Welcome to the HSBC Climate Webinar. I will now pass over to your host for today, Richard O'Connor, Global Head of Investor Relations.
Thank you, operator. Good morning, good afternoon, or good evening, everyone. Thank you for joining us today. I will shortly be passing you over to Noel Quinn, Group Chief Executive Officer, and Daniel Klier, Global Head of Sustainable Finance, who will present HSBC's updated climate policies. We will then, after 15 to 20 minutes, move on to Q and A, where you can use the raise-a-hand functionality at the bottom center of the screen to ask verbal questions. Alternatively, you can send in questions to investorrelations@hsbc.com, and we will try to answer them on this call, or the IR team and myself will get back to you soon after. With that, Noel, please go ahead.
Thanks, Richard. Good morning, afternoon, everyone, and thank you for joining us today. I'm going to hand over to Daniel shortly to talk about our climate aims. First, I want to say a few words about our overall ESG strategy. Over the last few months, while the short-term environment has been challenging, we, and I personally, have devoted a significant time to considering how best to build the long-term health of the business. It's absolutely the right time to do this. We don't just want to grow. We want to do so in a way that provides lasting value for all our stakeholders and communities everywhere that we operate. We see ESG and the environmental sustainability aspect, in particular, as the foundation of that aim. It's right to do morally, but it's the right thing commercially as well. Sustainability is not a new focus for us.
We've put significant effort into building our strong existing reputation in sustainable finance, which is how we've currently ranked number one in the world. It's time to go further. That means going broader, extending our focus beyond capital markets to cover the full scope of our business and the full scale of our client franchise. It means going deeper, embedding climate into all parts of our business, from product development to wealth, to asset management, and to supply chains. We need to be as comfortable assessing business models on their contribution to building a new, resilient, thriving, low-carbon world, as we have been assessing credit risk in the old world. This requires us to build new skills, new capabilities, and new innovations within HSBC. I want us to be clear that our climate ambition is a holistic one.
We're covering the whole economy and employing the whole of the bank. It means more than just growing our exposure in some areas and withdrawing from others. In fact, it's the sectors where the transition is hardest that require the greatest support from HSBC. We intend to stand by our clients as they make their transition and to support them with finance and investment in any way that they need us to. Some sectors will be able to transition more quickly than others, which is why a balance across our whole portfolio is so important. Achieving that balance is how we intend to achieve on net zero ambition while also supporting our clients on their transition journeys. That is just and fair. I want to point out that while this ambition focuses on the E of ESG, we remain focused on what a healthy organization needs to succeed and thrive.
In particular, what motivates our people. The feedback from our people so far is that our climate announcement has been received extremely positively, and it has engaged and energized our people to swing them behind our aims. We are also totally committed to increasing the diversity and inclusiveness of our workforce so that we can serve all our customers effectively and to guaranteeing the strongest governance standards of any financial institution. Strong governance is the bedrock of our corporate culture. HSBC was built on the principles of prudence, conservatism, and building a sustainable business. Strong governance is what underpins these principles. Though we may at times stumble, we will not ease our commitment to consistently deliver the strong governance we are known and respected for.
You have my commitment that we will not only maintain this principle of strong governance, but that we will be humble and transparent in acknowledging where we make mistakes and in correcting our course quickly and openly. With that, I'll pass over to Daniel to take you through the presentation.
Thank you, Noel. As Richard said, I will take a few minutes to provide an overview of our strategy, and we will then have time for Q and A. If we move to slide two of the presentation. As Noel said, it is very clear to us that climate is only one part of a much broader ESG strategy. Since 2017, established a senior governance and approach to ESG, climate being one of them. We have a monthly steering committee, we have an oversight by the board, and we have since then published five ESG reports and have been upgraded by both MSCI and Sustainalytics, where we now stand above our immediate peer group. Today, we will talk about climate, but as in previous years, we're very committed to provide a more holistic overview of ESG.
Through the work that Richard is doing, we will continue to engage investors on all the different priorities, which includes diversity and inclusion. Noel, earlier in the year, made a commitment on Black Lives Matter, and obviously governance, which includes our approach to data and cyber. Today, we will focus on the climate angle of the broader ESG agenda. If you go to slide three, it is very clear that this decade is the decade of change. The world needs significant investment to deliver the goals of the Paris Agreement and the implementation of the wider sustainable development goals. It is also very clear that COVID accelerated this transition, and that happened in many ways. Governments and regulators are accelerating their efforts.
You will have seen the European Union launching a $250 billion package with a large green element, the German government, the French government declaring 30% of their recovery along green. Also you have seen China making a commitment in the middle of the COVID crisis to go to carbon neutrality by 2060. What's more important, we have seen many companies moving in the middle of the crisis. In our recent survey, 85% of companies believe climate change will have significant impact on their business model, and 55% say they already see the impact of climate change on their business model today. And along the same lines, investors are increasing their effort. More than 90% of investors now have a sustainable finance and ESG strategy. What's more important, risk and return now plays the most important role.
