CASE STUDY: HSBC Climate Change Index

Quantifying the climate change opportunity

HSBC'S Global Climate Change Benchmark Index

The Problem

There are many economic studies highlighting the financial opportunities and benefits of tackling climate change. These models are useful for policy makers but investors need more detailed information about specific businesses and projects to invest in. 

Traditional socially responsible investment rating and screening approaches are too broad to pin point the winners in a low carbon economy. Main stream analysts have the appropriate tools but lack the knowledge about climate change science and policy to make sense of the emerging low carbon economy.

The question investors need an answer to is where should I put my money?

The Solution

Financial services companies are attempting to answer this question. They assess the potential of products and services that are likely to be in increased demand in the future due to climatic changes or increased legislation. They then either group these companies together in a fund or offer clients the opportunity to invest in an individual company or project.

HSBC's Approach

HSBC has tracked the performance of companies engaged in developing products and services that respond to a changing climate since 2004 and used this data to launch its Global Climate Change Index in September 2007.

The Index captures and tracks the stock market performance of companies around the world that are actively engaged in providing goods, products and services directly linked to climate change. The Index has shown the number of companies engaged in tackling climate change has increased from 166 in January 2004 to 390 in October 2008, with an average company value of US$4.8 billion.

Benchmark Index new composition as of September 2008

Joaquim de Lima, Head of Equity Quantitative Research said: "Since the launch of the Index there is strong evidence to suggest that tackling climate change represents a substantial economic opportunity. Annual revenues from the Climate Change Sector have reached US$300 billion, making it larger than the biotech and software sector combined."

The research has, for the first time, enabled the climate change sector to be clearly and quantitatively defined, comprising companies that operate in four key industrial groupings: Low Carbon Energy Production; Energy Efficiency and Energy Management; Water, Waste and Pollution Control; Finance, including carbon trading, based on the HSBC model built with advice from Lord Stern.

Companies are included in the Index when more than 10% of their revenues are derived from addressing climate change and the Index is reviewed annually to refine the investment themes in light of the evolving understanding of climate change science, policy and regulatory frameworks.

The index enables HSBC to tailor specific investment opportunities for clients wishing to target specific regions and sectors, as well as opportunities to create diversified portfolios across the entire emerging low carbon economy. This type of simple yet effective approach is exactly what investors are looking for.

HSBC has adopted the Climate Principles. This case study outlines how the organisation is meeting its commitment under Section 2.1.1, 'We will incorporate climate and carbon issues onto our research activities and, where relevant, will utilise the findings to develop products and services that benefit our customers and clients.'