HSBC Holdings plc (HSBA) Earnings Call Transcript & Summary

To spend a few minutes with Noel Quinn. HSBC is one of the world's largest banking and financial organizations, serving approximately 40 million customers across the globe from individual savers and investors to some of the world's largest and most significant companies and governments. Today, we're honored to have Noel Quinn, Chief Executive Officer of HSBC since 2019. Alongside his leadership at HSBC, Noel chairs the financial services task corps of His Royal Highness the Prince of Wales' Sustainable Markets Initiative as a principal member of the Glasgow Financial Alliance for Net Zero. Noel, thank you very, very much for being with us today.

Thank you, Todd. Good to be here.

Noel, you attended COP27 earlier this month, one of the few big bank CEOs at the event this year. Before we jump to COP27, let me go back for a minute. One of the key achievements of COP 26 was the Glasgow Financial Alliance for Net Zero. Mark Carney updated us earlier this morning that we're now at over 500 financial institutions and are approaching over 40 countries who manage over 150 trillion in assets. Having committed to the goal of net zero portfolio emissions by 2050. What do you see as the key achievements over the first year of the Alliance?

So COP26 was very much around the private sector working with the public sector to give financial commitment to the promises of net zero. So it was all about commitment. It was all about the provision of money and talking about the provision of money to work with the public sector to really put in place blended finance solutions to fund the investment program needed to get industry to be net zero by 2050. But there are a lot of unanswered questions. So if the money is there and there's a quantification of the money available, how is it going to happen? And the difference between COP 26 for me and COP27 is, in that year, there was a lot more granular discussion around the methodology for bringing the finance into play, not just the quantity of finance, but the how, what is really meant by blended finance. And what we did is we worked on a number of projects. For example, the Jet P program for Indonesia, the Jet P program for Vietnam, a similar program in South Africa. And then Egypt themselves have their own portfolio of projects where the public sector in each of those countries and the private sector equity and private sector debt looks at those, that portfolio of projects, to try and come up with a framework for funding that specific portfolio of projects to Vietnam, for Indonesia, for South Africa and for Egypt. And to take the concept of blended finance down to a more granular level, and to talk about the deal structures, and to talk about how, for example, the MDBs need to change there, we believe, could adapt their business model to take a more horizontal view of risk rather than a complete vertical view of risk. And then how private sector finance, if they do that, can come in and provide private sector equity alongside the MDBs, alongside government policy and alongside private sector debt. And we started to talk at quite a granular level about the funding packages for those. So we were involved in Indonesia, Vietnam and Egypt; other banks who are involved in Vietnam and Egypt and Indonesia and also Africa. That's the difference between 27 and 26. The other thing on 27 is all of the standard setters with the FSB, the IFRS, the World Bank, the IMF, IASCO were there as well, and we talked about disclosure requirements for the industry and how we take those promises and provision of finance into a more tangible set of disclosures for banks, for asset managers, for investors. And what should be done, and particularly everyone focuses on measuring carbon emissions. What we try to do is say, it's not just about measuring today's emissions. It's also about measuring the journey that each company and each bank's going to go on and the transition plan for companies and the transition plan for financial institutions. So we had another stream of work on standard setting.

I think playing on that standard setting, 2027, I think one of the comments that I understand you made was highlighting the importance of science based elements to underpinning the corporate transition. Would you elaborate on that?

Yes. Listen, there's an awful lot of dialogue -- and actually, the dialogue started even in Egypt, Todd, where we got to really measure today's emissions and make sure there is an audit trail on there. It's challenged, it's robust. I agree with that. My one comment was don't spend the next 2 years agreeing the methodology globally for how to measure today and forget about the really important task is how are you going to measure the journey for tomorrow. And the transition plan is the journey for tomorrow. So having greater disclosure at a corporate level for companies to publish their transition plans is probably as important as companies publishing their current carbon footprint. Because knowing today won't solve for tomorrow. The transition plan solves for tomorrow. And then for a bank, our job, my job with relationship managers, banking those corporates is to make sure those relationship managers are able to have a dialogue with those companies they bank about the journey they're going to go on for the next 20, 30 years. What investments they're going to make in green or renewable energy, in lowering their carbon footprint. And then the bank's transition plan becomes the aggregate of the companies we bank. And those transition plans can't be the absence of science. You need to underpin those transition plans with something that has that testing mechanism, that check and balance mechanism that says, well, the science says this is what your curve should be. Does your transition plan match to that curve for this industry sector? I'll give you an example. Sustainable aviation fuel for the airline sector, we all believe that's the right answer. But at the moment, there isn't the capacity to produce the staff needed and the quantities to change the carbon footprint of the airline sector. So the curve for the airline sector is going to be very different to the curve for the passenger vehicle sector where electrification is happening and is likely to be materially impacting the economy in the next 10 to 15 years. That is not true for the airline sector at the moment because we haven't built the capacity to produce that. That curve needs to be different. So it's got to be grounded in science but it has to be granular, ideally led by corporates and then assessed by financial services.

