HSBC AM published today its coal policy, almost a year after its parent group HSBC announced its phasing out of coal financing. The asset manager announced it wanted to exit coal by 2030 in EU and OECD countries and 2040 globally and introduced some investment restrictions for the coal sector. While Reclaim Finance welcomes this long awaited policy, it highlights that the benefits of the new restriction rules could be wiped out by big loopholes.

HSBC AM committed to not buy new debt and new shares (1) issued by companies involved in coal expansion. This is quite positive in theory, because:

1. Tackling coal expansion should now be the priority of robust coal policies, as there is no room in the carbon budget for new coal assets (2).
2. Tackling the primary market, and especially bond issuance, is key to stop supporting fossil fuel expansion. Coal companies are increasingly turning to the bond market as a safe haven (3).

But unfortunately HSBC AM won’t stop new investments into all companies with coal development plans because of a flawed definition. Like HSBC group, not only HSBC AM won’t consider as coal developers companies that started construction or have been contractually committed (via power purchase agreement) before January 2021, but it also won’t consider as coal expansion the purchase of existing coal assets through corporate mergers and acquisitions. Last but not least, HSBC only assesses net expansion, while climate science requires to no longer build new coal assets on top of phasing out existing ones.

Furthermore, coal expansionists could remain in its portfolio until 2040, while best practices and climate emergency require to divest from them immediately or after a short delay.

To truly exit coal, asset managers must set the path to progressively exclude coal from their passive portfolio. We analyzed HSBC AM’s coal policy for its passive assets, which represent around 15% of its AUM, based on our guidelines for passive funds.

A robust policy for passive funds should:

i) Be completely transparent about the scope covered / not covered yet among passively managed assets. The percentage of assets currently covered compared to the total AUM must be specified.

ii) At minimum, commit not to launch any new product without robust coal exclusion criteria (and especially a criteria to exclude coal developers).

iii) Offer climate-friendly funds with robust coal exclusion criteria as the default option for all clients across all product offerings. Existing default funds can be switched to climate-friendly equivalents.

iv) For existing funds, identify fossil fuel developers, starting with coal developers identified by the Global Coal Exit List (GCEL), and vote against the companies as soon as this year; engage with other asset managers to ask index providers to identify and exclude coal laggards from all standard indexes; publish commitments to offer incentives for asset owners to switch funds; reposition standard funds. The policy should state publicly what is being done and the date after which all passive funds will be covered by the coal policy.

HSBC AM is far from meeting these requirements. Not only does it not publish this information (i), but HSBC AM also does not offer coal-free index funds by default (ii). The policy commits them to not launch new passive funds with coal holdings BUT with a vaguely defined exception for companies with 1.5°C objectives. Coal developers are not mentioned (iii). Finally, it committed to engage all issuers with exposure to coal (prioritizing biggest holdings) but has not committed to systematically vote against all coal developers as soon as 2023. HSBC AM has not said at which date it will exit coal in passive funds. While it mentions it will engage index providers to obtain more coal free indexes, no ask is made regarding standard indexes (4) (iv).

The policy lays out that companies with more than 10% of revenue from coal will be “subject to enhanced due diligence” that might lead to investment restrictions and divestment. But as in many policies from financial institutions, it is unclear what are the redlines for HSBC AM to consider a transition plan “incompatible with [their] net zero objective”. While several factors are described to assess the plans (5), they are mainly based on disclosure requirements and not prioritized, furthermore, no deadline is given for divestment. HSBC AM indicates it will vote against the boards of companies which do not provide a TCFD reporting, which is a laughable ask. A robust coal policy would have a set of exclusion thresholds, and a commitment to reduce thresholds over time combined with a robust engagement process (6).

With this long awaited policy, HSBC AM is leaving the pool of the worst climate laggards among asset managers. A coal policy is a first basic step for any asset manager member of the NZAM and big asset managers such as DWS or Credit Suisse AM still haven’t taken that step. This being said, the new HSBC AM coal policy is still way too accomodating with the coal sector given the climate emergency and is not aligned yet with best practices in the sector.

To go further:

Our full analysis of HSBC AM’s coal policy is in the Coal Policy Tool.

Notes :

1.  Restricted to IPOs.
2.  As outlined in the IPCC scenarios and as underlined recently in the coal statement signed by the top three leaders of the Glasgow Financial Alliance on Net Zero (GFANZ).
3.  By issuing bonds they can enjoy less public scrutiny, less transparency and ready access to trillions of dollars of debt.
4.  Furthermore, HSBC AM does not commit to progressively reposition its passive funds.
5.  See point 6. in HSBC AM’s coal policy.
6. For companies that will remain in your portfolio (those which are not developing coal assets), we recommend the adoption of a set of criteria (ideally 20% of revenues/power generation derived from coal and above 10MT and 5GW of production/electricity produced from coal), with a commitment to reduce thresholds over time and until reaching 0-5% of revenues. Companies under such thresholds can be engaged, with a short engagement period, to ensure they adopt coal exit plans. In any case, your policy should be very explicit about what is expected from this engagement period: that these companies should commit to go below the thresholds by the required timeline and must adopt robust asset-based coal exit plans (see our 10 criteria for evaluating corporate coal phase out plans).