HSBC Holdings Regulatory News (HSBA)

Environmental, social and governance review

Our ESG review sets out our approach to our environment, customers, employees and governance. It also explains how we aim to achieve our purpose and deliver our strategy in a way that is sustainable and how we build strong relationships with all of our stakeholders.

44 Our approach to ESG

46 Environmental

73 Social

85 Governance

How we present our TCFD disclosures

Our overall approach to TCFD can be found on page 17 and additional information is included on pages 68 and 423. Further details have been embedded in this section and the Risk review section on pages 221 to 230. Our TCFD disclosures are highlighted with the following symbol: TCFD

Our approach to ESG

We are on a journey to incorporate environmental, social and governance principles throughout the organisation, and are taking steps to embed sustainability into our purpose and corporate strategy.

About the ESG review

Our purpose is: 'Opening up a world of opportunity'.

To achieve our purpose and deliver our strategy in a way that is sustainable, we are guided by our values: we value difference; we succeed together; we take responsibility; and we get it done.

We also need to build strong relationships with all of our stakeholders, who are the people who work for us, bank with us, own us, regulate us, and live in the societies we serve and on the planet we all inhabit.

Transition to net zero

We have continued to take steps to implement our climate ambition to become net zero in our operations and our supply chain by 2030, and align our financed emissions to net zero by 2050. We have expanded our coverage of sectors for on-balance sheet financed emissions targets, noting the challenge of evolving methodologies and data limitations. In addition, our operating environment for climate analysis and portfolio alignment is developing. We continue work to improve our data management processes and are setting targets to align our provision of finance with the goals and timelines of the Paris Agreement.

In March 2022, we announced plans to turn our net zero ambition for our portfolio of clients into business transformation across the Group. The plan involves the publication of a Group-wide climate transition plan in 2023. We continued our work to review and update our wider financing and investment policies critical to achieving net zero by 2050, which included publishing an updated energy policy and thermal coal phase-out policy in December 2022. 

We are also working with peers and industry bodies to help mobilise the financial services industry to take action on climate change, biodiversity and nature.

Building inclusion and resilience

Our social pillar is centred around building inclusion and resilience for our colleagues and customers, as well as in the communities we serve.

We are committed to ensuring our people - and particularly our leadership - are representative of the communities that we serve, and that we support their well-being and development so they can learn and grow in their careers. We are equally committed to ensuring there are no unnecessary barriers to finance for our customers. We have an ambition to create a welcoming, inclusive and accessible banking experience.

Inclusion goes hand-in-hand with resilience. We build resilience for our colleagues by supporting their physical, mental and financial well-being, and by ensuring they are equipped with the skills and knowledge to further their careers during a period of significant economic transformation. For our customers, we build resilience primarily through education - by helping them to understand their finances and how to manage them effectively.

Acting responsibly

Our governance pillar focuses on our approach to acting responsibly and recognises topics such as human rights, conduct and data integrity.

Our policies and procedures help us provide the right outcomes for customers, including those with enhanced care needs, which in 2022 took into account the current cost of living crisis. Customer experience is at the heart of how we operate and is measured through customer satisfaction and customer complaints.

We continue our journey to embed ESG principles across the organisation, including incorporating climate change-related risks within the risk management framework, training our workforce, incorporating climate-related targets within executive scorecards, and engaging with customers and suppliers.

Environmental - Transition to net zero

• Since 2020, we have provided and facilitated $210.7bn of sustainable finance and investment towards our ambition of $750bn to $1tn by 2030. We monitor developments in taxonomies and changing market guidelines in this space.

• In December, we updated our energy policy as an important mechanism to help deliver our financed emissions targets and phase down fossil fuel financing in line with our net zero ambition, and introduced further restrictions for thermal and metallurgical coal.

• We have introduced on-balance sheet financed emissions targets for eight sectors, noting the limitations of evolving methodologies and data quality.

> Read more in the Environmental section on page 46.

Social - Building inclusion and resilience

• In 2022, 33.3% senior leadership roles were occupied by women, with a target to achieve 35% by 2025. We have put in place important foundations to support our goal of doubling the number of Black employees in senior leadership roles by 2025.

• Employee engagement, which is our headline measure, increased to 73% in 2022 following a five-point increase from 2019, and was three points above benchmark.

> Read more in the Employees section on page 74.

Governance - Acting responsibly

• We conducted a review of our salient human rights issues, including stakeholder consultation with non-governmental organisations ('NGOs') and potentially affected groups.

• Our customer satisfaction performance, using the net promoter score, improved in many markets in which we operate. However, we still have work to do to improve our rank position against competitors, as some have accelerated their performance faster than us.

> Read more in the Governance section on page 85.

How we decide what to measure

We listen to our stakeholders in a number of different ways, which we set out in more detail within the 'ESG overview' on page 14. We use the information they provide us to identify the issues that are most important to them and consequently also matter to our own business.

Our ESG Committee and other relevant governance bodies regularly discuss the new and existing themes and issues that matter to our stakeholders. Our management team then uses this insight, alongside the framework of the ESG Guide (which refers to our obligations under the Environmental, Social and Governance Reporting Guide contained in Appendix 27 to The Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited), and the LR9.8.6R(8) of the Financial Conduct Authority's ('FCA') Listing Rules, and other applicable laws and regulations to choose what we measure and publicly report in this ESG review.

Under the ESG Guide, 'materiality' is considered to be the threshold at which ESG issues become sufficiently important to our investors and other stakeholders that they should be publicly reported. We are also informed by stock exchange listing and disclosure rules globally. We know that what is important to our stakeholders evolves over time and we plan to continue to assess our approach to help ensure we remain relevant in what we measure and publicly report.

Recognising the need for a consistent and global set of ESG metrics, we monitor the developments related to International Sustainability Standard Board ('ISSB') and other standard setters. In the absence of a globally consistent set of sustainability standards, we continued to report against the core World Economic Forum ('WEF') 'Stakeholder Capitalism Metrics' and Sustainability Accounting Standards Board ('SASB') metrics this year.

Consistent with the scope of financial information presented in our Annual Report and Accounts, the ESG review covers the operations of HSBC Holdings plc and its subsidiaries. Given the relative immaturity of ESG-related data and methodologies in general, we are on a journey towards improving completeness and robustness.

> For further information on our approach to reporting, see the 'Additional information' section of page 422.

Our reporting around ESG

We report on ESG matters throughout our Annual Report and Accounts, including the 'ESG overview' section of the Strategic Report (pages 14 to 19), this ESG review (pages 44 to 96), and the 'Climate risk' and 'Insights from climate scenario analysis' sections of the Risk review (pages 221 to 230). In addition, we have other supplementary materials, including our ESG Data Pack, which provides a more granular breakdown of ESG information.

> For further details of our supplementary materials, see our ESG reporting centre at www.hsbc.com/esg.

Assurance relating to ESG data TCFD

HSBC Holdings plc is responsible for preparation of the ESG information and all the supporting records, including selecting appropriate measurement and reporting criteria, in our Annual Report and Accounts, ESG Data Pack and the additional reports published on our website.

We recognise the importance of ESG disclosures and the quality of data underpinning it. We also acknowledge that our internal processes to support ESG are in the process of being developed and currently rely on manual sourcing and categorisation of data. Certain aspects of our ESG disclosures are subject to enhanced verification and assurance procedures including the first and second line of defence. We aim to continue to enhance our approach in line with external expectations.

For 2022, ESG data is subject to stand-alone independent limited assurance reports by PwC in accordance with International Standard on Assurance Engagements 3000 (Revised) 'Assurance Engagements other than Audits or Reviews of Historical Financial Information' and, in respect of the greenhouse gas emissions, in accordance with International Standard on Assurance Engagements 3410 'Assurance Engagements on Greenhouse Gas Statements', issued by the International Auditing and Assurance Standards Board, on the following specific ESG-related disclosures and metrics:

• our Green Bond Report 2022 (published in December 2022);

• our financed emissions for 2019 and 2020 for six sectors (see page 50);

• our progress towards our ambition to provide and facilitate $750bn to $1tn of sustainable finance and investment (see page 57);

• our own operations' scope 1, 2 and 3 (business travel) greenhouse gas emissions data (see page 63), as well as supply chain emissions data; and

• our 2019 baseline for financed emissions covering 38% of assets under management for our asset management business (see page 56).

The work performed by external parties to support their limited assurance report is substantially less than the work performed for a reasonable assurance opinion, like those provided over financial statements.

Our data dictionaries and methodologies for preparing the above ESG-related metrics and third-party limited assurance reports can be found on: www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre.

Environmental TCFD

Transition to net zero

We are developing new solutions to the climate crisis and supporting the transition of our customers, industries and markets to a net zero future, while moving to net zero ourselves.

At a glance

Transition to net zero

Our net zero ambition represents one of our four strategic pillars. At the core of it is an ambition to support our customers on their transition to net zero, so that the greenhouse gas emissions from our portfolio of clients reaches net zero by 2050. We also aim to be net zero in our operations and supply chain by 2030. We have made good progress on our net zero ambition, including publishing an updated energy policy as an important mechanism to meeting our financed emissions targets, and expanding our financed emissions targets to eight sectors in total. We aim to provide and facilitate $750bn to $1tn of sustainable finance and investment to support our customers in their transition to net zero and a sustainable future by 2030. We continue to engage with our clients on their transition plans and to provide them with financing solutions to support their sustainability goals.

Our approach to climate risk

We recognise that to achieve our climate ambition we need to enhance our approach to managing climate risk. We have established a dedicated programme to develop strong climate risk management capabilities.

We manage climate risks in line with our risk management framework and three lines of defence model. We also use stress testing and scenario analysis to assess how these risks will impact our customers, business and infrastructure. This approach gives the Board and senior management visibility and oversight of the climate risks that could have the greatest impact on HSBC, and helps us identify opportunities to deliver sustainable growth in support of our climate ambition.

For further details on our approach to climate risk management, see 'Environmental, social and governance risk' on page 139, 'Climate risk' on page 221 and 'Insights from scenario analysis' on page 226.

Impact on reporting and financial statements

We have assessed the impact of climate risk on our balance sheet and have concluded that there is no material impact on the financial statements for the year ended 31 December 2022. We considered the impact on a number of areas of our balance sheet including expected credit losses, classification and measurement of financial instruments, goodwill and other intangible assets, our owned properties, as well as our long-term viability and going concern. As part of assessing the impact on our financial statements we conducted scenario analysis to understand the impact of climate risk on our business (see page 67). For further details on our climate risk exposures, see page 145.

For further details of how management has considered the impact of climate-related risks on its financial position and performance see our 'Critical accounting estimates and judgements' in Note 1 'Basis of preparation and significant accounting policies' from page 335.

Transition to net zero TCFD

Understanding our climate reporting

The transition to net zero is one of the biggest challenges for our generation

We recognise that our planet urgently needs drastic and lasting action to protect our communities, businesses and the natural environment from the damaging effects of climate change.

Our ability to meet our net zero ambition - to align the financed emissions of our portfolio to net zero by 2050, and to become net zero in our operations and supply chain by 2030 - relies on the pace of change taking place in the real economy and action among a broad set of stakeholders, including policymakers. This will include responsible actions from both HSBC and our clients to address climate change.

We acknowledge that to achieve our climate ambition we need to be transparent on the opportunities, challenges, related risks and progress we make. Our reporting will need to evolve to keep pace with market developments and we will aim to overcome challenges with regard to consistency across different markets in which we operate. The role of standard setters and regulators will be important in achieving standardisation. We have highlighted below some of the limitations and challenges that our organisation, and the wider industry, face with regard to climate reporting.

Our transition will be challenging but we have an opportunity to make an impact

Our global footprint means that many of our clients operate in high-emitting sectors and regions that face the greatest challenge in reducing emissions in the critical decades ahead to 2050. Their ability to transition effectively will be key to reaching a global net zero economy in time, but they are often faced with increasingly high energy demand, relatively new carbon-intensive assets, and lower level of investments into clean technologies.

Our approach is rooted in engagement with our clients to provide them with the capital and tools to help them transform their business models and decarbonise. It is also rooted in the reality that a just and inclusive transition requires us to consider region-specific challenges and opportunities. Additionally, countries are moving at different speeds and, given our geographical and sectoral spread, we will naturally have one of the most complex transitions.

Limited international alignment on green taxonomies

Green finance taxonomies are not consistent globally, and evolving taxonomies and practices could result in revisions in our sustainable finance reporting going forward. We recognise that there can be differing views of external stakeholders in relation to these evolving taxonomies, and we will seek to align to enhanced industry standards as they are further developed. We aim to increase transparency across the different types of green and transition finance and investment categories going forward, and plan to engage with standard setters to help evolve sustainable finance product standards to best incentivise science-based decarbonisation, particularly in high transition risk sectors.

Engagement with clients on their transition at an early stage

Success will require governments, clients and finance providers to work together. Stable and strong policy environments are critical to accelerating the energy transition. Active engagement between public and private stakeholders is fundamental to de-risk new technologies and markets and establish new business structures.

We established a new process to assess client transition plans for our largest energy sector clients and those involved in thermal coal to help inform areas for further engagement and guide business decisions. We acknowledge that our assessment of client transition plans is in the initial stages and our engagement with clients on their plans and progress will need to continue to be embedded.

In December 2022, following extensive consultation with scientific and industry bodies, we published our updated energy policy and an update to our thermal coal phase-out policy. These policies acknowledge a need to phase down financing of fossil fuels while also investing at scale in climate solutions to enable a transition to net zero.

Need for enhanced governance, processes, systems, controls and data

Our climate ambition requires enhanced capabilities including governance, processes, systems and controls. We also need new sources of data, some of which may be difficult to assure using traditional verification techniques. We continue to invest in our climate resources and skills, and develop our business management process to integrate climate impacts. Our activities are underpinned by efforts and investment to develop our data and analytics capabilities and to help ensure that we have the appropriate processes, systems, controls and governance in place to support our transition.

We are taking steps to establish an ESG data utility tool to help streamline and support data needs across the organisation. We are enhancing our processes, systems, controls and governance to help achieve the required scale to meet the demands of future ESG reporting. Certain aspects of our reporting rely on manual sourcing and categorisation of data. This categorisation of data is not always aligned with how our businesses are currently managed. We also have a dependency on emissions data from our clients. Given the manual nature, enhanced verification and assurance procedures are performed on a sample basis over this reporting including the first and second line of defence. Our models undergo independent review by an internal model review group, and we obtain limited assurance on our financed emissions and sustainable finance disclosures from external parties including our external auditors.

Understanding our climate reporting continued

Capturing the full-scope of our emissions

Having set on-balance sheet 2030 emissions targets for the oil and gas, and power and utilities sectors, we have now expanded our coverage to include heavy industry and transport sectors, which are key drivers of energy demand. These sectors cover the most emissions-intensive parts of our portfolio. We plan to extend our analysis to four additional sectors - shipping, agriculture, commercial real estate and residential real estate - in our Annual Report and Accounts 2023 and related disclosures.

