omit fossil fuels or nuclear energy.
These preferences have nothing to do with optimising efficiency
by maximising their risk/return profile.
To some extent, sustainable investing is about integrating your
values into your investment decisions so yes, human behaviour
does play a large part in sustainable investing.
Some firms and organisations make a big play of ESG; is
enough being done to educate advisors, such as those at the
graduate and post-graduate level? Can you cite any examples of
people/organisations taking a lead on this?
ESG integration and sustainable investing must be more than a
marketing exercise to avoid any greenwashing. We also need to
ensure that we all speak the same language when there are various
interpretations of the same terminology. Also, there is no
regulatory harmonisation of definitions yet, besides the limited
green EU taxonomy.
For that we need more education and awareness of what sustainable
investing truly means, both at a university-level and for
established finance professionals.
A great example of this is the CFA UK society launching the
Certificate in ESG investing. This helps to ensure that
practitioners have a minimum level of knowledge and a consistent
understanding.
There is currently a lot of volatility and fear in
markets – how can ESG help frame investment and poise through
such a period over the medium term?
At HSBC Private Bank, we believe that ESG will not only survive
the bear market, but it will thrive even more so once we recover
from it. In fact, it is more resilient than the rest of the
market. Today’s market shows that too many actors fail to price
in environmental and social externalities, which can lead to
careless corporate behaviour towards stakeholders.
COVID-19 has brought disruptions to communities and societies
around the world and has highlighted how the most vulnerable are
being treated. This crisis will hopefully put our wellbeing and
the environment front and centre of our economic system and ESG
integration is the most useful tool for investors to achieve
that.
Sustainable investing and ESG integration is all about minimising
Environmental, Social and Governance risks and taking advantage
of ESG opportunities while having a longer-term investment
horizon. Therefore, we strongly believe that ESG will not only be
resilient in the current market environment, it will also become
more prevalent.
If there is one final point that you would like to make
about the ESG trend, what is it?
Some asset managers, financial advisors or data providers talk
about ESG as the latest buzzword. What is important is to
understand how they integrate it and what steps they are taking
to implement it. ESG is not just a fad but a long-lasting change
in how we invest, with huge benefits for all.
References:
1, Adapted from a quote from HSBC Global Research, ESG matters:
Climate and ESG outperforming during COVID-19, 25 March
2020.