We have seen many publications, HSBC Research was one of them, that demonstrated that throughout the crisis, companies that are more aligned with ESG targets, and even more important, companies that are more aligned with climate targets, outperformed the market. As this evidence becomes clearer, more and more investors are shifting their portfolios towards sustainability climate aligned targets. Therefore, for us, it is very clear the financial services sector has a very important role to play in this, and HSBC has a very important role to play to mobilize the capital that is needed to support our clients and governments in managing an orderly transition and to manage the risk that will come if we don't manage climate change proactively. If you go to the next slide, please. HSBC has long been a leader in the transition to a low carbon economy.
We're currently ranked number one in the green social and sustainability bond market. We are seen as an innovator. We launched the first energy transition bond, the first Sukuk green bond. We were the innovators in sustainable supply chains. We have by now trained 28,000 colleagues in HSBC, and we're well on track to deliver our original 2017 target of $100 billion financing, which we will probably reach by the end of this year or early next year. We've been named the world's best bank in sustainable finance in 2019 and 2020. While this is all great, we realize that it is now time to accelerate. As Noel said, we need to go deeper and broader to bring this topic to all of our clients and to all of our product solutions. Therefore, if you look at the next slide five, please.
We have a three part strategy that we announced about a month ago, which has three critical elements. The first one is becoming a net zero bank. Becoming a net zero bank means two quite distinct things. It means becoming net zero for our own operations by 2030, which is important to role model, but more importantly, to align our entire finance emissions portfolio to net zero by 2050 or sooner. We've also made clear that we're using the PACTA approach as the key metric and approach to oversee this, and then TCFD disclosure to provide evidence. I will talk more about this in a minute. The second element, which is very, very clear, to achieve net zero, we need to support our clients in this transition.
We've earmarked $750 billion- $1 trillion of financing and investment over the next 10 years to help our clients and set up the teams and systems within the bank to support this. As Noel said, this is not just a bond market, this is a mobilization of the entire bank. Then third, and as important, we know a lot of the solutions to address climate change exist but currently aren't market ready. With that, I talk about investment in nature, I talk about investment in sustainable infrastructure, particularly in emerging markets. I talk about a lot of the technologies that currently sit in universities and small startups that need to scale. For us, the third priority is how do we unlock these new climate solutions? I will unpack each of these three priorities on the following pages.
If we go to the next slide and unpack the first priority. It is very clear that to achieve the transition to a net zero low carbon sustainable economy, the entire global economy needs to transition. What you see on the left-hand side of this page is only the top five emitting countries and the top five emitting sectors, and it's very clear this isn't a single sector approach or a single country approach. This needs to happen over the entire portfolio. For us to become net zero, there are five elements that we will deliver, and you see that on the middle of the page. It is aligning our portfolio, our finance emissions, across the entire footprint of HSBC to net zero. It is to work with our customers to develop their journeys to lower their carbon emissions. It is to make regular and transparent TCFD disclosure.
We were one of the founding members of TCFD. One of our colleagues wrote TCFD within three years on that journey, but we know a lot more needs to be done to provide truly transparent information that investors can use to make investment decisions. Number four is we will go net zero with our own operation. Then very important, we will work with our peers, central banks, industry bodies, and policymakers to create standards that people can use and trust, because it is very clear we need to avoid greenwashing in this space, and we can only do this if we work as an industry.
What you see on the right side of the page is the type of metric that you can expect from us in the future, and that ranges from our operational sustainability metrics to finance emissions to the shape of our transition finance portfolio, and we will use our annual TCFD disclosure to make these disclosures. If you move to the next slide seven, please. To deliver net zero, as I said before, we need to support our customers in this transition. The OECD and the International Energy Agency expect that the world needs to invest about $100 trillion into financing by 2030 for the low-carbon transition. What you see is it ranges across all geographies in the world with a very, very strong tilt to emerging markets, and it also ranges across all sectors.
Our three commercial priorities on this side to help clients in their transition, but also to build a lasting sustainable business for the future, is transition finance. How do we help our clients in that transition in their own operations and in their supply chains? That goes particularly to the high carbon, hard-to-abate sectors that need the additional financing. It is the work that we're doing around sustainable infrastructure. We know that wind and solar in developed markets have been very successful, but there's a lot more to do to bring the same concept to emerging markets to make hydrogen work, to make batteries and storage work. We believe we can build a leading sustainable investment business.
We very often talk about financing in the bond franchise, but if you look at the business model of HSBC, we have an incredible opportunity to help retail investors, institutional investors, mobilize capital and find investment sources. Whenever we talk to institutional investors, their main concern is actually the access to investment opportunities. With negative rates now in many developed markets, this is more important than ever to mobilize this. Between our asset management business, our wealth business, our global markets business, and our custodian, we have the capabilities to build a leading sustainable investing franchise that sits alongside the financing franchise and supports each other. If you go to the next slide, I just wanted to give you three examples of how this materializes. On transition finance, a few weeks ago, we helped Etihad Airlines with the first transition Sukuk bond.
