4 May 2023
HSBC Asset Management Research & Insights Senior Manager
Learning About ESG is an educational series that connects environmental, social and governance topics with investing.
Join us each issue to see how global developments can have implications for investors. The better we understand ESG, the bigger the role it can play in our everyday lives – and investment portfolios – contributing to a better world.
Governments and private companies have been advancing space exploration efforts of late, with the latest attempt at landing a robot on the moon coming days after Earth Day. Yet, slow progress should serve as a reminder that any ambitions of finding exciting new planets to call home will remain science fiction for the foreseeable future, if not forever. In the spirit of Earth Day, we must begin to appreciate the rich life on this planet that has been providing us with a long list of our essentials – breathable air, food, water, building materials, energy sources, medicines, and more, or else face a bleak future.
The planet’s biodiversity underpins the global economy. Services it delivers, such as crop pollination or the removal of carbon from the atmosphere (carbon sequestration), are worth an estimated USD125-140 trillion annually. That is roughly 1.5 times global economic output each year[@oecd-biodiversity].
Herein lies the problem. Ecosystem services are not captured or valued in the formal economy. As a result, up to 1 million species are threatened with extinction, with more than USD200 billion of global crop output annually at risk due to loss of their pollinators[@un-sustainable-development-report]. The World Economic Forum estimates that more than half of the world’s output is moderately to highly dependent on nature. Yet around a fifth of countries are at risk of their ecosystems collapsing[@biodiversity-and-ecosystem-services].
Output dependence on nature
The fact that biodiversity loss and climate change are inextricably linked has further raised the profile of biodiversity-related initiatives. Land use change, mainly consisting of deforestation, is responsible for up to a fifth of CO2 emissions itself[@the-london-school].
One reason for the lack of value placed on biodiversity historically is that it can offer little direct economic benefits to the local landowners. For example, it’s typically worth more to a farmer to cut down trees than to keep a forest in the ground. To address this conflict, we need a system that values the ecological services the forest provides and aligns the incentive of the farmer with that of the public good.
Early steps are being taken. As an example, Gabon is one of the world’s only net sequesters of carbon, to the tune of over 100 million tonnes annually. In reward, the African republic has become the first to be paid for continued preservation of its forests as part of a USD150 million deal with the UN-backed Central African Forest Initiative.
Even in the absence of such large-scale solutions, preserving and restoring biodiversity can already provide financial gains to landowners. Switching from industrialised agriculture to restorative farming, or from intensive to more sustainable forestry methods, serve as examples.
The aforementioned examples of sustainable changes can deliver a new and broader set of cash flows, with greater resilience. This is due to the higher value being placed on sustainable agriculture and wood products by consumers, ancillary revenue streams such as eco-tourism, savings on pesticides and fertilisers, along with potential land price appreciation due to the mounting scarcity value of biodiverse land.
Demand from large corporations which have made commitments to biodiversity and reducing carbon emissions offers further financial incentives, through growing sales of carbon offsets, or credits for the removal of carbon dioxide emissions to offset emissions made elsewhere.
Early progress in valuing nature’s services is important. With new regulations driving up the price of carbon emissions, as evidenced by the roughly 600% increase for EU carbon allowances over the last five years, this should translate to enhanced value and revenue streams for natural carbon sinks.
For investors, exposure to assets that are countering instead of aggravating biodiversity loss and climate change will serve as a useful diversifier against environmental risks elsewhere in their portfolio. It also means opportunity for positive impact while investing in assets whose value should rise to match their importance.
Perhaps financial incentives will give Earth Day a more prominent slot in our calendars in future, so that we celebrate it accordingly.
ESG: a set of Environmental, Social and Governance criteria that investors can apply to analyse and identify material risks and growth opportunities in investments.
Natural carbon sinks: like forests, the ocean and soil are natural reservoirs that absorb carbon dioxide from the atmosphere.
Carbon sequestration: Capturing and storing carbon dioxide, keeping it out of the Earth’s atmosphere so that it doesn’t cause the atmosphere to warm. The process helps reduce climate change.
Carbon emissions: are emissions stemming from the burning of fossil fuels during any kind of manufacturing process.
This document is prepared by The Hongkong and Shanghai Banking Corporation Limited (‘HBAP’), 1 Queen’s Road Central, Hong Kong. HBAP is incorporated in Hong Kong and is part of the HSBC Group. This document is distributed and/or made available by HSBC Bank Canada (including one or more of its subsidiaries HSBC Investment Funds (Canada) Inc. (“HIFC”), HSBC Private Investment Counsel (Canada) Inc. (“HPIC”) and HSBC InvestDirect division of HSBC Securities (Canada) Inc. (“HIDC”)), HSBC Bank (China) Company Limited, HSBC Continental Europe, HBAP, HSBC Bank (Singapore) Limited, HSBC Bank Middle East Limited (UAE), HSBC UK Bank Plc, HSBC Bank Malaysia Berhad (127776-V)/HSBC Amanah Malaysia Berhad (807705-X), HSBC Bank (Taiwan) Limited, HSBC Bank plc, Jersey Branch, HSBC Bank plc, Guernsey Branch, HSBC Bank plc in the Isle of Man, HSBC Continental Europe, The Hongkong and Shanghai Banking Corporation Limited, India (HSBC India), HSBC Bank (Vietnam) Limited, PT Bank HSBC Indonesia (HBID), HSBC Bank (Uruguay) S.A. (HSBC Uruguay is authorised and oversought by Banco Central del Uruguay) and HBAP Sri Lanka Branch (collectively, the “Distributors”) to their respective clients. This document is for general circulation and information purposes only.
