Decarbonisation and biodiversity preservation are creating exciting new investment opportunities, say HSBC Global Private Banking and Wealth’s Stefan Lecher and Cheuk Wan Fan
Environmental, social and governance (ESG) concerns are becoming increasingly important for high-net-worth individuals (HNWI) and family offices in Asia as they look to generate more sustainable financial returns and have a positive impact on the world.
This focus on sustainability is expected to increase going forward, with 46 per cent of HNWIs in Hong Kong, mainland China and Singapore expecting their investment portfolios to be made up entirely of ESG investments within the next three to five years, according to research by HSBC Asset Management.
The Covid-19 pandemic has not only accelerated this trend, but also demonstrated that companies with strong ESG ratings tend to be more resilient during economic downturns and periods of market volatility.
Stefan Lecher, regional head of investments & wealth solutions, Asia Pacific, at HSBC Global Private Banking and Wealth, points out that the S&P 500 ESG Index has outperformed the S&P 500 every year for the past five years, with the difference particularly marked in the past two years during the pandemic.
“The climate crisis is the biggest threat to the global economy, according to the World Economic Forum, so ignoring ESG when investing is no longer an option,” explains Lecher.
“It is mission critical that when you build a portfolio fit for the future, it is resilient—not just for the next few years, but for decades to come.”
Decarbonisation Opportunities
HSBC Global Private Banking has identified Asia’s transition to a low-carbon economy as a source of significant opportunities for HNWIs and family offices who want to invest their money to achieve positive outcomes.
Asia Pacific is currently the world’s largest CO2-emitting region, accounting for 52 per cent of global carbon emissions, based on findings from *BP Statistical Review of World Energy. But it is also the largest investor in energy transition. The International Energy Agency forecasts that China will need to spend RMB200 trillion on green transformation between now and 2060—the date at which it aims to be carbon neutral.
HSBC expects this transformation to be replicated across the region, with renewable energy, green infrastructure and the electrification of industrial and transport sectors all set to be key areas for investment.
Cheuk Wan Fan, chief investment officer Asia at HSBC Global Private Banking and Wealth, says: “We believe the decarbonisation process will bring in capital and accelerate innovation to create new growth industries and investment opportunities in Asia.”
While decarbonisation offers new investment opportunities, it is not without risks, one of which is its heavy reliance on frontier technological breakthroughs. “Many climate solutions are linked to technological innovation, but green technology stocks are experiencing market volatility due to concerns that if companies cannot generate near-term earnings, their valuations will suffer as interest rates go up,” Fan explains.
HSBC mitigates this risk by conducting fundamental research to identify the most resilient and competitive players that will benefit from the low-carbon transition. It also conducts stringent product due diligence to eliminate greenwashing risks and to assess whether companies’ solutions will achieve their decarbonisation objectives.
To help clients meet both their ESG and financial objectives, HSBC offers solutions across different asset classes. “Some of these we build on our own, but we also follow an open architecture approach to find the best providers and build partnerships with them, giving clients access to a broad range of ESG solutions that meet their needs,” Lecher says.
It set up a dedicated ESG Solutions team to drive the development of its ESG investment and product proposition and optimise the end-to-end client journey. Leveraging both CIO themes and fundamental research into companies’ ESG performance, its investment counsellors assist family offices and private clients who want to build their own ESG investment portfolios. Clients are provided with regular updates on the performance of their ESG investments and their contribution in the portfolios.
As many clients are business owners and entrepreneurs who seek to adapt their own corporate strategies to manage climate risks, HSBC Global Private Banking also partners with the investment banking and commercial banking divisions within the group to help clients find sustainable financing solutions as they seek to reduce their carbon footprint.
“Our ESG research and insights identify the emerging climate and sustainability trends. These are examples of the added value that we provide to help our clients on their sustainability journey,” Fan says.
*BP Statistical Review of World Energy, July 2021, 70th edition, bp.com