Etihad is using the proceeds $600 million to invest in energy efficiency to unlock research sustainable aviation fuels, to change their entire operations to become lower carbon and aligned with their transition pathway. On sustainable infrastructure, we were the lead arranger for the new Viking Link between Denmark and the U.K., which is incredibly important to balance our networks. We all know with renewable power, we will see a lot more swings in the network. This link is incredibly important. You see other examples. We've recently done Taiwan's largest offshore wind farm. We also are the lead arranger of many of the Indian renewable projects for some of the largest Indian developers, which very often are backed by pension funds from the West, because India has a very advanced framework.
On the investment side, one of the examples here is we've launched REGIO, which is a green investment fund, green bond fund for the real economy together with the IFC. It was launched earlier in the year. We have many other examples. We recently launched a full range of sustainable ETFs, local funds to offer our institutional and retail investors a full suite of products. In the appendix, you have a few more pages with detailed examples across all different sectors. What I'm particularly pleased about in recent months is that the debate has moved into the real economy. We have seen Enel, Volkswagen, and many other companies access the market, but also we've seen smaller companies in the commercial banking space access the market. We've done the first green loans in the U.K. and Canada.
We've helped a chemical plant in Bangladesh with $ 1.3 billion to implement carbon capture and storage. This is really where the broadening of the footprint starts to materialize. If you go to slide nine, I talked about the need to unlock new climate solutions. On this page, you see two examples of what we mean by this. One is nature. We know for the world to achieve net zero, we need to accelerate investments in nature. We need negative emissions because the world will always have a positive carbon footprint. We've teamed up with Pollination to create a joint venture that will create the world's largest natural capital manager.
We target a $1 billion nature fund, which will follow by a $2 billion carbon credit fund to mobilize these investments and to create a global market for offsets, which will then serve large companies and institutional investors around the world to achieve carbon neutrality. Also deliver returns, because we know nature actually will be an important investment class in the future. The other topic that I mentioned is sustainable infrastructure. Sustainable infrastructure in emerging markets in particular, currently sees a very significant funding gap of over $3 billion a year, while investors are looking for bankable projects. So we've created a coalition that we're leading under the auspice of President Macron, the One Planet Summit, which is called FAST-Infra, with about 100 investors, banks, and multilateral development banks, to create a product standard for sustainable infrastructure.
If you think about the success of the green bond market, we're aiming to do something very, very similar here. Create a global standard, allow asset managers and banks to launch products that can then mobilize the funding. We've launched the work publicly in June, and later in November, we will see the recommendation and policy interventions that will start to come through. These are only two examples of a whole range of next level climate solutions, two that we believe are very important to mobilize investments for the next decade. If you go to slide 10, please. It is very obvious that embedding a climate strategy can only be successful if it's integrated into the internal and external workings of an organization. For us, this means engaging our senior executives in internal and external forums. It is systematically training our staff.
As I said before, we've trained now 28,000 colleagues. We have a formal training program that is run by the University of Cambridge for us. Also, it is a topic that we take into a lot of our local markets because needs are different in different markets. We've established a network of about 400 champions in our commercial and global banking and markets business that have this in their job titles. As it always is, it is critical to align this into incentives. This topic is part of our scorecards, part of our incentive plans, to make sure this is a topic that is right front and center for the executives and the frontline staff that we have. Finally, integrating climate opportunities and risks into the way we govern and way we look at disclosure and risk is incredibly important.
As I said earlier, we have now three years of TCFD disclosure under our belt. It was critical to get disclosure into the core of the bank because finance teams, audit teams, audit committees need to understand these metrics to truly affect change. In summary, we see the transition to a low-carbon economy as one of our biggest strategic opportunities. It is not just the right thing to do, but it also represents a significant commercial opportunity. If we don't do it, a significant financial risk. We've long been seen as a leader in this market, but we know we need to do more, and we need to go deeper and broader. Achieving for net zero for HSBC is something truly challenging, and it requires work across our entire customer portfolio. To support this, we've earmarked $750 billion-$1 trillion of financing.
We also know that we don't have all the answers today. We are very clear that we need to work with customers, regulators, policymakers, investors, to find solutions throughout that journey. We know where to start, we also know that over the next five years, further changes will happen and we will provide regular disclosures and updates to investors the first time with our full year results, next February. With that, I'll hand over to Richard for Q and A. Thank you everyone for attending.
Yes. Thank you, Noel and Daniel. We will now open up to Q and A. As a reminder, can you please click raise your hand function to ask a question or do send them in via email as per the instructions. We've got two written questions already, which I'll read out. They come from Esmé van Herwijnen from EdenTree. The first question is, you have a net zero target for finance emissions by 2050. How will you achieve this, and to what extent will this lead to decarbonization targets versus offsetting emissions, i.e. how much will the offsetting emissions play a role in your net zero, please?