Our initial focus has been on on-balance sheet financing, including project finance and direct lending. We also have facilitated emissions from our capital markets activities, through our underwriting in debt and equity capital markets and syndicated lending. We aim to update our targets and baselines to include both on-balance sheet and off-balance sheet activities following the publication of the industry standard for capital markets methodology by the Partnership for Carbon Accounting Financials ('PCAF'). This should give guidance on how to apportion the emissions responsibility between a facilitator and an investor within capital markets activities.

Our Asset Management business released a coal phase-out policy in September 2022, and made its initial emissions disclosure in November 2022 with a portfolio decarbonisation target for 2030 to align investments with the goals of the Paris Agreement. The commitment covers listed equity and corporate fixed income where data and methodologies are most mature. We will also consider the inclusion of emissions on our insurance business.

Disclosure challenges for year-end reporting

Given the challenges on data sourcing, as well as the evolution of our processes and industry standards as mentioned above, there has been an impact on certain climate disclosures:

- Thermal coal exposures: We acknowledge that our processes, systems, controls and governance are not yet designed to fully identify and disclose thermal coal exposures, particularly for exposures within broader conglomerates. We are reassessing the reliability of our data and reviewing our basis of preparation to help ensure that we are reporting all relevant thermal coal exposures aligned to our thermal coal policy. As a result, we have not reported thermal coal exposures in this Annual Report and Accounts 2022. We expect that our updated thermal coal exposure dating back to 31 December 2020 will be made available for reporting as soon as practicable in 2023, although this is dependent on availability and quality of data.

- Facilitated emissions: In March 2022, we said we would set capital markets emissions targets for the oil and gas, and power and utilities sectors based on the industry reporting standard from the PCAF once published. We have chosen to defer setting targets for facilitated emissions until the PCAF standard for capital markets is published, which is expected in 2023. We had intended to disclose facilitated emissions for 2019 and 2020 for the oil and gas, and power and utilities sectors for transparency, as we did last year. However, following internal and external assurance reviews performed during the year, we identified certain data and process limitations and have deferred the publication of our facilitated emissions for 2019 and 2020 for these two sectors while additional verification procedures are performed. We aim to provide these disclosures as soon as practicable in 2023. We continue to monitor the developments in industry standards for the publication of such emissions and associated targets, and, as mentioned above, we will seek to align to the PCAF standard when published. However, we will aim to provide transparency on our 2019 and 2020 facilitated emissions for the oil and gas, and power and utilities sectors as they become available, which may be in advance of the PCAF standard being available.

- Shipping financed emissions targets: For the shipping sector, we have chosen to defer setting a baseline and target until there is sufficient reliable data to support our work, allowing us to more accurately track progress towards net zero.

Continuing to evolve our climate disclosures

In 2023, we plan to publish our first Group-wide climate transition plan to provide further details of our strategic approach to net zero and how we plan to transform our organisation to execute our ambition. We also aim to publish an updated deforestation policy and build out our financed emissions portfolio coverage to include agriculture, residential real estate, commercial real estate and shipping, and plan to update our targets for certain sectors to include facilitated emissions once the PCAF standard is launched.

In 2023, we will continue to review our approach to disclosures, with our reporting needing to evolve to keep pace with market developments.

> For details of assurance around ESG data, see page 45.

> For details of our approach to calculating financed emissions and the relevant data and methodology limitations, see page 52.

> For details of our sustainable finance and investment ambition, see page 57.

> For details of our approach to thermal coal, see page 66.

Awarded as a green lease leader

We are carrying out a programme to promote green lease clauses across our global portfolio of leased buildings, which commit our landlords to helping us reduce our impact on the environment. As part of this programme, in May 2022, we agreed to move our US headquarters to The Spiral office tower at 66 Hudson Boulevard in Manhattan, New York, which we expect to reduce our total energy consumption by 60% compared with 2021. The Spiral is on track to achieve industry leading LEED Gold and Fitwel certifications for sustainability and building health. Alongside our real estate broker JLL, and our landlord Tishman Speyer, we were recognised by the Green Lease Leaders Organisation with a Green Lease Leaders Team Transaction Award - Platinum Level, for our collaboration to improve the energy efficiency and sustainability of buildings.

Our approach to the transition

We are committed to a net zero future. Our global footprint means we play a significant role in the sectors and regions most critical to the transition to net zero. Many of our clients operate in the high-emitting sectors and regions that face the greatest challenge in reducing emissions. This means we can have a significant impact in helping to drive down emissions in the real economy, but this is a challenging process that will take time.

The Paris Agreement aims to limit the rise in global temperatures to well below 2°C, preferably to 1.5°C, compared with pre-industrial levels. To limit the rise in global temperatures to 1.5°C, the global economy would need to reach net zero greenhouse gas emissions by 2050. We are committed to a science-aligned phase-down of fossil fuel finance in line with the Paris Agreement.

We have committed to publish our own Group-wide climate transition plan in 2023. This plan will bring together our climate strategy, science-based targets, and how we plan to embed this into our processes, policies, governance and capabilities. It will outline, in one place, not only our commitments, targets and approach to net zero across the sectors and markets we serve, but also how we are transforming our organisation to embed net zero and help finance the transition. Our approach to nature and enabling a just and resilient transition will also be incorporated into our climate transition plan.

Our net zero policies

In December 2022, we published our updated policy covering the broader energy system, including upstream oil and gas, oil and gas power generation, coal, hydrogen, renewables and hydropower, nuclear, biomass and energy from waste. The policy seeks to balance three related objectives: driving down global greenhouse gas emissions; enabling an orderly transition that builds resilience in the longer term; and supporting a just and affordable transition. In December, we also expanded our thermal coal phase-out policy, in which we committed to not providing new finance or advisory services for the specific purposes of the conversion of existing coal-to-gas-fired power plants, or new metallurgical coal mines. Our updated energy and thermal coal phase-out policies were drafted in consultation with leading independent scientific and international bodies and investors. Details on the policies can be found in 'Our approach to sustainability policies' on page 65.

Working with our customers and suppliers

We believe we can make the most significant impact by working with our customers to support their transition to a net zero global economy.

We aim to align our financed emissions to net zero by 2050 or sooner. We are setting targets on a sector by sector basis that are consistent with net zero outcomes by 2050. In assessing financed emissions, we focus on those parts of the sector that we consider are most material in terms of greenhouse gas emissions, and where we believe engagement and climate action have the greatest potential to effect change, taking into account industry and scientific guidance.

We have set interim 2030 targets for on-balance sheet financed emissions for eight sectors. These include six sectors for which we have reported 2019 and 2020 emissions: oil and gas; power and utilities; cement; iron, steel and aluminium; aviation; and automotive. We have also set targets for thermal coal power and thermal coal mining.

In 2022, we established a process to assess client transition plans to help inform areas for further engagement and guide business decisions. We expect engagement with our customers on their transition plans to form a core part of our approach as we pursue our targets. We acknowledge that our assessment of client transition plans is in the initial stages and our engagement with clients on their plans and progress will need to continue to be embedded.

We aim to become net zero in our operations and supply chain by 2030. This covers our direct and indirect greenhouse gas emissions, known as scope 1, 2 and 3 emissions. As well as transforming our own operations and supply chain to net zero, we are asking our suppliers to do the same.

The next section provides further details on how we are measuring our progress on our financed emissions ambition. For further details of the progress made to date on our own operations and supply chain, see page 62. The diagram below shows how these ambitions map to our scope 1, 2 and 3 emissions.

Explaining scope 1, 2 and 3 emissions

To measure and manage our carbon emissions, we follow the Greenhouse Gas Protocol global framework, which identifies three scopes of emissions. Scope 1 represents the direct emissions we create. Scope 2 represents the indirect emissions resulting from the use of electricity and energy to run a business. Scope 3 represents indirect emissions attributed to upstream and downstream activities taking place to provide services to customers. Our upstream activities include business travel and emissions from our supply chain including transport, distribution and waste. Our downstream activities include those related to investments and financed emissions.

Under the protocol, scope 3 emissions are also broken down into 15 categories, of which we provide reporting emissions data for three related to upstream activities, which are: purchased goods and services (category 1); capital goods (category 2); and business travel (category 6). We also provide reporting data for one category related to downstream activities, which is investments and financed emissions (category 15).

> For further breakdown of our scope 1, 2 and 3 emissions, see our ESG Data Pack at www.hsbc.com/esg.

Financed emissions TCFD

We announced our ambition to become a net zero bank in October 2020, including an aim to align our financed emissions to net zero by 2050 or sooner. We plan to publish initial financed emissions targets for 2030, and in five-year increments thereafter. We remain committed to working with our customers to support their journey towards a net zero future, and deploying capital towards decarbonisation solutions for the most emissions-intensive sectors.

Our analysis of financed emissions considers on-balance sheet financing, including project finance and direct lending. We distinguish between 'on-balance sheet financed' and 'facilitated' emissions where necessary. Financed emissions link the financing we provide to our customers and their activities in the real economy, and provide an indication of the greenhouse gas emissions associated with those activities. They form part of our scope 3 emissions, which include emissions associated with the use of a company's products and services. We also recognise that we have more to do to embed these targets in our business, including enhanced capabilities and new sources of data as set out on page 47.

In 2021, we started measuring our financed emissions for two emissions-intensive sectors: oil and gas, and power and utilities. On the following pages, we present the progress for both sectors against the on-balance sheet financed emissions baseline that we now measure ourselves against. We have also begun measuring the financed emissions and setting targets for four additional sectors: cement; iron, steel and aluminium; aviation; and automotive. During our analysis of the shipping sector, we noted significant data gaps. We have therefore chosen to defer setting a baseline and target for this sector until there is sufficient reliable data to support our work.

We plan to measure and report progress on an annual basis, and plan to extend our analysis to four new sectors - shipping, agriculture, commercial real estate and residential real estate - in our Annual Report and Accounts 2023 and related disclosures. For the new sectors, we plan to set production intensity targets. We believe these targets are robust as they are linked to real world production, and allow us to deploy capital towards solutions for progressive decarbonisation, supporting our clients' transition plans.

Our approach to financed emissions

In our approach to assessing our financed emissions, our key methodological decisions were shaped in line with industry practices and standards. We recognise these are still developing.

Coverage of our analysis

For each sector, we focused our analysis on the parts of the value chain where we believe the majority of emissions are produced based upon industry benchmarks, and to help reduce double counting of emissions. For aviation, we have focused on scope 1 emissions from airlines and scope 3 from aircraft lessors as we believe the use of lower emissions aviation fuels and different propulsion systems for new aircraft is where attention needs to be prioritised to meet net zero targets. By estimating emissions and setting targets for customers that directly account for, or indirectly control the majority of emissions in each industry, we can focus our engagement and resources where we believe the potential for change is highest.

With regards to the different types of greenhouse gases measured, we include CO2 and methane (measured in CO2e) for the oil and gas sectors, and CO2 only for the remaining sectors due to data availability and greenhouse gas emissions materiality within each sector.

To calculate annual on-balance sheet financed emissions, we used drawn balances as at 31 December in the year of analysis related to wholesale credit and lending, which included business loans, trade and receivables finance, and project finance as the value of finance provided to customers. We excluded products that were short term by design, which are typically less than 12 months in duration, following guidance from the Partnership for Carbon Accounting Financials ('PCAF'), and to reduce volatility.

The chart below shows the scope of our financed emissions analysis of the six sectors, including upstream, midstream and downstream activities within each sector.

Key:

Setting our targets

We set targets for sectors based on decarbonisation pathways that are constructed using the Net Zero Emissions by 2050 scenario produced by the International Energy Agency ('IEA').

Following guidance from the Net-Zero Banking Alliance ('NZBA') and the Science Based Targets Initiative ('SBTi') this scenario has low reliance on negative emissions technologies, or the possibility for the rise in global temperatures to exceed 1.5°C before cooling again. The scenario makes reasonable assumptions about the potential for carbon sequestration through nature-based solutions and land use change.

Our approach for financed emissions accounting does not rely on purchasing offsets to achieve any financed emissions targets we set.

Meeting our targets for 2030 is dependent on immediate and significant deployment of available clean technology solutions, as shown by the IEA's Net Zero by 2050 roadmap for the global energy sector. Innovation in this decade needs to be accompanied by large‐scale construction of infrastructure to enable the implementation of cleaner technologies. This will require strong policy support and public and private capital to be deployed at scale.

We also recognise that the supply and demand side of the market need to move concurrently. The reduction of fossil fuels in favour of clean energy supply needs to be matched by an increase in demand from industry, buildings and transport to consume clean energy. Both the supply and demand still require significant policy support to enable this transition economically.

An evolving approach

We believe methodologies for calculating financed emissions and setting targets should be transparent and comparable, and should provide science-based insights that focus engagement efforts, inform capital allocation and develop solutions that are both timely and impactful. We continue to engage with regulators, standard setters and industry bodies to shape our approach to measuring financed emissions and managing portfolio alignment to net zero. We also work with data providers and our clients to help us gather data from the real economy to improve our analysis.

Scenarios used in our analysis are modelled upon allocation assumptions of the available carbon budget and actions that need to be taken to drive the global transition to 1.5°C outcomes. Assumptions include technology development and/or adoption, shifts in the energy mix, the retirement of assets, behavioural changes and implementation of policy levers, among others. We expect that scenario developers will be continually working to improve the usability, accuracy and granularity of pathways.

Leading the electric battery charge in Indonesia

We are supporting Hyundai in its journey to produce only electrical vehicles by 2040. We acted as a mandated lead arranger and lender towards a $711m loan to a joint venture company between Hyundai Motor, Kia, Hyundai Mobis and LG Energy Solution. The financing will help fund the construction of an electric vehicle battery manufacturing plant in Karawang, Indonesia, which would be the first in south-east Asia. The facility will have an annual production capacity of 10 gigawatt hours ('GWh')-worth of lithium-ion battery cells.

As the electric vehicle battery sector continues to grow, the facility will help establish Indonesia as an electric vehicle supply chain hub in Asia and be a crucial contributor to Hyundai's net zero ambitions in the region.

Connecting the offshore energy industry

The global transition to a net zero economy provides opportunities for companies looking to create new connections to renewable energy sources. UK-based JDR Cable Systems, which is part of TFK Group, links global offshore energy sources to the land using its subsea cable technology. As it looks to expand its production, and with the backing of UK Export Finance, we helped to provide a £100m investment loan to finance the building of a new facility in Cambois, near Blyth, Northumberland. The new facility, which occupies the site of a former coal-fired power station, will help JDR expand its product portfolio. It is expected to complete in 2024.

Financed emissions continued

Data and methodology limitations

Our financed emissions estimates and methodological choices are shaped by the availability of data for the sectors we analyse.

- We are members of Partnership for Carbon Accounting Financials ('PCAF'), which seeks to define and develop greenhouse gas accounting standards for financial institutions. PCAF developed the Global GHG Accounting and Reporting Standard for the Financial Industry, which focuses on measuring and reporting financed emissions. The PCAF Standard provides guidance on assigning data quality scoring per asset class, creating data transparency and encouraging improvements to data quality in the medium and long term.

