Jane: [00:00:01] Hello and welcome to the LSEG Sustainable Growth Podcast, where we talk to leading experts about sustainability and finance. I'm Jane Goodland and this week I'm talking to the marvellous Dr Celine Herweijer, HSBC's Group Chief Sustainability Officer and Member of the Group Executive Committee. Not only is she responsible for the ongoing development and implementation of the group's sustainability strategy, she also finds time to be Visiting Senior Fellow at the Grantham Research Institute on Climate Change at the London School of Economics. Celine is a climate scientist and a NASA fellow. She also holds a PhD, MPhil and Masters in Climate Modelling and Policy from Columbia University, and she's also a World Economic Forum Young Global Leader. But before we hear from Celine, a quick reminder to follow us so you don't miss any future episodes. And also, don't forget to rate us on Spotify, Apple Podcasts, or any other platform you use. Hello, Celine. Thank you so much for coming on the show. It's really good to see you.
Celine: [00:01:04] Hi Jane Great to be here. Thank you.
Jane: [00:01:06] So, what I'm really curious about Celine is that, tell me about how you ended up at HSBC because you joined the bank in 2021, I believe. But what was your journey to that role?
Celine: [00:01:17] Yeah, well, let me just start actually there because it's a newly created role on the Group Executive Committee, which Noel established right after he set the climate change strategy, purposefully because he didn't want a banker in that role. He wanted someone with a deep science background that had also worked across industries on the transition. And there I was. At the time, I was Global Innovation and Sustainability Leader at PwC. I'd been there for over a decade, worked with clients globally across pretty much any sector you can think of. But I'm actually originally a climate scientist, so I started off actually doing marine biology. I learned about coral bleaching. I quickly switched to doing climate modelling, Master's PhD and NASA fellowship. And then I thought, actually, if I'm going to have an impact, it's my working lifetime where we're going to make or break our ability to respond to this. So I have to get into the private sector, and I have to kind of get into the roles that are going to change the way business and finance flow. And here I am.
Jane: [00:02:10] Brilliant, and you're in a great place to have a massive, massive impact. So that's cool. And actually, can I just ask you, what is a NASA fellowship? I'm curious. I've never come across that before.
Celine: [00:02:19] Well NASA doesn't just do space science. I think people always assume it does, but obviously they do a huge amount of climate modelling. So it's a fellowship, essentially means you get your PhD and then research paper afterwards by NASA and collaborate with all of their kind of modelling capabilities.
Jane: [00:02:34] That's really impressive. Well done you. So sustainability is at the centre of HSBC's business strategy, which actually is a great starting point. And transition to net zero is one of the four strategic pillars. Tell us why climate is so critical to HSBC and what's the motivation behind the bank's focus?
Celine: [00:02:56] Absolutely. So I mean, the starting point and we know, everyone knows this really these days, is that the transition to net zero will impact every single sector in the global economy. It's basically the future of any industry, how you decarbonise. And that's why it's up front in our corporate strategy because it affects all of our customers, our markets and HSBC ourselves. We can come to this later, but we did our first transition plan a couple of different months ago, and we wanted to be really deliberate at pointing out our three motivations to act on net zero and why it's up there, up front in our corporate strategy. And actually the first one, and we talk about this a lot again, is the fact that there's 150 trillion or so, some models say 200 trillion of financing needed in the next three decades, of which around just under 40 trillion is needed by the end of 2030 to finance the transition across the industries and markets. And about 60% of that is in HSBC's core regions of the Middle East and Asia. Another way is to look at it is just under half of any corporates' capital expenditure needs in the next three decades needs to go to the transition.
Celine: [00:04:02] In other words, this is not just altruistic and the need to have a positive impact. This is a huge commercial opportunity for banks, especially a bank like ours that sits at the heart of the markets that need to transition and the sectors that need to transition to help finance that transition. So we wanted to be very explicit about that. Banking debt within that capital stack needs to make up about 30% of the finance that's needed over the next three decades. The second of all is it's a systemic risk, right? Systemic risk if we don't manage this properly and the order of magnitude stress tests that are out there at the moment through the different stress tests that we do for the regulator, really don't capture the scale of that risk. They underestimate the sum of the systemic impacts because they don't include a lot of the loss amplification or the wider chronic risks that are there in the system. The fact that the future of insurability itself is going to be threatened in many areas where risk based pricing means it's just not affordable for companies or for consumers anymore.
