Sustainable Finance Research Executive Summary. Commissioned by HSBC 2016

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1 Sustainable Finance Research Executive Summary Commissioned by HSBC 16

2 East & Partners is a leading specialist business banking market research and analysis firm. The firm s core expertise is in the provision of analysis and advisory services tailored for the commercial, business and institutional banking markets across Asia Pacific, Australasia, Europe and North America. The delivery of accurate quantitative analysis on businesses exploding demand for sophisticated transaction, FX, debt, treasury, investment and advisory banking services and products has been uniquely addressed by East's "bottom up" research methodologies since 1987, based on many thousands of customer interviews with CEOs, CFOs, CIOs, treasurers, investors and business owners. East's multi-client demand side research and consulting work has enabled the firm to partner virtually every major domestic and international bank present in the geographies the firm operates in. East & Partners Europe 4 Cavendish Square, London W1GPG, United Kingdom Phone: +44 (747) Disclaimer While East & Partners endeavours to ensure the quality of this Publication, East & Partners does not accept any responsibility for the accuracy, completeness or currency of the material included in this Publication, and will not be liable for any loss or damage arising out of any use of, or reliance on, this Publication.

3 Introduction Globally, around half of corporate issuers (48.7 percent) and the majority of institutional investors (58.7 percent) have a strategy to reduce the environmental impact for their organisation. Climate-related investments and green bonds have increased significantly since they were first launched in 7, with ongoing global commitments including the recently ratified Paris Agreement (COP21) i, growth in sustainable finance continues to exceed expectations and has the potential to move from a niche market into the mainstream. HSBC has been at the forefront of sustainable financing and thought leadership over the last few years, from its membership of the ICMA Green Bond Principles ii and its recent accreditation to the Green Climate Fund, it is playing an significant role in the market s overall development. To support the banks continued leadership in the sector and ongoing efforts to provide customers with best possible guidance, HSBC commissioned industry research firm East & Partners to conduct analysis into global understanding of sustainable investing, barriers and growth projections. The resulting in-depth report is summarised here, focused on three key areas: disclosure, regional differences and awareness.

4 Disclosure The level of disclosure is seen as key for climate related investments. Less than a quarter (23.8 percent) of corporate issuers disclose their firms environmental impact. European issuers and investors lead their peers in both green strategies and in levels of corporate disclosure with more than half (54.7 percent) of European issuers disclosing their environmental strategy, well above the global number of 37 percent. This lead position extends to future plans around disclosure of green strategy initiatives, with half of all European issuers, (5. percent), who are not already disclosing, planning to do so in the coming year. Forward dated guidance is strong among issuers with one in three indicating that they will be disclosing over the coming year signifying substantial growth momentum, however it is important to note that one in two issuers are unsure if they will disclose their green strategy over the same time frame. Middle East based issuers are the least forthcoming with strategy disclosure with well over three quarters not currently disclosing and the majority of respondents remaining unsure if they will over the coming year. Noting these mixed levels of disclosure, it s not a surprise that the research shows nearly 85 percent of global institutional investors believe current levels of corporate disclosure around climate related risks faced by a business are inadequate. In addition over half of European and American investors highlight the level of current disclosure by corporates as highly inadequate. The Financial Stability Board s Task Force on Climate-related Financial Disclosure (TCFD) iii has an important task in front of them, with less than a quarter (23.8 percent) of global corporate issuers disclosing their environmental impact and a limited 37 percent disclosing their green strategy initiatives. Disclosure is twice as prevalent among large issuers over small issuers at 43.4 percent and 19.4 percent respectively Green strategy disclosure is limited at 37. percent worldwide Globally the level of disclosure made by corporates around climate related risk is increasing, led by European (84.3 percent) and American (7.8 percent) issuers Stakeholder pressure is seen as the main driver of increasing levels of disclosure by corporates while investors believe regulation and the risk of negative publicity will be the cause of increased ESG reporting 92.4 percent of Middle East investors believe current corporate disclosure is inadequate

5 Corporate Issuers: current and Future Plans to Disclose Environmental Strategy and Impact % of Regional Total Currently disclose strategy Currently disclose impact 1 Europe Americas Asia Middle East Up to Over Total Market Will disclose strategy in the coming year Unsure if strategy will be disclosed in coming year 1 Will disclose impact in the coming year Europe Americas Asia Middle East Up to Over Total Market

6 Performance and Impact Consideration of their environmental impact infrequently extends down the supply chain, with only a third of issuers setting environmental requirements on their suppliers. Unsurprisingly smaller corporates lack pricing power to implement changes with only 5.6 percent requiring suppliers to adhere to an environmental reduction strategy, the broader supply chain action is undertaken by corporates turning over in excess of US$1 billion per year. It is clear from the research that there are significant variances not only by business size but by region for both issuers and investors in the adoption and awareness of sustainable finance solutions. Nearly two thirds of all European investors integrate environmental, social and governance (ESG) performance as an investment factor, while less than one in five Middle East investors share their approach. This pattern is repeated throughout the research with European investors, followed by American investors, consistently a few steps ahead of their Asia and Middle East based counterparts with regard to implementation of green strategies, plans to increase green investments and firm wide mandated approaches to low carbon investments across all portfolios Regional variances in investor appetite for green investments and intergration of ESG performance as an investment factor Yes we integrate ESG performance No we do not integrate ESG performance Yes we plan to increase green investments Europe Americas Asia Middle East Up to FUM Over FUM Total

