Money and morality

In a world where business is driven by the pursuit of profits, returns and growth, what is right ethically, and what is positive environmentally and socially can sometimes fall by the wayside.

But times are changing.

Whether through their own corporate conscience or pressure from shareholders, stakeholders and investors, companies are putting more focus on ESG – environmental, social and governance factors – as part of how they do business to both benefit their bottom lines and create a broader impact for the world.

At HSBC, living up to our wider societal obligations has always been part of our company’s culture and identity.¹ While we recognise that there have been times, particularly in the recent past, where we have failed to meet the standards expected of us, we are cognisant of the fact that societal expectations are changing – and our stakeholders and investors are placing increasing importance on the wider impact businesses have on people and the planet.¹

So over the past few years, we have taken steps to improve all aspects of our financial and non-financial performance, and to live up to the duty of care we have to all our stakeholders.¹

ESG or responsible investing is commonly defined as the integration of environmental, social and governance factors into investment processes and decision-making.² ESG factors cover a wide range of issues that are not traditionally part of financial analysis, but may have financial relevance.² At HSBC, for example, this might include how we are supporting sustainable growth through transitioning to a low-carbon economy, creating a healthy and diverse workforce through diversity and inclusion efforts, and building a responsible business culture through stronger corporate governance.¹

The origins of ESG investing can be traced back to 2004 when former UN Secretary General Kofi Annan wrote to over 50 CEOs of major financial institutions, inviting them to participate in a joint initiative under the auspices of the UN Global Compact to find ways to integrate ESG into capital markets.² This initiative produced a report titled “Who Cares Wins” a year later, which coined the term ESG.² The report made the case that embedding environmental, social and governance factors in capital markets made good business sense and would lead to more sustainable markets and better outcomes for societies.²

Today, ESG investing is estimated at over US$20 trillion in assets under management or around 25% of all professionally managed assets globally.² The rapid growth of ESG investing builds on the socially responsible investing (SRI) movement that has been around longer.² But unlike SRI, which is based on ethical and moral criteria using mostly negative screens like not investing in alcohol, tobacco or firearms, ESG investing is based on the assumption that ESG factors have financial relevance.² Many investors now recognise that ESG information about companies is vital to understanding corporate purpose, strategy and management quality of companies.²

As a socially conscious investor, you can use ESG criteria as a set of standards for a company’s operations to screen potential investments.³ As part of your environmental criteria, you may consider how a company performs as a guardian of nature.³ Your social criteria may examine how a company manages relationships with employees, suppliers, customers and the communities where it operates.³ Finally, your governance criteria may look at the company’s leadership, executive pay, audits, internal controls and shareholder rights.³

Of course, not all investors are onboard with ESG.² Some are still reluctant to embrace the concept, arguing that the goal of investments is to maximise returns irrespective of environmental or social impacts, or broader governance issues such as corruption.² But the tide is shifting as evidence has grown to support the correlation that good corporate sustainability performance is associated with good financial results.²

The idea that investors who integrate corporate, environmental, social and governance risks can improve returns is gaining traction worldwide.² In Europe, for example, pensions funds and insurers have started to award new business exclusively to asset managers with ESG capabilities.² ESG investing is also growing in Malaysia, backed by our prominent presence in Islamic finance on a global level.⁴ Proactive efforts and strong commitment from Bank Negara Malaysia, the Securities Commission and Bursa Malaysia have also paved the way for ESG investing to thrive in Malaysia.⁴

Khazanah Nasional Bhd became a signatory of the Principles for Responsible Investment, a global investor initiative in partnership with UNEP Finance Initiative and UN Global Compact, in 2017 and Retirement Fund Inc (KWAP) followed suit in 2018 – with both organisations integrating ESG factors into their investment decisions.⁵ In July 2018, KWAP reported that the pension fund would set aside a total of RM3.8 billion for ESG investments.⁵

In line with HSBC’s aspirations in sustainable investments and commitment to global sustainable development, as well as our commitment to Malaysia’s efforts to promote the country as an Islamic finance hub, HSBC is proud to take the lead in sustainable investments with the launch of the first-ever ESG Islamic Structured Product in Malaysia.⁶ Offered by HSBC Amanah, this ESG-related Islamic Structured Product provides investors with the opportunity to invest in an investment that matches their values when it comes to environmental and social causes.⁶ 

Environmental

• We support the global transition to the low-carbon economy through our own sustainable operations and by supporting our customers with their transition 
• We maintain robust climate-related risk management, covering sensitive sectors, such as energy, palm oil and forestry

Social

• We aim to grow in a way that puts the customer at the centre 
• We want to create the healthiest human system in our industry. We are working to create the right environment so everyone can fulfil their potential
• We are focusing on diversity and inclusion in our workforce, and we are striving to put the customer at the heart of everything we do

Governance

• We aim to maintain high standards of governance across all geographies
• We are committed to protecting our customers and communities through financial crime risk management and cyber security due diligence

Source: HSBC Holdings Plc, Environmental, social and governance update, April 2019.

