Summary
No sustainable investment objective
(a) All mandatory PAIs as defined in Table 1 of Annex 1 of the Regulatory Technical Standards for Regulation 2019/2088 are used to assess that the subfund's sustainable investments do not significantly harm environmental or social objectives.
To carry out the DNSH assessment, absolute and relative minimum thresholds were established for the 14 mandatory PAIs.
In the event of disagreement with data provided by an external data provider, or where the data is insufficient, a qualitative or quantitative assessment may be carried out by the investment teams, in collaboration with the Responsible Investment team, in order to reach a final decision. Where an issuer is found to be causing or contributing to significant harm, the security may still be held in the subfund, but will not count towards the subfund's ""sustainable investment"" allocation.
(b) An external data provider is used to monitor issuers and detect controversies that may indicate potential breaches of the United Nations Global Compact (UNGC) principles. These principles are aligned with the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. The ten UNGC principles include the assessment of non-financial risks such as human rights, working conditions, the environment and the fight against corruption. Issuers reported for potential breaches of the United Nations Global Compact principles are excluded, unless they have been subject to enhanced ESG analysis (ESG Due Diligence) establishing that that they are not in breach of these principles.
HSBC Asset Management is also a signatory to the United Nations Principles for Responsible Investment.
Sustainable investment objective of the financial product
The subfund invests primarily in shares issued by European companies that contribute to climate solutions. Climate solutions are products or services that directly or indirectly provide the solutions needed to decarbonise the players involved in the energy and ecological transition.
These products and services meet one of the following conditions:
- they provide a low-carbon or zero-carbon activity (e.g. renewable energy),
- they enable low or zero carbon activity through the value chain (such as battery manufacturers),
- they protect, manage or restore the environment or natural resources,
- they prevent or reduce the risk of adverse impacts of climate change on people, nature and property (physical risks).
Assessing investments in climate solutions means measuring their potential to significantly reduce, avoid or eliminate potential GHG emissions. Assessments are therefore based on modelling the potential future outcomes of decarbonisation rather than examining historical trends in the company's emissions.
Investing in climate solutions is more than just investing in renewable energy.
Achieving a low-carbon transition will require structural and disruptive changes in the economy.
The subfund invests in eight climate-related eco-sectors: renewable energy, energy efficiency in industry, green buildings, transport – sustainable mobility, circular economy, biodiversity, clean water and environmental protection, adaptation to physical risks, and information and communication technologies.
In addition, issuers are deemed to contribute to climate solutions when at least 20 per cent of their revenues or other quantitative scores/measures demonstrate material alignment with climate solutions.
In this way, the subfund contributes to the environmental objectives defined in article 9 of the Taxonomy Regulations, and in particular to the objectives of climate change mitigation and climate change adaptation.
In addition, the companies identified are all examined and selected according to ESG criteria (selection of the best companies in each sector) and sustainability indicators tailored to the specific characteristics of the subfund.
Lastly, the subfund undertakes to exclude:
- any issuer found to be in breach of one or more principles of the United Nations Global Compact and the OECD Guidelines for Multinational Enterprises;
- securities of issuers involved in so-called ""excluded"" activities. Excluded activities are set out in the section on the binding elements of the investment strategy.
Achievement of the sustainable investment objective is measured using sustainability indicators, some of which are measured against the MSCI Europe IMI GDP weighted Net Return index. However, the MSCI Europe IMI GDP weighted Net Return index has not been designated to determine whether the subfund meets the sustainability objectives.
Investment strategy
(a) The subfund invests in equities of all capitalisations issued by European companies whose activities contribute to climate solutions. The stock-picking process, which consists of two independent and successive stages, is based on non-financial and financial criteria.
A minimum non-financial analysis ratio of 90 per cent is applied to the subfund's eligible assets.
The portfolio is constructed as follows:
1) Definition of the universe of eligible securities
The first step in the process is to determine the subfund's SRI universe from an initial investment universe.
This initial investment universe is made up of around 1,200 European large-, mid- and small-cap companies.
The SRI universe is obtained by reducing the initial investment universe by first applying exclusions based on environmental, social and governance (ESG) criteria defined by the Greenfin label, HSBC Asset Management's responsible investment policies and the exclusions applicable to the "Paris agreement" benchmark indices in accordance with ESMA guidelines on funds’ names.
A detailed description of the subfund's exclusions can be found in the SFDR appendix of the SICAV's prospectus.