Some today have expressed a degree of optimism with the pace at which things are occurring. Do you share that optimism? And then the second piece of that, just roll forward, we're now a year away from November of 2023, where COP 28 will be in the Emirates. What are your expectations?

Yes. If you go back 5 years ago, most of the debate was, is there a problem or isn't there and people were having to be convinced that there was a problem. I don't think that's the case now. In any dialogue I have with CEOs, chairmen of companies we bank, I don't hear them trying to defend the status quo. I hear them embracing the change. And I think what we're now doing is seeing that shift into I'm embracing the change and here's my plan. Now plans are changing, are a mixed level of evolution and sophistication. But I'm very optimistic that the pace of change has moved beyond a debate about should we. It moved on then to a debate about we will do and here's my commitment, net zero by 2050. And we're now in Phase 3, which is here's my plan to make it happen. And the dialogue I'm having with clients is that pace of change is accelerating. We all wish we'd started 10 years or 20 years earlier what we have started, and the pace is picking up. And I was in India recently, met a number of clients there. The amount of investment that's going into renewable energy, hydrogen, wind, solar, electrification is breath taking from the private sector, supported by the public sector. I don't think you'd have had that conversation. I wouldn't have had those same conversations 3 years ago. projects are coming to the table now. So I'm optimistic.

COP 28 expectations, objectives.

More granularity. And I think we've got to start getting granularity on. We've talked for long enough about blended finance. I don't think there's 1 standard definition of blended finance, by the way, I think, but we've got to get it out of the concept and we've got to get it into and here's a package of projects that are being financed with blended finance structures for country x and country y. And we've got to try and take those projects and those templates and make them scalable. So it's not just project by project, but the template that works good for country X, we could take it to a country A, B, C D and E. And you don't have to go back and reinvent the wheel all the time. You've got a methodology for working with the MDBs, the public sector to bring projects like hydrogen or SAF to market, an appropriate package, public sector policy public sector or MDB money plus private sector money and there's a template, a contract structure that you can repeat on a number of occasions. We've got to get out of bespoke stand-alone methodology all the time.

You made reference to India. We were together in Hong Kong earlier in the month, it seems like a millennium ago for you and your travel. But just comments from your lens through HSBC and your other initiatives. Obviously, Asia, you referenced India, China, you referenced Vietnam, Indonesia, others. Just talk for a minute about the importance of Asia and particularly Southeast Asia in this.

Well, look, Asia is the manufacturing hub of so much of the world's supply chain, and around about 70%, 75% of Asia is powered by coal fire power. So there is a massive transition to take place across Asia. And I've got a very positive impression that there is a strong willingness to actually address systemically without all the answers yet been identified, how you transition off of coal fire power. But to do that, you've got to build the new energy sources first, and then you can transition. Without the new energy sources, it's hard to transition. So there's a lot of investment projects that I'm aware of going into the renewable side. Then the question is, how do you then be able to retire coal? Once you've got the capacity built up on the alternatives, you've got to then retire coal early. And how do you fund the early retirement of coal. And that can't be private sector alone. That's got to be a combination of public and private sector. And we're having that dialogue with Indonesia. We've had the dialogue, I think, with Vietnam as well. We're working with the Asian Development Bank on putting a portfolio of packages together as other banks are. But I think you've got to build the capacity first and then you do early retirement. Now early retirement has got to be genuine and it's got to be material. Early retiring by 5 years is probably not the answer. You've got to be looking at 10, 15 year early retirement and cancellations in some of the new build projects. But you've got to get that renewable funded first. And I was very encouraged by what I heard in India. Very encouraged.

Sticking with emerging markets for a second, Goldman Sachs has a carbon economics research team, estimates kind of 2 trillion to 3 trillion of investment, others have suggested even higher numbers on a per annum basis over the foreseeable future. And I think to get that transition, the emerging market is clearly an important part of it as you already referenced. How do you think, more so you've made reference already, the capital markets, governments, investors, the collaboration necessary to deploy the capital to achieve that investment?

