HSBC has entered the US structured sustainable investment space with a first of its kind - a market linked certificate of deposit (MLCD) offering that the bank has issued in conjunction with The UN Climate Action Summit, recently held as part of last month’s United Nations Annual Meeting.
HSBC Bank USA has launched a seven-year MLCD with the proceeds raised to be directed into projects that align with the UN Sustainable Development Goals. The bank will invest client funds into projects such as building hospitals, schools, renewable power facilities, clean water efforts, LEED buildings, etc.
“It seems like there is not one day where [we] don’t see someone from the asset management space talking about ESG and sustainable investing,” Vishal Desai (pictured), senior vice president of structured products sales, HSBC USA, told SRP.
“ESG has become a market trend, and asset managers and index sponsors are trying to capitalize on the increasing demand. In the US, we see this conversation developing industry-wide.”
The UK bank has been researching this space and established itself globally - HSBC rolled out an ESG-related investment product range in Malaysia earlier this year as it seeks to become “a leading player in this space and we have made a public commitment to sustainable finance”.
We wanted to stick to an index sponsor and an index that people in the US market would be familiar with
The return of the new CDs are linked to the positive performance of the S&P 500 ESG Index which itself aligns investment objectives with ESG values by selecting companies based on the S&P DJI ESG Scores and other comprehensive ESG data, according to Desai.
“We went with the S&P 500 ESG index because we wanted to stick to an index sponsor and an index that people in the US market would be familiar with,” said Desai. “Doing something simple such as adding an ESG filter but still tracking the performance of the S&P 500 is something we thought would resonate with retail investors in the US.”
Conventional structure
The S&P 500 ESG Index excludes tobacco, controversial weapons, and companies not in compliance with the UN Global Compact, and also excludes shares of companies with S&P ESG Scores in the bottom 25% globally within their industry groups.
The index targets 75% of the market capitalization of each Global Industry Classification Standard (GICS) industry group within the S&P 500, and the broad market exposure and industry diversification lends itself to a return profile similar to that of the S&P 500.
“The new product is a reflection of our objectives around ESG and a response to the demand we see in the market,” said Desai, adding, “we wanted to test a product that offers exposure to sustainable assets”.
“At the moment, we don’t see demand for a specific underlying asset or index but around the concept.”
Investors want to know what green bonds are available and also if they can invest in index-linked products.
“We have been working for a while in figuring out where the demand would come from and trying to cast a fairly wide net,” said Desai. “So we had the opportunity to combine the green bond concept which we were able to turn into a sustainable development goals concept with an ESG underlying.”
The MLCD is a very well-known wrapper and one that HSBC has used for many years to deliver structures to retail investors, according to Desai. "The fact that the MLCDs provide capital protection will give people comfort, and we think it’s a very efficient instrument to provide exposure to assets that are not well known. Retail investors are more willing to try a structure wrapped as a MLCD than one with no protection or soft-protection.
"In principle, we’re not changing the structure but offering an alternative -- something we have offered for many years to investors seeking sustainable assets. We’re just adding a positive story to the usual S&P 500 structures we market," he said.
Increasing appetite
Desai believes the increasing demand for ESG-linked products is down to a “couple of factors”. On one hand, growing demand is a consequence of the change in demographics –as we see more and more millennials with investable assets seeking to invest in things that aligns with their value system.
Desai also points that although in the past that some SRI-linked products did not deliver as expected, these new investors are happy to balance performance and personal values if the investment helps to fund social or sustainable programs.
“This has created a whole new source of demand and the need to develop products that responds to that investment need,” said Desai. “The ability to use technology to comb through a lot more information and being able to identify different factors and back-test them: these are also driving demand.”
Product providers are also stepping up their game as they have “more of an ability to look at areas of sustainable investing that can provide sources of yield and risk management”.
“We don’t think it is a performance story but a tracking story, and it would be difficult to pitch as a performance story because there is no guarantee that a particular risk factor will perform in a particular market environment,” said Desai. “However, we wanted to deploy an index that would recognisable by US investors and would align with people’s values.”
US market
ESG has become a global trend and some markets will lag others but eventually they all are moving in the same direction.
“You cannot turn your back or ignore market trends,” said Desai. “We are at initial stage in the US market but it is important to be there as demand starts to accelerate.”
As suggested by recent launches in the US, including Citi’s first US structured green bonds, BNP Paribas’ partnership with Research Affiliates to expand its ESG offering in the US market, Societe Generale’s first ever Positive Impact equity linked note deal in the US, and UBS’ structured note linked to the Global Sustainability Signatories Index 7.5% VC ER, issued by the World Bank's International Bank for Reconstruction and Development (IBRD), ESG structured products are being noticed in the US.
“We think this space will continue to grow and structured products are a very interesting vehicle to deliver this kind of strategy as you can provide protection and other features that other products cannot offer,” said Desai. “We’re using this launch as a proof of concept. We have the scope to expand our offering in this space because we have the capacity and capabilities.”
The bank will focus on the initial offering and gauge demand, according to Desai. “We think that as the market evolves we will see demand for new underlyings and payoff structures,” he said.