Connecting the United Nations Sustainable Development Goals (SDG) to Green Finance

Channels: Green Bonds

Companies: HSBC

People: Jean-Marc Mercier, Victoria Clarke

The SDGs are a set of 17 goals and an accompanying 169 targets that aim to address, by 2030, a broad range of sustainable development issues. They were adopted by the UN in September 2015. In November 2017 HSBC Bank issued an innovative $1 billion green bond aligned with the UN's Sustainable Development Goals (SDGs), in a deal that was three times oversubscribed.

Environmental Finance (EF): Sustainable development goals seem to be gaining traction among investors. So it seems that your SDG bond was well timed.

Jean-Marc Mercier, HSBCJean-Marc Mercier Global Co-Head of Debt Capital Markets at HSBC (JM): Indeed, the SDGs appeared in 2015, so it is relatively recent, and it takes some time for the market to be large enough to be able to take $1 billion, so we are very happy this year to do such a size.

Two years ago we did a green bond from the HSBC France balance sheet, but this is not just green, this is sustainable developments. We thought it made a lot of sense to use this relatively new label.

It is totally compatible with the Green Bond Principles and the Sustainability Bond Guidelines. So, we have done this aligning ourselves to the UN as well as to ICMA.

EF: Do you have a vision of where the market is going; do you think it will morph into more of a sustainability bonds market, of which green will be a significant part, or do you think that the two will go hand-in-hand?

JM: To start with, I think it will grow.

The green, social and sustainability market stands at about $140 billion in issuance this year, so huge growth from last year – nearly 40%, and this will continue to grow and probably more than double in the next couple of years.

But this is still a niche when you think of it. My view is this will become mainstream; it will be much bigger, a huge a part of what we do, and a lot of corporates, banks, agencies and sovereigns will frequently use this format to finance themselves.

That is a very clear direction from the discussions we are having at Global, European and indeed the French level.

Also many countries look at what is happening in China. There is a huge acceleration of people being conscious they need to take care of the severe pollution problem because otherwise we really have a major issue globally with climate change.

So yes, we need to finance the transition; everyone will use this format to get funding going forwards.

Interestingly, at the same time as having the regulators, central bankers, talking about climate risks, the insurance companies and rating agencies are thinking that they need to focus on the risks.

From all sides, people have a real understanding of the importance of the subject. It is the major topic of many conferences and meetings that are talking about financing to help the transition. So for us, in finance, it is very exciting to be part of that and help our clients to transition to a low carbon economy.

EF: When you talk about the market continuing to double over the next couple of years, are you talking about the green bond market in particular or are we talking more about the sustainability market as a whole?

JM: Sustainable is kind of both. You have green on one side, social on another, then sustainability is across everything. For example, the 17 Sustainable Development Goals (from the UN), some of them are green (affordable and clean energy (7) and climate action (13)) but some of them are purely social focus, like quality education (4), and Good health and wellbeing (3).

We started, as a market, with green. I think we are growing steadily and green is above $100 billion annually, and with social to give a sustainable market, well, the last I looked it was $140 billion for 2017YTD.

So, yes the two go hand in hand and both will continue to grow.

EF: Obviously, you have done a green bond previously. Why did you do an SDG bond this time?

JM: We did that because it is bigger than just green, which is about climate change.

We wanted to also support 'sustainable development' that focuses on benefiting society. We see the importance of helping to combat social issues like poverty or access to education, and as we also finance these types of activities, it made sense for us to go beyond green. We focus our SDG bond on 7 of the 17 SDGs, and this is all public on our webpage.

Sustainable is quite a widespread goal.

EF: Any particular reason why you chose the SDGs rather than just calling it a sustainability bond or using any of the other numerous labels which are out there in this market?

JM: it makes a lot of sense to connect with the UN goals.

Some of them are a little challenging to include, so we didn't include all 17, but some of them are really bankable – improving access to education, health care, fresh water, sanitation – it is things that you need investments for that work within our framework.

It works in our city and transport systems, and, again, that is something you need financing for, right?

So, for many of the SDGs, it is something that needs investment, in fact there are many papers that point to the obvious funding gap from public finance, so private finance needs to step in. It therefore makes a lot of sense for a bank to play a part in that.

EF: How did you choose the 7 of the 17 goals that would be eligible for your bond?

JM: So for us it was quite simple. We actually went through all the 17 goals to see whether you can, effectively, invest and finance our clients who are investing in that.

So whether it is people or corporates, or government institutions, can you actually help them towards those goals?

Do we have a loan somewhere in the bank to have some exposure to those goals?

EF: So it was a case of going through your own lending book and seeing which are already being done, rather than looking at the SDGs and seeing which ones you think would be right for you to do?

JM: a bit of both, obviously, you look at what you have done in the past, but you also look at what you can do in future – if you feel that some of the goals need funding and that we will be able to fund some of our clients to help towards those goals.

So, it is not just about the past, it is actually about the future, and the signalling that goes top-down to our teams and to our clients, that we want to help them around those targets or those goals. I think it is a very strong statement.

EF: How did you devise the criteria that 90% of a company's revenues need to come from a relevant activity in order for its loan to be eligible?

Victoria Clarke, HSBCVictoria Clarke, head of sustainable bonds, EMEA, DCM (VC): This criteria was developed for our 2015 Green Bond Framework, in collaboration with Cicero. We wanted a way to incorporate loans to pureplay companies and wanted to ensure that our criteria for identifying a pureplay business was practical.

Had we set the threshold at 100%, it would have been a challenge to demonstrate with certainty, so we set the boundary at 90%, with the caveat that the business could not derive any revenues from sectors excluded in the framework.