- We found that data quality scores varied across the different sectors and years of our analysis, although not significantly. While we expect our data quality scores to improve over time, as companies continue to expand their disclosures to meet growing regulatory and stakeholder expectations, there may be fluctuations within sectors year on year, and/or differences between the data quality scores between sectors due to changes in data availability.

- The majority of our clients do not yet report the full scope of greenhouse gas emissions included in our analysis, in particular scope 3 emissions. In the absence of client-reported emissions, we estimate them using proxies based on company production and revenue figures, and validated key data inputs with our global relationship managers. Although we sought to minimise the use of non-company-specific data, we applied industry averages in our analysis where company-specific data was unavailable. As data improves, estimates will be replaced with reported figures. Our 2019 emissions for our oil and gas, and power and utilities sectors have been revised as a result of changes to data sources.

- Third-party data sets that feed into our analysis may have up to a two-year lag in reported emissions figures, and we are working with data providers to help reduce this.

- The methodology and data used to assess financed emissions and set targets are new and evolving, and we expect industry guidance, market practice, and regulations to continue to change. We plan to refine our analysis using appropriate data sources and current methodologies available for the sectors we analyse.

- In line with the PCAF Standard, to calculate sector-level baselines and annual updates, our portfolio-level financed emissions are weighted by the ratio of our financing in relation to the value of the financed company. We believe this introduces volatility and are assessing if portfolio weight is more appropriate. We remain conscious that the economic value used in the financed emissions calculation is sensitive to changes in drawn amounts or market fluctuations, and we plan to be transparent around drivers for change to portfolio financed emissions where possible.

- The classification of our clients into sectors is performed with inputs from subject matter experts and will also continue to evolve with improvements to data and our sector classification approach.

- The operating environment for climate analysis and portfolio alignment is also maturing. We continue to work to improve our data management processes, and are implementing steering mechanisms to align our provision of finance with the goals and timelines of the Paris Agreement.

Our methodology for financed emissions is set out in our Financed Emissions Methodology, which is available at www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre.

Targets and progress

We have set out in the table below our defined targets for the on-balance sheet financed emissions for the following sectors: oil and gas; power and utilities; cement; iron, steel and aluminium; aviation; and automotive. On the following pages, we provide more granular details on our financed emissions within these sectors.

1 Our absolute and intensity emission metrics and targets are measured based on the drawn exposures of the counterparties in scope for each sector, which is a subset of our total loans and advances. For the oil and gas sector, absolute emissions are measured in million tonnes of carbon dioxide ('Mt CO2e') and intensity is measured in million tonnes of carbon dioxide per exajoule ('Mt CO2e/Ej'); for the power and utilities sector, it is measured in tonnes of carbon dioxide equivalent per gigawatt hour ('tCO2/GWh'); for the cement sector, it is measured in tonnes of carbon dioxide per tonne of cement ('tCO2/t cement'); for the iron, steel and aluminium sector, it is measured in tonnes of carbon dioxide per tonne of metal ('tCO2/t metal'); for the aviation sector, it is measured in tonnes of carbon dioxide per million revenue passenger kilometres ('tCO2/million rpk'); and for the automotive sector, it is measured in tonnes of carbon dioxide per million vehicle kilometres ('tCO2/million vkm').

2 Our power and utilities target units have been revised from our 2021 analysis, and the target has been revised from 0.14 Mt CO2e/TWh to 138 tCO2/GWh due to rounding. The target value remains unchanged.

3 While the iron, steel and aluminium 2030 target is aligned with the IEA Net Zero Emissions by 2050 scenario, we also reference the Mission Possible Partnership Technology Moratorium scenario, whose 2030 reference range is shown in parentheses.

Financed emissions continued

When assessing the changes from 2019 to 2020, it is important to emphasise the long-term commitment that is needed to meet our 2030 interim targets and how changes to exposure and market fluctuations impact yearly updates. Movement from one year to the next may not reflect future trends for the financed emissions of our portfolio, and as we are at the beginning of our journey to track and measure progress, we believe it would be premature to infer future trends from the 2019 to 2020 progress at this stage. In addition, the Covid-19 pandemic led to anomalies in our portfolio's financed emissions for 2020.

For some sectors, our financed emissions baseline will be different from the Net Zero Emissions by 2050 reference scenario baseline. Where we have applied an absolute reduction target such as for the oil and gas sector, and the target is defined as a percentage reduction from the baseline they will be the same. Similarly, when the sector portfolio intensity is very similar to that of the global average, the baselines may be the same.

We plan to report financed emissions and progress against our targets annually and to be transparent in our disclosures about the methodologies applied. However, financed emissions figures may not be reconcilable or comparable year on year, and targets may require recalibration as data, methodologies and reference scenarios develop.

Oil and gas

For the oil and gas sector, we cover all scopes for upstream as well as integrated companies to help ensure we include the vast majority of CO2 and methane emissions created by crude oil and natural gas extraction and consumption. In line with the IEA Net Zero Emissions by 2050 scenario, we target an absolute reduction of 34% in on-balance sheet financed emissions by 2030, using 2019 as our baseline. We believe decarbonising the energy system, and therefore our ability to meet our targets, requires electrification of the economy, combined with a shift from consuming fossil fuels towards the use of more renewable electricity and alternative fuels.

Due to data quality and modelling improvements, we have revised our 2019 baseline to 33.0 million tonnes of carbon dioxide ('Mt CO2e'). The sector's PCAF data quality score is 2.7 for scope 1 and 2, and 2.9 for scope 3 in 2019, indicating that we need to find better data sources, such as reported and verified emissions. Many clients report scope 1 and 2, but for scope 3 we have had to estimate many data points using production and revenue proxies, in line with PCAF guidance. In 2020, absolute financed emissions decreased 9%, mostly as a result of changes in our portfolio during the first year of the Covid-19 pandemic.

Power and utilities

For the power and utilities sector, we include scope 1 and 2, and focus on power generation only. We also follow the IEA Net Zero Emissions by 2050 scenario and target an on-balance sheet financed emissions intensity of 138 tonnes of carbon dioxide equivalent per gigawatt hour ('tCO2/GWh') by 2030, using 2019 as our baseline. The power and utilities sector is expected to expand significantly as the electrification of transport, heating and other activities will drive an increase in electricity demand. To enable this growth through low-emission sources of electricity, we have chosen an intensity target. We believe financing for renewable electricity will need to increase significantly to help us meet our targets, alongside smart grids and energy storage.

Due to data quality and modelling improvements, we have revised our 2019 baseline to 589.9 tCO2/GWh, which is higher than the IEA global average. The PCAF score is 3.3, for scope 1 and 2 in 2019, as many of our smaller clients are not disclosing their scope 1 to 2 emissions. These have mostly been estimated using production or revenue, which will be replaced when we have reported and verified emissions from clients. In 2020, the emissions intensity of our portfolio decreased by 14% as a result of clients moving their generation mix to lower emission sources and portfolio shifts.

Cement

We cover scope 1 and 2 for all companies with clinker and cement manufacturing facilities. In line with the IEA Net Zero Emissions by 2050 scenario, we target an on-balance sheet financed emissions intensity of 0.46 tonnes of carbon dioxide per tonne of cement ('tCO2/t cement') by 2030, using 2019 as our baseline. Some emission reductions can be achieved through energy efficiency. However, we believe that to significantly reduce fuel and process emissions from cement manufacturing, and our ability to meet our targets, large-scale investments are required in new technologies, such as clinker substitution, alternative fuel use such as bioenergy, and carbon capture use and storage. Our 2020 emission intensity stayed level with 2019, as there were no significant changes to the emission intensity of our clients. The PCAF score for the cement sector is 2.2 for scope 1 and 2 in 2019, which is higher compared with other sectors, as we have reported emissions data for a large portion of our clients, and have only needed to estimate emissions through production or revenue proxies for the smaller clients in our portfolio.

Key

Iron, steel and aluminium

We cover scope 1 and 2 for midstream iron, steel and aluminium production. Due to the low materiality of the aluminium sector's financed emissions within our portfolio, we have combined them with our iron and steel financed emissions. For the iron, steel and aluminium sector, we target an on-balance sheet financed emissions intensity of 1.05 (1.43) tonnes of carbon dioxide per tonne of metal ('tCO2/t metal') by 2030, using 2019 as our baseline. We use the IEA Net Zero Emissions by 2050 scenario as our core target scenario, and have included the net zero-aligned Mission Possible Partnership Technology Moratorium as an alternative scenario. We recognise that our ability to meet our targets in so-called 'hard-to-abate' sectors is dependent on strong policy support to unlock widespread investment and the scaling up of crucial nascent technologies. We will continue to monitor the progress in the uptake of low-carbon technologies, and assess real economy progress against the IEA and Mission Possible Partnership scenarios. The emissions intensity in 2020 rose due to increased financing to the aluminium sector, which has a higher carbon intensity than that of steel. The PCAF score is 2.5 in 2019, as only a small number of clients have reported emissions, and for many we have had to make estimates based on their revenue.

Aviation

In the aviation sector, we included airlines' scope 1 emissions and aircraft lessors' scope 3 emissions, as we believe this captures direct emissions from aircraft as the main source of emissions. We exclude military and dedicated cargo flights. As per the IEA Net Zero Emissions by 2050 scenario, we target an on-balance sheet financed emissions intensity of 63 tonnes of carbon dioxide per revenue passenger kilometre ('tCO2/rpk') by 2030, using 2019 as our baseline. To reach these intensity levels, and help meet our targets, we believe the sector needs significant policy support investments into alternative fuels, such as sustainable aviation fuel, and new aircraft to reduce emissions. Sustainable aviation fuel is currently too costly and in limited supply, so the industry's decarbonisation efforts are highly dependent on partnerships between energy companies, airlines and aircraft manufacturers. Due to the travel disruption caused by the Covid-19 pandemic in 2020, emissions intensity figures increased significantly as aeroplanes carried fewer passengers on average. This can be seen in the IEA numbers as well as our client portfolio. For the aviation sector, the PCAF score is 2.8 for scope 1 and 2, and 2.8 for scope 3 in 2019, as emissions or production data is available for most clients, although we continue to have a challenge with finding reported emissions from smaller firms.

Automotive

For the automotive sector, we look at scope 1, 2 and 3 emissions from the manufacturing of vehicles, and tank-to-wheel exhaust pipe emissions for light-duty vehicles. We excluded heavy-duty vehicles from our analysis, following industry practice. We will consider including them at a later stage of our analysis as data and methodologies develop. We target an on-balance sheet financed emissions intensity of 66 tonnes of carbon dioxide per vehicle kilometre ('tCO2/vkm') by 2030, using 2019 as our baseline. This is in line with the IEA Net Zero Emissions by 2050 scenario, modified to match the share of new in-year vehicle sales for light-duty vehicles. We believe decarbonisation of the automotive sector, and therefore our ability to meet our targets, needs large-scale investments in new electric vehicle and battery manufacturing plants, widespread charging infrastructure, and government policies to support electric vehicles. Our 2020 intensity reduced by 8% as a result of clients manufacturing more efficient vehicles, and the increased sales of electric vehicles. The PCAF score for the automotive sector is only 3.3 for scope 1 and 2, and 3.4 for scope 3 in 2019, as most companies only report their scope 1 and 2 emissions. We had to estimate scope 3 emissions using vehicle production numbers. Increased self-reporting of scope 3 emissions from clients would significantly improve data quality.

Key

Our analysis of shipping emissions

As part of our work in 2022, we analysed financed emissions for the shipping sector to establish a baseline. During our analysis we noted significant data gaps in reported emissions and data from external vendors at the company level. For scope 1 emissions, which are typically the easiest to source, we would have needed to have made estimates using outstanding amounts rather than production or revenue indicators, which would have resulted in the least accurate data quality scoring. We have therefore chosen to defer setting a baseline and target for this sector until there is sufficient reliable data to support our work, allowing us to more accurately set a baseline and track progress towards net zero. We will continue to engage with strategic clients within the sector to encourage disclosure and discuss their transition plans. We believe the shipping industry will require significant policy support and innovation to allow for the use of lower emissions fuels in existing as well as new ships. On the supply side, the provision of low-carbon fuels will need to increase sufficiently to meet this new demand.

Financed emissions

The table below summarises the results of our assessment of financed emissions using 2019 and 2020 data.

1 Total amount of short-term finance excluded for all sectors listed is $9.3bn in 2019 and $7.6bn in 2020

2 Total loans and advances analysed in 2019 were $38.3bn representing 1.7% of wholesale credit and lending and project finance at 31 December 2019, and in 2020 were $34.7bn representing 1.7% of wholesale credit and lending and project finance at 31 December 2020.

3 PCAF scores where 1 is high and 5 is low. This is a weighted average score based financing for on-balance sheet financed emissions.

4 In the Annual Report and Accounts 2021 the units for power and utilities were reported last year as MtCO2e, and are now amended to Mt CO2. Oil and gas absolute emissions are measured in MtCO2e. This year we amended the units for the power and utilities sector from Mt CO2e/TWh' to tCO2/GWh to align to market practice. While the target value remains unchanged this has led to a revision in the figure reported from 0.14 Mt CO2e/TWh' to 138 tCO2/GWh.

5 Our 2019 emissions for our oil and gas, and power and utilities sectors have been revised due to changes in data impacting drawn amounts of client lending, and amendments to the assumptions governing the in-scope client population.

† Data is subject to independent limited assurance by PwC in accordance with ISAE 3000/ ISAE 3410. For further details, see our Financed Emissions Methodology and PwC's limited assurance report, which are available at www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre.

Our analysis of facilitated emissions

In March 2022, we said we would set capital markets emissions targets for the oil and gas, and power and utilities sectors based on the industry reporting standard from the PCAF once published. We have chosen to defer setting targets for facilitated emissions until the PCAF standard for capital markets is published, which is expected in 2023. We had intended to disclose facilitated emissions for 2019 and 2020 for the oil and gas, and power and utilities sectors for transparency, as we did last year. However, following internal and external assurance reviews performed during the year, we identified certain data and process limitations and have deferred the publication of our facilitated emissions for 2019 and 2020 for these two sectors while additional verification procedures are performed. We aim to provide these disclosures as soon as practicable in 2023. We continue to monitor the developments in industry standards for the publication of such emissions and associated targets, and, as mentioned above, we will seek to align to the PCAF standard when published. However, we will aim to provide transparency on our 2019 and 2020 facilitated emissions for the oil and gas, and power and utilities sectors as they become available, which may be in advance of the PCAF standard being available.

Financed emissions continued

Embedding financed emissions into our business

Our net zero ambition is underpinned by our relationships with customers and collective engagement, so that we are able to support our customers to take action to address climate change in their own activities.

To achieve this, we aim to embed how we manage and assess financed emissions within our financing portfolios to provide a basis for informing client engagement and business management decisions from a climate perspective.

