27 Apr 2023
Willem Sels
Global Chief Investment Officer, HSBC Global Private Banking and Wealth
We believe that sustainability is an important trend that investors can no longer ignore. Companies may lose customers if their products and services are considered insufficiently sustainable. In addition, they may gain market share for producing greener or more sustainable products. We think that analysts and rating agencies will increasingly penalise companies that are insufficiently sustainable, resulting in a higher cost of funding for such companies.
So what is the right strategy when it comes to sustainable investing? We have developed 6 basic principles. They are not exhaustive, but are a good place to start.
‘Why’ you want to invest sustainably will guide the ‘how’. Are you ‘values’ driven (which may lead you to exclude certain sectors and activities) or do you want to change corporate behaviour through engagement? Are you mainly looking at sustainability to discover new opportunities (thematic approach) or manage risks and generate better risk-adjusted returns (enhanced approach), or make a direct impact (impact investing)?
The net zero transition needs long-term capital, corporate engagement takes time to yield results, and some new technologies will take time to become profitable. In our view, the very short-term performance of investments is often linked to financial factors, not sustainability factors.
All asset classes need to contribute to the funding of the climate transition and are affected by the changing investment environment. Diversification can help broaden the opportunity set and mitigate risk as no one asset class will outperform all the time.
Selection in each asset class can be skewed towards companies and governments with superior ESG practices, and explicit allocations made to relevant themes like green bonds or renewables. Companies that manage their ESG risks and create value for stakeholders are also more likely to survive through cycles and thrive in the long term.
Thematic investments are more often positioned as “satellites” in a well-diversified portfolio. They typically consist of companies that offer specific product solutions or services to help transition to a more sustainable world, e.g. climate change mitigation or adaptation solutions.
In fact, every company in your core portfolio is also affected by sustainability issues such as climate change impacting supply chains, regulatory changes, etc. Therefore, all companies need to build future-proof businesses. While many of the thematic investments related to sustainability will have a sector bias (utilities, technology) and/or style bias (growth stocks), investors should consider the sustainability risks and opportunities of both their core and thematic holdings.
As definitions and practices are still evolving, the role of a strong fund manager or distributor is key to ensure the investment matches the strategy and objectives you have set. Some banks may even deploy ESG ratings to let investors understand how sustainable their portfolios are.
A growing, more transparent and competitive market will provide more opportunity and liquidity to investors. With time, we see no reason why investors would not incorporate a sustainability approach across the entirety of their portfolio.
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Important information on sustainable investing
“Sustainable investments” include investment approaches or instruments which consider environmental, social, governance and/or other sustainability factors (collectively, “sustainability”) to varying degrees. Certain instruments we include within this category may be in the process of changing to deliver sustainability outcomes.
There is no guarantee that sustainable investments will produce returns similar to those which don’t consider these factors. Sustainable investments may diverge from traditional market benchmarks.
In addition, there is no standard definition of, or measurement criteria for sustainable investments, or the impact of sustainable investments (“sustainability impact”). Sustainable investment and sustainability impact measurement criteria are (a) highly subjective and (b) may vary significantly across and within sectors.
HSBC may rely on measurement criteria devised and/or reported by third party providers or issuers. HSBC does not always conduct its own specific due diligence in relation to measurement criteria. There is no guarantee: (a) that the nature of the sustainability impact or measurement criteria of an investment will be aligned with any particular investor’s sustainability goals; or (b) that the stated level or target level of sustainability impact will be achieved.
Sustainable investing is an evolving area and new regulations may come into effect which may affect how an investment is categorised or labelled. An investment which is considered to fulfil sustainable criteria today may not meet those criteria at some point in the future.
