HSBC has its eyes on significantly growing its Middle East operations. But as the world's largest exporter of oil, the region's carbon footprint is entrenched. We assess whether Europe's largest bank has the appetite to confront these issues head on.
A small but profitable region, the Middle East is a designated growth area for HSBC, alongside Asia.
The bank has committed up to $1trn globally to support clients transitioning to net zero…
…But admits it ability to do this in the Middle East “will take some time”, citing a lack of robust data.
At its AGM in May, HSBC will set out the next phase of its climate strategy, bowing to high-profile shareholder pressure to replace intangible long-term targets with a clear, science-based strategy. A signatory of the recent Glasgow Financial Alliance for Net Zero, the bank is finally walking in the right direction.
This is all well and good in a European context where EU policy and the huge swell of financial sector interest in all things ESG provide an enabling backdrop to transition. But how can the bank’s Middle Eastern operations, embedded in economies dependent on fossil fuel revenues, be brought into line with HSBC’s net-zero ambitions?
Credited with introducing European banking ideas to the region, HSBC has been at the heart of transition in the Middle East since its antecedent, Imperial Bank of Persia, was established in 1889. Even now, its ties to governments run deep. In 2019, it was the only bank on the top line of Saudi Aramco’s $29.4bn IPO and provides financing and advisory services to many of the region’s top state-owned companies.
Middle East and North Africa may, in terms of revenue, operate in one of the group’s smaller regions, but it is a profitable one, returning $19m pre-tax in 2020 versus losses in Europe of $4.2bn, which perhaps explains senior management’s intention to double down on the bank’s capital markets operations in the Middle East.
“From an HSBC point of view this is a region where this is really starting to happen,” says Gareth Thomas, head of global banking for Middle East, North Africa and Turkey (MENAT) at HSBC. “MENAT and Asia are our two designated growth regions,” he says. “It is essential that we get this whole agenda right as we deliver it here.”
In a place where glittering cities in the desert are built entirely on the riches of oil, the challenges of meeting the Paris Agreement are acute.
For example, with 99% of its energy coming from fossil fuels, Saudi Arabia – one of the bank’s most important countries – is one of the G20’s top CO2 emitters by unit of power, and has a “critically insufficient” climate policy, according to analysis by Climate Transparency. In short, the Gulf is not on track to meet Paris’s goals.
HSBC might not be either for that matter. But following pressure from ShareAction and a consortium of investors with $2.4trn of assets under management, HSBC in March pledged to publish and implement a policy to phase out the financing of coal-fired power and thermal coal mining. It also agreed to set clear targets to align the bank’s provision of finance to the Paris Agreement goals, starting with oil and gas and also power and utilities.
Is it possible for the bank to meet its dual objective of increasing financing activity in the Middle East, while at the same time drastically reducing its Scope 3 emissions?
Thomas recognises that this is a region with a long way to go to before becoming sustainable, with the balance of economic activity still skewed overwhelmingly to fossil fuels.
But, in a region dominated by government, economic transformation is the driving force that will see the green agenda widely adopted in the Gulf, he tells Capital Monitor.
A region in transition
After the price of oil crashed in late 2013, Gulf governments ramped up plans for economic diversification. New and sustainable energy sources were central to these sweeping reform programmes. The UAE, for example, plans to source 44% of its clean energy from renewable sources by 2050, while Saudi Arabia has said it will generate 50% of its energy from renewables by 2030.
Government-led projects like The Sustainable City, the first operational net-zero energy city in Dubai, and Saudi Arabia’s Neom, a $500bn sustainable city the size of Belgium, are projections of a region dedicated to innovation and change.
“The fact that sustainability and environment have become such an important topic globally fits at the point at which this region is really trying to develop and change the nature of its economy,” says Thomas. “The two are bound together.”
On the retail side too, the bank is meeting demand for green deposits, and in the UAE has developed green car loans and green mortgages (of which it has booked three so far in 2020). It also launched the Schroders Sustainable Multi-Asset Income Fund in the UAE, showing the global groundswell of green consciousness has reached the Gulf.
The bank has pledged to make financing decisions with a consideration for climate change, and to intensify its support for customers in their transition to lower carbon emissions. In October it committed to between $750bn and $1trn of financing and investment to help its clients globally transition to net zero.