In 2022, we developed an operating model across our Global Sustainability teams to strengthen our processes, systems, controls and governance. The Global Sustainability function also established a Sustainability Centre of Excellence, a team of sustainability specialists with deep subject matter expertise on new climate technologies, climate analytics and transition planning and assessment, to help us fulfil our net zero commitments and serve our customers.

The Global Sustainability Centre of Excellence, together with the Group Risk and Compliance, and Global Finance functions, have continued to develop our approach, including working to embed financed emissions into our business activities and culture. We have strengthened our climate data and analytics capability to help inform decision making and portfolio management, as well as expanded the resources to support business engagement.

We are placing climate and sustainability at the heart of our engagement with customers, and in particular those customers with the greatest potential to effect change. In 2022, we requested and assessed transition plans for EU and OECD managed clients in scope of our thermal coal phase-out policy. We have also requested and are assessing transition plans for our major oil and gas clients (see page 49).

We aim to provide and facilitate $750bn to $1tn of sustainable finance and investment by 2030 to support our customers in their transition to net zero and a sustainable future. In 2022, we also started to develop an approach for allocating financing to scale technologies critical to reach net zero.

Our own climate transition plan will bring together our financed emissions targets and climate strategy, with how we plan to embed this into our processes, infrastructure, governance and engagement.

The next section provides further detail on how we are embedding net zero considerations into our customer engagement and unlocking finance to support our customers on their transition to net zero and a sustainable future.

Reducing emissions in our assets under management

In July 2021, our asset management business, HSBC Asset Management, signed up to the Net Zero Asset Managers initiative, which encourages investment firms to commit to manage assets in line with the attainment of net zero emissions by 2050.

In November 2022, HSBC Asset Management announced its ambition of reducing scope 1 and 2 carbon emissions by 58% by 2030 for 38% of its total assets under management, consisting of listed equity and corporate fixed income, which amounted to $193.9bn at 31 December 2019.

A baseline year of 2019 was chosen for our calculations as it offered a more realistic picture of the level of carbon emissions intensity than the period after the pandemic. Our baseline for the emission intensity of our portfolio in 2019 was 131tCo2e/M$ invested, which includes scope 1 and 2 emissions of companies in our portfolio.

Our baseline represents the emissions associated with our investing activities in terms of emissions per dollar invested relevant of the assets under management in scope for this assessment. We will review our interim target at least every five years, with a view to increasing the proportion of assets under management covered until 100% of assets are included. Implementation of our net zero targets remains subject to consultation with our key stakeholders. We plan to stay actively engaged to help support our investors on their own decarbonisation goals, and continue to apply resources in the development of climate solutions.

To support the development of HSBC Asset Management's climate strategy and goal to deliver on its target, it has chosen to align to the Institutional Investors Group on Climate Change's net zero investment framework, which was created for investors to provide a common approach around the actions, metrics and methodologies required to align portfolios to net zero.

The PCAF data quality score for our baseline emissions was 2.63. Data is subject to limited assurance by PwC in accordance with International Standard on Assurance Engagements 3000 (Revised) 'Assurance Engagements other than Audits or Reviews of Historical Financial Information', and with respect of the greenhouse emissions, in accordance with International Standard on Assurance Engagements 3410 'Assurance Engagements on Greenhouse Gas Statements', issued by the International Auditing and Assurance Standards Board. For the methodology, PwC's limited assurance report, and details on HSBC Asset Management's net zero ambition, see www.assetmanagement.hsbc.com/net-zero.

Backing green SMEs in the UK

Panthera Group, a family-run construction company, launched EnviroHoard, the UK's first construction hoarding system to be verified as net zero carbon. In March, we supported the firm with the first ever loan through our $500m Green SME Fund, which we announced at COP26 as part of our commitment to supporting small and medium-sized businesses in their transition to net zero. Panthera will use the loan to grow its business in the UK. In 2022, Panthera reduced 446 tonnes of carbon emissions through its installations, and set up a partnership with Circular Ecology and Trees for Cities to help offset the carbon impact of its installations.

Supporting customers through transition TCFD

We understand that financial institutions have a critical role to play in achieving the transition to a net zero global economy. We believe the most significant contribution we can make is by mobilising finance to support our portfolio of customers in their transition to decarbonise.

Mobilising sustainable finance for our customers

Given our global presence and relationships with our customers across industries, we recognise the role we can play in catalysing the global transition to net zero. We are well positioned to help finance the transition in developing and emerging economies, mobilising capital to help enable sustainable business models and an inclusive, just and resilient transition.

In 2022, we continued to expand the horizons of sustainable finance through our products, services and partnerships to help enable emissions reduction in the real economy:

- We launched a $5bn sustainable finance scheme to support businesses of all sizes to transition to low-carbon operations in China's Greater Bay Area, with successful loan applicants entitled to a range of additional services including training, subsidised third-party assessments and assistance from a newly formed team with sustainable financing expertise.

- We created a sustainable supply chain finance programme for apparel company PVH Corp in the US to finance environmentally and socially friendly production at its manufacturing facilities (see page 97).

- We supported Panthera Group, a family-run construction company, to finance and grow the UK's first construction hoarding system to be verified as zero carbon, (see page 56).

- We expanded our green mortgage offering to our retail customers in Hong Kong, mainland China, India and Türkiye, as well as electric vehicle and energy efficiency loans to customers in Hong Kong, Egypt and Argentina.

- We committed to working collaboratively with the government of Egypt in its Nexus of Food, Water and Energy programme to identify ways to use scarce public finances effectively and efficiently, and help raise private finance to support priority projects from its national climate change strategy.

As part of the Just Energy Transition Partnership, which aims to mobilise capital towards emerging and developing economies to support their national climate strategies, we agreed to support the facilitation of at least $10bn of private sector financing for projects in Indonesia and $7.8bn for projects in Vietnam over the next three to five years.

In addition, we were also mandated to act on 12 ESG-related government bonds, including inaugural issuances for the governments of Singapore, Canada and Uruguay. In 2022, we secured six awards at the Environmental Finance Bond Awards, revealing the high regard in the market for our structuring and engagement work across green, social and sustainability bonds during 2021. In the IFR Awards 2022, we were named ESG Financing House of the Year. We were also recognised by Euromoney as the Best Bank for Sustainable Finance in Asia for the fifth consecutive year, and in the Middle East for the fourth.

Embedding net zero transition into our client engagement

In 2022, we requested and assessed transition plans for EU and OECD managed clients in scope of our thermal coal phase-out policy. We also requested and are assessing transition plans for our major oil and gas clients. In 2023, we expect to complete assessments for remaining clients in scope of our thermal coal phase-out policy. Similarly, we expect to complete assessments for major oil and gas and power and utilities clients globally as well as other clients in EU and OECD markets in scope of our energy policy.

Our assessments consider historical emissions and disclosures, emissions reduction targets, details of transition plans to achieve targets, and evidence of activities in line with these plans. Our assessment framework helps us to understand our clients' transition plans, develop an engagement strategy to help support them on their transition journey and help us achieve our net zero ambition. We acknowledge

that our assessment of client transition plans is in the initial stages and our engagement with clients on their plans and progress will need to continue to be embedded.

Sustainable finance and investment

We define sustainable finance and investment as any form of financial service that integrates ESG criteria into business or investment decisions. This includes financing, investing and advisory activities that support the achievement of UN Sustainable Development Goals ('SDGs'), including but not limited to the aims of the Paris Agreement on climate change.

The SDGs, also known as the Global Goals, were adopted by all UN member states in 2015 as a universal call to action to end poverty, achieve gender equality, reduce inequality, protect the planet and ensure that all people enjoy peace and prosperity by 2030.

We have reviewed and updated these definitions to reflect our updated climate ambition, which is available at www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre.

$210.7bn

Cumulative progress since 2020 on our ambition to provide and facilitate sustainable finance and investment.

(Ambition: $750bn to $1tn by 2030)

Supporting customers through transition continued

Financing the transition

We aim to help our customers transition to net zero and a sustainable future through providing and facilitating between $750bn and $1tn of sustainable finance and investment by 2030. Our sustainable finance ambition has promoted green, sustainable and socially-focused business alongside sustainable infrastructure and energy systems, and enhanced investor capital through sustainable investment.

Since 1 January 2020, we have provided and facilitated $185.3bn of sustainable finance, $19.0bn of sustainable investment and $6.4bn of sustainable infrastructure, as defined in our Sustainable Finance and Investment Data Dictionary 2022. This included 36% where the use of proceeds were dedicated to green financing, 13% to social financing, and 15% to other sustainable financing. It also included 27% of sustainability-linked financing and 9% of net new investments flows managed and distributed on behalf of investors. 

In 2022, our underwriting of green, social, sustainability and sustainability-linked bonds for clients decreased in line with the overall market, although remained at 15% of our total bond issuances. On-balance sheet sustainable lending transactions increased by 53%, compared with 2021. The outstanding sustainable finance on-balance sheet position was in excess of $24bn at 31 December 2022.

Sustainability-linked bonds are a recent innovation in the debt capital markets, which allow investors to manage their sustainability strategies by linking targets, and progress towards them, to the issuers' financing costs. These products do not require definitions of use-of-proceeds as they are linked to issuers' broader sustainability commitments.

Issuer commitments and strategies continue to develop and be included in medium- to long-term sustainability plans. We expect that sustainability-linked bonds will become increasingly meaningful for transparency in issuer performance against science-based transition pathways and other sustainability goals. We have supported customers within the high transition risk sectors to issue sustainability-linked bonds which support the transition to the net zero economy and a sustainable future.

We are working closely with industry bodies, such as the International Capital Markets Association ('ICMA'), to establish a robust set of standards for the market. The ICMA Sustainability-Linked Bond Principles provide guidelines on what is core, material and relevant in terms of key performance indicators, and provides advice on how targets should be assessed.

Our approach to financing net zero

In 2022, we started developing a strategy to help us orient how we allocate our financing solutions and capital to support our clients' transition to net zero and help deliver a significant decarbonisation impact to the global economy. The approach, based on the IEA's Net Zero by 2050 scenario, identifies the infrastructure, technologies and new business models critical for industries to transition to net zero. We recognise that we will need to adapt our capabilities in specific products and sectors to capture business opportunities and help finance the transition. In 2022, we made several investments to play a catalytic role, including through Pentagreen Capital, an innovative financing vehicle set up in partnership with Temasek, to accelerate sustainable infrastructure in south-east Asia, and with Breakthrough Energy Catalyst to gain expertise in nascent, 'new-economy, sectors aligned with our clients' net zero ambitions.

> Our data dictionary defining our sustainable finance and investments continues to evolve, and is reviewed annually to take into account the evolving standards, taxonomies and practices we deem appropriate. Our review involves reviewing and strengthening our product definitions, where appropriate adding and deleting qualifying products, making enhancements to our internal standards, and evolving reporting and governance. Our progress will be published each year, and we will seek to continue for it to be independently assured.

>  The detailed definitions of the contributing activities for sustainable finance and investment are available in our revised Sustainable Finance and Investment Data Dictionary 2022. For our ESG Data Pack, Sustainable Finance and Investment Data Dictionary and third-party limited assurance report, see www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre.

Sustainable finance summary1

1 This table has been prepared in accordance with our Sustainable Finance and Investment Data Dictionary 2022, which includes green, social and sustainability activities. The amounts provided and facilitated include: the limits agreed for balance sheet-related transactions provided, the proportional share of facilitated capital markets/advisory activities and the net new flows of sustainable investments within assets under management. In 2022, green liabilities were removed from the data dictionary, which resulted in $0.3bn removed from the published 2021 cumulative total.

2 The $210.7bn cumulative progress since 2020 is subject to limited assurance by PwC in accordance with International Standard on Assurance Engagements 3000 (Revised) 'Assurance Engagements other than Audits or Reviews of Historical Financial Information'. For our Sustainable Finance and Investment Data Dictionary 2022 and PwC's limited assurance report, see www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre.

3 For green, social and other sustainable use of proceeds, our capital markets products are aligned to either ICMA's Green Bond Principles, Social Bond Principles or Sustainability Bond Guidelines. Our lending labelled products are aligned to the LMA's Green Loan Principles, the LMA's Social Loan Principles or our sustainable trade instruments, which align the use of proceeds to the UN SDGs.

4 Sustainability use of proceeds can be used for green, social or a combination of green and social purposes.

5 Our sustainability-linked-labelled products are aligned to either the ICMA Sustainability-Linked Bond Principles or LMA Sustainability-Linked Loan Principles. The coupon or interest rate is linked to sustainability key performance indicators and the funds can be used for general purposes. Of the cumulative total of $56.5bn, $10.1bn relates to sustainability linked bonds and $46.4bn relates to sustainability linked loans. Within the sustainability linked loans, $13.1bn relates to lending to customers within the six high transition risk sectors (i.e. automobiles, chemicals, construction and building materials, Metals and mining, oil and gas, and power and utilities) as described on page 223.

6 Net flows of HSBC-owned sustainable investment funds that have been assessed against the Sustainable Finance and Investment Data Dictionary 2022.

7 Additional detailed information in relation to our sustainable finance and investment progress can be found in the ESG Data Pack.

Supporting customers through transition continued

Responsible and sustainable investment

We offer a broad suite of ESG capabilities across asset management, global markets, wealth, private banking and securities services, enabling institutional and individual investors to generate financial returns, manage risk and pursue ESG-related opportunities.

Our Asset Management business seeks to drive innovation at scale, and bring new propositions to the market for investors, including sustainable exchange-traded funds and lower-carbon investment solutions. We are committed to further developing our sustainable product range across asset classes and strategies, as well as enhancing our existing product set for ESG criteria where it is in the investors' interests to do so. In 2022, we launched 24 funds with a sustainable focus.

In our aim to support the transition to more sustainable ways of dealing with resources and waste, through the circular economy, HSBC Asset Management launched the HSBC Global Investment Fund ('HGIF') Global Equity Circular Economy fund.

To support its net zero ambition, HSBC Asset Management continued to add to the range of products aligned to Paris-aligned benchmarks, launching two exchange-traded funds in 2022 that invest in emerging markets and Asia-Pacific. These benchmarks' underlying assets are selected in such a manner that the resulting benchmark portfolio's greenhouse gas emissions are aligned with the long-term global warming target of the Paris Agreement.

In 2022, HSBC Asset Management's fixed income, equity and stewardship teams held over 1,000 meetings with companies in our portfolios. These included discussions on climate-related matters, with more than 60 of these having specific, targeted outcomes with climate objectives. We continue to engage with issuers, encouraging the reporting of emissions data, the setting of emissions reduction targets, the assessment of climate risk, and the development of robust transition strategies.

We expanded our investment offering for private banking and wealth clients with the launch of 22 sustainable investing mutual funds and exchange-traded funds in 2022. We offer a range of sustainable investment products across other asset classes, including equities, fixed income, discretionary and alternatives. We enhanced our ESG thematic products offering linked to indices. For example, we collaborated with Euronext and Iceberg Datalab to design the first broad-based biodiversity screened equity index family.