Celine: [00:04:58] The fact that we have things like rapid Amazon dieback or methane clathrates being able to be released as ice melts in the Arctic and other regions. So this kind of stuff's not built in, but it's really the fact that we need to have a financial stability mandate now, not for the next three years, but for the next 20 to 30 years. So our ability as a bank, a financially, systemically important bank to stay on top of managing these systemic risks is absolutely critical. And just quickly, the third motivation we put in there in our transition plan is that, you know, there's a huge amount of change now happening as a result of the transition, new policies, new regulations, new standards, and we want to be shaping those, not just responding to them. We want to be engaging because, you know, our transition plan is the aggregation of all of our customers' transition plans. We can't get there unless our customers can get there. And we've all got a lot of learning to do on what works and what doesn't, and how to channel in more investment to where we need it. So we wanted to be at the heart of shaping it as well.
Jane: [00:05:46] So this climate transition plan, like you said, it was published a couple of months ago. It's a big piece of work, isn't it? I mean, I looked it's 101 pages. Now I can't say that I've read every single one, but I did look through the plan and I was really impressed. I mean, I absolutely would encourage our listeners to go and take a look. It's very easy to find on HSBC's website. What I'm curious about, I mean, it's incredibly detailed as well, what I'm curious about is, tell me about the process of getting to that point of publication, because obviously publishing the plan is almost like that's the beginning of the work, in a way, setting out what you're going to do and how you were going to do it. But tell me about the process of getting to that point, because that must be an incredibly big lift to get there.
Celine: [00:06:28] Yeah, I tell you, we were probably optimistic. We thought we'd get it done in six months. It took a year. Hopefully next time we can do it in six months, that would be great. Clearly it's a whole organisation effort, as you can imagine. So the entire executive team was involved in all of this, oversight from the board, multiple board meetings, every business line, every function, every region involved in shaping it. And we did have discussions about whether we should do a 30-page plan or could it be 100 pages, but actually, that's the amount it took to tell the story that we needed to kind of accurately. And it's our first one, and we split it into three things. I mean, the first thing to acknowledge is we set our ambition in 2020. We've been super busy executing and delivering parts of that, whether it was setting and making progress towards the 2030 sector by sector finance emissions targets, whether it was that 1 trillion financing, sustainable finance and investment target, we set making progress against that, whether it was new policies, we had our thermal coal phase out policy, our energy policy, like all these different things, we've been putting in new initiatives like our 1 billion Climate Tech Venture Debt Capital or Breakthrough Energy Catalyst. So we've been busy doing all these things, but we didn't have one place that brought it all together, that uniquely told the story of who we are as HSBC, as a bank, the products that we have, the markets that we serve, that we're a huge bank all across Asia and the Middle East and parts of Latin America.
Celine: [00:08:04] So our footprint and really how we can bring the strengths of HSBC to bear for the transition. So that strategic narrative hadn't been brought together before. And we say quite clearly in the plan, we want to, our North Star is to make the decisions that have the impact on global net zero emissions, not just our portfolio emissions. Otherwise, you can get unintended consequences. And we want to do that by transitioning industry, because we are a bank that banks large energy companies, large industrial conglomerates across Asia, you know, the aviation companies, the shipping companies, etc. So transitioning industry, our role as a transition bank is critical, but also the new economy, you know, 156 or so years ago when HSBC started, we were famous for banking the entrepreneurs back then and we want to be the bank for the entrepreneurs of the new economy, the so-called kind of climate tech pioneers. And third of all, with one of the largest trade banks in the world, trade decarbonising supply chains when you get ten x of emissions, that has to be at the heart of the strengths that we bring for the transition. So being able to lay out uniquely who we are as HSBC and that role we can play.