Listen, some of the capital markets will not be available for some of these projects in the early years because their brand-new technology are relatively new with new cash flows that are unproven, with an energy cost that in the first few years is probably going to be uneconomic, maybe 3x the unit cost of the alternative at the current energy supply. So I think some of those projects in the development phase in the early phase is going to be hard to take to capital markets. That's why I think there is a role for public sector and MDBs and private sector equity and debt. We're going to have to play a role. And we do face a challenge. Most banks, corporate banks like ourselves, it's not very easy because of regulatory policy to do 20-year debt. It's penal or capital loaded. But equally, the capital markets aren't there to do 15- or 20-year debt in the early stages. So what's the funding source? And we're having dialogue with the regulators to say, if you really need private sector debt to put money into play over the long term, and maybe after 10 years, it can be taken out to the capital markets. But not in the first 5 years. And that's where -- and in some emerging markets, the real issue -- the real issue sometimes is political risk and currency risk in the developing markets. And that's where I think there's a role for MDBs to take a slice of risk as opposed to the whole risk spectrum. And that may be political risk on will the offtake agreement get interfered with from one regime to another, will the subsidy profile survive change of administration. That's risk that is very hard for the private sector to take where the capital markets will or on balance sheet for the banking sector. I think that's where the MDBs have got to come in and take some horizontal risk off the table to then allow the private sector to put equity and debt in with some of that risk taking off. That's less of an issue for the developed markets, but certainly a major issue for the developing markets.

And I'll come back to capital markets in a second, let's go specifically to HSBC for a minute. Some of the references you made on timetable, because I think increasingly, the realization, this is a transition. It's going to take years. You've made a declaration that you have an ambition to provide and facilitate between 750 billion and 1 trillion by 2030, specifically sustainable finance and other investments...

On the balance sheet and off, capital markets...

Just shed light a little bit on how you think about it. You just answered it in part, but some of the biggest impact that you think you're going to have towards sustainable growth with that.

Yes. I mean this, we measure progress against that, and we've got a very rigorous audit process internally to make sure projects that we finance in either on balance sheet or through capital markets, qualify against that criteria. And we got an assurance process in book. So far, we've done about 170 billion of the -- up to 1 trillion so we're making progress. Is sustainability or sustainability linked, in the early days, it was more bond capital markets, less on balance sheet. This year, end of last year, much more that is on balance sheet. So turning the corporate bankers into lenders for sustainability as opposed to advisers for capital markets activity. That's the big shift this year. And that's happening in commercial banking, mid-market corporate and large corporates. So funding hydrogen plants or funding electrification. We'll fund in changing carbon capture capability. So there's on-balance sheet projects being done there. But there's a lot more still to go. I think we'll get to the trillion because I think the pace of change is picking up as every year goes by. And more and more projects come into market.

You made reference to some of the tools that need to occur. Carbon pricing clearly is an element of that.

I'm a bit of a cynic on carbon pricing. I believe in the theory I just struggle to believe in the concept that all of the governments of the world would agree a framework for carbon pricing. I just don't think there is. Particularly cross-border carbon pricing, having one uniform methodology for carbon pricing is the right answer. Do I think the politics of today's world will ever get to that in the near term? Probably not. However, I do think voluntary carbon markets can get us a long way there, where you can basically allow the voluntary carbon markets to match investment -- sources of investment with projects that demand investment. And I think that is probably the best way to build the bridge between investment and demand, investment supply and demand. Maybe I'm going to be wrong on carbon pricing, but I don't hold out a huge amount of hope of a consensus on should we or shouldn't we.

Is there an element of carbon pricing versus carbon markets. So the...

It's carbon markets more than carbon prices.

And so just on that for a second, there remains a bit of a challenge around the markets about liquidity, the illiquidity, if you will, and just kind of the emergence of that, what's it going to take to have that emerge more fully if you think about a world of markets and you think about oil or copper, just general commodity market activity. Is there an opportunity for this to get to that level? What would it be?

Todd, I think we've got to be patient on this. This is a brand new market that's being created in a very complex world. I mean you know what copper is. It's copper. What is a good sustainable project requires much more definition than some of the existing markets. And it's getting that definition of sustainable projects at scale with legitimacy that then can allow investors to put the money. I think the supply is there, the appetite to invest is there. The biggest challenge is getting the supplier projects with credibility and definition that investors are willing to say, yes, I'm going to put my investment dollars into that. And I think time will get there, the architecture, our project definition and project legitimacy and authenticity will be developed over the coming years and that, therefore, will fuel the market. I think the concept of the market is easy. The practicality is all on the supply side, more so the demand side.

And do you see markets are -- there's various markets around the world. Do you see it emerging in any particular geography or is it truly global?

