Panellists at Sibos say investors and issuers alike are increasingly recognizing the strategic benefits of embracing ESG [environment, social, governance] in their businesses – something which is evidenced in the HSBC SF&I Survey. Fifty-one percent of issuers and investors told HSBC that focusing on ESG was an effective way by which to strengthen returns and reduce risk. Elsewhere, regulatory pressure is also a catalyst behind the pivot towards sustainability. Sibos panellists highlight markets – including those in Europe, Asia and North America – are requiring institutional investors to publicly disclose how they integrate ESG in their portfolios. These regulatory interventions are prompting more investors to scrutinize issuers about how they incorporate ESG into their businesses.
Central banks are also examining climate change from a systemic risk perspective. One speaker warns that the potential impact of climate change on banking stability is likely to be much greater than the challenges faced by the industry during the subprime mortgage crisis. Central bankers say that financial institutions face two main threats from climate change, principally physical risks arising from climate-related natural disasters, and transitionary risks – whereby policies designed to reduce carbon emissions result in rising costs for companies - thereby denting their profits. 3
In response, a number of Central Banks are now actively exploring whether to impose tough green capital requirements on banks and insurers with exposures to carbon-intensive industries. Other Central Banks - including the European Central Bank [ECB] along with regulators in the UK - are already conducting climate-related stress tests on financial institutions. Georges Elhedery, Co-Chief Executive of Global Banking and Markets at HSBC, says Central Banks need to strike the right chord on climate change stress testing and capital requirements. He notes that if non-green assets are subject to lax treatment by Central Banks, then financial institutions will have fewer incentives to support the transition to a global net zero economy. Conversely, he warns that if the rules are too strict, it risks forcing banks to withdraw funding altogether – something that could prompt organizations to seek financing from the less regulated shadow banking market and remove incentives to work with banks on undertaking their transition.