Lack of visibility
But it is hard to see at this stage how the bank is actively prioritising financing and investment that lower carbon emissions because the data is not yet available, particularly with regards to the bank’s six designated high-risk transition sectors, which made up almost 20% of the group’s total wholesale loan exposure in 2020.
Sabrin Rahman, HSBC’s head of sustainability for Europe and the Middle East, says the bank is in the process of collating the data of financed emissions from its customer base to define what its net-zero pathway will look like for each sector towards 2050, but acknowledges this will “take some time”.
Market evidence is hard to decipher too, partly because green bonds are in their infancy in the Gulf. Sustainable bonds made up only 5% of the record volume of bonds issued in the Gulf last year (versus 15% globally). For the other 95%, there was no shortage of demand whatsoever, suggesting debt dynamics in the region have little do to with sustainability objectives, Thomas says.
In addition, lending banks are under no obligation to track the impact of their capital, with the onus on issuers to detail the effect of the funding. Bond issuers are expected to produce green bond reports to the market but for syndicated lending, borrowers are under no obligation to do so publicly. The ability of companies to choose which information is a made available is a clear weak link when it comes to sustainability reporting.
By 2020, HSBC Bank Middle East had facilitated green financing of $500m, up from $100m at the end of 2018, while its direct lending – project finance and green loans – stood at $2.3bn in 2020, up from $600m in 2018. This amounts to $2.8bn from the bank’s total sustainability target of $100bn, set in 2017.
And while the bank has played an integral role in deals like Etihad Airways’ first sustainability-linked $600m transition bond, Emirates NBD’s first sustainability-linked loan, and a $3.8bn Saudi riyal-denominated green loan for The Red Sea Development Company, it still continues to engage in substantial transactions with the oil industry.
On 10 April, EIG announced it had signed a $12.4bn deal to lead a consortium of investors to acquire 49% of Aramco Oil Pipelines Company, a newly formed entity with the rights to 25 years of tariff payments for oil transported through Aramco’s crude oil pipeline network. HSBC acted as financial advisor to EIG.
In 2019, ShareAction wrote to banks to urge them not to do business with Saudi Aramco, a company it identified in a letter dated 17 October 2019 as “the world’s single-largest corporate emitter of carbon dioxide”. The influential NGO still holds this position, saying it will not support an injection of fresh capital into a company that has no plans to transition in line with net zero.
We’ve seen banks like NatWest take a more public stance in asking their oil and gas major clients to publish credible transition plans by the end of 2021.Jeanne Martin, ShareAction
“There’s always this tension with HSBC on helping clients transition,” says Jeanne Martin, senior campaign manager at ShareAction. “I do think banks have a role in helping clients transition, but you have to be very clear about what you want them to do and what your red lines are.
“We’ve seen banks like NatWest take a more public stance in asking their oil and gas major clients to publish credible transition plans by the end of 2021.”
The Aramco deal follows a similar one involving the Abu Dhabi National Oil Company (ADNOC), which saw the UAE flagship lease the rights to 38 gas pipelines for over $10bn. A year earlier, it did the same for its oil pipelines. HSBC was involved with both, as was nearly every other major global bank.
Part of the journey
“I don’t think it will be reasonable to expect any of our clients to change their business models overnight,” says Thomas when questioned on the deal. “When you look at oil companies out of the region… it is about how they are diversifying.”
And while banks are starting to think hard about the viability of some client relationships going forward, Thomas is convinced that a policy of continued client engagement, alongside financing solutions like a ‘transition sukuk’, a Shariah-compliant green bond-like instrument, and green trade finance, are the best way to meet the bank’s global climate ambitions.
“I have been in several meetings with our CEO and clients and he has made it very clear that what we are not doing is walking away from clients and saying this is a too difficult category, we are definitely not doing that,” says Thomas. “Our commitment is to stay with those clients, to be part of their journey.
“The world I work in is governments and large corporates and it is pretty rare that you talk to a client who doesn’t get this. I have not come across a client who says I won’t change.”
As the prospect of flying cars in Neom and jet aircraft-speed trains in the UAE attest, the region does not want for ambition or innovation. Governments are clearly committed to the green agenda. But it remains to be seen whether a seat at the table of the world’s biggest oil producers is enough for HSBC to really effect the change it needs to see.
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