At HSBC Life, our insurance business, we are focused on ensuring our customers have more access to ESG investment fund options aligned to their ESG preferences. ESG funds invest only in companies with strong ESG credentials or in key ESG-related areas. We increased the availability of ESG investment fund options within our investment-linked products. During 2022, we launched in Hong Kong a new protection-linked plan with three ESG fund choices now available, and we launched our first ESG fund in Mexico.

Accelerating growth in geothermal and recovered energy

Ormat Technologies Inc., which has been operating in renewable energy production for more than 50 years, has developed expertise and global experience in the supply and development of geothermal, recovered energy and energy storage solutions. We supported Ormat in June 2022 with the issuance of a $431m green convertible bond, the proceeds of which will support Ormat grow its business and develop its renewable green energy projects.

Ormat now has a total generating portfolio of approximately 1.1 gigawatts, including a geothermal and solar generation portfolio across the US, Kenya, Guatemala, Indonesia, Honduras and Guadeloupe, as well as holding an energy storage portfolio in the US.

First ESG underwriting guide for life and health insurance

Our insurance business, HSBC Life, co-sponsored and co-led the first ESG underwriting guide for the life and health insurance sector. The guide was published by the United Nations Environment Programme Finance Initiative ('UNEP FI') Principles for Sustainable Insurance, a set of principles endorsed by the United Nations and the insurance industry.

This guide, which was published in June 2022, provides a framework for life and health insurers to evaluate a range of ESG risks and factors on the mortality, morbidity, longevity and hospitalisation risks when underwriting.

These include risk mitigation strategies alongside best practices for insurers to consider.

The guide was put together in collaboration with a global team of sustainability experts from 11 other member companies of the UNEP FI Principles for Sustainable Insurance. Its purpose is to reinforce the key role insurers need to play in helping to solve the major ESG challenges of our time, such as the spread of infectious diseases, biodiversity and nature loss, social inequality, and mental health and well-being.

Unlocking climate solutions and innovations TCFD

We understand the need to find new solutions to increase the pace of change if the world is to achieve the Paris Agreement's goal of being net zero by 2050.

We are working closely with a range of partners to accelerate investment in natural resources, technology and sustainable infrastructure to help reduce emissions and address climate change.

Sustainable infrastructure

Addressing climate change requires the rapid development of a new generation of sustainable infrastructure, particularly for emerging markets.

During 2022, we demonstrated our commitment to catalysing financing for sustainable infrastructure projects, with the launch of Pentagreen Capital, a debt financing vehicle we set up in partnership with Temasek (see [below]).

We continue to take a leading role in the FAST-Infra initiative, which we helped conceive, working with the IFC, OECD, the World Bank's Global Infrastructure Facility and the Climate Policy Initiative, under the auspices of the One Planet Lab. Through the FAST-Infra initiative, we helped launch in 2021 the Sustainable Infrastructure (SI) Label - a consistent, globally applicable labelling system designed to identify and evaluate sustainable infrastructure assets. The initiative continues to grow, with the appointment in November 2022 of a consortium with global expertise in sustainability standards, global finance, software and data platforms, to manage the secretariat of the SI Label, so the label becomes an enduring and widely adopted standard.

Natural capital as an emerging asset class

Climate Asset Management, a joint venture we launched with Pollination in 2020, forms part of our goal to unlock new climate solutions. Combining expertise in investment management and natural capital, Climate Asset Management offers investment solutions that generate competitive risk-adjusted returns for investors, and nature-enhancing ecosystems to help protect biodiversity and accelerate the transition to net zero.

In December 2022, Climate Asset Management announced it had received commitments of over $650m for its two strategies:

- the Natural Capital Strategy, which invests in agriculture, forestry and environmental assets, with the aim to deliver impact at scale alongside long-term financial returns; and

- the Nature Based Carbon Strategy, which targets nature restoration and conservation projects in developing economies, prioritising community benefits while generating high-quality carbon credits.

One of Climate Asset Management's first investments was the Restore Africa Programme, in partnership with the Global EverGreening Alliance, announced in November 2021. The programme, which is the world's largest community-based land-restoration project, aims to benefit 1.5 million smallholder farmers and their communities through the restoration of up to 2 million hectares of degraded land across six sub-Saharan countries. The programme has started being implemented in Kenya, Uganda and Malawi, with plans for Zambia, Tanzania and Ethiopia to follow in 2023.

Climate Asset Management is a founding member of the Natural Capital Investment Alliance, whose 15-strong membership of investment firms aims to have mobilised $10bn towards nature-based economic themes.

Backing new technology and innovation

Addressing climate change requires innovative ideas. By connecting financing with fresh thinking, we can help climate solutions to increase in scale to support sustainable growth.

We continue to unlock new climate solutions, focusing on supporting innovation in critical areas such as green technologies. In January 2022, we announced our investment of $100m as an anchor partner in Breakthrough Energy Catalyst, a programme that uses private-public capital to accelerate the development of four critical climate technologies: direct air capture, clean hydrogen, long-duration energy storage and sustainable aviation fuel.

Our philanthropic programme, Climate Solutions Partnership, aims to scale up climate innovation ventures and nature-based solutions, as well as help the energy sector transition towards renewable sources in Asia (for further details, see page 84).

Our climate technology venture debt and venture capital platforms invest in companies that are developing innovative technological solutions that help companies and governments understand, track and reduce their greenhouse gas emissions. We expanded our venture debt platform to support climate technology hardware and software companies that are growing rapidly. In 2022, we achieved our initial goal to fund $100m to climate technology companies through this platform, and consequently increased our commitment to $250m. In 2022, we committed an additional $100m to fund women and minority entrepreneurs through our venture debt platform.

HSBC Asset Management also launched a venture capital strategy that invests in transformative early stage companies enabling decarbonisation and de-pollution of industries. The strategy invests across four investment themes: power transformation, transport electrification, supply chain sustainability and climate risk mitigation. We seeded the strategy with capital in November 2021, and it has since invested in three start-up companies. HSBC Asset Management continues to actively fundraise for this strategy, aiming to raise additional funds from institutional and private wealth clients over the course of 2023.

Accelerating sustainable infrastructure in Asia

In August 2022, we officially launched Pentagreen Capital, a sustainable infrastructure debt financing vehicle set up in partnership with Temasek. Pentagreen's goal is to accelerate the development of sustainable infrastructure in Asia by removing the barriers that can prevent marginally bankable projects from accessing capital. With a combined $150m of seed capital committed by the founding partners, the Singapore-based company aims to provide more than $1bn of loans over the next five years, targeting opportunities initially in south-east Asia. Its primary focus will be on clean transport, renewable energy and energy storage, and water and waste management.

Biodiversity and natural capital strategy

We recognise that achieving net zero goes hand in hand with halting and reversing nature loss. Nature loss, which refers to the decline of natural capital, ecosystem services and biodiversity, is one of the greatest systemic risks to the global economy and the health of people and the planet. According to The Nature Conservancy, natural climate solutions can provide up to 37% of the emission reductions needed by 2030. At the same time climate change is accelerating nature loss, and consequently the ability for nature to mitigate climate change impacts.

We understand we need to do more to embed nature-related issues into our sustainability policies and climate transition plan, and we are committed to strengthening our risk management approach and engaging with our customers.

Understanding our exposure

In 2022, we made progress with understanding how to assess and monitor nature-related risks, as well as how to create effective transition plans with the aim of halting our contribution to nature loss from our business activities:

- We conducted analysis on how reliant our large corporate clients were on ecosystem services, including the nature-related benefits crucial for the provision of food and drinking water, which demonstrated that our clients were highly dependent on water availability.

- To improve our understanding of the potential credit risks that nature-related risks pose to our customers, we worked with the Cambridge Institute on Sustainability Leadership, by evaluating the impact of three months of water shortage on a sample of our customer portfolio comprising heavy industry companies in east Asia.

- We participated in a pilot test of a draft version of the Taskforce on Nature-related Financial Disclosures ('TNFD') framework for risk and opportunity management and disclosure, which helped us understand its implications and provide feedback ahead of its release in September 2023.

- We intend to publish a new deforestation policy, informed by scientific and international guidance, in 2023. For further details of our biodiversity and natural capital-related policies, see 'Our approach to sustainability policies' on page 65.

Reducing nature loss

We are making progress with the investment and financing of biodiversity and nature-based solutions through client products and services and partnerships. In 2022, these included:

- In August 2022, our asset management business, HSBC Asset Management, launched a biodiversity exchange-traded fund that enables investors to incorporate sustainable considerations within their portfolios (see below).

- Our Global Private Banking business launched a biodiversity strategy for our private bank clients in Hong Kong and Singapore, which focuses on investing in companies that are well positioned to harness, regenerate and protect biodiversity through the circular and bio-based economy. 

- Through the Climate Solutions Partnership, our philanthropic collaboration with the World Resources Institute and WWF, we issued two reports on the hurdles and success factors for scaling up nature-based solutions.

> For further details of our approach to nature and related initiatives, see our Statement on Nature in the ESG reporting centre at www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre.

Our presence in environmentally sensitive areas

As a global organisation, our branches, offices and data centres may be located in - or near - areas of water stress and/or protected areas of biodiversity, as we support our customers and communities in these locations.

Approximately 58.5% of our global offices, branches and data centres are located in areas identified as being subject to high and very high water stress, accounting for 39.7% of our annual water consumption. These are predominantly urban or city centre locations with large, concentrated populations. Our industry is a low user of potable water, and we have implemented measures to further reduce water consumption through the installation of flow restrictors, auto-taps and low or zero flush sanitary fittings.

In addition, 1.6% of our global office, branch and data centre portfolio lies in protected areas and areas of biodiversity. We strive through our design, construction and operational standards to ensure that, where possible, our premises do not adversely affect the environment or natural resources in these areas.

Building biodiversity risk awareness into ETFs

Asset owners and managers have a role to play in addressing potential transition and physical risks. Our asset management business, HSBC Asset Management, launched the first of its kind biodiversity screened exchange-traded fund, which provides investors with the opportunity to consider biodiversity risk factors in their portfolios. This exchange-traded fund tracks the Euronext ESG Biodiversity Screened Index series, which was jointly developed by HSBC, Euronext and Iceberg Data Lab. The Biodiversity Footprint Score excludes companies from the index that do not sufficiently consider biodiversity impacts as well as those with poor ESG credentials and/or business activities deemed harmful towards biodiversity.

Our approach to our own operations TCFD

Part of our ambition to be a net zero bank is to achieve net zero carbon emissions in our operations and supply chain by 2030 or sooner.

Reduce, replace and remove

We have three elements to our strategy: reduce, replace and remove. We plan to first focus on reducing carbon emissions from consumption, and then replacing remaining emissions with low-carbon alternatives in line with the Paris Agreement. We plan to remove the remaining emissions that cannot be reduced or replaced by procuring, in accordance with prevailing regulatory requirements, high-quality offsets at a later stage.

Our energy consumption

In October 2020, we announced our ambition to reduce our energy consumption by 50% by 2030, against a 2019 baseline, and in 2022 we achieved 24%. We plan to do this by optimising the use of our real estate portfolio, and carrying out a strategic reduction in our office space and data centres. We are using new technology and emerging products to make our spaces more energy efficient, such as in the UK, where an additive to our boiler systems helped make heating in our branches 13% more efficient.

As part of our ambition to achieve 100% renewable power across our operations by 2030, we continue to look for opportunities to procure green energy in each of our markets. A key challenge remains the limited opportunity to pursue power purchase agreements or green tariffs in key markets due to regulations.

We are tracking the impact on our emissions from our colleagues working from home, as they continue to embrace more flexible ways of working. We calculated the electricity used by our colleagues working from home was 5% of our total electricity consumption in 2022. This only includes energy consumption from the IT equipment and lighting. We do not report employee home working emissions in our scope 1 and 2 performance data.

Business travel and employee commuting

In 2022, our travel emissions remained below 50% of pre-pandemic levels in 2019, with international travel restrictions remaining for much of the year in key Asia markets, slowing the return to business travel. We are closely managing the gradual resumption of travel through internal reporting and review of emissions, and through the introduction of internal carbon budgets, in line with our aim to halve travel emissions by 2030, compared with pre-pandemic levels. With hybrid working embedded across the organisation, the use of virtual working practices has reduced the need for our colleagues to travel to meet with other colleagues and customers. We continue to focus on reducing the environmental impact from the vehicles we use in our global markets, and accelerate the use of electric vehicles. In 2022, we reduced the company car fleet size by 24%. We are now aiming to ensure that all new vehicles ordered are fully electric or hybrid vehicles where possible.

Engaging with our supply chain

Our supply chain is critical to achieving our net zero ambitions, and we are partnering with our suppliers on this journey. In 2020, we began the three-year process of encouraging our largest suppliers to make their own carbon commitments, and to disclose their emissions via the CDP (formerly the Carbon Disclosure Project) supply chain programme. The target for 2022 was for suppliers representing 60% of total supplier spend to have completed the CDP questionnaire. In total, suppliers representing 63.5% of total supplier spend completed the CDP questionnaire.

We will continue to engage with our supply chain through CDP, and through direct discussions with our suppliers on how they can further support our transition to net zero.

In 2022, we also formalised our supply chain sustainability strategy through the update of our supplier code of conduct and the development of our sustainable procurement procedures. The new procedures set out the minimum requirements and operational information required to help ensure our sustainability objectives relating to climate change, the environment, human rights, and diversity and inclusion are clearly addressed in the way that we operate and conduct business with suppliers.

Focus on natural resources

Alongside our net zero operations ambition, our aim is to be a responsible consumer of natural resources. Through design, construction and operational standards, we strive to ensure that, wherever possible, our premises do not adversely affect the environment or natural resources. We have identified specific focus areas including waste, paper and sustainable diets, and are exploring key opportunities to reduce our wider environmental impact over the coming decade.

Our environmental and sustainability management policies

Our buildings policy recognises that regulatory and environmental requirements vary across geographies and may include environmental certification. The policy is supported by Corporate Services procedures on environmental and sustainability management, ensuring HSBC's properties continually reduce their overall direct impact on the environment. Detailed design considerations documented in our Global Engineering Standards aim to reduce or avoid depletion of critical resources like energy, water, land and raw materials. Suppliers are required to adhere to strict environmental management principles and reduce their impact on the environment in which they operate.

Our approach to our own operations continued

Emissions from our energy and travel in 2022

We report our emissions following the Greenhouse Gas Protocol, which incorporates the scope 2 market-based emissions methodology. We report greenhouse gas emissions resulting from the energy used in our buildings and employees' business travel. Due to the nature of our primary business, carbon dioxide is the main type of greenhouse gas applicable to our operations. While the amount is immaterial, our current reporting also incorporates methane and nitrous oxide for completeness. We do not report employee home working emissions in our scope 1 and 2 performance data. Our environmental data for our own operations is based on a 12-month period to 30 September.

In 2022, we continued to decrease our emissions from our energy consumption and travel, achieving a 58.5% reduction compared with our 2019 baseline. This was mainly attributed to travel restrictions and the reduction of usage of our buildings due to the Covid-19 pandemic. We also implemented over 400 energy conservation measures that amounted to an estimated energy avoidance in excess of 11.9 million kWh and increased our consumption of renewable electricity to 48.3%.

