Summary
No sustainable investment objective
1. This product promotes environmental or social characteristics, but it does not have a sustainable investment goal.
2. The principle of “do no significant harm” to environmental or social objectives applies only to the underlying sustainable investments of the subfund. This principle is incorporated into the investment decision-making process, which includes consideration of principal adverse impacts.
(a) HSBC Asset Management’s “do no significant harm” (DNSH) assessment of issuers as part of its sustainable investment process includes consideration of all mandatory principal adverse impacts (PAI). It involves a holistic analysis of the company’s multiple sustainability impacts rather than focusing on a single factor. When an issuer is identified as potentially controversial, it cannot be considered a sustainable investment. All relevant PAIs are thus examined and integrated into the investment process according to an approach that combines exclusions (sectoral, the most severe ESG controversies, norms-based exclusions, etc.) with voting and shareholder engagement activities to instil and maintain a positive change dynamic within companies. Furthermore, a company will be considered not sustainable when it does not comply with the Principles of the United Nations Global Compact and its associated international standards, conventions, and treaties or if it is involved in weapons banned by international conventions. With the exception of these last two PAIs, we use proxies. In our view, the setting of exclusion thresholds (e.g. GHG emissions) for each PAI is not always relevant and could compromise the fact that many sectors and companies are in a transition strategy. In addition, engagement is essential to ensure that companies with limited disclosure, particularly in emerging economies, are initially excluded from the definition of sustainable investment and allow us to be a catalyst for positive environmental or social change. For example, we use a 10 per cent threshold on revenues from thermal coal mining (and coal-fired power generation) as an exclusion filter to indirectly address all PAIs related to greenhouse gas emissions.
A description of HSBC Asset Management’s sustainable investment methodology applied by HSBC Global Asset Management (France) is available on the management company’s website: www.assetmanagement.hsbc.fr/fr/retail-investors/about-us/responsible-investing/policies.
(b) HSBC Asset Management is committed to applying and promoting international standards. The ten principles of the United Nations Global Compact are among the priorities of HSBC Asset Management’s Responsible Investment Policy. These principles include non-financial risks such as human rights, labour standards, the environment, and anti-corruption. HSBC Asset Management is also a signatory to the United Nations Principles for Responsible Investment. They provide a framework for the identification and management of sustainability risks. In this subfund, companies that have been found to have violated any of the 10 principles of the United Nations Global Compact are systematically excluded. Companies are also assessed according to international standards such as the OECD Guidelines for Multinational Enterprises.
Environmental or social characteristics of the financial product
The subfund promotes E, S, and G characteristics by investing in international equity and fixed-income markets with a euro bias by selecting securities issued by companies or countries in a universe of issues that meet Environmental, Social, and Governance (ESG) and financial quality criteria.
The SRI universe is obtained following the reduction of the initial investment universe, first by applying exclusions based on Environmental, Social, and Governance (ESG) criteria defined by the SRI label framework and HSBC Asset Management’s responsible investment policies.
This initial investment universe consists of securities selected on the international equity markets of developed countries with a euro bias and euro-denominated rates.
As such, this initial investment universe consists of issuers from:
- An investment sub-universe composed of equities of eurozone countries, represented by the MSCI Emu, a benchmark given for information purposes;
- An investment sub-universe composed of international equities, represented by the MSCI World, a benchmark given for information purposes;
- An investment sub-universe composed of euro-denominated bonds, represented by the Bloomberg Euro Aggregate 500MM index, a benchmark given for information purposes. The weight of non-government issues in the above-mentioned index is adjusted to reflect the target sector weightings of the investment sub-universe in the event of significant deviations. The above-mentioned index, reduced to non-government issues and adjusted in terms of weighting, is a comparative element to monitor the sub-universe’s non-financial performance.
Then, based on the SRI universe, the portfolio consisting of “equities” segments and a “bonds” segment is determined:
1. For non-government issues:
- Taking into account two specific sustainability indicators: an environmental indicator (greenhouse gas (GHG) intensity) and a social indicator
(lack of human rights policy indicator).
For these two sustainability indicators, for each of its segments, the subfund commits to obtaining a better ESG performance than that of each of the above-mentioned benchmarks.
- By using a rating improvement approach to select for each of its segments the securities enabling the portion of the portfolio excluding government exposures to have an ESG rating higher than that of each of the above-mentioned benchmark indicators, after eliminating at least 30 per cent of the worst securities based on the ESG rating and all the exclusions applied by the subfund.
2. For government issues and exposures:
By using an ESG Selection approach to select the countries with a minimum ESG rating according to the non-financial rating agency ISS ESG from among euro-denominated issuing countries.
The subfund is also committed to carefully considering environmental issues through its voting and engagement activities.
The subfund is actively managed and does not track a benchmark. There is no benchmark representative of our management philosophy and therefore of our investment universe, nor has any index been designated to determine whether the subfund is aligned with the environmental or social characteristics that it promotes.
Investment strategy
(a) The HSBC RESPONSIBLE INVESTMENT FUNDS – SRI MODERATE subfund is a profiled subfund within a multi-asset SRI range composed of several profiles.