HSBC Asset Management's responsible investment policies applied by HSBC Global Asset Management (France) are available on the management company's website at www.assetmanagement.hsbc.fr.
Second, based on the SRI universe, the second step is to define the universe of eligible securities. In order to achieve its investment objective, the subfund invests primarily (at least 80 per cent) in equities of all capitalisations issued by European companies whose activities contribute to climate solutions. Climate solutions are products or services that directly or indirectly provide solutions needed to decarbonise the players involved in the energy and ecological transition, i.e. the transition from an economic model that is heavily dependent on fossil fuels (oil, gas, coal) to a more sustainable, even carbon-free model. A detailed description of the above products and services can be found in the section “What is the sustainable investment objective of this financial product?”
To combat climate change, the subfund actively contributes to financing companies that provide the solutions needed to decarbonise economic players and that take advantage of green growth. One of the indicators used to monitor and measure the portfolio’s environmental performance is the “avoided emissions” indicator. Avoided emissions correspond to future emissions from a green technology compared to a conventional technology that it would replace during its life cycle. The subfund aims to achieve avoided emissions that exceed those of the MSCI Europe IMI GDP Weighted Net Return index, the benchmark used for information purposes to assess its performance.
This step involves analysing companies' activities to identify those that fall within sustainable themes such as renewable energy, industry and energy efficiency, the circular economy (including waste management and pollution control) and organic farming.
The securities are then ranked according to their green intensity. This green intensity is defined as the contribution of eligible activities to the company's total revenues (less than 10 per cent, between 10 per cent and 50 per cent, and more than 50 per cent of revenues).
This step is carried out in collaboration with our fundamental research teams, who provide knowledge of issuers through direct discussions with companies and the use of external data providers. This step includes an assessment of activities that run counter to the energy and ecological transition.
The subfund's investment universe may be extended to include securities that are not included in the above-mentioned eco-sectors, but are identified as contributing to the environmental objectives of the strategy, while complying with the exclusion rules mentioned above.
The chosen companies are selected based on their good ESG profile (2) and financial attractiveness (3).
2) Selection based on non-financial criteria (SRI filter)
The subfund adopts an active management philosophy based on Environmental, Social and Corporate Governance (ESG) criteria across the entire universe (thematic and diversification universe).
The companies identified above are all examined and selected based on ESG criteria and sustainability indicators tailored to the subfund’s specific characteristics.
The ESG rating of issuers, used in the selectivity-based approach, is constructed from an E rating, an S rating, a G rating and an aggregate ESG rating. The ratings (E, S and G) are provided by ESG data providers who assess the non-financial aspects of the business sector to which the rated company belongs.
Environmental aspects are related to the nature of the company's activity and the sector to which it belongs. Thus, for example, in mining and quarrying, utilities and air transport, CO2 emissions directly linked to the company's activity are of paramount importance: failure to measure and control them can represent a major industrial risk and can result in financial penalties and/or significant reputational damage. For example, if a cement or energy company is highly exposed to climate risk and fails to take adequate mitigation measures, it may maximise its risk of penalties or production disruptions in the event of major climate events for which it is unprepared.
The second pillar, Social, covers concepts related to relations with civil society, personnel management, compensation and training policy, respect for trade union rights, occupational health and safety policy. The very nature of the company's business will strongly influence the nature and relative importance of these practices. In sectors where there is a proven risk of accidents, such as construction and mining, for example, workplace accident prevention and compliance with safety standards are priority criteria.
Lastly, with regard to Governance, aspects such as the structure and representation of the Board of Directors, the attendance and independence of directors, the robustness of audit and control processes and respect for minority shareholder rights are systematically analysed. The assessment of the company's performance in these areas will also take into account the country in which the company is based, the country in which it is listed and/or the country in which it has its registered office, for example.
These first three scores are then weighted according to the weight assigned by the Management Company to each of the E, S and G pillars within the company's sector, and aggregated to form an ESG score that will be used to rank companies by sector.
The relative weight of each of the three pillars is at least 20 per cent and varies according to the specific features of the company's business sector. The sector groupings are based on the GICS level 1 and level 2 classification, which is then aggregated into 12 economic ""macro-sectors"". The weighting of each of the E, S and G pillars within these 12 macro-sectors reflects the ESG investment and research teams' view of ESG risks and opportunities. These sector weights are available in the subfund Transparency Code on the Internet (www.assetmanagement.hsbc.fr).
