HSBC GIF Global Equity Climate Transition Fund

Sustainable, Responsible &/or ESG Policy:

The Global Lower Carbon Equity fund aims to provide long-term total return by investing in a portfolio of equities, while promoting ESG characteristics within the meaning of Article 8 of SFDR. The fund aims to do this with a lower carbon intensity, calculated as a weighted average of the carbon intensities of the sub-fund’s investments, than the weighted average of the constituents of the MSCI World (the “Reference Benchmark”).

HSBC’s global multi-factor equity strategy aims to deliver consistent outperformance against a market cap weighted index by investing in a well-diversified equity portfolio that is exposed to five factors: value, quality, momentum, low risk and size. It aims to maximise the risk-adjusted returns through an efficient portfolio construction process with rigorous risk management.

As per our multi-factor equity process, we maximise exposure to five factors but with additional constraints applied during the optimisation stage to manage climate and ESG risks:

• Carbon emissions – the fund targets at least 50% reduction in carbon footprint vs the benchmark.
• Social and Governance scores – the fund targets at least 10% uplift in MSCI S and G scores vs the benchmark.

Our approach to building factor and multi-factor equity strategies focuses on delivering strong factor efficiency and exhibiting a high proportion of targeted risk per unit of active risk. This approach eliminates unwanted risks from a portfolio and provides focused and pure multi-factor exposure for our investors.

Within HSBC Asset Management, the consideration of ESG principles is an essential element of our fund offering and underlying investment management processes. We will continue to build on the progress we have made to ensure these important factors are integral to our business. We see it as consistent with our fiduciary duties to our clients to review the climate resilience of investments and contribute towards financing the transition to a low-carbon economy. We achieve this through:

• Identifying low-carbon investment opportunities
• Assessing the risks and opportunities presented by climate change
• Engaging with investee companies
• Reporting on the actions we have taken and the progress we have made in addressing climate risk
• Working with policymakers

Furthermore, we have a responsibility to exercise active stewardship on behalf of our clients. We meet with companies regularly to improve our understanding of their business and strategy, signal support or concerns we have with management actions, and promote best practice. We believe that good corporate governance ensures that companies are managed in line with the long-term interests of their investors. We also engage with carbon-intensive companies to encourage more climate-resilient business strategies.

This approach allows us to integrate material ESG factors into our investment analysis and decision-making during every step of the investment cycle in order to achieve client aims of reducing risk and enhancing returns.

Process:

The HSBC Global Lower Carbon Equity fund uses a multi-factor investment process, based on five factors (value, quality, momentum, low risk and size), to identify and rank stocks in its investment universe with the aim of maximising the portfolio’s risk-adjusted return. Although the investment process currently uses these five factors, it is subject to ongoing research regarding the current and potential additional factors. In order to lower the exposure to carbon intensive businesses, all stocks in the portfolio are assessed for their carbon intensity.

The Investment Manager uses a proprietary quantitative investment process to create a portfolio that maximizes the exposure to the higher ranked stocks, whilst minimizing the portfolio’s risk characteristics through the application of a series of constraints such as country, sector and stock weights, and which aims for a lower carbon footprint and an enhanced ESG profile.

HSBC implements a team-based approach with segregated responsibilities and expertise. Our investment process is designed and managed by a globally integrated research, portfolio management and dealing team. Within the Quantitative Equity team, the multi-factor equity strategy is designed and maintained by our specialist Quantitative Research team, implemented by our Index & Systematic Equity Portfolio Management team and executed via a centralised equity dealing desk.

Quantitative Process

Step 1: Universe Ranking and Score Optimisation

The starting universe to construct our strategy is a list of investable stocks excluding companies involved in the use, development, manufacturing, stockpiling, transfer or trade of cluster munitions, anti-personnel mines, biological weapons, blinding laser weapons, chemical weapons and non-detectable fragments.

Each stock in the universe is ranked from most to least attractive based on the five composite factors defined as follows:

Factor Definition

HSBC’s multi-factor equity strategy is based on five well-established factors: Value, Quality, Momentum, Low Risk and Size.

• Value: a composite value metric that differentiates between “expensive” and “cheap” stocks.
• Quality: a composite fundamental metric targeting companies that generate substantial profits both efficiently and sustainably.
• Momentum: a composite measure that differentiates stocks/sectors that have risen over the past 12-months from those that fell.
• Low Risk: a statistical metric that distinguishes between riskier and less risky stocks.
• Size: a composite that distinguishes between large and small cap stocks.