Celine: [00:08:52] And then the implementation plan, which is step by step, the parts of the bank that we're transforming from our risk function to how we make portfolio and transaction decisions, to our governance, to our incentives, to the metrics for measuring change, the capability we're building. You know, it was really, really important. And coming back to the process, you know, a lot of this was around aligning stakeholders and the clarity of messaging and actually the process of doing it. As we were doing this, we realised we had to set up a sustainability execution program where we have different group executive members, whether it's myself, the CFO, the Chief Risk Officer responsible for different parts of this transformation program. It matured in a way, this doing this process matured our approach. We were already doing, as I mentioned, all these things, but it made us bring it together much more holistically, everyone understanding things much more clearly and building out that plan and that accountability together. So I highly recommend it. And also we ask our customers now for their transition plans. It's built into our policies. We're rolling that out across different sectors. So clearly we need to walk the talk and show that we've thought about how to do this ourselves so that we can engage with our customers on the learnings and what it can look like.
Jane: [00:10:02] So Celine, this sounds like a really huge business transformation exercise, how are you actually setting yourself up to deliver on this?
Celine: [00:10:11] Absolutely and I think that was part of the maturation of going through the net zero transition plan programme. We completely restructured how we are going to be managing this transformation. I mean, first of all, there is a big transformation team, a three year transformation programme, we’ve got ten modules, a module could be financed emissions embedding, it could be the disclosures, it could be transforming risk management etc. So we have ten of these. Each one is led by a different member of the group executive committee and that was really important. It’s not just about me as Group Chief Sustainability Officer, it’s all of us around that table, driving the transformation and the relevant parts of our business or the functions we represent. And then ultimately, the group CEO, Noel, is then responsible through to the board. Every single board meeting we have we provide and update on our progress in that transformation now. So it’s a huge execution programme. And I think that’s really the job of the CSO now these days is to lead big transformations across organisations with their group executive committee alongside them.
Jane: [00:11:10] I’m sure that’s going to be music to many people’s ears who are listening. You've definitely highlighted some of the advantages of setting out your plan, both through internal alignment, pulling together the strategic narrative, engage with customers. Are you feeling that there are any disadvantages of setting out your plan in such great, robust detail?
Celine: [00:11:30] The other thing actually is we were brutally honest in our plan. And I think that was really important for us because whether it's corporates or banks, we've all been doing a lot of things at the moment around greenhouse gas accounting, target setting, use of 1.5 aligned scenarios. And I think there's been a real realisation since we've been doing that around what's in our control, what's not in our control, where the dependencies are, where the uncertainties are. And in our plan, actually, we were very real about that. And that's some of the positive feedback we've had is that we were really honest around, okay, how are we going to approach scenarios as scenarios change in the future and what that means for target setting, like how are we going to think about the fact that in some really hard to abate sectors, even clients who commit to 1.5 aligned targets might not actually get there in cement by the time it's 2030 and it's the midpoint and we have our midpoint target. The challenge was we actually in a way had to talk about challenging things and we know it's evolving, right? So it's a point in time. The transition plan was written and published as a point in time at the beginning of this year.
Celine: [00:12:28] But we're clear in the plan up front and throughout that we will continue to evolve this. And I think as long as we make that clear in our stakeholders that look to our annual report and our accounts for our year-to-year execution and progress against that plan, because things will continue to evolve this. And then I think as there are substantial material changes, maybe we develop more on our approach to nature. Our real estate sector chapter was probably the kind of least well developed, because we're in the middle of doing that assessment now around our real estate portfolio. As things change, we will probably look to update parts of the plan or issue documents alongside it. But I think it's important we don't get too scared to say, oh, we're going to write everything. And then things will change as long as we keep updating, letting our stakeholders know, showing what that looks like in our annual report. Then I think we felt comfortable and actually we felt like this was at risk mitigation. By the end of writing the document, we felt it was mitigating risks of misunderstanding what we're actually trying to do.
Jane: [00:13:23] And you mentioned your stakeholders and updating stakeholders about both the plan and also progress to it. Presumably, shareholders are a really big and important stakeholder for this type of information?
Celine: [00:13:35] Absolutely. Yeah. I mean, our investors were very keen for us to have this plan. We engage them along the way in terms of how we were hoping to structure the plan. We had lots of engagement afterwards. And again, that's been super positive. Again, we have investor meetings. We were always talking about bits of our agenda in isolation, you know, oh, now we've set new targets for the heavy industry sectors and automotives. It was always bit by bit. But now we have this transition plan holistically to bring them back to and we can kind of dive in different components. So that was very much kind of welcomed by them as well.