In 2022, we collected data on energy use and business travel for our operations in 28 countries and territories, which accounted for approximately 92.4% of our FTEs. To estimate the emissions of our operations in entities where we have operational control and a small presence, we scale up the emissions data from 92.4% to 100%. We then apply emission uplift rates to reflect uncertainty concerning the quality and coverage of emission measurement and estimation. This is consistent with both the Intergovernmental Panel on Climate Change's Good Practice Guidance and Uncertainty Management in National Greenhouse Gas Inventories and our internal analysis of data coverage and quality.

> For further details on our methodology and relevant environmental key facts, see the ESG Data Pack at www.hsbc.com/esg.

1 Data in 2022 is subject to PwC's limited assurance report in accordance with International Standard on Assurance engagements 3410 (Assurance Engagements on Greenhouse Gas Statements). For further details, see GHG Reporting Guideline 2022 and third-party limited assurance report at www.hsbc.com/our-approach/esg-information/esg-reporting-and-policies.

Emissions from our supply chain in 2022

The data we receive through our engagement with CDP has enabled us to report our supply chain emissions for the first time. Our methodology uses supplier emissions data where we have it from 500 of our largest suppliers, through CDP. Where we do not have emissions data for suppliers, we use industry average carbon intensities and spend data to define the contribution to our supply chain emissions. As more of our suppliers report their emissions, we should be able to include more accurate data and fewer industry averages in the calculation. We have applied a data quality score to the sources of data we used to determine counterparty emissions. Our initial supply chain emission figures may require updating as data availability changes over time and methodology and climate science evolve. For further details, see our GHG Reporting Guidance.

In 2022, emissions from our supply chain increased by 16% compared with 2019, as a result of an increase in spend - particularly in IT services - and a rise in the average carbon intensity of our suppliers. The CDP-provided industry averages rose, increasing the emissions for our suppliers where we do not have emissions data. However, in 2022 there was a decrease in carbon intensity of suppliers who disclose their emissions compared with 2021, particularly in servers and data centres. While the carbon intensity of our supply chain decreased, a rise in spend on services in 2022 led to a 1% increase in emissions compared with 2021.

1 Data quality scores where 1 is high and 5 is low, based on the quality of emissions data. This is a weighted average score based on HSBC supplier spend and is in line with HSBC's financed emissions reporting methodology

2 Supply chain emissions calculated using a combination of supplier emissions data and industry averages.

3 Data in 2019, 2020, 2021 and 2022 for scope 3 (purchased goods and service) and scope 3 (capital goods) is subject to PwC's limited assurance report in accordance with International Standard on Assurance engagements 3410 (Assurance Engagements on Greenhouse Gas Statements). For further details, see GHG Reporting Guideline 2022 and third-party limited assurance report at www.hsbc.com/our-approach/esg-information/esg-reporting-and-policies.

Our approach to climate risk TCFD

Managing risk for our stakeholders

Climate risk relates to the financial and non-financial impacts that may arise as a result of climate change and the move to a greener economy. We manage climate risk across all our businesses and are incorporating climate considerations within our traditional risk types in line with our Group-wide risk management framework. Our most material exposure to climate risk relates to corporate and retail client financing activity within our banking portfolio. We also have significant responsibilities in relation to asset ownership by our insurance business, employee pension plans and asset management business.

In the table below, we set out our duties to our stakeholders in our four most material roles.

> For further details of our approach to climate risk, see 'ESG risk' on page 139 and 'Climate risk' on page 221.

Banking

Our banking business is well positioned to support our customers managing their own climate risk through financing. For our wholesale customers, we use our transition and physical risk questionnaire as part of our risk framework to understand their climate strategies and risk. We have set out a suite of policies to guide our management of climate risk, including our recently updated energy policy and thermal coal phase-out policy (see page 65). We continue to develop our climate risk appetite and utilise metrics to help manage climate exposures in our wholesale and retail portfolios. Climate scenario analysis is used as a risk assessment tool to provide insights on the long-term effects of transition and physical risks across our corporate and retail banking portfolios, as well as our own operations (for further details, see page 67).

Asset management

HSBC Asset Management managed over $608bn assets at the end of 2022, of which more than $55bn were held in sustainable investments. The majority of the remaining assets were invested in ESG-integrated strategies.

When assessing the impact of climate-related risk to our portfolios, we are increasingly considering both physical and transition risks. As a result, we have integrated ESG and climate analysis to help ensure that risks faced by companies are considered throughout the investment decision-making process. Investment teams through portfolio management tools assess, examine and determine the level of potential ESG risks that could impact the current and future value of issuers.

One of our key approaches to manage climate risk is through engaging with the companies we invest in. Our HSBC Asset Management Stewardship Plan outlines our approach to engaging with issuers, including on the topic of climate change.

Employee pensions

The Trustee of the HSBC Bank (UK) Pension Scheme, our largest plan with $33bn assets under management, aims to achieve net zero greenhouse gas emissions across its defined benefit and defined contribution assets by 2050. To help achieve this, it is targeting an interim emissions reduction of 50% by 2030, from 2019 levels, for its equity and corporate bond mandates. This commitment was made in the context of wider efforts to manage the impact of climate change on the Scheme's investments and the consequent impact on the financial interests of members.

During 2022, a framework was put in place to assess progress towards the 2030 targets. The Scheme, which has reported emission reductions for the equity and corporate bond mandates between 2019 and 2021, will continue to report against the 2030 targets, and aim to widen the coverage of its assessment and reporting over time. 

> For further details of the HSBC Bank (UK) Pension Scheme's annual TCFD statements and climate action plan, see https://futurefocus.staff.hsbc.co.uk/active-dc/information-centre/other-information.

Insurance

In 2022, our Insurance business, which has life insurance manufacturing subsidiaries in eight markets and total assets under management of approximately $126bn, updated its sustainability policy to align with the Group's new thermal coal phase-out policy. An ESG policy on corporate underwriting was also introduced.

Risk appetite was reviewed relating to key ESG aspects. ESG standards were embedded into insurance product development processes and operational capabilities.

In response to multiple and differing ESG regulatory initiatives and developments, HSBC's insurance entities in the EU have implemented key disclosure-related regulatory requirements. These requirements mainly impact insurance-based investment products manufactured by HSBC entities in the EU. Related requirements for the UK and other jurisdictions are expected to be introduced in the near future.

Our approach to sustainability policies TCFD

We recognise that businesses can have an impact on the environment, individuals and communities around them. We continue to develop, implement and refine our approach to working with our business customers to understand and manage these issues. We have joined various partnerships to support our role in this, including the World Economic Forum's Principles for Financing a Just and Urgent Energy Transition.

Our policies

Our sustainability risk policies cover agricultural commodities, chemicals, energy, forestry, mining and metals, thermal coal, UNESCO World Heritage Sites and Ramsar-designated wetlands. We also apply the Equator Principles when financing projects.

These policies define our appetite for business in these sectors and seek to encourage customers to meet good international standards of practice. Where we identify activities that could cause material negative impacts, we will only provide finance if we can confirm clients are managing these risks responsibly. Such customers are subject to greater due diligence and generally require additional approval by sustainability risk specialists.

Our sustainability policies are aligned with our approach to climate risk, and our net zero ambition.

> For further details on how we manage sustainability risk, as well as our full policies, see www.hsbc.com/our-approach/risk-and-responsibility/sustainability-risk.

Supporting the transition 

Reinforcing our ambition to support our clients' transition to lower carbon through transition financing, we updated our thermal coal phase-out policy, which we explain further on the following page, as well as our energy policy, which we set out below.

Governance and implementation

HSBC's relationship managers are the primary point of contact for our customers and are responsible for checking whether our customers meet applicable policies. Within our Group Risk and Compliance function, we have reputational and sustainability risk specialists who are responsible for reviewing, implementing and managing our sustainability risk policies as well as our application of the Equator Principles. Our global network of more than 75 sustainability risk managers is supported by regional reputational risk managers across the Group who have additional oversight responsibilities for sustainability risk.

The Wholesale Reputational and Sustainability Risk team also became part of Risk Strategy, with expanded Group-wide responsibilities, to strengthen the governance and oversight of sustainability risk policies, and to reflect the evolution of the sustainability agenda.

The Sustainability Risk Oversight Forum, made up of senior members of the Group Risk and Compliance function and global businesses, continued to oversee the development and implementation of policies that seek to identify, manage and mitigate the Group's sustainability risk.

As part of our oversight of sustainability risk policies, we operate an assurance framework that is designed to take a more holistic view of risks, including by:

- ESG news screening, taking a risk-based approach, across the sustainability risk policies;

- overseeing clients considered to be of higher risk;

- reviewing client files across the sustainability risk policies; and

- monitoring of the sustainability risk client portfolio against a defined set of key control indicators overseen by the Sustainability Risk Oversight Forum.

The framework is used to monitor the in-scope portfolio and keep track if there is a deterioration in the risk ratings. With the respective risk rating assigned, our sustainability risk specialists will agree the necessary actions to help mitigate unacceptable risks with the business.

Where considered appropriate, a submission can be made to the Reputational Risk and Client Selection Committee to agree an appropriate course of action.

Our energy policy

In December 2022, we published our updated policy covering the broader energy system, including upstream oil and gas, oil and gas power generation, hydrogen, renewables and hydropower, nuclear, biomass and energy from waste. The policy seeks to balance three related objectives: supporting the reduction of global greenhouse gas emissions; enabling an orderly transition that builds resilience in the longer term; and supporting a just and affordable transition. Central to our approach is our commitment to supporting clients who are taking an active role in the transition.

In line with the policy, we will no longer provide new finance or advisory services for the specific purpose of projects pertaining to new oil and gas fields and related infrastructure whose primary use is in conjunction with new fields. Engagement on transition plans is a key part of our approach. We will continue to provide finance or advisory services to energy sector clients at the corporate level, where clients' transition plans are consistent with our 2030 portfolio-level financed emissions targets and net zero by 2050 commitment. If a client's transition plan is not produced, or if, after repeated engagement, is not consistent with our targets and commitments, we will not provide new finance and may withdraw existing financing.

The IEA's 2021 Net Zero by 2050 report highlights that an orderly transition requires continued financing and investment in existing oil and gas fields to maintain the necessary output. We will therefore continue to provide finance to maintain supplies of oil and gas in line with current and future declining global oil and gas demand, while accelerating our activities to support clean energy deployment. 

As part of our previously announced ambition to provide $750bn to $1tn in sustainable finance and investment by 2030 to support our customers in all sectors, we will support critical areas such as renewable energy and clean infrastructure.

Our thermal coal phase-out policy

In December 2021, we published a policy to phase out thermal coal financing in EU and OECD markets by 2030, and globally by 2040. This incorporated project finance, direct lending, and arranging or underwriting of capital markets transactions to in-scope clients, as well as the refinancing of existing finance facilities.

In line with our commitment to review our policy and targets each year, taking into account evolving science and internationally recognised guidance, we expanded the policy in 2022. We committed to not provide new finance or advisory services for the specific purposes of the conversion of existing coal-to-gas-fired power plants, unless the client demonstrates to us its intention to transition to abated power generation, consistent with our targets and commitments; and the plants do not operate in environmentally or socially critical areas. We also committed to not provide new finance or advisory services for new metallurgical coal mines. With the updated policy, we additionally committed to:

- reduce absolute on-balance sheet finance emissions by 70% in both the thermal coal power and thermal coal mining sectors by 2030;

- apply an amended definition of thermal coal expansion as it pertains to mergers and acquisitions activity; and

- decline new relationships with companies that operate thermal coal assets in environmentally and socially critical areas.

Biodiversity and natural capital-related policies

Our sustainability risk policies restrict financing activities that have material negative impacts on nature. While a number of our sectoral policies have such restrictions, our forestry and agricultural commodities policies focus specifically on a key impact: deforestation. These policies require customers involved with major deforestation-risk commodities to operate in accordance with sustainable business principles, as well as require palm oil customers to obtain certification and commit to 'No Deforestation, No Peat and No Exploitation' (see 'Our respect for human rights' on page 87). While we seek to work with our clients to help ensure their alignment with our policies, we have withdrawn banking services to customers who have not engaged, for example, in meeting our certification requirements.

As part of our net zero commitment, we are reviewing our current policy protections in this area, and aim to release a revised policy, informed by scientific and international guidance, in 2023.

> For further details of our approach to biodiversity and natural capital-related activities, see 'Biodiversity and natural capital strategy' on page 61.

Exposure to thermal coal

In our thermal coal policy published in December 2021, we disclosed our intention to reduce thermal coal financing exposure by at least 25% by 2025, and by 50% by 2030, using our 2020 Task Force on Climate-related Financial Disclosures ('TCFD') as our baseline. Using the same methodology and data used in our baseline reporting as at 31 December 2020, we are making progress against these targets.

Our 2020 baseline comprised thermal coal power generation and mining exposures within the power and utilities, and metals and mining sectors, as defined in our TCFD disclosures. We are in the process of expanding the on-balance sheet exposures that are in-scope for our thermal coal policy to include those outside of these two TCFD sectors.

Our processes, systems, controls and governance are not yet designed to fully identify and disclose thermal coal exposures, particularly for exposures within broader conglomerates. Until our systems, processes, controls and governance are enhanced, certain aspects of our reporting will rely on manual sourcing and categorisation of data. We are reassessing the reliability of our data and reviewing our basis of preparation to help ensure that we are reporting all relevant thermal coal exposures aligned to our thermal coal policy. As a result, we have not reported thermal coal exposures in this Annual Report and Accounts 2022. We expect that our updated thermal coal exposures dating back to 31 December 2020 will be made available for reporting as soon as practicable in 2023, although this is dependent on availability and quality of data.

Thermal coal financed emissions targets

As mentioned earlier, our financed emissions target is a reduction of 70% in both the thermal coal power and thermal coal mining sectors by 2030, using a 2020 baseline. We now intend to publish our baseline financed emissions alongside our updated thermal coal exposures as mentioned above.

Asset management policy

In September 2022, our asset management business, HSBC Asset Management, published its own policy on how a phase-out of thermal coal would impact on investments it makes on behalf of clients.

The policy aligns with the commitment made by HSBC Asset Management under the Net Zero Asset Managers initiative to support investing aligned with net zero greenhouse gas emissions by 2050, or sooner.

Under its policy, HSBC Asset Management will not hold listed securities of issuers with more than de minimis revenue exposure to thermal coal in its actively managed portfolios beyond 2030 for EU and OECD markets, and 2040 for all other markets. The policy includes some restrictions on investment exposure to thermal coal ahead of these deadlines, as well as commitments to undertake enhanced due diligence on the transition plans of investee companies with thermal coal exposure. Companies held in investment portfolios that do not develop credible plans to transition away from thermal coal could face voting sanctions, and ultimately a divestment of holdings.

> For further details of the policy, see www.assetmanagement.hsbc.co.uk/-/media/files/attachments/common/coal-policy-b2b-en-09162022.pdf.