Value, Quality and Size composites in our model are comprised of a number of sub-components – this is primarily because there is no academic consensus on the definition for each factor. Momentum is better defined but even here there is room for ambiguity, such as choosing relevant look-back periods. We use an industry momentum signal covering multiple look-back periods. In the case of Low Risk, we base the estimation upon our proprietary risk model for robustness.

Factor combination – Our approach to eliminating unwanted bias and delivering factor clarity

Pure Factors

Our aim in combining factors is to identify groups of securities which could outperform the market cap weighted index while benefitting from diversified factor exposure.

When two factors are highly correlated (positively or negatively), they essentially explain the same effect. They will either double up the same risk or cancel out the premium. To address this, we have a regression process in place to ensure the factors are independent from each other.

The ‘pure’ factor composites are designed to minimise unintended risk, by controlling possible interaction between the five of them. Our signal orthogonalisation process ensures that, prior to combination, the five factors have zero cross-sectional correlation (ex-ante), before they are combined into the final multi-factor score. The covariance between these factors are then estimated as part of our customised risk model to ensure the factors’ risk can be managed in a fully transparent manner.

Factor Tilting

Although we do not claim to be able to ‘time’ factor exposures, we do believe it is possible to generate a tailwind by tilting factor allocations to take advantage of changes in the factors’ cycles.

It should be noted, however, that our core strategy is purposely agnostic to subjective macro views. These are better managed at the asset allocation level. Our objective is to assign slight variations around equal weight to those factors which are performing strongly and/or providing diversification to the portfolio in order to benefit from the dynamic of factor cycles. This adjustment has seen our factor weights adjust in relatively tight bands.

These tilts are taken within tight ranges to ensure that the diversification benefits accruing as a result of having exposure to multiple factors are not compromised. With the help from our customised risk model fully aligned to the target factors, the final combined multi-factor score carrying the tilting is implemented efficiently. Individual factor exposure limits are applied in this process to ensure implementation precision.

Step 2: Portfolio Optimisation

Once the final ranking is determined, based on the multi-factor model, a portfolio optimisation process builds the final portfolio for implementation. The process also leverages the Quantitative Equity Research team’s proprietary risk model and cutting-edge data infrastructure to ensure stability and speed for model portfolio production. For example, customised ESG and lower carbon emission objectives can be integrated into the process seamlessly.

At this stage, portfolios are also subject to active sector, country and risk (non-alpha generating) factor, and ESG constraints, to ensure the portfolio is not overexposed to single stocks, industries or countries and that the risk and tracking error budgets are utilised efficiently. A strict weight limit is placed on sector/country/single stock positions and turnover. Tracking error is also primarily managed at this stage and is one of the portfolio level constraints used in the Quantitative Equity Research team’s proprietary risk model.

With regard to the carbon emissions reduction target embedded in the portfolio, this is also implemented directly at the portfolio optimisation stage. We apply carbon emissions as a thematic constraint against the relevant benchmark and impose upper limits/exclusions on particular securities.

Specifically, we use the weighted average of S&P Trucost Carbon Emissions Scope 1+2 scores as a proxy for the portfolio’s carbon footprint. We ensure the portfolio exposure against the benchmark is truncated to the desired levels.

We also take further measures at the stock level to strengthen thresholds around carbon emissions:

We apply the following exclusions:

• Controversial weapons and cannabis companies
• Tobacco companies
• Thermal coal companies are excluded if they meet the following conditions: 10% or more revenue from thermal coal extraction, and/or 50% or more electricity generating capacity from thermal coal, and/or 10% thermal coal power generation-revenue percentage
• Non-compliant UNGC: stocks that are flagged to breach UNGC Principles

Step 3: Rebalancing and Implementation

The Quantitative Equity Research team reviews the model portfolios on a monthly basis to determine if changes are necessary. Changes are communicated to the Index & Systematic Equity Portfolio Management team. Although formal rebalancing exercises occur each month, the portfolio is constantly monitored to ensure that risk/return objectives are in line with tracking error requirements (by both the research and the implementation teams separately).

The Index & Systematic Equity Portfolio Management team within the Quantitative Equity team is responsible for efficient implementation of the model portfolios via risk-controlled baskets, low turnover and multi-layer risk management. The team also manages daily cash flows and corporate actions.

When implementing the portfolio, the portfolio management team ensures that the liquidity of individual positions and market risk are taken into account and managed appropriately. The team also uses risk management tools to ensure that each invested portfolio is within tolerance limits of the corresponding model portfolio.

Resources, Affiliations & Corporate Strategies:

HSBC Asset Management was an early PRI signatory in 2006. As a signatory of the PRI, we work with other investors in leading engagement on a range of issues. We report annually on our responsible investment activities and how UN PRI principles and different ESG aspects are covered as part of our investment processes. We achieved a PRI score of A+ in the 2018, 2019 and 2020 PRI Assessment Report for Strategy and Governance.