Jane: [00:14:05] I'm sure it was. And in terms of, you mentioned earlier about your commitment including financed emission targets, I was just curious if we can explore that a little bit. Can you explain what this means in reality for your clients, and what's in the plan to actually deliver this?
Celine: [00:14:22] Yeah, so I'm sure some of the audience will know all about financed emissions, probably in their day job like it is mine and some might not. So I think probably worthwhile starting there. But if you're a fast-moving consumer goods company, your Scope 3 is your supply chain, right? For us, the biggest part of our Scope 3 as a banking organisation is our financing portfolio. We've got Scope 3, which is our supply chain. That's still tough, but it's relatively easy in comparison to decarbonising our whole portfolio, you know, on balance sheet and in some areas, our off-balance sheet portfolio along a 1.5 pathway. Even more so because it's even more direct because we're basically, again, saying our portfolio is our customers' ability to get there. So financed emissions is basically the emissions of our financing portfolio. And there's this new thing now called facilitated emissions, which PCAF have just approved the methodology for. And we've now added that to our oil and gas and power and utilities sector, which is the capital markets transaction. So they're not our direct lending, they're not on our balance sheet, but we facilitate them. They're with us sometimes for a few days or a few weeks, and you wait them at a 33 percentage and count them in the target as well. So what we do is we go sector by sector, starting with the most carbon intensive ones.
Celine: [00:15:32] We followed the guidance of the Net Zero Banking Alliance. We started with oil and gas and power and utilities and coal mining, and then we did the transport sectors and heavy industry. Now we're working on real estate, which is super tricky from a data perspective. We’re using the IEA Net Zero Economy Scenario, which is 1.5 with limited overshoot. And that when you put that in it, it spits out a number. So oil and gas, 34% reduction by 2030 for that portfolio. Scope 1,2 and 3 emissions on an absolute basis. For coal mining, we also have an absolute target. But for the other sectors like power and utilities and the demand side sectors, we have an intensity-based target. And we purposely did that because we don't want to cap on financing going to those sectors in the next decade, two decades, three decades. Clearly, no one who wants the transition to happen wants a cap on financing, because those are the sectors that are going to need a huge amount of finance to transform their technology and infrastructure bases. And power and utilities, we know there's going to be a massive ramp up in electrification that's needed to move away from fossil fuel
Celine: [00:16:23] generation as well. So that's there. And that's the kind of new rewiring that's now happening across the financial industry, as you know, which is to now decarbonise our financing portfolios towards net zero and track progress against that annually in our annual reports. And the most important part of that is not setting and measuring, but it's then the embedding program. That's what we're focussed on now. So that right now where we've set the target, as a transaction comes in, even at the do we or don't we phase, we measure the financed emissions impacts. We know the real time whole portfolio financed emissions for each sector that we have position, live position. And we say, okay, this transaction would add that, and we're at the point now of starting to think how we allocate financed emissions caps, but always alongside risk, credit risk considerations, commercial considerations at the client level. So that's what we're playing with. But I think the importantly and we're very real and we talk about this a lot, again we don't want to get obsessed about the portfolio target. We need to get obsessed about the real world emissions. And sometimes you can have an unintended consequence. I'll give you one simple example and then I'll let you move on. But the simple example: power and utilities target.
Celine: [00:17:42] We've got a 70/75% intensity reduction needed. Actually if you put in the latest IEA scenario because of what's happened with energy crisis, it kind of moves down to 68% because more decarbonisation is pushed to post 2030. But that aside, it's a substantial intensity reduction that's needed. The easiest way for a bank like us to do that is to shift more of our portfolio to Europe and to the US, where the grids are already cleaner, we've already moved away from coal. That's not the right answer for the real world, because the biggest emissions growth is going to happen from the coal to clean transition happening slowly or quickly in Asian markets, right, which have a huge reliance, over 60 to 70% on coal in those grids today. So we can't do that. So our big job over the next decade is how do we make these decisions, manage these portfolios, ensure we still drive commercial profitability. That's front of mind as we're doing this, optimising for commercials and minimising credit risk, etc. But we don't do it in a way that, you know, you had Nick Robins on talking about Just Transition. This is one perfect example. You can't do this portfolio alignment in a way where you're basically pulling finance away from the countries that need it the most.