Daniel.
Very happy to make a start in this. For us, it is very clear, achieving net zero needs a transition across the entire portfolio. The first priority is helping clients in the reduction of their carbon footprint. As we set out, and also set out in our annual TCFD disclosure, we have six sectors that are particular focus for us. That's oil and gas, power and utilities, building and construction, the automotive sector, chemicals, and metals and mining. Obviously this commitment goes broader because it addresses our entire $2.77 trillion balance sheet. In those particular sectors, we now have 2,000 clients where we have annual engagement as part of our risk review. It's a mandatory part of managing risk. Also we have, obviously, proactive engagement with those clients on the opportunities they have to change their business footprint.
In the first phase, it will be helping these clients in the transition. We also realize that not every client will go to net zero, not every part of the world will go to net zero, and therefore, there will be a role for nature, and there will be a role for offsets, but it will be a solution later on once we realize how far we get with our client portfolio. It is not the intention to go to carbon neutrality just by offsets. That would be too easy. We know we have a lot more work to do with our customers to achieve the net zero ambition with them, and then for us.
Thank you, Daniel. I'll read out the second written for now. We've got a question from Ronald Bosch coming next, Roland. The second question from Esmé from EdenTree is, to what extent will you stop financing customers who are heavy emitters, and for example, coal? How big a role will that play?
I think, as we said, it is critical that this is a transition of our entire portfolio. When you take the coal element, we already have a policy out there that allows no further financing of project finance of new coal- fire power plants and of new coal mines across our portfolio. It is then really the question, how do you deal with existing customer exposures? There we will use PACTA as the leading tool. We made a commitment that PACTA is our tool to measure transition of clients, and it will then be a client-centric approach to assess transition pathways and help them. I just want to give you one example, which for me makes this very clear. China Light and Power, which is the main power operator in Hong Kong, is currently heavily reliant on coal.
Essentially, it's currently powered by coal-fired power. We have recently done the first energy transition bond for China Light and Power. They have a pathway for an 80% reduction away from coal, an 80% reduction in their carbon footprint by 2050. In our view, those are the clients that we need to support. I always quote the one statistic, which for me is most striking. 100 companies in the world are responsible for 70% of global carbon emissions. Those are the companies that we need to transition. Those are the large utilities, the large oil and gas clients, but also steel and cement. Therefore, in the first instance, it's our role to help them, to work with them on disclosure, and use transparent assessment across our entire portfolio to measure and report progress.
Thank you, Daniel. Over to the operator. Has anybody raised their hand yet? Just a reminder, use the raise your hand function, and do give us your name and institution before the operator unmutes you and takes your question.
Hi, Magdalena. You are unmuted now. You can go ahead and ask your question.
Thank you very much. It's Magdalena Stoklosa at Morgan Stanley. I've got two questions, please. The first is on the regulatory side. Could you let us know how do you think about the climate stress tests and how they will look like? Of course, we are seeing regulators globally thinking about these. So far, what have been your conversations with various regulators about it, about the inclusion of the climate transition within the overall capital framework? That would be my first question. My second question is really about your view about how banks in general should be communicating their commitment on the lending side. Of course, particularly when we look at the climate transition, some banks talk about sustainable financing targets, some banks talk about exclusions. What do you think is the right way to communicate that lending side, transition side commitment? Thank you.
If I could maybe-
Thank you.
Daniel, can I just give a couple of thoughts first, and then you add some more comments. On the climate stress test, I think that's something we all have to face up to and find a solution to. If you're asking me a worry I have at the moment on the regulatory framework, it's on the one hand, we now need to start factoring in to our existing risk models, the risk of stranded assets and the risk of industries that are going to face challenges in the light of sustainability. We're having to enhance our risk models to do stress tests that take into account the sustainability factors that will play in over the next few years and decades.
I guess if we as an industry do not adequately take account of those risk factors, then you could envisage penalty load-ins on the capital calculation for that part of the balance sheet that is deemed to be at risk. If you now look at the other side of the equation and you look at those industries that are emerging, the new business models that are emerging, to try and find new forms of energy, new ways to do transportation, those business models also need to be risk assessed. Now, they will attract a better rating under those risk models from a sustainability perspective than possibly the old industries. They probably have the potential to attract poorer ratings on their financial and credit risk because they're unproven, and there potentially will be false starts.
We've seen that in part in wind and solar, where some projects haven't been successful. The challenge for the regulatory environment at the moment is to avoid a double hit. That's not one bank issue, but I think the issue is you could potentially get penalty loadings on capital for the extant portfolio from an environmental perspective, and you could potentially get some penalty loading on some new industries for the credit risk associated with those new business models and new technologies and new industries. I think what we need to do is work with our regulators to find a way that you don't end up with a double hit, that you end up with an appropriate risk model applying. That's in our hands. We need to make sure that we can take our regulators through that journey on both aspects that are before us.