Insights from scenario analysis TCFD

Scenario analysis supports our strategy by assessing our position under a range of climate scenarios. It helps to build our awareness of climate change, plan for the future and meet our growing regulatory requirements.

Having run our first Group-wide climate change scenario analysis exercise in 2021, we produced several climate stress tests for global regulators in 2022, including the Monetary Authority of Singapore and the European Central Bank. We also conducted our first internal climate scenario analysis.

We continue to develop how we produce our climate scenario analysis exercises so that we can have a more comprehensive understanding of climate headwinds, risks and opportunities that will support our strategic planning and actions.

In climate scenario analysis, we consider, jointly:

- transition risk arising from the process of moving to a net zero economy, including changes in policy, technology, consumer behaviour and stakeholder perception, which could each impact borrowers' operating income, financing requirements and asset values; and

- physical risk arising from the increased frequency and severity of weather events, such as hurricanes and floods, or chronic shifts in weather patterns, which could each impact property values, repair costs and lead to business interruptions.

We also analyse how these climate risks impact how we manage other risks within our organisation, including credit and market risks, and on an exploratory basis, operational, liquidity, insurance, and pension risks.

Our climate scenarios

In our 2022 internal climate scenario analysis exercise, we used four scenarios that were designed to articulate our view of the range of potential outcomes for global climate change.

These scenarios, which reflect different levels of physical and transition risk and are varied by severity and probability, were: the Net Zero scenario, which aligns with our net zero strategy and is consistent with the Paris Agreement; the Current Commitments scenario, which assumes that climate action is limited to the current governmental commitments and pledges; the Downside Transition Risk scenario, which assumes that climate action is delayed until 2030; and the Downside Physical Risk scenario, which assumes climate action is limited to current governmental policies.

For further details of these scenarios, and how they were designed to identify, measure and assess our material climate vulnerabilities, see 'Insights from scenario analysis' in the 'Climate risk' section on page 226.

Analysing the outputs

Climate scenario analysis allows us to model how different potential climate pathways may affect our customers and portfolios, particularly in respect of credit losses. As the chart below shows, losses are influenced by their exposure to a variety of climate risks under different climate scenarios.

Under the Current Commitments scenario, we expect moderate levels of losses relating to transition risks. However, the rise in global warming will lead to increasing levels of physical risk losses in later years. A gradual transition towards net zero, as shown in the Net Zero scenario, still requires fundamental shifts in our customers' business models, and significant investments. This will have an impact on profitability, leading to higher credit risk in the transition period. A delayed transition will be even more disruptive due to lower levels of innovation that limits the ability to decarbonise effectively, and rising carbon prices that squeeze profit margins.

Overall, our scenario analysis shows that the level of credit losses can be mitigated if we support our customers in enhancing their climate transition plans.

For the full internal climate scenario analysis, including our assessment of the impacts of climate change on our corporate lending, retail mortgage and commercial real estate portfolios, see Insights from scenario analysis on page 226. 

Use of climate scenario outputs

We are starting to consider climate scenario analysis in core decision-making processes, including strategic and financial planning, risk management, capital assessment, business decision making, client engagement, and Group reporting. It helps to inform our strategy and supports how we capture opportunities while minimising risks, and enabling HSBC to navigate through the climate transition.

We use the analysis to anticipate climate-related impacts for our customers by identifying new opportunities where possible, including targeted financing to support their transition journey.

We have considered climate risk in our annual financial planning cycle. In order to do this, we reviewed the inclusion of ECL outcomes from our internal climate scenario analysis using the Current Commitments scenario because we deem it the most likely to transpire over the planning horizon.

Next steps

We plan to continue to enhance our capabilities for climate scenario analysis and use the results for decision making, particularly in respect of:

- our risk appetite, by identifying business-critical metrics and using scenario analysis to test, calibrate, and monitor against thresholds;

- client engagement, by identifying the climate opportunities - such as supporting the growth of renewables, biomass, electric vehicles - and vulnerabilities by engaging with and supporting our customers; and

- strategy, by using the range of scenario analysis outcomes to shape our strategy across business and regions.

Modelled climate losses

1 The counterfactual scenario is modelled on a scenario where there will be no losses due to climate change.

2 The dotted lines in the chart show the impact of modelled expected credit losses following our strategic responses to reduce the effect of climate risks under the Net Zero and Downside Transition Risk scenarios.

Our approach to climate reporting (TCFD)

Task Force on Climate-related Financial Disclosures ('TCFD')

The table below sets out the 11 TCFD recommendations and summarises where additional information can be found.

We have considered our 'comply or explain' obligation under the UK's Financial Conduct Authority's Listing Rules, and confirm that we have made disclosures consistent with the TCFD Recommendations and Recommended Disclosures, save for certain items, which we summarise below and in the additional information section on page 423.

Task Force on Climate-related Financial Disclosures ('TCFD') continued

Task Force on Climate-related Financial Disclosures ('TCFD') continued

Social

Building inclusion and resilience

We aim to play an active role in opening up a world of opportunity for our customers, colleagues and communities as we bring the benefits of connectivity and global economy to more people around the world.

At a glance

Our relationships

Our purpose is opening up a world of opportunity, and we aim to bring that purpose to our customers, colleagues and the communities in which we operate.

Inclusion is key to opening up a world of opportunity. It involves a commitment to remove unnecessary barriers to our people, our customers and our communities in realising their potential. Creating an inclusive environment for our colleagues enables them to flourish, and supports the strong and purposeful delivery of our strategy.

We are committed to ensuring our colleagues - and particularly our leadership - are representative of the communities that we serve, and that we support their well-being and development so they can learn and grow in their careers. We do this because we know that when we build an inclusive, healthy and stimulating workplace for our people, the whole Group succeeds.

We are equally committed to ensuring there are no unnecessary barriers to finance for our customers. Customers should not find it more difficult to access finance because of their gender, their sexual orientation, their neurodiversity or their disability. We have an ambition to create a welcoming, inclusive and accessible banking experience that opens up a world of opportunity for our customers.

Inclusion goes hand-in-hand with resilience. We build resilience for our colleagues by supporting their physical, mental and financial well-being, and by ensuring they are equipped with the skills and knowledge to further their careers during a period of significant economic transformation.

For our customers, we build resilience through education: by helping them to understand their finances and how to manage them effectively, and by creating propositions that simplify the banking experience while helping wealth to grow. We also build resilience through products and services that protect what our customers value - their health, their families, their homes and their belongings.

Building inclusion and resilience can also mean working to address gaps where we think we can make a difference. From working for fair pay and representation for our colleagues, to opening up access to finance to underserved customer groups, to ensuring HSBC branches and offices are safe spaces for everyone, we are committed to fairness and inclusivity.

Finally, we aim to give back by engaging with our communities through philanthropic giving, disaster relief and volunteering. We are focusing these efforts on our priorities: the just transition to net zero and building inclusion and resilience.

We believe building inclusion and resilience helps us to create long-term value and growth. By removing unnecessary barriers and striving to be a fair and equitable bank, we can attract and retain the best talent, support a wider customer base to achieve their goals over the long term, and stimulate growth in our communities. This is how we open up a world of opportunity for our colleagues, our customers and our communities.

Promoting diversity and fostering inclusion

Our approach to diversity and inclusion

Our purpose, 'Opening up a world of opportunity', explains why we exist as an organisation and is the foundation of our diversity and inclusion strategy. Promoting diversity and fostering inclusion contributes to our 'energise for growth' priority. By valuing difference, we can make use of the unique expertise, capabilities, breadth and perspectives of our colleagues for the benefit of our customers.

To achieve progress, we are focused on specific Group-wide priorities for which we hold senior executives accountable. Alongside Group targets, some executives have local priorities, such as combating social inequality in the UK, and the promotion of Hispanic representation in the US, to allow flexibility for a broader diversity and inclusion agenda that is contextually relevant.

Our approach extends beyond our colleagues and opens up a world of opportunity to our customers and the communities in which we operate. As we set out on the following pages, we are pleased to report progress in 2022, although we acknowledge there is more work to be done.

How we hold ourselves to account

We set meaningful goals

Our executive Directors and Group Executives have goals within their annual performance scorecards that are tied to remuneration plans. In 2022, we continued to make progress against our three goals to:

- achieve a 35% representation of women in senior leadership roles by 2025;

- achieve a 3.4% representation of Black heritage colleagues in senior leadership roles in the UK and US combined by 2025, aligned to our commitment to double the number of Black colleagues in leadership positions globally; and

- achieve a satisfaction score of at least 75% in our Inclusion index, which looks at the inclusivity of our culture by measuring our colleagues' feelings of belonging, trust and psychological safety, as recorded within our employee Snapshot survey.

We report and track progress

Data is critical and gives our Group Executive Committee regular progress checks against its goals. Our measures to track progress consist of:

- a quarterly inclusion dashboard, which tracks progress against goals with specific data on hiring, promotion and exit ratios;

- a formal assessment of the Group Executive Committee's performance against its three goals, run by our executive compensation team, at the half-year, third quarter and the end of the year, which is then reported to the Group Remuneration Committee; and

- semi-annual inclusion review meetings where our Head of Inclusion meets each Group Executive to review data and their progress against their goals, and to discuss actions and provide recommendations to support further progress.

We benchmark our performance

We use external disclosures and benchmarks to measure the progress we are making, and to provide us with insight into what actions to prioritise. In 2022, we achieved: 

- the Parker Review target of having at least one Director from a minority ethnic group on its Board, with three Board members;

- Stonewall's Gold standard and rank as a top global LGBTQ+ inclusion employer;

- a score of 87.2 in the Bloomberg Gender Equality Index, which tracks the performance of public companies committed to transparency in gender data reporting. This was 13.1 percentage points above the financial sector average.

-

A data driven approach to inclusion

Our approach to collecting ethnicity data through colleagues' self-identification underpins our ethnicity strategy to better reflect the communities we serve. Allowing colleagues to self-identify helps us to set market representation goals. We have enabled 91% of our workforce to be able to share their ethnic heritage with us. A total of 55% of our colleagues have now made disclosures on their ethnic background, where legally permissible.

Strong self-declaration rates in the UK and US have enabled us to develop our ethnicity strategy with market-specific Black heritage representation goals. We define Black heritage to include all colleagues in the UK who identify as Black or mixed race where one of the ethnicities is stated as Black, and in the US for all colleagues who identify as Black or African-American.

Employees can also share their disability, gender identity and sexual orientation data where legally and culturally acceptable to do so. These self-identification options are enabled for 90%, 81% and 70% of our workforce, respectively.

Engaging with diversity at the Board level

We have a designated non-executive Director responsible for workforce engagement, whose role is to bring the voice of the employee into the boardroom. Our employee resource group leadership community is an important contributor and communicator related to workforce engagement. Additionally, non-executive Directors are aligned to each of our employee resource groups.

In 2022, we continued our Bank Director Programme that invites a diverse group of senior leaders from across the Group to gain exposure to boards and develop board skills. This programme is building an internal pool of diverse talent that we will be able to assign to roles with our subsidiary boards. 

For further details of Board diversity, see our Corporate governance report on page 247.

Creating a diverse environment

Women in senior leadership

After achieving our ambition of having 30% of senior leadership positions held by women in 2020, we set a new goal to reach 35% by 2025. We remain on track, with 33.3% of senior leadership roles held by women at the end of 2022, an increase of 1.6 percentage points since 2021. A total 35.7% of all external appointments into senior positions were female, down from 37.8% in 2021, and 38.1% of all promotions into senior leadership roles were female.

Talent programmes, including Accelerating Female Leaders, helped increase the visibility, sponsorship and network of our high-performing senior women. Since starting the programme in 2017, 38% of participants have either been promoted or taken a lateral move to develop their careers. We have also retained 87% of colleagues who have completed the programme.

In our Accelerating into Leadership programme, which prepares high potential, mid-level colleagues for future leadership roles, 44% of participants in 2022 were women.

We also had more than 2,600 women participating in our Coaching Circles programme, which involves senior leaders advising and supporting colleagues to develop their leadership skills and build their networks.

Our succession planning for key leadership roles includes an assessment of the diversity of our succession plans. We are improving the gender diversity of those in roles deemed most critical to the organisation, and successors to those roles. In 2022, 36% of the succession pool for these roles were women.

In our support of our people throughout the different stages of their lives and careers, and in our aim to enable equal participation at work, we introduced gender neutral parental leave in the US and Australia, and improved paid maternity and paternity leave in Mexico and Argentina.

1 Combined Group Executives and direct reports includes HSBC Group Executives and their direct reports (excluding administrative staff) as at 31 December 2022.

2 Directors (or equivalent) of subsidiary companies that are included in the Group's consolidated financial statements, excluding corporate directors.

3 In our leadership structure, we classify: senior leadership as those at career band 3 and above; middle management as those at global career band 4; and junior management as those at global career bands 5 and 6.

Black colleagues in senior leadership

We are on track to double the number of Black colleagues in senior leadership roles globally by 2025, having increased the number of Black senior leaders by 37% since 2020.

During 2022 we set a new Group-wide ethnicity strategy with the principle of better reflecting the communities we serve. We test this principle by comparing our workforce to national census data and setting goals to narrow material representation gaps over time. Our analysis highlighted Black heritage representation gaps in the UK and the US. We therefore set a goal of having 3.4% of Black heritage colleagues in senior leadership roles in the UK and US combined by 2025. While we are on track to meet this, with 2.5% of leadership roles held by Black heritage colleagues in 2022, we know there is more to be done to be representative of the societies we serve.

Our ethnicity strategy is overseen by a committee of senior leaders, led by our Group Chief Risk and Compliance Officer. The committee provides strategic direction to the Global Ethnicity Inclusion Programme.

In 2022, we continued to focus on inclusive hiring, investing in talent and growing leadership effectiveness. We have launched programmes to provide sponsorship and mentoring such as Solaris in the UK, which supports talented Black female colleagues, and a Black heritage programme in Global Banking and Markets, where 25% of participants at Director level secured promotion within 12 months of commencing the programme. In 2023, we will extend the programme to Commercial Banking colleagues and to colleagues in the US, with an additional focus on Hispanic colleagues. To help us attract diverse talent, we partner with specialist recruitment organisations that engage ethnically diverse talent. We also introduced reverse mentoring, which pairs Group Executives with Black heritage colleagues.

Representation and pay gaps

We have reported gender representation and pay gap data since 2017 for the UK, and extended this to include gender data for the UK, the US, mainland China, Hong Kong, India and Mexico, alongside ethnicity data for the UK and US. In 2022, we extended this to include gender data for Singapore and the UAE. This covers over 70% of our workforce.

In 2022, our mean aggregate UK-wide gender pay gap was 45.2%, compared with 44.9% in 2021, and the ethnicity pay gap was 0.4%, compared with -0.8% in 2021. Our UK gender pay gap is driven by the shape of our workforce. There are more men than women in senior, higher-paid roles and more women than men in junior roles. Given differences in variable pay levels across these roles, the increase in the 2021 variable pay pool contributed to the slight widening of our pay gap for 2022. 

