The Green Light: Investing For A Sustainable Future With HSBC Private Banking
As we consider the new normal and begin to adapt to life in a post-pandemic world, people and businesses have started to recalibrate their priorities. Many investors are looking more closely at where their wealth is being deployed, and at ways to adjust their portfolio in favour of investments that reflect a more sustainable approach to society and the environment.
Environment, social and governance (ESG) considerations had been growing in importance for high-net-worth individuals before Covid-19, but HSBC Private Banking has seen that accelerate during the pandemic.
“This partly reflects the rising investor demand for more sustainable investment solutions that can help them to manage ESG risk and adapt to the new normal more effectively,” says Fan Cheuk Wan, chief investment officer Asia for Private Banking and Wealth Management at HSBC. “But the pandemic has also prompted many investors to seek investment opportunities that can help the world move towards a rebuilding process that focuses on creating a better and more sustainable future.”
Sustainable investment is often identified as a long-term investment megatrend, but the global response to the pandemic has helped to change perceptions about how quickly governments and businesses can act. As a result, portfolios and attitudes are changing to reflect expectations of a much more rapid shift.
In 2020, several major economies made explicit commitments to a net zero carbon future. Fan predicts that 2021 will be a pivotal year for sustainable investment as the US rejoins the Paris Agreement on climate change, and China, the world’s largest carbon emitter, pledges to achieve carbon neutrality by 2060 and highlights green initiatives as key elements of its recently announced 14th Five-Year Plan.
“A sustainable future is more attainable now that the world’s two largest carbon-emitting countries are making solid commitments to fighting climate change alongside global partners,” says Fan.
Sustainability is not just about the environment, and Fan notes that investors are increasingly interested in solutions that are also aligned with the United Nations’ Sustainable Development Goals (SDG) and other social aspirations.
Besides doing good, SDG-aligned investments can generate stable, long-term returns across fixed income and credit asset classes, as companies that are engaged in sustainable development projects also generate relatively resilient income and cash flow.
Fixed income opportunities that meet sustainability criteria can be more challenging to source than for public equity, which means that credit issued to finance SDG objectives can be extremely attractive to investors, both to meet their ESG goals and to help build more balanced portfolios.
Companies that embrace and advocate for issues around social equity are also increasingly valued by sustainability-focused investors after the events of 2020, when the pandemic focused attention on healthcare equality and, more recently, the uneven distribution of Covid-19 vaccines, while the Black Lives Matter movement brought worldwide attention to racial inequality.
“At HSBC, we truly believe that companies that adopt principles of diversity and inclusion, including within the management and leadership teams, also help to bring a more sustainable corporate strategy and business model,” says Fan.
Family offices and high-net-worth individuals can follow a variety of approaches to embed ESG into their portfolios.
One of the most common approaches is ESG integration, sometimes known as ESG-enhanced investment or ESG factors, which employs positive and negative screening to identify companies that do well in managing ESG risk and are positioned to perform well in the low carbon transition.
One of the benefits of this approach is that it can be implemented in actively managed or discretionary solutions, long-only funds or even ETFs, across a well diversified multi-asset portfolio.
“Instead of going after individual, single securities, investors can position themselves in a better-diversified investment vehicle to achieve their sustainable investment objectives,” says Fan. “We have a very stringent product due diligence process and assess the ESG credentials and relative ESG performance of the underlying investment vehicles to help our clients mitigate greenwashing risk.”
While some solutions may brand themselves as green, HSBC’s product due diligence process looks into the underlying strategies and the investment approach to determine whether such solutions truly ally with clients’ investment objectives as stated in their investment profile.
Thematic long-only funds and ETFs provide dedicated exposure to the structural growth factors exposed to green technologies and the disruptive trends that will drive the global low-carbon transition.
Fan says that ESG thematic fund solutions have seen strong inflows during the past 12 months, partly in response to the global race to net zero and accelerating green tech innovation. The Biden administration has already indicated plans to roll out massive green investments, focused on green technology, renewable energy and grid infrastructure.
Meanwhile, in China, the commitment to carbon neutrality will require massive investment in clean energy, electric vehicles and the whole supply chain to deliver on these promises.
“Thematic investment funds are uniquely exposed to the exciting structural growth opportunities brought by the global fight against climate change, so a lot of new investment vehicles have been rolled out with a focus on renewable energy, electric vehicles, climate change solutions and sustainable consumption,” says Fan.
With a longer investment horizon, many impact investment opportunities tend to occur in the private equity space and attract a lot of interest among family offices and ultra-high-net-worth clients, who often adopt a more strategic view and longer-term investment horizons, due to their focus on family legacy and wealth transfer rather than short-term returns.
“While some aspects of the climate crisis represent an imminent threat, the low-carbon transition is really a multi-decade project and requires a longer investment horizon,” says Fan. “This is going to become a prominent investment trend.”
Many of these opportunities are directing capital towards transformation projects and technological innovations that will positively impact the environment and also contribute to innovative solutions to combat climate change. At the same time as engineering positive impact, these investments are also designed to generate sustainable financial returns.
Among the biggest concerns for ESG investors are data quality and disclosure, particularly in Asia, but Fan says the region is rapidly making strides to catch up.
“Regulators in Asia are setting up policy reviews and enhancing their ESG regulatory frameworks,” she says. “We continue to see that the gap in terms of the regulatory requirements between Asian markets and the West are narrowing.”
More stringent ESG information disclosure requirements will help long-term investors to apply ESG factors in portfolio construction. In the absence of a unified ESG market standard, investors face difficulties to assess sustainability metrics and ESG performance of companies without better disclosure. Hence, it is encouraging that regulators in emerging markets are embracing the value of better-quality ESG disclosure.
Similarly, there has been some criticism that ESG portfolios tend to favour large companies that can afford to make the costly disclosures, but Fan says that many small- and mid-cap companies are actually among the most likely to embrace ESG principles, especially in the newly rising tech and other innovative sectors. As with so many aspects of ESG, the divide is largely generational.
This bias towards the healthcare and tech sectors has helped to drive returns for sustainable investment solutions during the past year, as these are the sectors that have performed best during the pandemic, especially compared to sectors exposed to climate risk such as mining, energy and heavy industry.
While this strong financial performance is welcome and has helped to drive further interest in the sector, ESG investing is not a short-term strategy. “Looking at the long-term return outlook of sustainable investments, we believe that ESG investing will deliver a stronger risk-adjusted return mainly because of the investment process that focuses on quality earnings and sustainable cash flow,” says Fan. “ESG factors themselves are actually effective risk mitigating tools because you are screening out those companies that are most vulnerable to ESG risks, limiting your portfolio exposure to drawdown risk.”
As governments and businesses around the world increasingly direct investment towards the sustainability revolution and rebuilding a better world after the pandemic, ESG investing is expected to become a mainstream portfolio approach that is capable of making positive social impact while delivering resilient returns across the investment horizon over the long term.
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