The long-term strategic allocation is composed of 30 per cent equities and 70 per cent international bonds with a euro bias.
The minimum non-financial analysis rate is 90 per cent of the eligible assets of the Subfund.
The Subfund may directly hold up to 10 per cent of its assets in issues not rated according to ESG criteria.
The process of selecting securities, consisting of two successive, independent steps, is based on non-financial and financial criteria.
The integration of non-financial criteria into the securities analysis and selection process begins with determining the SRI universe of the Subfund based on an initial investment universe.
This initial investment universe consists of issues selected on the international equity markets of developed countries with a euro bias and euro-denominated rates.
As such, this initial investment universe consists of issuers from:
- An investment sub-universe composed of equities of eurozone countries, represented by the MSCI Emu, a benchmark given for information purposes;
- An investment sub-universe composed of international equities, represented by the MSCI World, a benchmark given for information purposes;
- An investment sub-universe composed of euro-denominated bonds, represented by the Bloomberg Euro Aggregate 500MM index, a benchmark given for information purposes. The weight of non-government issues in the above-mentioned index is adjusted to reflect the target sector weightings of the investment sub-universe in the event of significant deviations.
The above-mentioned index, reduced to non-government issues and adjusted in terms of weighting, is a comparative element to monitor the sub-universe’s non-financial performance.
The SRI universe is obtained following the reduction of the initial investment universe, first by applying exclusions based on Environmental, Social, and Governance (ESG) criteria defined by the SRI label framework and HSBC Asset Management’s responsible investment policies.
A detailed description of the Subfund’s exclusions is presented in the section detailing the binding elements defined in the investment strategy in the SFDR appendix to the 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.
Then, based on the SRI universe, the portfolio consisting of “equities” segments and a “bonds” segment is determined:
1.For non-government issues:
- Taking into account two specific sustainability indicators: an environmental indicator (greenhouse gas intensity) and a social indicator
(lack of human rights policy indicator).
For these two sustainability indicators, for each of its segments, the subfund commits to obtaining a better ESG performance than that of each of the above-mentioned benchmarks.
- By using a rating improvement approach to select for each of its segments the securities enabling the portion of the portfolio excluding government exposures to have an ESG rating higher than that of each of the above-mentioned benchmark indicators, after eliminating at least 30 per cent of the worst securities based on the ESG rating and all the exclusions applied by the subfund.
2. For government issues and exposures:
By using an ESG Selection approach to choose from among euro-denominated issuing countries those with a minimum ESG rating according to the non-financial rating agency ISS ESG.
A) Non-government issues:
The ESG rating of issuers, used in the rating improvement approach, is constructed from an E rating, an S rating, a G rating, and an ESG aggregate rating.
The ratings of the pillars (E, S, and G) are provided by external ESG rating agencies that assess the non-financial aspects of the business sector to which the rated company belongs.
For each E, S, and G rating, several aspects are assessed, such as:
- Environmental aspects are connected with the nature of the company’s activity and its particular sector. In extractive industries, utilities and air transport, for example, the release of CO2 emissions directly related to the company’s activity is of paramount importance: not measuring or controlling these emissions can represent a major industrial risk and result in major financial penalties and/or reputational damage. For example, if a cement or energy company is highly exposed to climate risk and does not take adequate mitigation measures, it may maximise its risk of sanctions or production disruptions in the event of major climate events for which it is not prepared.
- With regard to governance, aspects such as the structure and representativeness of the board of directors, the attendance rate and level of independence of directors, the robustness of audit and control processes, and respect for minority shareholders’ rights are systematically analysed. The assessment of the company’s performance in these areas also takes into account, for example, the country in which the company is located, the country in which it is listed, and/or the country in which it has its registered office.
- The third pillar, social, covers concepts related to relations with civil society, staff management, remuneration and training policy, respect for trade union law, occupational health and the issuer’s safety and security policy. The very nature of the company’s business will strongly affect the nature and relative importance of these practices. In sectors where there is a proven risk of accidents, such as construction and mining, the prevention of accidents in the workplace and compliance with safety standards are priority criteria.
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 sector of activity. 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 perspective of the ESG investment and research teams regarding ESG risks and opportunities. These sector weightings are available online in the Subfund’s Transparency Code (www.assetmanagement.hsbc.fr).
The selection of securities based on these ESG criteria is thus based on a proprietary ESG analysis model with data supplied by non-financial rating agencies and in-house research.
B) Government issues and exposures:
Euro-issuing countries are ranked according to their overall “ESG” rating, which is based 50 per cent on the Environmental (E) pillar and 50 per cent on the Social/Governance (S/G) pillar.
The Social and Governance pillar includes the analysis of the political and governance system, human rights and fundamental freedoms, and social conditions. The Environmental pillar includes the analysis of natural resources, climate change and energy, production, and sustainable consumption.
The scores, resulting from the analysis by the non-financial rating agency ISS ESG, range from A+ to D-. The SRI strategy consists of selecting from among issuing countries those that have a minimum ESG rating. Thus:
- for countries rated between A+ and B-, there are no investment limits.
