HSBC Launches ESG Reporting Service

Today, HSBC’s securities services arm launched a portfolio reporting service that aims to provide asset managers and asset owner clients with independent measurement of the environmental, social, and governance (ESG) performance and carbon footprint of their large holdings.

The service is aimed at HSBC’s post-trade services clients, which include asset managers, pension funds, and sovereign wealth funds. The report, which will be delivered monthly or quarterly as a PDF, will summarize a portfolio’s ESG characteristics.

“Say, for example, there is a fund that has 200 different stocks and other types of investments within it. We will produce a report that pulls out the largest 10 positions that scored highly for ESG, and we pull out the largest 10 positions that scored poorly for ESG,” says Chris Johnson, director of market data for securities services at HSBC.

The service will use ESG scores and emissions data from ratings providers MSCI, Sustainalytics, and Vigeo Eiris. 

“Clients can choose between the three providers and can then see, based on that research, the scores and ratings of which assets are highly or poorly regarded. So essentially, it’s a summary report that lets asset owners know where they can challenge their fund manager. Or, if they are a fund manager, they can check against their own research, and produce some comparisons to see which companies are rated highly or poorly,” Johnson says, adding that the bank plans to increase its list of providers over time.

The report will also provide scores on securities holdings for each specific category, whether under E, S, or G, so that clients can see month by month how each company scores in those separate pillars. Each ESG ratings provider has a different proprietary methodology that gives different weightings to the E, the S, or the G, so the report will allow users to break down each bucket’s scores.

The report will apply to any type of fund, not just specialist ESG funds, as long as the funds have constituent assets that are rated by the three providers. 

Johnson says HSBC’s securities services division, as a post-trade services provider, spent the past three years thinking about how ESG data could be used to produce meaningful, monthly reports for clients.

“The challenge with ESG is that it’s quite based on opinions at the moment, and a lot of information is geared toward pre-trade investment. We haven’t found much in the way of information that is standardized and common, that we can report. And so we examined the markets and performed quite a lot of sample analysis. And we found that there are two metrics against which we could produce reports. One is ESG scores and ratings, and the other is carbon emissions,” he says. 

Johnson says the service is not trying to definitively answer which companies are the best or worst ESG performers or carbon emitters. Rather, it offers clients insights from the ratings providers to assist them in portfolio governance and decision-making.

“The reason we did it this way is that ratings and scores can be very different to each other. If you go to MSCI and Sustainalytics and Vigeo Eiris, you will get quite different answers from each, as we discovered during our sample analysis. So we thought that by giving clients a choice of three, they can have one or two or three different reports, one from each provider. And each month, they can see how their portfolio fares according to each,” Johnson says.

As a result of increased investor demand for ESG products and increasing regulatory scrutiny, investment firms need more transparency and insight in this area, Johnson says. He adds that this way, clients don’t need separate licenses with the three providers, but get them packaged together in the monthly report.

“There is a lot of information there, but how do you usefully interpret it? Asset owners, the pension funds, may well intend to include ESG in their investment strategies, so this service could be a means of introducing ESG into their investment strategy by providing oversight over portfolios, and a means to challenge fund managers over ESG investments. Similarly, sovereign wealth or asset managers might want to get some information from providers they don’t currently contract with. Or, if they are a small fund manager, they may not have access to these providers,” Johnson says.