Jane: [00:18:53] And this must take an enormous amount of collaboration with your clients, because you can't just throw out a target and then expect your customer to do the rest. I'm presuming that this is kind of changing the way you engage with customers.?
Celine: [00:19:07] Yeah, absolutely. I mean, again, we don't like to get them thinking in terms of the finance emissions, that's our own thing to kind of manage that. The engagement we're using with them is really around the transition plan engagement, which is, again, why we had to do our own. And obviously the majority of them don't have transition plans yet, it's not mandated. But we can do our own assessment. We can look at where they are. We can talk with them about where they are. So we do our own transition plan assessments of customers. And that's it front and foremost. It's talking to them about how to accelerate their decarbonisation, offering financing solutions so that they can invest in the new technologies and infrastructure that they need, trying to push forward on that. But engagement with customers absolutely is first and foremost.
Jane: [00:19:44] And that's a good segue actually into the part about investment and HSBC's talked about providing a trillion in sustainable finance by 2030. Can you help us understand that a bit more about what does that really mean? Because a trillion is huge. So how does that actually become a reality?
Celine: [00:20:02] I almost start a step before that, which is what we can do to help finance a transition will be way bigger than that 1 trillion. That's just the stuff that we're accounting that we can label as green transition, etc. over time. But actually what we've just been talking about, the fact that we have to move our whole portfolio and help finance the whole portfolio, stuff we won't be counting, is still going to be important and a commercial opportunity for HSBC to support our clients on the transition and help finance beyond that. But then there's the stuff that we label, and I think, as you know, the kind of approach to what you will need to mature over time. So at the moment we're using standards. If you go to our ESG data book and our annual report each year, you can see the breakdown for what we count towards the 750 to 1 trillion. And at the moment we use standards to help define that, market standards, so market standards for what qualifies as a sustainability linked bond or a sustainability linked loan, then we've got green bonds, we have green trade instruments, we have green related renewables project finance. You can see that full breakdown in there. And what probably we expect over time is something like the sustainability linked bonds, they're probably going to be more robust over time,
Celine: [00:21:08] the kind of labelling especially for the higher transition risk sectors. So we'd rather be more cautious with that at the moment in terms of what we label, because we know those standards need to evolve and some of the spaces as well. I think that's the idea is that we start to capture and one of the moves that I think we're watching closely and we'd like to put more work into with our peers as well, is the, so we've got to be able to more clearly label between green and transition finance and give much more transparency around the categories within that. The UK government's obviously got a transition finance review, their MAS, and Singapore released the Transition Finance Framework, which is a good thing to go and have a look at. But more work needs to be done to have a holistic, credible transition financing approach. And we'd like to start eventually over time, and we say this in the transition plan, getting much more clear, granular in some of those metrics. So be very clear. We're doing managed coal phase out early retirement financing. You know, being able to label that and different categories of climate tech financing that we're doing as well. So watch this space. That's another area that will evolve in the plan and going forward.
Jane: [00:22:08] So let's pick up on that climate technology piece. Because actually, I'm sure from your background, in terms of being on the innovation end of the spectrum, this must be very close to your heart. So what's HSBC doing around climate tech?
Celine: [00:22:22] Yeah, absolutely is it's one of the last big projects I had at PwC was doing this first state of the market report on climate tech. And I mean, first of all, just before the markets got a bit more challenging in the last couple of years, if you looked at the venture ecosystem, climate tech was the fastest growing thematic in the ventures ecosystem. Everything has obviously been a bit hurt in the new market right now, and obviously we've got GenAI kind of has now become the new superhero, but climate tech is still very much up there. I mean, it's a big area for us. 35% of the technologies we need to get to net zero, the IEA say, are at a very, very nascent research stage and need commercialisation. What we want to do, obviously, we're a global bank and the climate tech hubs traditionally have been around the Silicon Valley, US hubs, there's a good hub in the UK, some in Paris. We want to make sure we help building the climate tech hubs in the Asian markets and the Middle East more broadly as well. In terms of thematic verticals, climate tech, the original clean tech, let's say that first wave, you know, around 2005 to 2011 was very much clean energy, right? What we're talking about now is all those kind of verticals. It's agriculture, it's decarbonising heavy industry, it's clean mobility, it's food and land use. And so we want to be supporting across all of those. It's also the cross-cutting verticals like carbon removal technologies.