Certainly for us, for the old, the extant or the existing book, we're into a much more significant level of data collection from our customers, because the answer is not just what we think, it's what information they are capable of providing to us to help us understand the journey that they're going on to transform their risk profile into a more acceptable profile from the environmental point of view. Hence our focus on PACTA. The other option for us is just walk away from certain industries as a bank and pass the problem to another bank. That doesn't solve the environmental problem. That doesn't improve the position for the world by just us walking away. It doesn't give those clients the funding they need to transition their business from a higher risk environmental business to a lower risk environmental business.
That's the one comment I would have. I acknowledge your concerns. We're building the risk models. I think your concern is one-sided, and possibly we need to be also thinking about the risk models we need to build for the new industries. With respect to communicating our lending strategy, and I think we've touched on it implicit in this note and explicitly I've just touched on it. The easy option for any bank is to just turn around and say, "I'll stop lending to these industries that are high carbon emitters." That doesn't address the underlying challenge and the underlying problem. It isn't particularly client-led. What I'd rather do is have dialogue with our clients, engage them in the dialogue about transition, understand their business plans on how they intend to meet it.
If they're willing participants on that journey, then we should be willing participants with them. We should try and make sure our balance sheet is available to them to work on that transition plan that they have. Therefore, our dialogue will be describing the journey that our clients are on and the progress we're making on their transition plans. That's really what we want to do. Daniel can give you more detail on that. Let me then close off and link the two points.
If we do not find a solution to the regulatory conundrum we talked about, the challenge for the banking sector will be it will become penal to both bank the existing and bank the future. That will put more pressure on the equity markets or the governments of the world to find the funding necessary to solve the funding gap that exists in the transition investment that's required. If the banking sector is not able to carry on that journey of funding, it will fall back to equity or government funding or no funding at all. Therefore, the journey won't happen. Daniel, do you want to add?
Okay.
Please contradict anything I've said if you feel you should.
No. I think you covered it well. Just maybe one addition on the stress testing side. We are using the NGFS scenario, we are currently running our first internal version of a stress test. The NGFS, for those of you that are not that familiar with it, is the Network for Greening the Financial System. It's a network of now more than 60 regulators around the world that have teamed up to make climate change a priority. The three scenarios that they're using are actually quite obvious ones. They're using one that they call the hothouse scenario. Essentially, the world doesn't find the policy response, and we're heading towards a four to five degree world. It's an early policy response. We very quickly see policy intervention from governments that ban certain industries.
You could see an accelerated ban of the internal combustion engine from certain markets and how you deal with that. The third scenario is a late policy response, which is a scenario where we wait very long throughout the 20s, but then realize that we have to have very rapid actions and introduce $100 carbon price and other policy interventions. For us, those three scenarios make a lot of sense. The other benefit is that they are globally consistent because they're lined up across regulators. One of the concerns that obviously we have as with a bank, our shape, is that we run different stress tests in different jurisdictions. The NGFS scenarios are probably the best framework to create a consistent approach to this.
Great. Thank you very much.
Elaine, you had a second question. Yep.
Oh, no. These were two of my questions. Thanks, Richard.
Okay.
Okay, my pleasure.
Hi, Richard. We have one more question from Arian.
Oh, yes. Thank you. Good afternoon. It's really, it's a question on that carbon tax. On regulation more broadly. Do you think the things are moving in the right? It's clear you're trying to do the right thing. The carbon tax really hasn't moved up the agenda yet. It seems it's awful difficult for you to move industries on as fast as you'd like if they're not being charged appropriately. Do you think that that balance is manageable? Secondly, bank capital is pretty onerous these days. Do you think regulators are interested in being supportive of you being very forward-looking? I mean, it's that tension you mentioned, Noel, between climate risk and credit risk. I mean, I haven't actually seen anything from regulators sort of giving back at all yet.
It's more just a sort of additional stress test at this point from what I can see, but I'll obviously be delighted to hear different. Thank you.
Daniel, do you want to do the first bit?
Happy to. On the first one, Alistair, I agree that a carbon price is a very helpful additional tool, but I think we have now moved beyond this. I think when you look at some of the big business model changes that you see in the oil and gas industry, in the automotive sector, where people are clearly realizing that the only way to get market capitalizations and valuations back up is building a business model for the future. I think we have moved beyond the threat of policy intervention to a environment where a lot of executives and our clients are realizing that actually sustainability and a more low-carbon line business model and better returns start to go hand in hand.
