Q&A: Why sustainable finance matters—and how you can get up to speed

Zoë Knight, group head of HSBC's Centre of Sustainable Finance, shares her views on the financial challenges and opportunities presented by climate change

Credit: Courtesy of HSBC

HSBC’s Zoë Knight calls on Canada to help fight climate change by issuing sovereign green bonds

Increasingly, companies of all sizes are making environmental, social and governance (ESG) considerations part of how they do business. Banks such as HSBC Holdings PLC  have joined the movement by embracing sustainable finance, which focuses on combating climate change.

For HSBC and others, the stakes are high. Through 2025, the London-based bank has committed to providing US$100 billion worth of financing and investment to develop clean energy, lower-carbon technologies, and projects that help to keep the international Paris climate agreement on track and meet the United Nations’ Sustainable Development Goals. Over the next 15 years, the world must invest US$100 trillion in green infrastructure just to have a roughly 65-percent chance of keeping the average global temperature to 2° C above its pre-industrial level, HSBC estimates. For the bank’s latest ESG update, click here

Managing director Zoë Knight, group head of HSBC’s Centre of Sustainable Finance, visited Vancouver in March to address the Globe Forum sustainable-business summit. We caught up with Knight to get her take on the financial challenges and opportunities presented by climate change.

What is sustainable finance?
We define sustainable finance as looking at any form of financial services integrating environmental, social and governance criteria into the business or investment decision. The idea is that it takes a longer-term approach and provides lasting benefits for both clients and wider society.

As you know, we’ve got this massive climate problem going on and other environmental externalities, and part of the reason why we’ve got such challenges is because historically, it’s been mainly financial factors that have been taken into account in terms of valuing projects or valuing financial securities, et cetera, and the ESG element has been left out.
So there’s been a large take-up and an emphasis on revisiting ESG as a subject issue. And historically where the emphasis might have been on taking a thematic perspective—looking at the sectors that fall into environmental or green projects or themes—around the last 10 years or so, people have adopted this wider ESG criteria approach, which has picked up momentum.

Why did HSBC get involved?
For several reasons, really. We’ve been covering climate change issues since 2007, and we’ve got a strong track record in operational sustainability. So we’ve been measuring our carbon footprint, looking at our operational energy use and water use, et cetera, and our operational environmental impact for a while now—say, for the last 10 years. And we formed a Climate Business Council in 2010 to comprehensively assess how our businesses could tap into climate change areas.

But we’ve become more forthright in communicating what we’re doing over the last five years. That’s been because we wanted to demonstrate what we were doing, partly due to shareholder pressure and an uptick in our stakeholder engagement on ESG as a theme, and more recently through needing to understand the consequences of climate impact and the fact that the world has now come to the Paris agreement consensus on keeping temperature rises below 2° and preferably to one-and-a-half, and how that might affect all of our clients.

So it’s really a multipronged rationale for why we’ve got better at communicating the ESG issues that we’re looking at, and how we are addressing the whole variety of factors that impact us.

What does this all mean for companies? Why should they care about sustainable finance and ESG?
Historically, the main levers have been shareholders and large corporates. Our view is that part of the success of the Paris agreement was in that shareholder activity—investors pushing for the deal and corporates pushing support for the deal. But more recently, that emphasis is triggering down through to supply chains and more middle-market and local enterprises, in the sense that large-cap stakeholders are wanting to make sure that the social/environmental factors are truly incorporated all the way through the supply chain.

And that means, in particular for business like ours as well, that have got a large exposure to non-listed entities, how do you assess the ESG and sustainable finance opportunities for those guys as well? Wider stakeholder engagement, I think, is the key driver.

What’s at stake for society, and for the global economy?
The beauty of Paris, and one of the key reasons that made it a success, was that the shift was on countries to determine how they are best fixed to address the climate problem and then put forward a plan to deliver that, whether it’s decarbonizing the power sector, for instance, or looking more closely at transport networks if countries have already got quite a low-carbon power mix. Looking at buildings and industry and energy use there, for instance, or the other side, making the most of carbon sinks like forestry and minimizing land-use change, et cetera.

So we’ve got that country planning perspective, and we saw massive buy-in from the country level to deliver that. Now that we’re heading into an implementation phase and looking more closely at the rule book of what the Paris Agreement needs to deliver, that filters out to the regional and provincial level.

What we’ve seen is quite a lot of cities and provinces have started to make their own commitments and started to want to go it alone, as it were, because they’re seeing a competitive advantage of establishing sustainable networks, transport networks, for instance, or green power. They’re building the skill set in green infrastructure, and that’s turning them into a more-competitive offering for people that live there and made them a better place to live. So I think that competitive advantage element is something that’s being looked at quite closely.

