Insurance and Sustainable Finance July 8, 2019 Divya Bendre, Vice - - PowerPoint PPT Presentation

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Insurance and Sustainable Finance

July 8, 2019

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Divya Bendre, Vice President, Sustainable Finance, HSBC divya.bendre@us.hsbc.com

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Important Notice – Informational Purposes Only

This presentation, including the accompanying slides and subsequent discussion, is for general informational purposes

• nly. The information used in preparing these materials was obtained from public sources and are intended solely for

your information. HSBC assumes no responsibility for independent verification of such information and has relied on such information being complete and accurate. Any prices, levels or figures included in this presentation may relate to past performance and will vary in accordance with changes in market conditions. Past performance is not a reliable indicator of future performance. HSBC makes no representation or warranty (express or implied) of any nature nor is any responsibility of any kind accepted with respect to the completeness or accuracy of any information, projection, forecast, representation or warranty (expressed or implied) in, or omission from, this presentation. HSBC expressly disclaims any and all liability that may be based on any information contained herein, including any errors or omissions herein, and any

• bligation to update, or otherwise revise, any of such information. In particular, no liability is accepted whatsoever by

HSBC for any direct, indirect or consequential loss arising from the use of or reliance on this presentation or any information contained herein by the recipient or any third party. The information, analysis and opinions contained herein constitute our present judgment which is subject to change at any time without notice. This presentation does not constitute an offer or solicitation for, or advice that you should enter into, the purchase or sale of any foreign exchange, derivative, security or other investment product or investment agreement, or commitment to provide any financing, or any other contract, agreement or structure whatsoever and is intended for institutional, professional or sophisticated customers and is not intended for the use of private individual or retail customers. Nothing contained herein should be construed as tax, investment, accounting or legal advice. No consideration has been given to the particular service needs, investment objectives, financial situation or particular needs

• f any recipient. Recipients should not rely on this document in making any investment decision and should make their
• wn independent appraisal of and investigations into the information and any investment, product or transaction

described in this presentation.

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7% 11% 58% 24% Wind Solar Energy Efficiency Sustainably- managed forestry 44% 56% Wind Solar

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Green Bonds: Insurers as investors and issuers Case study: Manulife

Green Bonds Issued

MFC 3.0% SGD 500 million subordinated debt due 21 November 2029 MFC 3.317% CAD 600 million subordinated debt due 9 May 2028

General account investments in renewable energy and energy efficiency projects

52,700 tons/year

• Est. CO2e avoided

258,400 tons/year

• Est. CO2e avoided

Responsible Investment at Manulife - highlights

• Manulife Investment Management is a UNPRI signatory
• By 2018 nearly 49.5 million square feet (80% of real

estate portfolio) had been certified under a sustainable building certification program such as LEED, ENERGY STAR or BOMA BEST

• John Hancock Investments manages almost $241 million

in assets through four ESG funds

• Hancock Agricultural Investment Group started working

with consultants on an agricultural sustainability framework for measuring and managing the sustainability performance of its U.S. farmland Example projects:

• Rivière-du-Moulins Wind Project, Quebec, Canada
• Grand Renewable Solar Project, Ontario, Canada

Example projects:

• Campo Palomas Wind Project B-bond, Salto, Uruguay
• Acquisition of Axium Infinity Solar portfolio, Ontario, Canada
• Financing of Hannon Armstrong energy efficiency projects, Washington, DC
• Vinegar Bend Timber, Alabama & Mississippi

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Unpacking the terms: Sustainable Finance – Impact Investing – ESG Investing Financial materiality and/or impact considerations

• Investments that are not differentiable on risk or return can be differentiated along the real economy impact axis
• Some investors are trying to balance real-world impact alongside risk and returns considerations
• ESG data contributes to both traditional risk-return analysis (e.g. PD-LGD) and impact analysis

Source: PRI An evolving industry: future-proofing the investment strategy

Three investments with the same risk-return profile Same three investments, but with real-world impact plotted

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Sustainable Financing Landscape ‘Labeled’ Bonds and Loans

Source: Environmental Finance articles

Green, Social & Sustainability Bonds ~ $750bn Use of Proceeds - focused Margin/coupon - focused NEW – ‘Transition’ Bonds

CLP Holdings Energy Transition Bond SNAM Climate Action Bond

Green Loans ~ $25bn Sustainability Linked Loans ~ $87bn Other structured transactions:

• Equity-index linked bonds
• ‘Green Coupon’ bond

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Green Bond Market Organic growth driven by investor demand

50 100 150 200 2013 2014 2015 2016 2017 2018 2019 Europe North America Supranationals Asia-Pacific Africa Latin America

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Global Green Bonds (USD596bn eq. to date) By use of proceeds category By issuer type

35% 25% 17% 11% 4%3% 2% 1% Energy Buildings Transport Water Waste Land Use Adaptation Industry 14% 13% 19% 20% 7% 20% 7% Government-Backed Entity ABS Development Bank Financial Corporate Local Government Non-Financial Corporate Sovereign Source: Climate Bonds Initiative

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ESG Ratings ESG performance: managing risks and opportunities

Which ESG ratings do you consider to be of highest quality i.e. excellence, robustness and accuracy of evaluation?