We see many of the actions of our clients that we have recently supported on this, no longer using this as a defensive tool, but almost as a positive tool to build a business model that will last the next 10, 20, 30, 50 years. The carbon tax that may or may not come, will only accelerate this. It's not the only reason why boards and executive teams and investors have now, I think, pushed on this agenda. On the forward-looking nature and whether regulators are supportive, I think most of regulators that we speak to essentially say, "We look at this from a prudential lens, and if you give us evidence that certain investments are lower risk, we're willing to work with you on RWA profiles and risk weights." If you look at the research around, you start to see that evidence.
You start to see that commercial buildings that have a green standard are actually higher longer value, long-term value. You start to see that infrastructure investment projects that have a climate alignment are lower risk in the longer term. Do we see that systematically yet? No. I think that's one big piece of work that we as an industry have to do together with regulators. You have some regulators that go further. If you look at the recent announcement by Christine Lagarde, she actually changed the mandate of the ECB to include sustainability in the mandate. While most regulators in the world look at this from a pure prudential perspective, the ECB now went a step further and said, "Sustainability is actually a core mandate for us," which allows them to actually go beyond the prudential lens that we see here in other jurisdictions.
I do expect that dialogue to be a balanced one, clearly one that looks at long-term financial risk, but also looks at the ability of regulators to work with the industry on mobilizing capital. When you listen to the speeches of regulators around the world, they will all say that the financial industry has a very critical role to play in this transition. Not the only role, but a very critical role. Noel, anything?
I think that's, I would endorse that. I think we're at that stage where we, the industry, need to be forming the answers to these questions in as logical and scientific a manner as possible to help the regulators understand our approach, understand the balance of risks, and create an appropriate environment. I wouldn't say we've got all the answers at the moment, but it's in our hands to formulate those answers and help the regulators on this journey that we're going through. I suppose I paint the worst-case scenario of the double hit potential, but I think we can solve it, but it will require the industry in total to present a coherent set of arguments on how to manage the risk profile of both the existing industries and the new industries, and to present a coherent argument to the regulators so they can make the right decision.
I think we can solve it, but we're on that journey.
Thank you.
Before I do, we've got another chat. I've got two written questions, which I'll read out one at a time. Are there any considerations around intermediate targets for 2030 for financed emissions, as JP Morgan has announced? That's come from Nina Roth of BMO.
Daniel?
Not yet. I think it's very clear we need to do the work. PACTA is the tool. We've onboarded them. We've worked with them for the last 12 months. It needs more work to actually set out that pathway. The other thing that we want to do is actually work with our peers to create a consistent framework on this. If you look at the asset owners. They have done a job already a year ago to define what they consider net zero. We want to do the same with our peer group so that when we say net zero and other banks in our international peer group say net zero, we actually mean the same thing. We know we need to provide more transparency and we will start to see interim milestones, but it needs to be a consistent approach.
We're working in a number of industry for a, on that consistent approach. You should see more on that over the next few weeks and months.
Thank you. The second question is a follow-up from Esmé van Herwijnen from EdenTree. Thank you for answering my questions. As a follow-up, I understand you will be supporting the most polluting businesses in their transition, and that is welcome. What I would like to understand is to what extent you will also continue to finance business as usual, BAU activities, including new fossil fuel E&P, coal mining, and fossil fuel projects or infrastructure more broadly. When will HSBC stop financing those clients that are not transitioning fast enough?
Well, there's already evidence of us having done that in certain areas, and we'll continue. If we do not believe that clients are serious about transitioning, then we'll have to look at doing more of that. Daniel, could you just recap some of the examples of where we have already pulled back certain activities?
Yeah. On the specific project side, we have already a very stringent policy when it comes to any new coal mining, any new coal- fire power. As many of you know, we also have restrictions in drilling in the Arctic, as well as expansions in the oil sands.
palm oil-
Palm oil
any palm plantations that are not in compliance with certain standards. We pulled back heavily on that industry around about five years ago. I was involved in that when I was in Asia. We only support clients who are committed to the RSPO standard. That's part and parcel of how we operate today.
Obviously all projects go through a test of the Equator Principles, which we take up all the way through group governance in a risk committee. When it comes to client transitions, I think we discussed as well here, what PACTA allows us to do, and for those of you that don't know PACTA, allow me one minute to unpack this a bit. It allows you to assess individual portfolios and clients on what transition pathway they should be on, and then actually have that engagement. When you talk about the automotive sector, you see in the model at what speed clients should shift towards hybrid and electric. You're then able to have those conversations with clients. You see the same in the steel sector and the cement sector, and to your point, in the energy sector and the utilities.
Clearly the power mix has to change, but the power mix will change at different speeds.
Got a couple more hands up in the chat room. Operator, over to you.
Sure, Richard. We'll go with Ronald Bosch first. Ronald, you are unmuted now. Please go ahead.
Yes. Thank you very much, Daniel and Noel, for this presentation. I have two questions. One is about the sustainable finance target, which you set to $ 100 billion, which likely to be met at the end of the year, and you have now the new target, $ 750 billion, $1 trillion. Maybe you can give a bit of an idea which areas, facilitation, financing, and investment, the components that has been built up. The second question, but I guess it's maybe partly already answered, is more about this setting of targets for the activities which are currently not aligned with Paris, increasingly stringent thresholds set for clients. Maybe you can give a bit of examples on that. Thank you.