This landmark Ringgit Malaysia Principal Protected Participation Floating Rate Islamic Negotiable Instruments (“FRINI”) linked to the Hang Seng Corporate Sustainability Index is an ESG-related Islamic Structured Product which is 100% principal protected if held to maturity.⁶ 

Investment strategies incorporating ESG have seen rapid global growth in recent years.⁶ The main factors driving ESG asset growth include the demand from asset owners and risk mitigation whereby ESG factors can be financially material.⁶ Here in Malaysia as well as worldwide, HSBC is seeing more asset owners embracing the notion of long-term sustainability needs to be embedded into their investment decisions.⁶ According to the latest data by Global Sustainable Investment Alliance, (GSIA) published in April 2019, global sustainable investing assets grew 34% to US$30.7 trillion in 2018 from US$22.9 trillion in 2016.⁶

As one of the market leaders in providing investment opportunities in structured products and a global front runner in driving ESG sustainable investments, we are happy to be able to leverage these strengths to offer the first ESG Islamic product in Malaysia – providing more alternative ESG solutions to cater to investor needs in Malaysia.⁶

ESG factors can have an impact on the potential performance of a portfolio and investors should consider these factors when making investment decisions.⁶ To learn more about ESG investing and how you can incorporate sustainable investing as part of your larger portfolio, speak to your Relationship Manager today.

Here in Malaysia as well as worldwide, HSBC is seeing more asset owners embracing the notion of long-term sustainability needs to be embedded into their investment decisions.⁶ According to the latest data by Global Sustainable Investment Alliance, (GSIA) published in April 2019, global sustainable investing assets grew 34% to US$30.7 trillion in 2018 from US$22.9 trillion in 2016.⁶

As one of the market leaders in providing investment opportunities in structured products and a global front runner in driving ESG sustainable investments, we are happy to be able to leverage these strengths to offer the first ESG Islamic product in Malaysia – providing more alternative ESG solutions to cater to investor needs in Malaysia.⁶

ESG factors can have an impact on the potential performance of a portfolio and investors should consider these factors when making investment decisions.⁶ To learn more about ESG investing and how you can incorporate sustainable investing as part of your larger portfolio, speak to your Relationship Manager today.

The UN Global Compact is the world’s largest corporate sustainability initiative that calls on companies to align strategies and operations with universal principles on human rights, labour, environment and anti-corruption, and take actions that advance societal goals.

Companies that commit to the UN Global Compact are encouraged to incorporate these 10 Principles into strategies, policies and procedures, and establishing a culture of integrity, to not only uphold their basic responsibilities to people and planet, but also setting the stage for long-term success.

Human Rights

1. Businesses should support and respect the protection of internationally proclaimed human rights; and

2. Make sure that they are not complicit in human rights abuses

Labour

3. Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;

4. The elimination of all forms of forced and compulsory labour;

5. The effective abolition of child labour; and

6. The elimination of discrimination in respect of employment and occupation

Environment

7. Businesses should support a precautionary approach to environmental challenges;

8. Undertake initiatives to promote greater environmental responsibility; and

9. Encourage the development and diffusion of environmentally friendly technologies

Anti-Corruption

10. Businesses should work against corruption in all its forms, including extortion and bribery

Source: United Nations Global Compact.

Sources:

1. HSBC Holdings Plc, Environmental, social and governance update, April 2019.

2. Forbes, The remarkable rise of ESG, 11 July 2018.

3. Investopedia, Environmental, Social, Governance (ESG) Criteria, 10 May 2019.

4. The Edge Markets, Malaysia becoming a sustainable responsible investment hub – RAM Ratings, 24 July 2018.

5. The Star Online, Guided by ESG factors, 18 February 2019.

6. HSBC Malaysia Bhd, HSBC Amanah introduces first-in-the-market ESG Islamic Structured Product in Malaysia, 10 June 2019.