There’s still a perception that green investing doesn’t pay. How can investors benefit from sustainable finance?
I talked a little bit earlier about how the success of Paris was partly driven by investor and corporate networks pushing the agenda. Essentially, many investors and corporates are being held to account on that, so they want or need to demonstrate that they are allocating capital in a way that is consistent with the 2° aims.

Now, some of that is regulatory-driven. For instance, France implemented an energy transition law that had an article within it targeting investors, and that was the first time that anyone had seen an explicit mandate for investors to demonstrate capital alignment with 2°. And that’s had quite a big ripple effect because the French pension funds and asset owners are global investors. They’re large corporate equity holders and fixed-income holders, but from a fixed-income perspective, they’re also needing to demonstrate green alignment, and green labelling helps with that. And being more transparent on the use of proceeds and the governance of capital is helping to signal that green alignment. So in many cases, it opens up a new audience for fixed-income securities.

Where does Canada fit into the big picture?
Canada has actually been pretty significant in the growth and development of green products. The provincial issuance from Ontario and Quebec, the green bonds there, have been market-leading. What would be great is if Canada followed the likes of Poland and France and Belgium and Hong Kong in issuing a sovereign green bond. I think that’s the area that most investors are looking to see scale up now.

The world’s largest economy has walked away from Paris Agreement. How could the U.S. attitude toward climate change affect the development of the sustainable finance market?
In terms of the definitions, taxonomy and standards discussion, which is where a lot of centres and countries are thinking at the moment, they’re obviously not part of that debate. But in terms of real-economy impacts, we’re certainly starting to see the commercial and economic and competitive element come through a lot more than we have done in the past, which means the adoption of renewables in certain states, for instance, will continue. And a lot of the high-carbon/low-carbon shift there will be economics-dependent, whereas in other regions you’ve get regulatory drivers.

But I think it’s worth remembering that there are a whole variety of stakeholders that are invested in Paris being a success. Countries are just one set. The whole climate risk and resilience, and identifying, preserving and actually growing value in a world that looks more closely at greenhouse gas reduction and rising temperatures going forward, that takes on a role of its own.

Where does investing in fossil fuels fit into all of this? Some large pension funds are divesting from oil and coal, but many banks are fossil-fuel investors.
Our energy economy is still very dependent on fossil fuels, and the power sector generally has been the biggest focus because it’s the easiest area to decarbonize, in the sense that there are clear substitutes for coal and gas in terms of wind and solar. There’s been a very strong divestment movement, led partly by universities, partly by states that are reassessing their sovereign assets, and that has mainly focused on coal. So we’re at a stage where the world knows how to solve the problem from a low-hanging-fruit perspective, i.e., decarbonize the power sector.

But other areas like industry and heat within buildings and so on, there are some sectors that are really hard to decarbonize, such as steel and cement. And much work is going on to look at how those sectors might evolve going forward. So for the time being, a lot of the emphasis is around standardization and definitions of what green means, and how to identify what best-in-class means from a green perspective, and also looking at transition planning, that whole road map of how we move from 2018 in terms of over 1° of warming to get to 2050, when we’re looking to net-zero emissions and trying to constrain temperatures to within 2°.

I don’t think anyone’s denying that there’s a huge challenge ahead, and a lot of that transition work will come from regulatory drivers as well as economic ones. And think the key challenge for the financial system is to try to understand how those different levers will play out in terms of speed and scale of greenhouse gas reduction, and what that means to sectors and industries.

This is why the work of the Task Force on Climate-Related Financial Disclosures is so important. It’s to [give] all different kinds of financial decision-makers the tool kit to better try and preserve value going forward and identify where the opportunities lie, and, more importantly, manage the future risk, and hopefully resilience to climate factors.

How can business leaders get informed about sustainable finance?
In an unashamed plug, they can come to the Centre of Sustainable Finance, which is our central place where we’re doing a lot of work on these issues. But there are also lots of networks being convened on this space. The World Bank has got a Carbon Leadership Pricing Coalition.

Universities are also convening networks. The drivers in this area are around academics, scientists and practitioners all joining together to move the debate forward, and there are a variety of networks at various levels that do that.

There’s an awful lot of bilateral work as well at a political level. I’ve been to various sustainable finance round tables in London and Canada that are jointly hosted by finance ministries or environment ministries or the high commissions, and that seems to be quite a good way of exposing leaders to these issues without being in too much of a public forum, if they’re less familiar and want to get a bit more knowledge on a private basis.

This interview has been edited.