Source: SustainAbility 2018 Rate the Raters survey of corporate sustainability practitioners; n=319 (Investor survey to come in 2019)

NEW - ESG analysis from rating agencies

On-request ESG evaluation service Proposed on-request corporate governance assessment and carbon transition risk assessment

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Formalizing ESG Risk Analysis Rating Agencies

2018 Environmental Risks Global Heatmap ESG Risk Atlas: Sector And Regional Rationales And Scores

Source: Moody’s, S&P

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Formalizing ESG Risk Analysis Investors

Understanding ESG in Bonds

Source: PIMCO June 2019

Looking ahead, our view is that ESG-based analysis should be a natural part of bond investing, along with the assessment of credit, duration, and other risk factors. We are committed to putting this into practice across our portfolios both from a top-down perspective, where we see ESG analysis as consistent with our annual Secular Forum process, and from a bottom-up perspective, where ESG is integrated into our fundamental research across fixed income sectors.

• PIMCO Secular Outlook, May 2019

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Emerging Green Taxonomies Defining ‘Green’ and what’s better than Business-As-Usual

Other taxonomies Proposed EU Sustainable Finance Taxonomy

To be included, economic activities must

• make a substantial contribution to one environmental objective meet any

specified technical screening criteria: 1. climate change mitigation 2. climate change adaptation 3. sustainable use and protection of water and marine resources 4. transition to a circular economy, waste prevention and recycling 5. pollution prevention and control 6. protection of healthy ecosystems

• do no significant harm to the other environmental objectives, and
• meet minimum social safeguards (compliance with International Labour

Organisation (ILO) core labour conventions) 67 economic activities have been classified as:

• Green activities: Activities that are already low-carbon and compatible with a 2050

net zero carbon economy

• ‘Greening of’ activities: Activities that contribute to a transition to a net-zero

emissions economy in 2050 but are not currently close to a net-zero carbon emissions level

• ‘Greening by’ activities: Activities that enable low carbon performance or enable

substantial emissions reductions

Source: EU Technical Expert Group

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Policy: Central Banks and Supervisors Drivers for continued momentum in sustainable finance

Financial System Review—2019

Vulnerabilities in the Canadian financial system: 1. Elevated level of household indebtedness 2. Imbalances in the housing market 3. Cyber threats and financial interconnections 4. Fragile corporate debt funding from certain markets 5. Climate change: (NGFS-related commitments)

1. Integrating climate-related risks into financial stability monitoring and micro-supervision. The Bank will develop the tools needed to monitor and analyze climate-related risks, leading to a meaningful assessment of these risks. One approach is to use scenario analysis. 2. Integrating sustainability factors into own-portfolio management. The Bank is considering how to integrate environmental, social and governance factors into its investment framework for the Bank of Canada pension fund. 3. Bridging the data gaps. By participating in the NGFS working groups and other groups, the Bank will help identify data gaps. This will help relevant domestic and international stakeholders focus their efforts to improve the availability of data. 4. Building awareness and intellectual capacity and encouraging technical assistance and knowledge sharing. The Bank is building its analytical capacity as part of a multi-year research plan. To accelerate the plan’s development, the Bank is collaborating with the NGFS and

• ther groups. The Bank plans to publish its work on the Financial System

Hub and as part of the Financial System Review.

6. Rapid change in crypto-asset markets Source: Bank of Canada, Environmental Finance Articles

“The FPC and the PRC are announcing that they will stress test the UK financial system for resilience against different climate pathways. The design of this stress test will start in the autumn, and the tests will be completed in 2021. …From next year, the Bank will become the first central bank to adopt the TCFD recommendations across our entire operations. And to improve our strategic resilience, the Bank will reduce the Bank’s carbon footprint by almost two thirds by 2030, consistent with a transition to a 1.5 degree World.”

• Mark Carney, Governor, Bank of England

"To be clear, we are thinking about this across all of our

• perations. But the single most useful thing I can do to

green my balance sheet is to get the banks we make loans to, and take deposits from, to green their balance sheets."

• Sarah Breeden, Executive Director, International Bank

Supervision, PRA

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