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Responsible Investment 2021

Integrating ESG Considerations
03 May 2021
    Download the full reportPDF, 3.5MB

    The materiality of ESG issues varies significantly from one sector to another. This is why we believe that, through developing bespoke sector-specific frameworks, we are better able to focus on the most relevant ESG issues for our investments and deliver better investment outcomes.

    Xavier Desmadryl - Global Head of ESG

    At HSBC Asset Management, we believe that Environmental, Social and Governance (ESG) issues can have a material effect on company fundamentals and performance over the longer term. Evaluating how companies manage their impact on the environment, their relationships with stakeholders, and their operations enables us to identify potential risks and opportunities which financial markets may not price appropriately.

    ESG factors are integrated across all our equity, fixed income, multi-asset and liquidity portfolios. Despite our ESG integration process being highly rated by PRI, we are always looking to improve our approach as best practices evolve to exceed the demands from our stakeholders. In 2020, we conducted a review of our ESG integration process and began work to strengthen any asset class or geographic specific gaps. For the alternative asset classes, where ESG integration is less established, we took steps to include ESG factors into the investment process more formally. This is leading to the development of specific scorecards. Real Estate, Hedge funds of funds and Private Debt are very different but will benefit from a dedicated ESG analytical framework, enabling the investment team to take more informed investment decisions.

    To read our full 2021 Responsible Investment annual review, click here

    Deep Dive: ESG in Fixed Income

    How are ESG issues embedded into the credit scoring process?
    Sustainability risks, especially corporate governance, have long been incorporated in our traditional credit rating methodology. As such, including ESG factors in our internal credit rating does not represent a change of philosophy.
    Nonetheless, the incorporation of E and S factors enhances transparency of other material issues and impacts our internal rating. This internal credit rating methodology applies to all asset classes from non-financial to financial corporates. We have defined key industry-specific ESG risks factors and identified 225 ESG data points, each weighted according to materiality to generate our overall rating.
    For instance, our financials holdings there is an emphasis on governance – including risk monitoring, audits and controls, corruption and bribery, contribution to financial instability – which we view as the most material factor in the overall ESG assessment. In contrast, for healthcare and pharmaceutical issues, our focus is on social dimensions such as access to medicines, prevention and control of medicines‘ potential misuse.

    How does the process differ for government bonds?
    Philosophically, there are similarities with corporate bonds, in identifying material ESG factors and then applying those to the analysis. We believe that strong management of ESG issues positively impact the attractiveness of a country’s bonds; conversely, poor ESG policies can cause us to reduce our investments. Our research has shown that the impacts can be particularly pronounced in emerging markets. Countries with higher ESG scores and improving ESG scores have generated better returns with lower volatility historically. Our sovereign engagements directly with governments aim to assess the forward-looking ESG policy trajectory in order to capture this performance rationale.

    Read the full Q&A with Rachida Mourahib, Head of fixed income ESG and green research, by downloading the full report available on the top of the page.