- for countries rated C+, the weight of these States in the portfolio cannot exceed the representative weight of these countries in the Bloomberg Capital Euro Aggregate 500MM index.
- for countries classified between C and D-, investments are not permitted.
The rating of issuing countries is reviewed on an annual basis.
An exhaustive list of external providers of ESG data is available in the section on the subfund’s ESG information online at www.assetmanagement.hsbc.fr
The Subfund also uses an “engagement” approach. This approach is implemented through an engagement policy established by the Management Company, which involves maintaining a presence with companies through one-on-one meetings, engagement actions, and exercising voting rights attached to the securities held in the portfolio.
The engagement policy and the voting policy are available on the management company’s website at www.assetmanagement.hsbc.fr.
Information on the social, environmental, and quality of governance criteria in this Subfund’s investment policy is available on the management company’s website and in the subfund’s annual report.
(b) The quality of governance is assessed on the basis of criteria specified in the investment process that include business ethics, the company’s culture and values, the governance framework, corruption, etc. We determine the materiality of governance both on an absolute basis, focusing in particular on the governance framework, controversies, and compliance with the principles of the United Nations Global Compact and the OECD Guidelines for Multinational Enterprises, and on a relative basis by comparing the quality of the company’s governance practices with that of its industry peers.
Where significant and/or impactful governance risks are identified, companies are subject to enhanced due diligence, which at minimum requires the management teams to perform additional analysis. Dialogue or engagement with the company is then monitored over time and kept on record. Lastly, we use our voting rights to express our support for companies’ positive development initiatives or, if their directors do not meet our expectations, our disagreement. In addition, we exclude issuers in violation of one or more of one of the 10 Principles of the United Nations Global Compact and of the OECD Guidelines for Multinational Enterprises.
Proportion of investments
The subfund’s strategic allocation is composed of 30 per cent equities and 70 per cent fixed-income investments on average. The portfolio will be invested in international equity and fixed-income markets with a euro bias by selecting securities issued by companies or countries in a universe of issues that meet Environmental, Social, and Governance (ESG) criteria.
The manager may invest in UCIs managed or distributed by an HSBC Group entity. These UCIs must meet the defined financial and non-financial objectives.
The SRI strategies of the UCIs or investment funds that may be selected by the fund manager (excluding UCIs/investment funds managed by the Management Company) may use ESG indicators and/or different SRI approaches independent of the subfund.
The minimum proportion of investments used to attain the environmental or social characteristics promoted by the subfund is 70 per cent. The remaining 30 per cent of investments is detailed in the section “Investments included in category #2 ‘Other’” below.
Although the subfund does not have sustainable investments as an objective, it commits to a minimum proportion of 10 per cent of its assets in sustainable investments.
The fund commits to investing a minimum of 10 per cent in sustainable investments with an environmental objective that are not aligned with the EU Taxonomy.
Investments included in category “# 2 Others”:
The subfund may hold cash, derivatives, and investments for which non-financial analysis could not be carried out due to the unavailability of ESG data. The use of derivatives will not help attain the fund’s environmental or social characteristics. Derivatives are used for portfolio risk adjustment (exposure, hedging).
Monitoring of environmental or social characteristics
All subfunds must have strong and/or improving E/S characteristics at the issuer and overall portfolio level.
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 (such as the portfolio’s average ESG score or exclusions) We also apply an enhanced due diligence process for companies that may be high risk due to violations of international conventions such as the principles of the UN Global Compact and/or not aligned with anti-financial crime standards or due to poor ESG ratings.
First-level controls are also performed by independent management teams:
- Contractual non-financial investment restrictions 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 relies on a proprietary ESG analysis model with data supplied by non-financial rating agencies and the management company’s internal research. HSBC Asset Management verifies the data used.
Data sources and processing
(a) Our investment team relies on the information available in the ESG Global Research intranet tool, which is populated by data from the following providers: MSCI ESG Research, ISS ESG, S&P Trucost, Sustainalytics, RepRisk, FTSE Green Revenues, Carbon4, Iceberg Datalab (IDL), GAIA Research, Equileap and Denominator.
(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 E/S characteristics.
(b) HSBC Asset Management is not aware of any methodological limitations likely to prevent the attainment of the E/S characteristics pursued by the subfund. The subfund may invest in derivatives. Sustainability risks are therefore more difficult to take into account because the subfund does not invest directly in the underlying asset. As of the date of the prospectus, no ESG integration methodology can be applied to derivatives.
Due diligence
As part of our investment process, we carefully monitor and analyse all companies and other issuers held in actively managed portfolios 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 strategy, financial and non-financial performance and constraints, risks, capital structure, social and environmental impact, and corporate governance. For this monitoring, we use our own in-house research and the research of brokers and other independent research providers.
We also apply an enhanced due diligence process for companies that may be high risk due to violations of international conventions such as the principles of the UN Global Compact and/or not aligned with anti-financial crime standards or due to poor ESG ratings.
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