7 Investment and Barriers Over percent of European institutional investors have plans to increase their climate related investments, this dips slightly to 74.1 percent of American and 63.1 percent of Asia investors, before dropping away completely to only 26.4 percent of Middle East investors, indicating they have current plans to increase their low carbon investments. These low levels of investment plans appear to not be due to a lack of interest, with 9.6 percent of Middle East investors reporting significant barriers holding them back, most notably a lack of credible investment opportunities available. The majority of investors across all regions indicated the presence of barriers impeding their green investment growth with.2 percent, 66.2 percent and 62.3 percent of American, Asian, and European based investors respectively reporting barriers to the increase of their climate related investments. The conundrum underlying these investor trends is that while the majority (58.5 percent) of issuers have operationally sustainable investment plans, 87 percent of them do not have a green/ sustainable finance strategy Corporate Issuers: existence of green/sustainable financing strategies to raise capital for green initiatives/ investments, and sustainability investment plans % of Regional Total 1 Yes No Current investment plans in place to make own business more sustainable Europe Americas Asia Middle East Up to Over Total Market

8 26.5 percent of Middle East issuers have a current strategy in place for reducing their organisations environmental impact European corporates place the most importance on their green strategy in determining their overall business strategy in comparison to their global peers Less than 1 percent of Asia based issuers have a sustainable financing strategy to raise capital for green initiatives and investments The vast majority of Europe and American issuers (77.1 percent and 7.8 percent respectively) have investment plans to make their business more operationally sustainable But only percent and 15.3 percent of European and American issuers (respectively) have a green/ sustainable finance strategy Around two thirds of European and just over half of American investors integrate ESG performance as an investment factor into their portfolio 82.2 percent of all investors globally indicated a lack of credible investment opportunities available as the key barrier to increasing their low carbon portfolio 15.6 percent of European investors now hold more green bonds as a direct result of the Paris Agreement, this is double the global number of 8.3 percent Over three quarters of global investors are concerned that the Paris Agreement to limit climate change will result in a loss of value for certain types of assets Inadequate levels of current disclosure by issuers and what investors see driving increased disclosures % of Regional Total 1 Regulation Stakeholder pressure Inadequate levels of disclosure Risk of negative publicity Best practice 1 Europe Americas Asia Middle East

9 Awareness, Understanding and the Paris Agreement Despite the media exposure and attention the 15 Paris Agreement has received since COP21, the majority of corporates are still very unsure about what it means for their business, sector and industry. Over two thirds of companies are uncertain if they will be impacted by the global commitment to limit climate change. Of the percent of the market who are expecting COP21 to affect them, increased regulation is the primary impact anticipated, this is followed by external stakeholder pressure to conform and pressure to incorporate debt issuance. Despite the handful of anticipated impacts, very few issuers are able to specify actions their business plans to take to respond and prepare. Do you believe the Paris Agreement will result in loss of value for certain types of economic activity or assets in your industry? % of Regional Total 1 No Unsure Yes Europe Americas Asia Middle East Up to Over Total Market This uncertainty extends to business opportunities presented by the transition to a low carbon economy, with.5 percent of all issuers unsure of any opportunities for them. Of the 1 percent who do think there will be business opportunities, no one is able to identify what specifically they may be. The research showed that the Paris Agreement to limit climate change to two degrees is expected by 43. percent of issuers to materially reduce the value of selected assets. The Paris Agreement has also raised concerns for investors with 77.2 percent concerned about future portfolio valuations. This concern around loss of value for certain types of economic activity and assets is most prevalent among Middle East investors with 94.3 percent reporting apprehension.

10 While COP21 has put many issuers and investors on edge in regards to their future business plans and portfolio valuations, the commitment to limit climate change to two degrees appears to be here to stay. It is therefore reassuring to see investment institutions place a high level of importance on their own role in facilitating and driving the transition to a low carbon economy. About the Research HSBC commissioned industry research firm East & Partners to generate unique and valuable insights into corporate issuers and institutional investors understanding of sustainable investing, barriers and growth projections. The reporting is based on direct interviews with 553 issuers, and investors, executed over a four week period ending 11 November 16. CFOs and CIOs included in the sample frame were distributed across Europe, the Americas, Asia and the Middle East. Footnotes: i. The Paris Agreement COP21 is an agreement within the United Nations Framework Convention on Climate Change dealing with greenhouse gases emissions mitigation, adaption and finance ii. iii. The ICMA Green Bond Principles are voluntary process guidelines that recommend transparency and disclosure, and promote integrity by clarifying the approach for issuance of a Green Bond The Financial Stability Boards Task Force on Climate-related Financial Disclosure (TCFD) is developing voluntary, consistent climate related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders

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