Everyone wants to be at the forefront of voluntary carbon markets. London does, Singapore does, Hong Kong does. I'm sure New York does as well. So everyone wants to get there. But everyone's got the same problem. Mostly, the projects that those markets are looking at are not in those markets. They're somewhere else. And their ability to get validated information on those projects is the common need, whether the market is operating in New York or Singapore or London, the project is somewhere else. And it's getting that definition of projects. And that's why under the SMI, working with the World Bank and others, we led the development of something called Fast Infra, which is a way of labeling sustainability projects with a robust methodology. So there's about 100 institutions that worked on that initiative, including the MDBs, to try and give a legitimacy to those projects. So if a project gets the label Fast Infra, it's gone through verification and analysis. And that definition has an audit trail back to a specific company -- country taxonomies. So the European taxonomy has an audit trail to Fast Infra. If Asia comes up with a taxonomy, it has an audit trail to Fast Infra. So you can understand how Fast Infra correlates to individual country taxonomies. If you can get something like that at scale, and we're just about to launch it with its own independent administrator, if you can get that to scale, you've got the ability to create a definition of supply of sustainable projects into a market trading environment that investors can then buy into.

Just for a second on pace of all this, I think at some level, degrees of optimism, other levels, it's still daunting you made reference to that started 10, 20 years ago. And yet you said to these conversations a degree of optimism that's come into the progress that's been made. A little bit of your calibration for all of us as to what do you think that timetable is? If you look at COP 26, COP 27, COP 28, what's happening? 500 institutions globally having signed up already, how do you see that timetable?

I suppose -- I'm going to give you an example of the automotive sector. By the middle of the 2030s, the passenger vehicle sector will have radically transformed itself in the space of 15 years, 20 years. It had Tesla as the initiator of it, but every one's then followed. I think there's going to be a similar pace of change taking place in most industrial sectors. Some of them are yet to identify their transition pathway. Clearly, I think agriculture, I just spoke to some investors about agriculture, I don't know that sector well enough personally and haven't researched it enough, but I haven't yet got a clear road map for the agricultural sector. I have a clear road map for the airline sector, I have a clear road map for passenger cars, a clear road map for the energy sector. I think what you're going to get in the next 10, 15 years is those road maps are going to be very well defined. And the successful companies are going to be early movers on that. And the laggards are going to have a challenge if they don't get on the journey. But I think the peer pressure within the sector, the competitive peer pressure within the sector gives me the confidence that there's going to be an awful lot of change taking place in the next 10 to 15 years. But some sectors are ahead of others.

Let's spend a minute on energy. Clearly, what's occurred in the energy affordability crisis. it started with the Russian-Ukrainian conflict, but it's been there for a long, long time, that just catalyzed in some respects. Again, your earlier reference of emerging markets are probably hardest hit their ability to deal with that shock, their ability to finance it to fund it. How do you see a global effort to try to get to a level of lower cost, more affordability, particularly as it relates to emerging markets?

I mean I think the war in Ukraine had a horrendous outcome and a horrendous event, but I believe it probably will have spurred companies and countries to invest even more in renewable and alternative energy sources. And you remember, most of those renewable energy sources are much more domestic than oil and gas, which is much more international. So, it's also more resilient nationally. So I think probably, in my view, I've not seen any weakening in the conversations I've been having with companies on their willingness to invest in renewals. If anything, I've seen an acceleration. There's also an acknowledgment that in the interim period, the current sources, oil and gas and gas in particular, probably need more investment in the near term, gas, in order to make sure we've got a reasonable transition journey from 2. And that's the real issue. But I don't see any weakening in the desire for renewables. I see an acceleration.

It's interesting. And from your perch at HSBC maybe transition a little bit to your broader lens into where we are economically, which at some level, you've seen a pullback in some of this discussion about transition that we need to be green right away. Maybe it's been constructive that there's an awareness that this is going to take time. And the pricing dynamics that we just referenced have calibrated that a little bit. But you wanted to share your perspective of where global economy is? And how does it relate to this if at all?

I mean the global economy is, I'm not an economist. There are much more informed wise people in this room on economics than me, but the 1 thing I would say about this versus COVID and versus GFC, this economic challenge we now face is not equal. It doesn't affect everybody equally. COVID affected everybody pretty equally. If I look at my own portfolio of businesses, the Middle East is booming, South and Southeast Asia is very strong, India, particularly. The U.K. challenged, but still strong. At the moment, I don't see the challenges that you see in press. I think some will come next year. Continental Europe and the U.K. probably are going to hurt more because of the proximity to the war in Ukraine and gas. The U.S. is still a strong economy. Hong Kong, China have been challenged with COVID. Fingers crossed there'll come a point, where COVID has been sorted in Hong Kong. China, there will come a day when COVID moves on for China, and there will be a rebound in China as a consequence of that. So it's not an equal effect all around the world. It's quite different. And for me, therefore, I can't look at the current economic challenge through one lens. I've got to look at it through multiple lenses, and make investment decisions and business decisions based on different market dynamics. It's not an equally impact the way COVID was. COVID was across the world.

Well, in the spirit of moving on, thank you very much for being with us, Noel. We really appreciate it. And we look forward to continuing the conversation.

It's a pleasure. Thanks, Todd. Thank you.