- HSBC launched an ESG reporting service for clients.
- Move comes as financial institutions are offering more ESG-related products to cater to growing interest from investors.
- COVID-19 pandemic has highlighted the importance of assessing risk for nonfinancial factors, says a bank director.
HSBC worked for more than three years on its new environmental, sustainability and governance reporting service for clients. But bank execs say it took the COVID-19 pandemic to bring it into focus and galvanize investors to consider nonfinancial risks in their assets.
“Big shock came from the pandemic,” Chris Johnson, the director of market data for securities services at HSBC, told Karma. “So the message [for] the investment world is that you can’t do this all on spreadsheets. There is a real world out there and ESG is the lens into the real world and the skill is finding those risks.”
The service, launched July 21, will provide clients such as individual asset owners, pension funds and insurance companies with a report that gives the ESG ratings of their portfolio based on data from ratings firms MSCI, Sustainalytics and Vigeo Eiris.
Financial institutions such as HSBC — one of the world’s largest banks, with $2.9 trillion in assets at end of March this year and offices in over 60 countries — are creating new services and products to cater to a growing appetite for such offerings from global investors. The Global Impact Investing Network says the impact investment market reached $715 billion in 2019 and is growing.
Johnson foresees the service helping clients with their regulatory compliance requirements as regulators in Europe gear up to ask for more disclosure around climate change risk. The bank will charge clients for the reporting service and plans to add data from more ESG ratings providers in the future.
HSBC’s service will help clients navigate ESG ratings that can vary widely because the sector has not adopted a uniform accounting standard. It will show patterns that help clients evaluate the carbon emissions associated with their portfolio, according to the different scores assigned by the ratings agencies, says Johnson, adding it then issues a report of “the largest positions that are highly performing and the largest positions that are poorly performing.”
“So they can see a materiality based perspective as to which of the holdings are standing out in ESG terms,” said Johnson. “We say this is an engagement tool. So they can call the fund manager and say, look, could I be overexposed in these highly rated ESG stocks, could there be a bubble?”
European regulatory disclosure rules require that carbon emissions have a uniform standard for evaluation and reporting and some investors take issue with the ESG ratings agencies because they do not. However, Johnson says other market players view it as a positive aspect of a sector that is evaluating different subjects that may not be easily comparable but all fall under the purview of ESG.
“The world of ESG research is wide and to suggest that it can be summed up in a data point is kind of missing the point,” Johnson told Karma. “I don’t think we can boil the ocean and change that. They have got their methodologies and they’re there for a purpose and they have many clients that pay for it because they respect and use it.”
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