The SRI universe consists of taking into account ESG criteria and rating and ranking companies into quartiles within each sector.
The SRI selection will be made within the thematic universe, supplemented by the diversification universe.
The SRI filter involves investing without any restriction in securities ranked in the first, second and third quartiles. Securities ranked in the fourth quartile are excluded. We believe that companies that meet all of these criteria are committed to long-term development.
The SRI ratings of the HSBC Responsible Investment Funds - Europe Equity Green Solutions subfund are updated every month.
The subfund's portfolio must be brought into line with the changes in quartiles resulting from the rating changes within two weeks of the new SRI universes being published and no later than the end of each calendar month. However, in exceptional circumstances, this period may be extended by a further three months, at the discretion of the manager, for companies ranked in the fourth quartile.
For companies for which no data has been provided by external data providers, the manager conducts a detailed internal analysis using the company's own data. The list of external ESG data providers is available in the subfund's ESG information section on our website www.assetmanagement.hsbc.fr
This best-in-class SRI approach aims to select securities with high ESG ratings, which helps mitigate the potential impact of sustainability risks on portfolio performance.
3) Determining the final portfolio
This stage involves analysing the securities in the filtered universe using fundamental financial analysis. Investment decisions are based on an analysis of fundamentals and valuations.
The Transparency Code for the HSBC Responsible Investment Funds - Europe Equity Green Solutions subfund is publicly available at the following internet address: www.assetmanagement.hsbc.fr and provides detailed information on the thematic approach to “energy transition” and the integration of ESG criteria in the subfund. This information is also available in its annual report.
Information on the social, environmental and governance criteria in this subfund's investment policy is available on the HSBC Global Asset Management website at the following address: (www.assetmanagement.hsbc.fr).
The subfund also uses an “engagement” approach. This takes the form of an engagement policy implemented by the Management Company, which involves visits in the form of individual meetings, engagement activities and the exercise of voting rights attached to the securities held in the portfolio. These policies, along with reports on engagement activities and the exercise of voting rights, are available on the Management Company's website (www.assetmanagement.hsbc.fr).
(b) The subfund's investments are assessed to determine whether they comply with minimum standards of good governance, taking into account compliance with the UNGC principles. In addition, corporate governance practices are examined through ESG and Pillar G ratings. Governance is assessed on the basis of criteria including ethics, culture and values, corporate governance and anti-corruption measures. Companies considered to have an inadequate governance framework are reviewed and may be subject to further analysis, which may involve specific engagement action. The HSBC Asset Management Stewardship team meets regularly with issuers to gain a better understanding of their business and strategy and to promote best practices. HSBC Asset Management believes that good corporate governance ensures that companies are managed in the long-term interests of investors. Issuers that meet sustainable investment criteria are identified based on minimum governance ratings and the absence of exposure to severe ESG controversies.
Proportion of investments
With the aim of financing companies that provide the solutions needed to decarbonise economic players and take advantage of green growth, the portfolio is constructed as follows:
- Defining the SRI universe by applying exclusions based on ESG criteria and the universe of eligible securities according to the thematic approach by analysing companies' activities to identify those that contribute to climate solutions.
The subfund's investment universe may be extended to include securities which are not part of the eco-sectors mentioned above in the investment strategy section, but which are identified as contributing to the strategy's environmental objectives, while complying with the aforementioned exclusion rules.
- Determining the portfolio by selecting securities specific to the theme and according to Environmental, Social and Corporate Governance (ESG) criteria, as well as fundamental financial analysis.
The various steps of the investment process enable the subfund to commit a minimum of 90 per cent of its assets to sustainable investments with an environmental objective. The balance consists of cash.
Monitoring of environmental or social characteristics
The financial product has a sustainable investment objective and therefore commits to holding at least 90 per cent sustainable investments with an environmental objective. As such, each issuer in the portfolio must:
- Contribute directly or indirectly to the green transition or another environmental objective;
- Undergo the DNSH (“do no significant harm”) assessment as part of the sustainable investment process, which includes consideration of principal adverse impacts (PAI);
- Present a robust governance framework.
HSBC’s sustainable investment methodology is available on the management company’s website at: www.assetmanagement.hsbc.fr/fr/retail-investors/about-us/responsible-investing/policies.
The management teams conduct ongoing monitoring. Funds are monitored to ensure that the portfolios meet the non-financial criteria and, where applicable, internally established thresholds (e.g. on sectoral exclusions).