Celine: [00:23:37] So we've hired a new Global Head of Carbon Removal Tech. We've got a new Global Head of Clean Hydrogen where we're trying to develop a pipeline, working with our bankers on that one. So we're also going in at the technology cross-cutting verticals. And with the launch of innovation banking that we did last year, we're actually able now as a bank to go much earlier stage. Before we were coming in around stage C or D, probably D more with our banking support. Now we can go all the way through to seed stage even and stage A. So what we want to do is help these pioneers grow, internationalise. We're offering corporate debt, venture debt, project finance debt, but also just the traditional banking trade finance payments and helping them internationalise, build supply chains, etc. So one thing we did set up is a dedicated allocation of 1 billion for climate tech venture debt. And that is pretty important in the current market because equity valuations are low, it's hard for start-up founders to reduce share of equity, and actually accessing venture debt is a pretty attractive time for them to do that because they don't dilute their ownership. There's all sorts of different ways we can support, but we're super keen to be right at the heart of supporting the climate tech innovation ecosystem globally, across the thematic verticals and helping with all forms of finance that we can help with as well as equity. We also, through HSBC Asset Management, invest equity in climate tech.
Jane: [00:24:57] It's really exciting, Celine. I must say it's really impressive talking to you to hear about all of the things that are going on and really seeing practically what it means for the bank to do this. I guess let's wrap up by just thinking forward, it's not long, six years to 2030 and a lot of the focus is on that. In your view, what are the key hurdles that could stop us ultimately getting to net zero?
Celine: [00:25:22] I'm going to talk as a scientist now. Let me go back to where we started today. But every tenth of a degree matters, right? We implement everything that all the policies say to policy scenarios at the moment, all the pledges that have been made, we're probably going to get to like a 1.8, 1.9 degree world or so, getting that down to 1.7 to 1.6 every tenth matters so much. It obviously doesn't get helped when we, the real world is the real world, right? We're in a situation geopolitically that we're in. The last few years have slowed down. They've pushed more decarbonisation post 2030. We're also, famous biggest year of elections in the whole world with 40% of the global population is going to the polls. We've got some pretty big impactful ones in terms of climate policies, in terms of where the outcome will be there. But I think regardless of what happens in the real economy, we've got no choice but to stay the course. We need to be able to ask those that are allocating capital in companies or in financial institutions to accelerate that allocation. And to stay steadfast, we need to all be able to kind of adjust our appetite for risk in the years ahead.
Celine: [00:26:27] And that includes the regulators in terms of how, you know, financial regulators are looking at or not looking at the risk of investing in green and sustainable infrastructure. That's one kind of perfect area at the moment is that banks, 30% of that, as I mentioned, that 150 trillion or so needs to come from commercial debt. A large part of that needs to be infrastructure financing. That's long tenure stuff, that's hard for us to do on our balance sheet. We can originate and distribute it for sure and take it off our balance sheet, but actually we probably need to be holding some of it and doing it at much larger scale as banks. We need to lean into that risk, and we need to be able to have the appetite to be able to do that as well. So I think there's a lot of collaboration needed. There's obviously blended finance. There's addressing the cost of capital in emerging markets. There's a lot of challenges to getting in there. But I think the main message is we need to adjust our appetite for risk. We need to work together on that. We need to better understand the risk. Actually, the risk for renewables is much less than many folks think it is. And so some of it is actually better understanding of risk and new instruments, new innovation, new partnerships. But we don't really have a choice. We all need to lean into this right now and help unlock that finance.
Jane: [00:27:34] Brilliant. I can't think of a better place to say thank you very much for giving us your time, your insights, your experience. It's absolutely fascinating. And I am going to go and read that 101 page report now, because, I mean, it looked good from a cursory look, but I really think that there's going to be some rich insights in there. So listeners, check it out and read the HSBC Climate Transition Plan. Celine, thank you once again for coming on and we'll see you again very soon.
Celine: [00:28:03] Thanks, Jane. Thank you.
Jane: [00:28:08] So that's it for this episode. What a fascinating conversation that was. If you've got questions, comments, or someone you'd like us to talk to, then do get in touch by email at fmt@lseg.com. That's all from me, but watch out for the next episode very soon.