Yeah. Thank you. On the $ 100 billion, the makeup of that, the current makeup is about 70% is facilitation. It's work that we do either through our bond franchise, but also our syndicated loan desk in the private debt market. 70% roughly is work that we do with investors to mobilize capital. We've talked about a number of the examples in this call, the ETFs, the Volkswagens, the Googles, who recently, to Chanel and Burberry as their first green bonds. Also, I give you the example of green loans across the network, which very often gets indicated to investors that have incredible demand in this. 15%-20% of the $ 100 billion target currently are balance sheet financing, so where we are the long-term counterpart.
Examples for this is, just as an example, the Walmart sustainable finance transaction, sustainable supply chain transaction, where we are taking the risk of their supply chain, introduce incentives into the supply chain to help suppliers shift to better ESG-aligned practices. About 15% of our $100 billion target currently is in the investment base. Between our asset management and our market business, where they help mobilize capital. The principle behind the $100 billion, also the new $750 billion- $1 trillion target, is always where do we mobilize additional capital into the energy transition? That's the principle of assessing. We have a data dictionary that sits on our website, and with our next full year results, we will update this data dictionary and provide the first disclosure against the new target.
Daniel, just for clarity, we only count against our $ 100 billion that which we participate in. We don't do the whole project, do we?
That's absolutely correct. We take our share of a project. We don't count a full bond or a full loan. We take our share that we either take on balance sheet or that we place out to investors. We've also recently conducted a piece of work together with UK Finance, which was published a few days ago, for the industry to find more consistent reporting standards. We realized that some banks would show full loan and bond proceeds. We only show a portion. There's a new piece of work out to create greater consistency on that. We again published this on our website as a sustainable finance data dictionary, so everybody has transparency, what we count and what we don't count.
Daniel, the roadmap for the $750 billion- $1 trillion.
The roadmap for the $750 billion- $1 trillion is actually a very detailed bottom-up plan that we've built with all lines of business. Clearly, the facilitation in the capital markets will continue to play a big role. That role will start to reduce as we're building out our asset management business, our wealth business, and especially in those other business in commercial banking. We see incredible appetite from mid-market companies and SME companies to tap into this market. In our recent Navigator survey, 85% of mid-market and SME clients said they need support in the transition, and they need a banking partner. In geographies like in Hong Kong, we've teamed up with an agency that actually brings advice to our clients, helps them in understanding their carbon footprint, their carbon transition journey, and then allows them to finance that through our balance sheet.
We will see more of that in the commercial banking space over the next few months and years.
Let me also be clear. Over the last six months, while we've been discussing this strategy, I probably gave Daniel the hardest time on this one particular number or two numbers, because I didn't want to just put out a number out there that was some sort of marketing strapline. I wanted to see a roadmap. Granted, it's a roadmap that covers an extended period of time. I wanted to see a roadmap that was bottom up, not top down, where we thought within our business, the different parts of the business, we thought we could be active at either providing finance or providing investment opportunities. We had each of the business areas put together their 10 year plan that put together what they believe they could be active in.
Now, clearly, there are judgment calls in that, but there is a plan, and it's a plan that has been built up from each business line, not from a top-down goal, and that became the number. What I was very adamant on is I wasn't wanting to put a number out, just a headline for the sake of a headline if I didn't think I had a roadmap to achieve it. That's where we spent quite a bit of time having a dialogue.
We've got two more hands raised, and then I think we'll call the meeting to a close. We've got Stuart Graham and then Magdalena. Operator, over to you.
Sure.
Stuart, you're unmuted.
Can you hear me?
Yes.
Yeah.
Thanks. I have two questions, please. First, how do you define carbon-intensive industries, and how big is your exposure right now? Second, there's obviously a lot of good commitments here, which are clearly very welcome. In that context, I guess I'm wondering why, like so many of your peers, you've not signed up to the UNEP FI Collective Commitment to Climate Action. Thank you.
Daniel?
Happy to take that. In our TCFD disclosure, we provide a figure which is 21% of our wholesale balance sheet that sits in six sectors that we consider the highest transition risk for us. Those six sectors are oil and gas, power and utilities, building and construction, automotive, chemicals, and the metals and mining industry. That's 21% of our wholesale balance sheet. Wholesale balance sheet is about $600 billion out of the total exposure that HSBC has. In these six sectors, we have 2,000 clients that we particularly engage with. Already two and a half years ago, we introduced climate risk as a core part of our credit risk process. In these sectors, both our risk officers and our relationship managers actively engage with those clients on, do they have a disclosure? Do they have a board mandate? Do they have somebody responsible for this?
