HSBCHoldingsplcFinancedEmissionsMethodology22February20221IntroductionThistechnicalsupplementprovidesfurtherdetailonthefinancedemissionsbaseliningandtargetsettingfortheoilandgas,andpowerandutilitiessectors,thatwehavecarriedoutfortheportfolioalignmentcapabilitybuiltbyHSBC.Theanalyticssitalongsideotherpurpose-builtmodelsandframeworksforstresstestingandriskmanagement,andenablesustomeasureandevaluatetheprogresswearemakingtowardsourambitiontoalignfinancedemissionstonetzeroby2050atthelatest.OurframeworkforanalysingourScope3financedandfacilitatedemissionsreflectsindustryrecommendations,ZeroBankingAlliancef-Portfinancedemissionsconsiderson-balancesheetfinancing,includingprojectfinanceanddirectlending,aswellasfinancingwehelpclientsaccessthroughcapitalmarketsactivities.Giventhedifferentnatureofthesetwoformsof-emissionswherenecessaryinourreporting.Themethodologyanddatausedtoassessfinancedemissionsandsettargetsisnewandevolving,andweexpectindustryguidance,marketpractice,andregulationstocontinuetochange.Weplantorefineouranalysisusingthedatasourcesandmethodologiesavailableforthesectorsweanalyse,including,amongothers,theScienceBasedFinancedemissionslinkthefinancingweprovidetoourcustomersandtheiractivitiesintherealeconomy,helpingtoformpartofourScope3emissions,whichincludesemissionsassociatedwiththeuseofaproductsandservices.Wegroupofconnectedcounterparties.Forfurtherdetailsofourapproachtoassessingfinancedemissionsandtargetsetting,seeourNetZeroAlignedFinanceApproachUpdateatwww.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre.Wehaveadoptedathree-stepmethodologytothejudgementsdefinedbyindustryrecommendations1forcomparabilityandtransparency(seeTable1).Therationaleforourmethodologicalchoicesissetoutonthefollowingpagesofthisdocument.1TaskForceforClimate-relatedFinancialDisclosures(2021),MeasuringPortfolioAlignment:TechnicalReport.2Table1-MethodologicalapproachMethodologicalStepKeyJudgementHSBCMethodologicalchoicesStep1:Translatingscenario-basedcarbonbudgetsintobenchmarks1.Whattypeofbenchmarkshouldbebuilt?Singlescenariobenchmarks2.Howshouldbenchmarkscenariosbeselected?1.5°CscenariothatcomplieswithcriteriasetoutbytheNZBASectorspecificgranularityUpdatescenarioswhenrefreshedbyscenarioprovider3.Shouldabsoluteemissions,productioncapacity,oremissionsintensityunitsbeused?AbsoluteemissionsandemissionsintensitymetricsforoilandgasEmissionsintensitymetricsforpowerandutilitiesStep2:Assessingcounterparty-levelalignment4.Whatscopeofemissionsshouldbeincluded?Scope1-3emissionsforoilandgasScope1-2emissionsforpowerandutilities5.Howshouldemissionsbaselinesbequantified?PCAFapproachanddataprioritisationTransparencyofdatasourcesandcalculationmethodologies6.Howshouldforward-lookingemissionsbeestimated?Historicaldata,publishedscenariosandemissionsreductiontargetsusedinprojections7.Howshouldalignmentbemeasured?AssessedcumulativelyforoilandgasAssessedagainstpoint-in-timeforpowerandutilitiesStep3:Assessingportfolio-levelalignment8.Howshouldalignmentbeexpressedasametric?