HSBC GAM’s discretionary ESG approach

Asset Class in Focus

Fund managers at HSBC Global Asset Management can accept or ignore ESG red flags, but they can’t deny the warnings, according to the firm’s responsible investment specialist.

“All our equity and credit analysts assess every security against an ESG (environment, social, governance) framework,  assigning them a high, medium or low grade. Issuers of equities or bonds identified as particularly risky are then subjected to enhanced due diligence,” Sandra Carlisle, director and senior responsible investment specialist at HSBC Global Asset Management told FSA in a recent visit to Hong Kong.

HSBC GAM was an early signatory of the Principles of Responsible Investment, a United Nations-supported international network of investors founded in 2006.

The firm has taken progressive steps since 2007 when it signed up, to integrate ESG into its investment processes for all mainstream asset classes, and ESG integration is a deployed by all the firm’s equity and credit analysts to support portfolio managers’ decision makings.

“A critical part of our responsible investing effort is to exercise our proxy votes at shareholder meetings in order to put pressure on companies to raise their ESG standards,” said Carlisle.

“However, we only exclude specific categories of companies in our funds if a client, for whom we have developed a customised portfolio, asks us to do so,” she said.

“Otherwise – with the exception of companies that produce or trade in banned weapons – we don’t exclude any company because of its activities. In the end, the investment returns matter most, and the managers don’t take a moral position,” she added.

HSBC GAM doesn’t rely on third-party data or evaluation providers; instead it uses its own criteria derived from the UN sustainable development goals.

“There is a lot of ESG data out there, but much of it tends to be backward looking,” said Carlisle.

In fact, HSBC GAM’s ESG process is neither proscriptive nor prescriptive. Even if a company (or country) scores poorly against the firm’s ESG metrics, the fund manager typically has the discretion to ignore the warnings and add the security to their portfolio.

“Ultimately, the decision rests with the investment team. But, if something goes wrong or new regulations affect the issuer negatively, then the fund managers can’t say they hadn’t been warned. The ESG assessment will have shown up any red flags,” said Carlisle.

However, HSBC GAM has clearly identified a market for funds with specific ESG mandates. A major focus of the Carlisles’s team of London-, Paris- and Hong Kong-based researchers is climate change, and that is reflected in its launch two years ago of a couple of low carbon products.

Reducing carbon footprints

The $330m HSBC GIF Global Lower Carbon Bond Fund invests in investment grade corporate bonds, with some exposure to green and high yield bonds. It has a bottom-up and top-down investment approach using “composite carbon intensity data” from Trucost, part of S&P Global, to understand the impact of individual issuers and sectors on total greenhouse gas emissions within the portfolio, according to the fund fact sheet.

Basically, the “carbon intensity” use of the collective holdings in the portfolio should be less than the fund’s benchmark, the Bloomberg Barclays Global Aggregate Corporates Diversified Hedged index.

In practice, sector allocation is quite similar to the benchmark, with notable underweight positions in consumer non-cyclicals and utilities and no big overweights – except a 10.3% cash position.

The fund has posted a 11.27% cumulative return since its launch compared with 6.25% for the average US-dollar fixed income fund, but at the expense of higher annualised volatility of 2.59% compared with 1.88%, according to FE Analytics data.

The much smaller $35m HSBC GIF Global Lower Carbon Equity Fund invests in developed markets equities whose “carbon footprint is assessed pre-purchase and then monitored,” according to the fact sheet.

Perhaps surprisingly, 61% of the fund is allocated to US equities, which is line with MSCI World index benchmark, but counter-intuitive when, as Carlisle pointed out, corporate US is well-behind Europe in embracing the notion of climate change.

In terms of sector, the fund’s largest overweights are to information technology and communication services, and its biggest underweights are to financials, consumer discretionary and materials.

The fund’s 7.14% return since launch has done better than the average international equity fund (6.74%), but has significantly underperformed its MSCI World index benchmark (13.34%). Its 13.10% annualised exceeds the fund sector average (12.20%), but is slightly less than the benchmark (13.22%), according to FE Analytics data.

Other “sustainable thematic funds” are planned, according to Carlisle. They are likely to be related to the goal of creating more “sustainable cities”, and the firm is in discussions with private bank and institutional investors.


HSBC GIF Global Lower Carbon Bond Fund vs sector average

Source: FE Analytics. US-dollar returns since launch of fund 27 September 2017. Data for benchmark Bloomberg Barclays Global Aggregate Corporates Diversified Hedge index is unavailable.

HSCB GIF Global Lower Carbon Equity Fund vs sector average and benchmark

Source: FE Analytics. US-dollar returns since fund launch 27 September 2017.

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