Industry standard

HSBC to detail net zero underwriting targets after launch of industry standard

HSBC Holdings PLC will complement its latest net zero targets with targets for capital markets activities once an industry standard is launched in 2022.

The UK-based bank said on Feb. 22 that it aims to cut emissions from lending to the oil and gas sector by 34% by 2030, among other targets, in line with industry advice Net-Zero Banking Alliance. But this direction only requires investment and lending objectives, meaning banks can omit off-balance sheet activities such as underwriting.

Activist investor groups ShareAction and Market Forces have criticized that HSBC’s targets only cover on-balance sheet business. ShareAction said it was “concerning”, since research most suggest of HSBC’s financing to upstream oil and gas majors comes through capital markets underwriting. HSBC’s decision to classify syndicated loan distribution as a capital markets business is “controversial,” ShareAction said.

Market Forces said HSBC’s goals can be achieved by moving exposures off the bank’s balance sheet instead of actually restricting funding to the oil and gas sector.

HSBC said it was committed to setting short- and medium-term targets for funded issues in the oil and gas sector, including capital markets activities.

An industry-accepted approach to assess capital market-based financing is being developed by the Partnership for Carbon Accounting Financials, or PCAF, a global partnership of financial companies that provides a framework for banks to assess and disclose greenhouse gas emissions, an HSBC spokesperson told S&P Global Market Intelligence.

“As soon as an industry-wide capital markets methodology is launched in 2022, we will work here as well to set near-term targets,” the spokesperson said. In its 2021 annual report, HSBC reported on capital markets-funded issuance, and the bank is engaging with clients who are major oil and gas producers on their plans to transition to net zero. regardless of on- or off-balance sheet financing, the spokesperson said.

Creation of an industry standard

Banks face a series of challenges by agreeing to these industry standards, including how underwriting activity is captured, Market Intelligence previously reported, citing PCAF Executive Director Giel Linthorst. Institutions measure on-balance sheet issuance at a certain point in time, but that doesn’t lend itself well to measuring underwriting activity, which is short-term in nature and can fluctuate widely, the executive said.

As PCAF discussions progress, the Net-Zero Banking Alliance said it will consider off-balance sheet activities in the next version of the guidelines, which is expected in April 2024.

By 2030, HSBC aims to reduce on-balance sheet financed emissions – Scope 1, 2 and 3 – for upstream oil and gas companies and integrated or diversified energy companies. Scope 1 and 2 emissions are those related to a company’s own operations and Scope 3 emissions are those associated with their value chains.

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The bank has also set a 75% reduction target for the electricity and utilities sector. It aims to achieve a balance sheet financed emissions intensity of 0.14 million tonnes CO2e/TWh by 2030, compared to its 2019 baseline of 0.55 Mt CO2e/TWh. This captures Scope 1 and 2 emissions from upstream power generation companies.

Market forces have declared this target a “major loophole” since it does not guarantee an absolute reduction in emissions from power plants.

HSBC said it has adopted an emissions intensity metric for electric and utility companies to account for an expected increase in electricity demand.

The bank’s targets demonstrate that management takes into account the risks associated with these business activities and the concerns of external stakeholders, Pauline Lambert, executive director of financial institution ratings at Scope Ratings, told Market Intelligence.

The scope includes environmental considerations when assessing banks’ long-term sustainability, but HSBC’s latest targets are “not currently a determining factor” for its credit rating, Lambert said.

Road to sustainable finance

HSBC said it provided and facilitated $82.6 billion in sustainable financing and investing in 2021, bringing the cumulative amount since January 2020 to around $126.7 billion. It aims for a total of between $750 billion and $1 trillion by 2030.

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The bank is working on its climate transition plan, which will be published in 2023, and will ask customer science-based transition plans, CEO Noel Quinn said during the bank’s full-year 2021 earnings call on Feb. 22.

The lender launched a new climate strategy in 2021, including a commitment to phase out coal fundingdue to pressure from an investor campaign led by ShareAction to align its financing policy as closely as possible with the Paris Agreement on climate change.

It intends to disclose targets for the coal mining, aluminum, cement, iron and steel, and transportation sectors in its 2022 annual report.