Sustainable, Responsible &/or ESG Policy:

The Global Lower Carbon Bond Fund targets a carbon score at least 40% lower than the benchmark.  To achieve this, we incorporate the Carbon Intensity Scores (CIS), which measures the amount of annual carbon and carbon equivalences emitted per USD 1 million revenue generated annually by a company, for each issuer for which the data is available.  The CIS for each issuer are ranked from highest to lowest within their respective sector. Ten percent of the highest polluting issuers from the lowest carbon-intensive sectors are excluded from the investment universe and 25% of the highest polluting issuers from the highest carbon-intensive sectors are also excluded.  All green bonds are also eligible for the portfolio as long as they meet HSBC’s strict green bond standards (to avoid “green washing”).  Green bonds are given a carbon score of zero to encourage green projects and to assist companies in their transition to a lower-carbon world.  This “carbon filter” defines the investible universe from which the portfolio manager can construct the portfolio. 

Process:

Our Fixed Income management process follows a disciplined and actively managed approach that is supported by proprietary research methods. We believe in the independent management of each strategy in order to most efficiently capitalize on the specializations of our unique investment teams. The global CIO is responsible for determining the overall process while the regional CIOs ensure the process is aligned to their local capabilities.

The investment process consists of four steps that are executed within the context of a rigorous approach to risk management and monitoring: risk budgeting, opportunity assessment, portfolio construction and risk monitoring.

Step 1: Risk Budgeting

We determine a risk budget for each portfolio taking into account the client/fund objectives and guidelines and available alpha sources. Factors typically include:

• Targeted level of volatility.
• Target performance, investment horizon, specific constraints (average life, maximum life and rating limits).
• Volatility of alpha sources.
• Information or Sharpe ratio for each alpha source. These numbers are derived from back-testing on the more quantitative strategies or result from the analysis of the team’s track-record.
• Correlations between alpha sources.

These risk budgets are reviewed twice a year or more frequently depending on market conditions such as changes in market environment or unusually high market volatility.

We manage this portfolio with internal ex-ante annualized tracking error target ranges and limits. For this strategy the target ex-ante range the overall portfolio is 1.50% to 2.00%.

This process is led by the lead portfolio manager with input from our quantitative team.

Step 2: Opportunity Assessment

Lower carbon eligible universe construction:

The initial investment universe consists of all the securities in the representative credit benchmark, the Barclays Global Aggregate Corporates Diversified Index Hedged USD. We incorporate the Carbon Intensity Scores (CIS), which measures the amount of annual carbon and carbon equivalences emitted per USD 1 million revenue generated annually by a company, for each issuer for which the data is available. The CIS for each issuer are ranked from highest to lowest within their respective sector. Ten percent of the highest polluting issuers from the lowest carbon-intensive sectors are excluded from the investment universe and 25% of the highest polluting issuers from the highest carbon-intensive sectors are also excluded. All green bonds are also eligible for the portfolio as long as they meet HSBC’s strict green bond standards (to avoid “green washing”). Green bonds are given a carbon score of zero to encourage green projects and to assist companies in their transition to a lower-carbon world.  This “carbon filter” defines the investible universe from which the portfolio manager can construct the portfolio.

Issue selection:

The credit analysis and internal rating processes for investment grade instruments rely on fundamental research with a strong focus on qualitative factors and are complemented by relative value considerations.

Additionally, the Global Credit Research team incorporates ESG analysis as specific inputs in its fundamental research framework. The research is internal, but external sources are used such as sell-side research, ratings agency updates and newsflow channels such as Bloomberg.  Furthermore, we use TruCost to obtain carbon scores and to assist in ESG analysis, we use several databases such as MSCI, Sustainalytics and RepRisk.

The credit bond positions are determined in a joint process with the relevant credit analyst and the regional portfolio manager having ultimate responsibility for portfolio construction. All credit positions are within the ‘investment universe’ as defined by credit analysts’ coverage and the lower carbon eligible investment universe. The joint credit decisions focus on fundamental, valuation and technical factors with the analyst research stored on the CorpRed global research database, HSBC Asset Management’s common internal web-based platform.