As with all aspects of the framework, we tested this with investors, and the response was positive as investors understood the need to be pragmatic.

EF: How much will be financing/refinancing?

VC: The first issuance under this framework will be refinancing loans and activity from the past two years and new investments. The details of this will be disclosed in our reporting - which will be public within one year.

We aim to report in a similar style/detail to our green bond but as we appreciate the market is constantly evolving we will also continue to note what investors are looking for and try to accommodate that.

EF: What were the practical differences between issuing an SDG bond and a green bond?

VC: The practical difference is the use of proceeds. They are broader - covering green and social projects for the SDG bond, whereas just green for the green bond.

Both our SDG and green bond frameworks are aligned with the four pillars of the ICMA 2017 Green Bond Principles and Social Bond Principles (the use of proceeds, project evaluation and selection process, management of proceeds, and reporting.) That being said, for the SDGs, we needed to develop new eligibility criteria in order to be able to identify that eligible project /pureplay business within each Eligible Sector.

To further enhance this framework, we have also drawn up potential impact reporting indicators for the chosen, eligible SDGs, and this was a bit more challenging than for our green bond given that there is no common KPI akin to GHG emissions avoided. Hence the variety of KPIs included in the SDG framework.

We are proud of this work and hope it can help to demonstrate a credible and transparent framework example for other issuers to follow.

EF: Was it well received by investors?

JM: When I look at our clients, whether they are corporates or not – there is a clear difference of the mood music of just one year ago.

Now, we are seeing some of our investor clients who decided to stop investing in carbon intensive companies /sectors and instead focus on understanding Environmental, Social, Governance (ESG) integration and considerations in their investment decision making; there is a huge wave of interest to move away from carbon-related assets from the investor side and to really invest in the future.

Everybody understands that it is risky business to be invested into carbon-related assets.

Then, on the other side, you have a bit of appetite from the banks, and we have done many trades, we were a structuring advisor on many of those bank transactions where they want to have a part of their balance sheet that is really financing green. So it is pretty clear it comes from both sides.

Additionally, you have got the authorities, whether they are central banks or regulators or offshore bodies, who continue to push towards this way, saying: 'Look, we all recognise that is what we have to do.'

EF: Sustainability is a growth space as well, right?

JM: we really believe it is a growth opportunity. Obviously, the market for bonds – I work in DCM so the bond side is growing – but also in general the green and social financial system is evolving positively. You see there is a lot of investments; we can see it first-hand in China, We can see it also in Europe. Clean energy is really coming; you have got the auto.industry moving very fast towards cleaner transportation, a positive move.

Something like three or four years ago we were not there at all. Now we heard the UK and France talking about the end of diesel, the end of fossil fuel. So it is a big dynamic here that we need to finance. Hence it goes way beyond the bond market.

EF: Did this bond bring in any new investors?

JM: Yes, sustainable bonds or green bonds attract a slightly different investor base. It is people, maybe, who would not have invested before in your name, so I think that is also the wealth it brings.

EF: Do you think this is a template for other SDG bond issuers can follow?

JM: Yes, that is right. When you do a successful transaction, everybody is noticing. Everybody will look into their own balance sheets and whether it makes sense for them.

So we had people asking for us to help them consider the idea for themselves which is exciting for us!

Also, I am sure we are not the only ones where investors are asking for social and green issuance, and these institutions very likely will keep those bonds for a long time. So I think it is a very good quality investor mix that you get on your issuance.

Reporting on Use of Proceeds

The HSBC SDG Bond issuing entity will provide a SDG Progress Report on an annual basis, until full allocation including:

Allocation Reporting:

  • Aggregate amounts of funds allocated to each of the Eligible Categories (as listed in the HSBC (SDG) Bond framework) together with a description of the types of business and projects financed;
  • The remaining balance of unallocated SDG Bond proceeds at the reporting period end; and
  • Confirmation that the Use of Proceeds of the SDG Bond(s) issued conforms with the HSBC SDG Bond Framework

Impact Reporting:

HSBC recognises investors' preference for enhanced information on Use of Proceeds. Where possible, HSBC will provide further information and examples of eligible businesses and projects financed by an HSBC SDG Bond

SDG categoryIndiciaitve Reporting Criteria
SDG 3: Good
Health and
Well-being
Number of hospital and other healthcare facilities built/
upgraded
Number of health checks provided
Number of residents benefitting from healthcare which is
otherwise not accessible
SDG 4: Quality
Education
Number of educational institutions funded – location and
type
Number of students supported
Number of years' of education provided which is otherwise
not accessible
SDG 6: Clean
Water and
Sanitation
Number of tonnes of clean water provided
Number of units of water hygiene equipment provided
Number of water infrastructure projects built ie. dams,
reservoirs
SDG 7:
Affordable and
Clean Energy
Kw of clean energy provided
Number of tonnes of CO2 avoided
Number of household/residents benefitting from affordable
and clean energy which is otherwise not accessible
Number of solar farms or wind farms
Location and type of solar or wind farms
SDG 9:
Industry,
Innovation and
Infrastructure
Length of low carbon tracks built
Number of electric/hybrid/ low-emission vehicles provided
Number of Smart Meters provided (cities / industry)
SDG 11:
Sustainable
Cities and
Communities
Number of household/residents
Length of low carbon tracks built
Number of electric/hybrid/ low-emission vehicles provided
Number of tonnes of CO2 avoided
Kw of clean energy provided
Number of Smart Meters provided
SDG 13:
Climate Action
Length of low carbon tracks built
Number of electric/hybrid/ low-emission vehicles provided
Number of tonnes of CO2 avoided