As HSBC shifts its strategic focus to Asia and the Middle East, Daniel Klier, global head of sustainable finance, explains why emerging markets will be the key battleground for sustainability issues.

Daniel Klier

Daniel Klier

HSBC recently committed to becoming a ‘net-zero’ bank by 2050, joining a small, but growing number of financial institutions to make similar pledges. In HSBC’s case, it is aiming to be carbon-neutral within its own operations and supply chains by 2030 (or sooner), and to have a net-zero customer portfolio by 2050. Not an insubstantial feat for a bank with operations and customers across the globe, including in many of the world’s emerging market economies and high-emitting sectors.

Daniel Klier, global head of sustainable finance and chief of staff, global banking and markets at HSBC, describes the commitment as a “big and forward-looking framework for the shape of the bank’s balance sheets and strategy”. Unlike some other banks it has not made specific commitments to divest from financing high-emitting industries, such as thermal coal or tar sands oil, within a set timeframe — a move which has attracted criticism from environmental campaigners who suggest it raises questions about the credibility of the bank’s intentions.

Career history: Daniel Klier  

2019 Global head of sustainable finance and chief of staff, global banking and markets, HSBC

2017 Group head of strategy and global head of sustainable finance, HSBC

2013 Group head of strategy, HSBC

2005 Partner, McKinsey & Company

However, Mr Klier believes that rather than making specific commitments with certain industries, it was far more important for the bank “to make a much bigger statement and set a much bigger ambition”. The markets where HSBC operates are also an important consideration. “Net-zero for a bank like HSBC is on a completely different scale,” he says, when compared to other banks which lack a large footprint in emerging market economies. “We operate in growing economies,” he says. “We operate in jurisdictions that don’t have 2050 net-zero plans, unlike Europe or the UK. And we want to be able to work with clients on pathways that work within the economic context they’re in — and that doesn’t always mean you have to step away 100%.”

On thermal coal specifically, HSBC has also recently stated: “We do not support new thermal coal mines and have not financed any new coal-fired power plants anywhere since April 2018.”

Mr Klier is also happy to address the credibility question head on. “This can’t be just nice marketing spin. This has to be a true direction of travel that will be backed up with facts over time. We need to work with our clients on this journey and we will report on progress every year.”

Supporting the transition

Mr Klier sees transition finance, i.e. providing finance which funds the costs associated with high-emitting companies and industries moving to more environmentally friendly ways of operating, as an instrumental element of this journey. He cites the example of China Light and Power, one of the largest energy suppliers in Hong Kong and currently heavily reliant on coal power. HSBC recently acted as a bookrunner and structuring adviser on its second energy transition bond, which will enable it to invest in alternative technologies.

Another example is Etihad Airways’s recent transition sukuk (the first Islamic finance deal of its kind), where HSBC acted as a joint global coordinator, and where proceeds will be used to invest in more fuel-efficient planes and reducing single-use plastics. He says, “These are the stories we want to engage with. We want to work with companies in emerging markets that are operating in a manner which is less future-proof and get them onto that transition journey.”

At the same time as announcing its net-zero commitment, HSBC also committed to providing between $750bn and $1tn in sustainable financing, including for companies transitioning to more sustainable ways of operating. Mr Klier says: “I think we all know that to achieve net-zero, we will need to mobilise a significant amount of capital. We’re now moving into the hard-to-abate sectors. So, oil and gas, transportation, steel, cement, shipping, aviation etc. And those really are the sectors where we know that billions needs to be invested in order to actually deliver that [net]-zero.”

When you look at emerging markets, there is an incredible pipeline of [sustainable] projects that can’t find money.

Daniel Klier

For Mr Klier, there is sometimes a frustrating disconnect on this topic between where capital is currently held and where it is most needed. “Whenever we run investor surveys there’s always an overwhelming sentiment that they want to do more in the space, but they don’t have access to enough investment opportunities. That’s why bonds are always massively oversubscribed,” he says.

However, he observes that, on the flip side, “when you look at emerging markets, there is also an incredible pipeline of projects that can’t find money”.

For him, bridging this gap is one of the most important issues to address. “That’s one of the big challenges. How do we bring together money which, at the moment, often sits in Western economies in negative-rate environments, hunting yields, and at the same time, you have a whole project pipeline in emerging markets that is lacking investment? The usual problems are foreign exchange risk, political risk, not enough transparency and projects that are too small.”

Mr Klier hopes that one possible solution is a new asset class, sustainable infrastructure, which is being developed through a cross-industry initiative with support from the Organisation for Economic Co-operation and Development and the World Bank. “Green bonds really became a success once a standard was defined. And we think the same is possible with infrastructure,” he observes.

Cleantech is the next game-changer

Mr Klier is also convinced that the world is on the cusp of technology being able to make a game-changing impact on reducing carbon emissions, such as hydrogen as a power source, but once again difficulties in attracting investment could be a barrier to progress.

“We’re convinced that there are many technologies out there in research labs and we’re on the verge of the next big unicorns coming out,” he says. “It reminds me of digital 20 years ago — we all knew something was coming there and now tech companies dominate every stock index. I think the same will come in the cleantech/circular economy space. It now needs money to scale.”

To address this point, HSBC has created a venture debt fund worth $100m, to assist companies to bridge the gap from initial seed funding to longer-term commercial funding, as well as a $100m philanthropic programme to assist innovation ventures to scale-up. Mr Klier comments: “The numbers may look small, but we see it as very important catalytic capital to unlock future solutions.”

A broader strategy

These are just some of the elements within the bank’s sustainable finance plans. Taking a step back, and looking at HSBC’s sustainability agenda as a whole, it is clear there is a dovetailing with the broader strategic pivot the bank has embarked on towards Asia and the Middle East. In the coming decades, much of the defining work and many of the important decisions needed to move the dial on sustainability and climate change will take place in emerging market economies.

“The shift towards more sustainable finance is a core pillar of our strategy; we strongly believe it is going to be one of the biggest drivers for financing and advisory activities,” says Mr Klier. “And we believe that the majority of the investment and activity which will need to be financed will be within emerging markets.”

In February, HSBC announced significant restructuring plans for the bank to drive growth at a global level. Notably, this included plans to “accelerate investments in Asia and the Middle East, and shift more resources to those regions”. While maintaining a focus on financing and investment banking capabilities, it will also reducing its exposure in Europe and the US, where lower growth is expected.

For Mr Klier, this announcement shows the bank is responding to a longer-term “megatrend” of increased growth in Asia and the Middle East, which has only been accelerated by the fallout from the Covid-19 pandemic. He says: “We feel very comfortable that the strategy that we announced in February is the right one.”

Unique strengths

“For us, it is very clear we have to shift our focus to where we have a unique platform,” he says. “The world of wholesale banking has many options and clients can choose different banks. So, we want to deploy our capital with clients where we can add value and have something unique to offer. For us, the uniqueness is our footprint in Asia that no one else can provide. That doesn’t mean that we won’t support clients in the US and Europe, but it means that we’re focusing on markets where we believe we have the right to play and the right to win.”

Mr Klier believes globalisation and interconnectivity will remain a potent force in the future — even if the configuration may look different to the present, with new connections between different regions and perhaps an increase in regionally-focused trade. And within that framework there is a space for HSBC to maintain a position as a bank with a global role.

“The world will need a leading international transaction bank,” he says. “With our footprint across all major regions in the world and our strongholds in emerging markets, we’re able to provide that facilitation for trade flows and capital. Therefore, I think for us the push in transaction banking remains one of the biggest priorities and opportunities.”

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