HSBC: Role of Banks in Sustainable Financing
Role of banks to adopt long-term sustainability initiatives in their core business activities. HSBC as an example of a leader in sustainable finance practices, but more still needs to be done by financial institutions in developing capabilities to price environmental and climate change risks of clients.
Sustainability in the Banking Industry
Banks have been slow movers in adopting long-term sustainability efforts compared to other industries. As other industries have taken measures to account for climate change in the past 20 years, banks have generally felt that they are relatively environmentally friendly in terms of waste, emissions, water and resource usage. However, they can play a larger role in accounting for climate change by incorporating sustainability practices into their core business activities. Initiatives that more strongly integrate sustainability into a bank’s policies, strategies, products, services and processes are necessary to bring long-term impact on climate change. Beyond social responsibility, as the effects of climate change become more pronounced, banks that have considered environmental risk in diversifying their business activities are likely to be more shielded from the accompanying adverse financial effects.
There are two main types of initiatives that banks and financial institutions can practice to promote sustainability and account for climate change; the first is related to the institution’s internal operations, and the next is related to its core business activities—more specifically, its investment and credit businesses. 
Internal Operations Initiatives
Bank sustainability efforts that focus on reducing energy and resource (particularly paper) consumption, increased use of renewable energy, and increased recycling / improved waste management activities related to day-to-day operations.
Core Business Initiatives
- Investment business: efforts focused on increasing investment in sustainable projects, sustainability funds, and sustainable pioneer companies.
- Credit business: efforts that can include utilization of environmental rating or scoring of loans, increased lending to sustainable companies and projects, and connection of credit pricing to sustainability performance of the debtor. 
HSBC as Sustainability Leader
The first type of initiative, related to a bank’s internal operations, is widely practiced today in large global financial institutions such as HSBC. For example, HSBC has reduced its carbon emissions by 22% from 2011 to 2015 and has increased the percentage of renewable energy consumption (wind and solar sources) to 9%, with a target of 25% by 2020.  See below for highlights from HSBC’s 2015 Strategic Report.
But the more impactful change for banks would fall under the second category—integrating sustainability practices into their core business activities. Changes to investment and credit decisions would impact the cost and availability of funding for companies and subsequently shift company incentives towards sustainable practices. One caveat to this is that the practicality of this change for financial institutions relies on cooperation from political and regulatory bodies of the country. HSBC is one of the leading large global banks to take strides in the direction of sustainable banking. It was among the first global banks to agree to implement the International Finance Corporation (IFC) Equator Principles, which constitute a risk management framework, adopted by financial institutions, for determining, assessing, and managing environmental and social risk  . HSBC also has a dedicated Climate Change Research group that focuses on sustainable financing, and has developed and implemented industry-specific sustainability risk policies with over 70 sustainability risk managers across its credit risk function. 
According to its 2015 Strategic Report, HSBC has pledged to invest $1bn in a portfolio of green, social or sustainable bonds and has raised $554m to fund customers and projects in the following sectors: renewables, energy efficiency, sustainable waste and water management, sustainable land use, climate change adaptation, and clean buildings and transportation . Although this is a promising start, this remains a fraction of HSBC investment and credit businesses.
Additional Efforts Needed
As banks are intermediaries between sources and consumers of funding, they play an important role in pricing the risk involved with lending and borrowing activities. Because of this, it is important for banks like HSBC to develop the ability to price environmental and climate change risks of their clients in the long-term. This will make it possible for banks to protect against the effects of climate change. By investing in and lending to clients who are taking appropriate measures to prepare for the effects of climate change, the bank will be effectively be exposed to less risk. Although HSBC is a leader in its industry for sustainable funding, it should continue to make investments in research to develop capabilities to price environmental and climate change risks and push for more investment in and lending activities to green projects, funds, and clients.
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 Jeucken, M, & Bouma, J 1999, ‘The Changing Environment of Banks’, Greener Management International, 27, p. 21, Academic Search Premier, EBSCOhost. http://ezp-prod1.hul.harvard.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=3068483&site=ehost-live&scope=site
 Weber, O. (2005). Sustainability benchmarking of european banks and financial service organizations. Corporate Social – Responsibility and Environmental Management, 12(2), 73-87. Retrieved from http://search.proquest.com.ezp-prod1.hul.harvard.edu/docview/213902921?accountid=11311
 HSBC UN Global Compact Communication on Progress 2015 http://www.hsbc.com/~/media/hsbc-com/our-approach/sustainability/reports-and-documentation/communication-on-progress-global-compact-2015.pdf
 Global Banks as Global Sustainability Regulators?: The Equator Principles https://www.researchgate.net/profile/Cynthia_Williams5/publication/228128581_Global_Banks_as_Global_Sustainability_Regulators_The_Equator_Principles/links/0912f5148963fbde1d000000.pdf
 Sustainability at IFC http://www.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_Corporate_Site/IFC+Sustainability/Partnerships/Sustainable+Banking+Network/
 HSBC Sustainability Finance http://www.hsbc.com/our-approach/sustainability/finance
 HSBC Holdings plc Strategic Report 2015 http://www.hsbc.com/~/media/hsbc-com/investorrelationsassets/hsbc-results/2015/annual-results/hsbc-holdings-plc/hsbc-holdings-plc-strategic-report-2015.pdf
Student comments on HSBC: Role of Banks in Sustainable Financing
Lena, I completely agree with you. Internal operations initiatives are the low hanging fruit and most of the impact should come from core business activities which effectively incorporate sustainability in the products and services that the bank offers to its customers.
You mentioned banks need to change their investing and lending decisions to incentivize customers shift towards sustainable practices. I believe the strategy is correct but limited to projects whose returns are above the bank’s cost of capital (since banks are for profit institutions).
The interesting question is how to support those other projects. Some other banks, such as UBS, are approaching the issue through their private wealth management business. Projects may return lower return than banks cost of capital, but still there may be some investors in the private wealth management who may have lower hurdle rates, or simply are willing to accept a lower yield because they think from an altruistic point of view, and therefore willing to underwrite such projects. In this case the job of the bank becomes to efficiently match both parties.
I do believe that, in the long-run, these efforts will pay off, given that environmentally friendly companies share in the economy will increase.
When I worked at Itau, Brazil’s largest private bank, we had an environmental department that focused specifically on the “Core Business Initiatives” that you have mentioned. Event though at the time it was clearly more of an image concern, I believe more banks should go in the same direction.
Really like how you pointed out that as the main suppliers of capital to the world, banks have the opportunity to really impact climate change through their core business operations.
To the point of developing an ability to assess long term environmental risk, i’ll be interested to see how objectively the banks think about this, and whether their deep ties to Big Energy (or Big Anything) hinder their ability to effectively price this risk.
It’s great to see the investment HSBC is making into sustainability projects and research. This could end being a major differentiator for them. I wonder if they are doing so because they truly believe these investments will reap long-term benefits, or if they see it as a loss leader or a PR initiative. I am skeptical that many banks hold the long-term vision to make hefty investments in sustainable projects until it is blatantly apparent that they must do so.