For example, through the CorpRed database, a Paris-based credit analyst can share research insights into a large French bank with US-based USD credit managers, London-based GBP credit managers and Asian portfolio managers. Furthermore, the analysts have regular calls with credit managers to discuss their sector/issuer responsibilities. 

We make decisions on a team basis so internal communication is key. Much of this will be ad hoc at the desk but we also believe in structure and each credit team holds a weekly credit meeting where market conditions are discussed, holdings are reviewed and portfolio changes validated.

Regional allocation:

We also seek to add value through regional allocation and leverage specialist credit teams in London and Paris to do so. 

The core investment universe comprises investment grade corporate bonds in the United States, United Kingdom and Europe. In addition, the strategy may also use credit default swaps (single names and indices) to express market views when more liquid or less expensive to execute than cash bonds.

Jerry Samet, the lead portfolio manager, decides the allocation after discussion with the Global Credit Allocation team, which meets twice a month. Jerry leads the discussion concerning the Global Credit portfolios, and the purpose of the meeting is to:

• Review of portfolio performance: identify key influences and monitor performance of active risks
• Review market movements
• Review key market influences – economic, valuation, corporate
• FIGIV update – Fixed Income Global Investment Views from the Fixed Income Global Communication Framework
• Key themes ahead
• Review/set exposures as appropriate, i.e. asset allocations, beta, currency, rates, sector and issuer exposures

Sector allocation:

Sector exposures are determined at the regional portfolio level and are primarily the result of bottom up credit decisions. These positions will reflect the decisions of the relevant local Credit Committee meetings that are held each week within each credit team and comprise all the local credit portfolio managers.

The sector exposures at the overall portfolio level are monitored by the lead portfolio manager. If there are relative positions which are not desired, these are discussed at the Global Credit Allocation Committee and appropriate changes can be made at the regional portfolio level.

Credit analysts are also organized into six global sector groups that engage regularly, including formal meetings at least quarterly, to allow analysts to discuss and gain perspective of their local industries and regions in a global context.

Credit allocation (beta):

Jerry, as lead portfolio manager is responsible for overall portfolio beta decisions – and may use an overlay to adjust exposures as needed. Jerry also decides the beta after discussion with the Global Credit Allocation Committee. 

Duration

The overall portfolio duration is managed by the lead portfolio manager who may use US treasury and German bund futures to adjust overall duration exposures. Portfolio duration is discussed at the twice-monthly global credit portfolio rates meeting with the Head of Global Bonds in London (who manages global government and aggregate portfolios).

The rates decisions in global credit portfolios are largely driven by views from the Global Bond team in London.  This team manages global government and global aggregate portfolios.  There is a bi-weekly rates meeting between this Global Bond team and the global credit lead managers in New York and London. 

Step 3: Portfolio Construction

The portfolio is constructed to take advantage of diversified alpha sources. The individual alpha sources are a result of our risk calibration methodology which when combined together maximize the portfolio’s overall Sharpe ratios giving us the maximum chance to outperform the benchmark. For this strategy, the alpha sources are issuer selection (40%), sector allocation (15%), beta management (20%) and duration (25%). These alpha sources are consistent with those for our traditional global credit portfolios.

From a macro perspective, beta, duration and yield curve strategies are set according to the team’s views which derive from HSBC’s fixed income platform’s overall economic outlook. At a sector and issuer level, the portfolio construction is a joint responsibility between HSBC’s 40+ worldwide credit analysts and portfolio managers.

The overall portfolio is comprised of regional allocations with the assistance of HSBC’s local portfolio management teams. Each regional portfolio is managed as a standalone portfolio with its own benchmark, guidelines and ex-ante tracking error range (which is monitored by the local Risk team). Each regional portfolio is managed in line with other local credit portfolios. As a result, individual bond positions are sized based on the single regional portfolio, not the size of the overall portfolio. This helps to limit the exposure to any one issuer and provides a high level of issuer diversification.