First-level controls are performed by teams independent of management:
- Contractual non-financial investment restrictions (including the subfund’s holding of sustainable investments) are currently set according to the same methodology as the financial ratios;
- Environmental, Social, and Governance performance indicators identified according to the fund’s strategy are monitored on a monthly basis by the risk department.
In addition, the subfund may undergo occasional and periodic fund compliance checks, which will ensure, in particular, that sectoral exclusions are respected.
Lastly, in connection with labels, controls are conducted by auditors outside the management company.
Methodologies
HSBC’s sustainable investment methodology is available on the management company’s website at: www.assetmanagement.hsbc.fr/fr/retail-investors/about-us/responsible-investing/policies.
Data sources and processing
(a) HSBC Asset Management uses data from a number of external providers such as Sustainalytics, ISS ESG, MSCI ESG Research, and S&P Trucost to ensure that the portfolio attains the sustainable investment objective.
(b) HSBC Asset Management verifies the data used.
(c) For the portfolio’s ESG rating, the data are weighted by coefficients reflecting our analysis of the various business sectors and their respective ESG impacts.
(d) Such data, if not communicated by companies, are estimated by our external data providers.
Limitations to methodologies and data
(a) The management company relies on non-financial data providers. As a result, the company is subject to certain operational and data quality risks associated with reliance on third-party service providers and data sources. Furthermore, data coverage may be limited depending on the type of issuer (small caps, certain high-yield issuers) and by the geographical area of the issuer (particularly for emerging countries). When non-financial data are not available in our suppliers’ databases, we initiate a qualitative analysis and possibly exchanges with the company to supplement our assessment of sustainable investments.
(b) HSBC Asset Management is not aware of any methodological limitations likely to prevent the attainment of the sustainable investment objective.
Due diligence
As part of our investment process, we carefully monitor and analyse all companies and other issuers held by the subfund before and during the investment period. Our monitoring, by the analysts, the management teams, investment restrictions, and the risk department, is quantitative and qualitative and includes the sustainability score, strategy, financial and non-financial performance and constraints, risks, capital structure, social and environmental impact, and corporate governance. For the purposes of this monitoring, we use our in-house research and the ESG research of independent providers and brokers.
Lastly, our teams in charge of voting and shareholder engagement activities can support the investment teams in the ESG assessment of issuers.
For more details on internal and external controls, please refer to the information provided in the “Monitoring of environmental or social characteristics” section.
Engagement policies
Our approach to shareholder engagement incorporates several levers for action including 1) direct dialogue with companies about their consideration of environmental and social issues to ensure that they are able to face the future and maintain long-term financial viability, 2) the exercising of voting rights by which we express our support for positive development initiatives or, conversely, our disagreement when directors do not meet our expectations, and 3) a gradual escalation procedure with companies when the ESG risks or controversies to which they are exposed are not managed.
Our management and analyst teams meet regularly with the companies in which we invest (or may invest) to better understand their business and strategy, demonstrate our support and/or express our concerns, and promote best practices.
We prioritise dialogue and interaction with companies in which we have significant positions, but also depending on the importance of the environmental or social issues identified. If a company is identified as being at risk on these issues at the end of our ESG analysis, we still favour dialogue over selling the security, but the lack of satisfactory progress or responses by the company in a timely manner that we consider reasonable to implement the desired changes may result in the exclusion of the security from our portfolios.
Lastly, every year, we define engagement themes that we consider to be key. These include climate change, biodiversity conservation, respect for human rights, diversity issues, equity and inclusion, the importance of just transition, and access to healthcare. As signatories to the Net Zero Asset Managers initiative and in keeping with our commitment to contribute to the goal of carbon neutrality for all our assets under management by 2050, we primarily engage in dialogue with companies involved in thermal coal. In practice, we are in contact with companies whose revenues were more than 20 per cent from coal mining as of the end of 2021. As we support a just transition imperative, we engage with companies to assess how their carbon neutrality transition plans take into account impacts on employees, supply chains, communities, and consumers. In terms of diversity, we have set ambitious targets for the number of women of boards of directors. For example, in Continental Europe, we have set a threshold of 40 per cent women in the composition of the boards of directors of large caps, 35 per cent for mid-caps, and 30 per cent for the small caps.
For our full Engagement Policy and Voting Policy, please visit: www.assetmanagement.hsbc.com/about-us/responsible-investing/policies
Designated reference benchmark
Not applicable