Also, do they have a credible pathway that is aligned with the Paris Agreement? These six sectors are continuously under review, but for us, those are the largest exposures, but also the exposures where we expect the most significant action by regulators or policymakers, because it is very clear this is the exposure to transition is not just one of technological change, it is also one where regulators are changing principles and operating standards in a market. When it comes to the Principles of Responsible Banking, we are signatories of the principles of responsible investing. We're working very closely with the United Nations, and we're a big supporter of, I think, all the work that's happening in that space. For us, it was at that point a consideration of how many additional principles do we sign up to, and what additional, essentially implications that has for us.
We are in very active dialogue with them, and we don't see anything in the principles that we don't agree with. I think on the reverse, a lot of the work that we're doing, I think, is fully aligned with that. There's no deeper motive, I think, in the fact other than that we are, I think, very close in the engagement anyway. On the PRI, we are one of the leading drivers in the principles of responsible investing side already.
Sorry, my question wasn't on the Principles of Responsible Banking, it was on the Collective Commitment. I mean, everybody's signed up to Principles of Responsible Banking, but the Collective Commitment seems to be just the real sort of forerunner banks. I was wondering why you were not part of that.
Happy to take that offline. I'm actually not entirely sure which commitment you mean then if it's not the principles. We recently signed up, I think to quite a few things. We are supporters and Noel put his name behind the push for Build Back Better, which was announced in May. I'm happy to take that offline because I'm not 100% aware of this.
Good
any explicit reason why we're not behind this?
Sure. Thank you.
Final question from Magdalena. Magdalena, go ahead, please.
Thank you very much. My last question really is on ESG ratings. The bank's ESG ratings. I'm kind of thinking, as you look at what various kind of ratings companies spit out from the perspective of the bank's rating across the industry, how do you actually assess the quality and probably more importantly, the informational content of those ratings out in the market at the moment? Do you think that they reflect the more recent progress the industry has done versus, of course, what was dominating them, a tremendous amount of fine or the fine kind of issues of the past? Because of course they are used by the active managers on the ESG side, they are used by ESG ETFs.
How useful do you think they are to the buy side when it comes to assessing the ESG progress of the banks? Sorry, a long question, but hopefully clear.
Daniel, I can chip in here as well, but Daniel, why don't you go first?
Sure. Happy to go first. I think we use the ESG ratings as a very useful guide to unpick where we're good and where we're not. I think you can always have an argument how good every rating is and how much of that is backward-looking versus forward-looking. Which sometimes concerns us that obviously a very large chunk of an ESG rating is based on historic information. What I would say is it is very helpful to unpick the 30, 40 submetrics that sit in there and actually understand where we are versus the industry. That's how we are using it. We essentially disentangle the ESG rating, and we use that as a measurement and also an intervention tool in our own operations.
If you take things like gender, obviously data and ethics, but also when you go into things like employee turnover, it is for us very useful to have industry benchmarks and metrics that we can use. I think how useful is it for investors, I think it is the question how deep do people engage with it. If you just look at the ESG overall score of a company, it is helpful and insightful, but if you go to the next level down, I think you actually get a lot of information the same way as you open a credit rating report or an annual report, and you start to understand a lot more what is actually driving this number. Richard.
Yeah. Look, we obviously look at a lot of investor surveys about which ratings they find useful and why, and which particular industry. Obviously this is a fast-moving, and almost it's a very young industry, the ESG rating industry, and I think it will develop very quickly over the next two to five years. We're engaging very heavily with all of those agencies to making sure that , any rating of ours is factually accurate, and clearly also engaging where there might be things which are legacy, historic, which no longer apply. We've made very good progress with a few of those agencies over the next few years, just to get our ratings accurate, therefore that they are useful to the investor base, as you say, Magdalena.
A lot of work still to do, both by the buy side, the issuers, and of course, the agencies to further improve in this area over the coming years.
Great. Thank you very much.
Right. Well, look, thanks very much, everybody. Noel, do you want to say any closing remarks before we finish?
Thank you for your time. If there are any follow-up questions, please reach out to Richard and myself and Daniel would be happy to go into more detail. I want to reassure you that this is a very firm commitment by the bank to the ESG agenda. I see this not only as the right thing to do, but I see it as a commercial opportunity. I do see growth emerging from delivery of this plan that we've talked about. I am absolutely committed for it to be holistic across the whole bank. I don't want it to be just one bit of the bank, capital markets. I want it to be across the totality of what we do.
I know that we as an industry and we as a bank have got to reskill our organization for the industries that are to come and the opportunities that are to come before us. We're committed to doing that. I'm pleased that we were able to put our focus on this over the last six months. Despite the fact that this being quite a challenging environment, we were, as a management team, absolutely committed to looking at this critical issue over the long term and not just have a very short-term focus on managing today's business. Thank you for your time, and we'll stay engaged with you.
Absolutely. Thanks, everyone.
Thank you.
Thank you. Bye-bye.