While we are confident in our approach to pay equity, until women and ethnically diverse colleagues are proportionately represented across all areas and levels of the organisation we will continue to see gaps in average pay. We are committed to paying colleagues fairly regardless of their gender or ethnic heritage and have processes to ensure that remuneration is free from bias. We review our pay practices and undertake a pay equity review annually, including an independent third-party review of equal pay in major markets. If pay differences are identified that are not due to objective, tangible reasons such as performance, skills or experience, we make adjustments.

For further details on our representation data, pay gap data, and actions, see www.hsbc.com/diversitycommitments and the ESG Data Pack at www.hsbc.com/esg.

Fostering an inclusive culture

In our annual Snapshot survey's Inclusion index, which measures our colleagues' sense of belonging, psychological safety, perception of fairness and trust, we achieved a favourability score of 76% in 2022, one point higher than our goal, and four points above the financial services industry benchmark.

There was a three-point increase in colleagues feeling able to speak up without fear of negative consequences. This was a positive indicator of our strengthening culture of inclusion, which is a critical component of our 'energise for growth' strategy.

To educate our leaders and colleagues on driving an inclusive culture, we provided a number of inclusive leadership training programmes, and enhanced our 'Making HSBC more inclusive' training. More than 10,500 colleagues also completed inclusive hiring training, which is aimed at enabling fair and inclusive hiring decisions that are in line with our hiring principles.

Employee resource groups

Our employee resource groups foster an inclusive culture, and contribute significant value to tens of thousands of colleagues, with networks focused on a range of issues, including: age, disability, parents and careers, ethnicity, gender and LGBTQ+.

Our employee resource groups celebrate key dates in the diversity calendar and hold events for colleagues to raise awareness, and build empathy and allyship. These included Pride, our network for LGBTQ+ colleagues and allies, holding a global '24 hours of Pride' campaign that engaged our workforce to collectively celebrate our LGBTQ+ colleagues. Our Embrace network for ethnicity hosted its first global summit, attended by over 1,300 colleagues, including senior leaders across three regions.

Looking to the future on disability

Our ambition is to become a leading disability confident employer and a digitally accessible financial services provider. In 2022, we continued to focus on driving our digital accessibility programme so that our products and service can be accessible for all.

For our customers and colleagues, we improved the accessibility of our public websites, mobile applications and internal systems. AbilityNet, the digital accessibility charity, benchmarked HSBC as having the most accessible website compared with other local competitor banks in 10 of 13 of our key Wealth and Personal Banking markets.

We are transforming our internal systems to be digitally accessible. In 2022, we engaged over 2,000 colleagues in digital accessibility awareness and training, supported by the launch of a digital accessibility hub, which provides training and knowledge resources. The hub achieved the best digital accessibility award at the 2022 Digital Impact Awards.

We are looking to extend our UK workplace adjustments process to other key markets, ensuring our colleagues have the right tools and technologies to perform their roles. The programme will help colleagues with a physical or sensory disability, long-term mental health conditions or neurodiversity needs to get advice and request additional equipment or software to enable them to do their work.

In 2022, HSBC UK was recognised as a Gold Standard employer, following an assessment by the Business Disability Forum, with a score of 95.8%, the highest score awarded. We were praised on our commitment, drive and innovation with regards to disability inclusion. In 2023, we will continue to progress the execution of our disability confidence strategy with a particular focus on improving the experiences of colleagues with a disability across the key stages of their career journeys.

Empowering diverse customers

Aligned to our purpose of opening up a world of opportunity, we are committed to identifying and removing the different barriers customers face in accessing financial services. In 2022, we contributed to this through several initiatives, including the launch of a $1bn lending fund to invest in female-owned businesses. We introduced new processes to support refugees fleeing the conflict in Ukraine so they can access the financial services they need to set up a new life in the UK. We also sponsor the Hong Kong Lutheran Social Service to develop the 'Health dollar fun' app to boost digital literacy among the elderly.

For further details of how we are making financial services more accessible and fair, see 'Our approach to customer inclusion and resilience' on page 83.

Creating more equal communities

We partner with external organisations to open up opportunities for those groups who have historically been disadvantaged. In 2022, initiatives included:

- working with the Indian Academy for Self-Employed Women to provide business training and support to access digital marketplaces;

- partnering with Rural Education and Development India to train 500 youths from migrant and rural families to equip them with skills for the healthcare and apparel sector; and

- supporting the National Council of Social Service in Singapore to support employability services for persons who have recovered from mental health issues.

Starting our journey on social mobility

We believe in the principle that the circumstances of someone's birth should not define their future.

In 2022, we began to collect the socio-economic diversity data of our colleagues within the UK, with the aim to improve social mobility. We will use this data to help us understand the representation and progression of colleagues from lower socio-economic backgrounds.

We also joined ProgressTogether, a membership body of firms aimed at addressing career progression and retention for those identifying with a lower socio-economic background. We established our 'Strive' employee resource group, which will support and advocate for colleagues from lower socio-economic backgrounds. We plan to expand Strive to other markets as our work matures.

Building a healthy workplace

Listening to our colleagues

We were founded on the strength of different experiences, attributes and voices. We believe that seeking out and listening to the views of our colleagues is a fundamental part of who we are and how we work. This has been especially important in 2022, as we looked to continue defining the future of work and driving change in how we work.

Listening to colleague sentiment

In 2022, we changed how we run our all-employee Snapshot survey, reducing the frequency from once every six months to once a year, with a focus on increasing participation to enable more granular reporting throughout the organisation. We received a record 167,668 responses to the survey in September, with 78% of employees participating, surpassing the previous year's record of 64%. 

This increase has enabled us to put more data directly in the hands of our people managers to understand how their teams feel about life at HSBC, with 5,000 managers given access to results, discussion guides and learning resources to help them engage with the feedback at a team level. We continue to report insights to our Group Executive Committee and the Board, and local results are shared across the Group to provide senior leaders across business areas with detailed insight to help plan and make decisions. 

We complement this all-colleague survey with targeted listening activities throughout the year, with employee lifecycle surveys aimed at new joiners, internal movers and voluntary leavers.

In May and June, we received more than 13,000 responses to our 'Future of work' survey, which explored how colleagues feel towards hybrid working. For further details of the findings and our approach to hybrid working, see 'Being a great place to work' on page 79.

In 2022, we also held a global 'employee jam', where over 18,000 colleagues across 63 markets came together for a live online conversation (see panel below). The Snapshot survey is also a key source of insight to inform our approaches to well-being. For further details of our approach to well-being, see page 80.

Employee conduct and harassment

We expect our people to treat each other with dignity and respect, and do not tolerate bullying or harassment on any grounds. Over the past few years, we have strengthened our approach to bullying and harassment, improving our collective understanding of, and response to, these issues.

Our global anti-bullying and harassment code helps us to maintain consistent high standards of conduct across the Group, while accommodating local cultural requirements. In 2022, we added further anti-bullying and harassment messages to our mandatory training for all our colleagues, and continued our campaign to encourage colleagues to be 'active bystanders' and speak up when they see or experience poor behaviours or things that do not seem right. 

We have mandatory local procedures for handling employee concerns, including complaints of bullying and harassment. Where investigations are required, we have a global framework setting the standards for those investigations, which we improved throughout 2022. We monitor bullying and harassment cases to inform our response and the data is reported to management committees. 

In 2022, 1,159 concerns were raised related to bullying, harassment, discrimination and retaliation. Of the 811 cases where an investigation has concluded, 47% were substantiated. We take action where we see standards fall short of our expectation. In 2022, 591 colleagues were dismissed in relation to misconduct, including 27 as a result of bullying, harassment or discrimination. We are not complacent and know that there is more we can do. Our refreshed values will guide and inform our plans to continue creating and promoting an inclusive working environment

Employee engagement 

73%

Employee engagement score (2021: 72%)

68%

Of colleagues feel able to achieve their career objectives at this company (2021: 67%)

77%

Of colleagues who feel confident about this company's future (2021: 74%)

Holding a live global online conversation

In April, we held a global 'employee jam', where over 18,000 colleagues came together digitally for a live conversation around three key themes: embedding our purpose, values and strategy; enhancing the colleague experience; and enhancing the customer experience.

Mirroring what we have heard in Snapshot surveys, colleagues told us that they believe in our purpose, strategy and values, but want to have a better understanding of their tangible impacts - both inside and outside HSBC - as well as their direct role in driving these.

Colleagues said that we have made progress in areas such as diversity, future skills and trust, but that the focus should now be placed on building a culture of inclusion and empowerment, and on a more consistent approach to well-being. They also said the Group should focus on simplifying internal processes. 

Listening to our colleagues continued

Employee engagement

We use eight Snapshot indices to measure key areas of focus and compare against peer institutions, including a new index focused on inclusion that we introduced in 2022. The table below sets out how we performed. 

1 Each index comprises constituent questions, with the average of these questions forming the index score. 

2 We benchmark Snapshot results against a peer group of global financial services institutions, provided by our research partner, Karian and Box. Scores for each question are calculated as the percentage of employees who agree to each statement. For further details on the constituent questions and past results, see the ESG Data Pack at www.hsbc.com/esg. 

3 The Inclusion index was introduced in 2022. It comprises questions that were asked in earlier surveys, so we are able to report a comparison with 2021.

For further details of well-being, see page 80, and for further details of inclusion, see page 76.

What we learned

All eight of our Snapshot indices improved slightly in 2022. Employee engagement, which is our headline measure, was three points above benchmark and one point above 2021 levels, and exceeded our target to maintain engagement levels during the year. The Strategy index continued to improve in relation to the financial services' benchmark.

Our colleagues continued to cite our approach to hybrid and flexible working as a reason to recommend HSBC, a theme that has been consistent since 2020. A greater proportion of colleagues also said they experienced a positive environment and culture, as well as saw training and progression opportunities, helping to drive our Employee engagement score.

One of the other top five factors identified to influence the Employee engagement score is colleagues' confidence in the company's future. Within the Strategy index, employees recorded feeling increasingly confident about the future of the company and understanding of our strategic objectives.

With inflationary pressures and the rising cost of living around the world, pay and financial well-being are growing concerns among colleagues. We saw an increase in comments relating to pay in the Snapshot survey, and self-reported financial well-being declined by four points, despite a four-point increase in employees reporting that they know how to get support about their financial capability. For further details of our approach to financial well-being, see page 80.

Our Snapshot survey showed 65% of colleagues reported they intend to stay with HSBC for five or more years, a one-point increase, while 19% said they intend to leave in the next two years, a two-point decrease. Despite this, involuntary turnover decreased to 3.3% and voluntary turnover increased to 14.1%, as labour markets picked up globally. Both our Snapshot and voluntary leaver surveys tell us that career development and pay and benefits continue to be key influencing factors for voluntary attrition, and they remain central to our people strategy. For further details of how we help our people develop their careers, see 'Developing skills, careers and opportunities' on page 81.

Being a great place to work

We continued to support our colleagues during the Covid-19 pandemic, and ensured their safe return to the office. In 2022, we made it a priority to support even more colleagues to work flexibly, while ensuring we are there for our customers when and where they need us. 

Hybrid working is a key part of our flexible working proposition and requires trust. We have empowered our people to find the right balance, guided by the three principles of:

- customer focus, by delivering excellent outcomes for our customers;

- team commitment, by connecting with each other, building our community and collaborating; and 

- two-way flexibility, by providing more choice on how, when and where we work, suitable for the roles we perform.

Our flexible working approach

Colleagues consistently tell us that our approach to flexible and hybrid working is a key reason to recommend HSBC as an employer. In June 2022, our 'Future of work' survey showed 81% of colleagues speak positively about our approach to flexible and hybrid working, and 80% feel it improves their work-life balance. 

In 2022, we refreshed our flexible working policies to provide more choice and make it easier to request a flexible working arrangement. Choices include flexible and staggered hours, job sharing, reduced hours and hybrid working. These new policies are available to more than 90% of colleagues, including our branch network and non-permanent employees. We have encouraged teams to have open conversations about flexible working opportunities.

More colleagues than ever are working in a hybrid way, where working time is split between the office and home or another location. According to our Snapshot survey in September, 59% of our colleagues work in a hybrid way, compared with 37% in 2021. 

Different markets are at different stages of embedding hybrid working, and in 2022 some continued to operate under Covid-19 conditions.

Getting the balance right

While working at home eliminates commuting time and provides more opportunities to balance work and life, some benefits of being together in person cannot be recreated remotely.

Overall, we have seen that colleagues in hybrid roles feel more productive and engaged than those who are unable to work remotely. However, nearly half of our colleagues told us that the networks of people they regularly interacted with decreased during the pandemic, and they missed social connections.

As a result, we have equipped leaders to achieve the right balance of remote and in-person working for their teams. Our people managers have access to in-person and on-demand learning to develop the skills needed to lead hybrid teams effectively. Nearly 8,000 hybrid working learning curriculums were completed by our people leaders in 2022. In addition, we ran targeted events to stimulate a successful return to the office and create new hybrid working habits. 

With more colleagues adopting balanced hybrid working patterns, the Snapshot survey showed 77% of colleagues said they have enough opportunities to connect and collaborate with people outside their immediate teams.

Our offices will continue to evolve to support increased collaboration. We are rolling out a digital app in several locations that will offer greater visibility of who is in the office to support teams coming together.

86%

Of people managers are confident their teams have the right balance of remote and in-person working to meet customer and stakeholder needs.

Greater front-line flexibility with far reaching benefits

Colleagues have embraced hybrid working across our eight global service centres that support our customer operations and services. Through a 'Hello hybrid' campaign, over 38,000 employees completed hybrid skills e-learning and nearly 850 colleagues took part in team dialogue sessions. The campaign helped our colleagues identify the best of remote and office working for their differing customer needs, cultures and regulatory requirements. As a result of the campaign, employee sentiment improved by 6% for the question 'I generally look forward to my work day.' In our main contact centres, colleagues now spend up to 67% of their working time on customer-facing activities.

Our approach to fair pay and performance

As part of our approach to performance management, we ask colleagues to set goals with the support of their line managers, which are regularly reviewed. We encourage people managers to hold regular performance and development conversations, incorporating feedback, and discussing well-being and progress. In the Snapshot survey, 76% of colleagues indicated they were happy with the support their manager provided for career development.

While our overall Career index, which measures employee sentiment towards career development, improved by one point, results from our employee listening channels indicated that sentiment around pay and career opportunities were key factors in colleagues' decisions to leave HSBC. In 2023, we will review our approach to pay and performance to ensure we are able to motivate colleagues in a way that is authentic to our culture and values. Our approach will help colleagues have clarity on performance expectations, awareness of development opportunities and access to resources.

As part of this programme, we are proposing to simplify assessments of colleagues and shift the focus to conversations about performance and growth, while improving transparency and structure in our fixed and variable pay design.

> For further details of our approach to colleague remuneration see page 281, and for details of our average standard entry level wages compared with local minimum wage, see our ESG Data Pack at www.hsbc.com/esg.