In 2010 we made the decision to move our dedicated ESG analysts into our mainstream equity and credit analyst teams in order to further integrate ESG into our mainstream investment processes. Since then, ESG assessments are a core responsibility of all of our portfolio managers and analysts. Our company and issuer level ESG research is undertaken throughout our organisation. All investment staff have sustainable investment responsibilities as part of their investment duties. ESG integration is a core task of all of our equity and credit analysts. The analysts use the research output of our Paris-based ESG research team in their portfolio research and analysis and portfolio managers include ESG considerations within their investment decision-making processes.

We have a dedicated responsible investment specialist team based in London and Paris. Their responsibilities cover our global Responsible Investment strategy and policy as well as the development of investment solutions for our global clients and Responsible Investment implementation. The team also plays an active role in industry engagement and policy and market initiatives to address systemic sustainability challenges. They work very closely with our corporate governance and engagement team based in London and with our ESG research team based in Paris and they work with our portfolio managers and ESG analysts on systemic ESG issues that require system level solutions through market policy and regulation.

We also have a Stewardship team, with members based in London, Paris and Hong Kong, and who work very closely with our investment managers when undertaking our stewardship activities.

We take into account all available company data including ESG factors when making investment decisions across all asset classes and strategies using in-house financial analysis, third party research and data as well as information gathered from company engagement. In addition to our own research we also use third party research and data from the following providers:

• MSCI ESG Research: Intangible Value ESG Assessment, comprehensive ESG assessment and Financial Crime Compliance screening. We use MSCI because their wide coverage of issuers and sector specific methodology
• ISS ESG (formerly ISS Ethix and ISS Oekom): Identifying issuers involved in the production and/or marketing of controversial banned weapons such as cluster munitions and landmine and government bonds' environmental and societal assessment. The specificity of our banned weapons definition can be implemented by ISS as one of the only providers covering government bonds
• Trucost Research: Quantitative environmental data to measure the carbon footprint of companies, issuers and our funds
• Sustainalytics: UNGC compliance and revenues from controversial and sustainable products and activities
• RepRisk: Tracking companies' reputational risk and involvement in ESG-related controversies (implementation in progress). Provides an ongoing view of issuer’s ESG performance, risks, and controversies
• FTSE Green Revenues: Provides revenues breakdown from green activity and its material impact on the bottom line for approximately 3,000 companies
• Carbon4Finance: Measures “carbon emission savings” to help understand a company’s strategic and financial commitment to a low-carbon transition

Collaborative Engagement

We focus on engagement with investee companies but also engage with stakeholders, regulators, industry partners and academics to inform standards and practices that will benefit the long-term interest of our clients.

A combination of the list below, together with local regulators and industry bodies and other institutions, provides an example of where HSBC Group and HSBC Asset Management have memberships and affiliations:

HSBC Asset Management

• UKSIF (the Sustainable and Finance association)
• AFG (Association Française de Gestion Financière) membre de la commission de Corporate Governance
• ORSE (Observatoire pour la Responsabilité Sociétale des Entreprises)
• ICGN (International Corporate Governance Network)
• Eurosif (the European Sustainable Investment Forum)
• FIR (Forum pour l’Investissement Responsable)
• Italian SIF (Italian Forum for Sustainable Finance)
• PRI (Principles for Responsible Investment)
• IIGCC (Institutional Investor Group on Climate Change)
• UK Stewardship Code
• ACGA (Asian Corporate Governance Association)
• Carbon Disclosure Project (CDP)
• Cambridge Institute of Sustainability leadership- ILG
• Council of Institutional Investors
• Global Climate Action 100+
• One Planet Asset Manager Initiative
• Finance for Biodiversity pledge
• Net Zero Asset Managers’ Initiative

HSBC Group

• UN Environment Programme Finance Initiative (UNEPFI)
• UN Global Compact
• Wolfsberg Principles
• OECD Convention on Combating Bribery
• OECD Guidelines for Multinationals
• International Chamber of Commerce Rules of Conduct to Combat Extortion and Bribery
• Global Sullivan Principles
• UN Universal Declaration of Human Rights
• Equator Principles
• Roundtable on Sustainable Palm Oil
• Global Business Coalition on HIV/AIDS
• Carbon Disclosure Project (CDP)
• Extractive s/industries’ Transparency Initiative
• UN Principles for Sustainable Insurance
• Cambridge Institute of Sustainability leadership – ILG
• Net Zero Banking Alliance
• Powering Past Coal Alliance (PPCA)

SDR Labelling:

Not eligible to use label (out of scope)