The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. This document must not be distributed in any jurisdiction where its distribution is unlawful. All non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings. The material contained in this document is for general information purposes only and does not constitute investment research or advice or a recommendation to buy or sell investments. Some of the statements contained in this document may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. HBAP and the Distributors do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. This document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed are based on the HSBC Global Investment Committee at the time of preparation, and are subject to change at any time. These views may not necessarily indicate HSBC Asset Management‘s current portfolios’ composition. Individual portfolios managed by HSBC Asset Management primarily reflect individual clients’ objectives, risk preferences, time horizon, and market liquidity.
The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in emerging markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries in which they trade. Investments are subject to market risks, read all investment related documents carefully.
This document provides a high level overview of the recent economic environment and has been prepared for information purposes only. The views presented are those of HBAP and are based on HBAP’s global views and may not necessarily align with the distributors’ local views. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. It is not intended to provide and should not be relied on for accounting, legal or tax advice. Before you make any investment decision, you may wish to consult a financial adviser. In the event that you choose not to seek advice from a financial adviser, you should carefully consider whether the investment product is suitable for you. You are advised to obtain appropriate professional advice where necessary.
We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not been independently verified.
Important Information about HSBC Global Asset Management (Canada) Limited (“AMCA”)
HSBC Asset Management is a group of companies, including AMCA, that are engaged in investment advisory and fund management activities, which are ultimately owned by HSBC Holdings plc. AMCA is a wholly owned subsidiary of, but separate entity from, HSBC Bank Canada.
Important Information about HSBC Investment Funds (Canada) Inc. (“HIFC”)
HIFC is the principal distributor of the HSBC Mutual Funds and offers the HSBC Mutual Funds and/or the HSBC Pooled Funds through the HSBC World Selection® Portfolio service. HIFC is a subsidiary of AMCA, and indirect subsidiary of HSBC Bank Canada, and provides its products and services in all provinces of Canada except Prince Edward Island. Mutual fund investments are subject to risks. Please read the Fund Facts before investing.
®World Selection is a registered trademark of HSBC Group Management Services Limited.
Important Information about HSBC Private Investment Counsel (Canada) Inc. (“HPIC”)
HPIC is a direct subsidiary of HSBC Bank Canada and provides services in all provinces of Canada except Prince Edward Island. The Private Investment Counsel service is a discretionary portfolio management service offered by HPIC. Under this discretionary service, assets of participating clients will be invested by HPIC or its delegated portfolio manager, AMCA, in securities, including but not limited to, stocks, bonds, mutual funds, pooled funds and derivatives. The value of an investment in or purchased as part of the Private Investment Counsel service may change frequently and past performance may not be repeated.
Important Information about HSBC InvestDirect (“HIDC”)
HIDC is a division of HSBC Securities (Canada) Inc., a direct subsidiary of, but separate entity from, HSBC Bank Canada. HIDC is an order execution only service. HIDC will not conduct suitability assessments of client account holdings or of the orders submitted by clients or from anyone authorized to trade on the client’s behalf. Clients have the sole responsibility for their investment decisions and securities transactions.
The following statement is only applicable to HSBC Bank (Taiwan) Limited with regard to how the publication is distributed to its customers: HSBC Bank (Taiwan) Limited (“the Bank”) shall fulfill the fiduciary duty act as a reasonable person once in exercising offering/conducting ordinary care in offering trust services/ business. However, the Bank disclaims any guaranty on the management or operation performance of the trust business.
THE CONTENTS OF THIS DOCUMENT HAVE NOT BEEN REVIEWED BY ANY REGULATORY AUTHORITY IN HONG KONG OR ANY OTHER JURISDICTION.
YOU ARE ADVISED TO EXERCISE CAUTION IN RELATION TO THE INVESTMENT AND THIS DOCUMENT. IF YOU ARE IN DOUBT ABOUT ANY OF THE CONTENTS OF THIS DOCUMENT, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL ADVICE.
© Copyright 2023. The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED.
No part of this document may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited.
Important information on sustainable investing
In broad terms “ESG and sustainable investing” products include investment approaches or instruments which consider environmental, social, governance and/or other sustainability factors to varying degrees. Certain instruments we classify as sustainable may be in the process of changing to deliver sustainability outcomes. There is no guarantee that ESG and Sustainable investing products will produce returns similar to those which don’t consider these factors. ESG and Sustainable investing products may diverge from traditional market benchmarks. In addition, there is no standard definition of, or measurement criteria for, ESG and Sustainable investing or the impact of ESG and Sustainable investing products. ESG and Sustainable investing and related impact measurement criteria are (a) highly subjective and (b) may vary significantly across and within sectors.
HSBC may rely on measurement criteria devised and reported by third party providers or issuers. HSBC does not always conduct its own specific due diligence in relation to measurement criteria. There is no guarantee: (a) that the nature of the ESG / sustainability impact or measurement criteria of an investment will be aligned with any particular investor’s sustainability goals; or (b) that the stated level or target level of ESG / sustainability impact will be achieved. ESG and Sustainable investing is an evolving area and new regulations are being developed which will affect how investments can be categorised or labelled. An investment which is considered to fulfil sustainable criteria today may not meet those criteria at some point in the future.