Portfolio construction is a joint responsibility between the regional specialists and the lead portfolio manager. The portfolio primarily comprises bond positions but may also include bond futures, CDX and FX forwards. The overall portfolio is expected to invest in 200 to 300 issuers, representing between 300 to 600 issues. The issuer selection process primarily relies on fundamental research with a strong focus on qualitative factors and is complemented by relative value considerations. In the first instance, unreliable issuers. This is driven by a pure fundamental and judgmental analysis, assessing a number of criteria which are essentially qualitative in nature to gauge whether or not a company can be trusted, and which have a strong correspondence to our ESG criteria.

Once analysts exclude issuers which, in their view, bear a high risk of a sudden and substantial capital loss, the remaining issuers in the investment universe are analyzed in terms of their business and financial profile.

When an investment decision is taken, it is applied within the parameters of the risk regime and portfolio/client guidelines.

Step 4: Risk Monitoring

Risk management is fully integrated into our investment process. We manage risks based on rigorous procedures and sophisticated tools with appropriate due diligence. Our primary objective is to ensure the level of risk in our clients’ portfolios fits their expectations and that both internal controls and client specific restrictions are adhered to.

At the portfolio level, the managers implement a dynamic approach to risk management using a risk-budgeting methodology. Our fixed income strategies are managed according to a range of risk factors such as duration, yield curve, credit, allocations, securities and currencies. They are complementary to the comprehensive risk budgeting approach which defines the tracking error, volatility and VaR limits for each of our portfolios. Other risk factors include benchmark-related risk, counterparty risk and compliance with portfolio guidelines.

The investment team has various tools (e.g. HSBC Analytics, Bloomberg) to assist in the management of risk budgets and provide pre-trade simulation. Analytics is a proprietary global web-based system used to monitor risks budgets and provide pre-trade simulation to measure the impact of an investment decision on the portfolio’s volatility and VaR. Bloomberg’s AIM platform serves as the firm’s Order Management System and is a key component of the Risk Management Framework, providing capabilities in several key functional areas of the Portfolio Management Workstream, such as security and portfolio analytics and pre-trade simulations.

All credit positions are monitored by the portfolio managers and analysts, and portfolio managers' review positions daily. Analysts are able to see credit positions in their coverage names through our various systems such as CorpRed, Bloomberg AIM and HSBC Analytics. Analysts are also required to provide active credit updates on fundamental or valuation criteria, or both. In the regional offices, there is an active dialogue between local portfolio managers, analysts and traders who all sit together.

The investment team holds weekly credit meetings which review the portfolio’s positions and compliance with the risk budgets. Additionally, the local managers will have regular reviews, typically monthly, with local team heads to review all aspects of the local portfolio management and performance. This is also conducted at a portfolio level between the lead portfolio manager and Michael Cross, Global CIO Fixed Income.

The portfolio has guidelines that are set by the independent Risk team in New York. These guidelines are determined and set at the overall portfolio and local level as restrictions. These restrictions are coded into Bloomberg’s Compliance Manager Module (CMGR) and are monitored by local Investment Restriction teams for each local region and at both the local and portfolio level by the Investment Restrictions team in New York. 

There are also various front-office systems that ensure compliance with risk guidelines and client constraints, pre-trade controls, coherence of orders and management of counterparty risks.

External teams set and monitor various risk metrics. For this portfolio, we monitor the VaR on a daily basis relative to the benchmark. This is calculated and monitored by the Global Risk team in London. The internal tracking error range (0.5% to 3.0% and internal limit of 4%) is set by the Risk team in New York and monitored monthly by the Global Risk team in London.

The investment teams also have access to tracking error data through HSBC Analytics. This system can also provide pre-trade modelling so that changes in tracking error can be assessed.

A key part of the risk monitoring is also the performance attribution. This is provided monthly by the Global Performance team in London using Barclays POINT. This is an independent check on the active risks taken and the performance impact on the 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