%absoluteemissionsreductionby2030froma2019baselineEmissionsintensityat20309.Howshouldcounterparty-levelemissionsbeaggregated?Portfolioweighted-averageDisclosureofproportionofportfoliocoveredbyanalysis3Figure1-Modelflow4Step1.Translatingscenario-basedcarbonbudgetsintobenchmarksWhattypeofbenchmarkhavewebuilt?2asingle-scenarioreferencebenchmarktoassessourfinancedemissions.Itprovidesuswithindustryspecificemissionsprojectionsfromwhichweconstructbenchmarkpathways.ThisbenchmarkhelpsussettargetsthataligntheprovisionandfacilitationoffinancewiththegoalsandtimelinesoftheParisAgreementataportfoliolevelglobally.TheNZEscenario2030inlinewitha1.5°Cwarmingoutcomewithnoorlowtemperatureovershoot2,3.Wechoseemissionsastheprimarymarkeroftransitionprogress.Alternative,production-basedbenchmarksonlyexistforasmallnumberofsectors,andwebelievetheuseofemissionsdatapermitstransparentdisclosuresandyearonyeartracking,facilitatingimpactfulclientengagement.Inacknowledgementofcurrentprojectionmodellingconstraints,weplantoworkwiththeIEAorotherscenariomodellerstocreatemoregranularregionalpathwayswhichcapturematerialdifferencesindecarbonisationthatmightaffectourportfolio.Howisourbenchmarkscenarioselected?TheIEANZEscenariothatweselectedbuildsonpreviousIEAscenarioswhichhavebeenusedextensivelyfortargetsettingandportfolioalignment.Choosingthisscenarioallowsustomakecomparisonsofourportfoliotargetswithotherbanksandpeerswhousethissamescenario.ThescenariomeetstherequirementsofourNZBAcommitmenttoalignourfinancingwithoutcomesconsistentwitha1.5°Ctemperaturerise.InchoosingtheNZEscenario,wecanmodelbothabsoluteandemissionsintensityactivityfigures(seeFigure2andFigure3).Thesecanbeusedtoconstructintensitypathwaysformostofthesectorswhichwearetargeting,allowingustoreflectdifferingratesofdecarbonisation.Forcertainsectors,furtherdetailsmaybenecessaryforwhichwewillincorporateadditionalreferences4.FollowingguidancefromtheSBTIandNZBA,ourscenariohaslowrelianceonnegativeemissionstechnologies,has--°C,andwebelievehasreasonableassumptionsoncarbonsequestrationachievedthroughnature-basedsolutionsandlandusechange.KeyassumptionsunderpinningtheNZEscenarioarepublicallyavailable5.Furthermore,wehavefocusedonascenariothatispeer-reviewedandusesaglobalenergymodeltogeneratesector-by-sectorprojections.2InternationalEnergyAgency(2021),NetZeroby2050,IEA,Paris3IPCC,2018:GlobalWarmingof1.5°C.AnIPCCSpecialReportontheimpactsofglobalwarmingof1.5°Cabovepre-industriallevelsandrelatedglobalgreenhousegasemissionpathways,inthecontextofstrengtheningtheglobalresponsetothethreatofclimatechange,sustainabledevelopment,andeffortstoeradicatepoverty,InPress.4Forexample,theIEANZEscenariodoesnotcurrentlyprovidedetailondecarbonisationpathwaysforagricultureandaluminium5InternationalEnergyAgency(2021),WorldEnergyModel,IEA,Paris5TheIEANZEscenariodetailsmorethan400sectoralandtechnologymilestonestohelpguidetheglobaljourneytonetzeroby2050.However,weremainmindfulthattheNZEscenariodoesnotyetincluderegionaldisaggregation,requiringustomakeassumptionsataregionallevelwithinourportfolio.Weplantoconsultwithexternalscientificandinternationalbodiestoinformtheseassumptionsandwillcontinuetomonitortheavailableclimatescienceandindustrypracticeforportfolioalignmentasitevolves.FurtherdetailsontheNZEscenarioareavailableatwww.iea.org/reports/world-energy-model/net-zero-emissions-by-2050-scenario-nze.Figure2-IEANetZeroEmissionsby2050referencescenario-oilandgassectorSource:InternationalEnergyAgency(2021),NetZeroby2050,IEA,Paris:NetZeroby2050Scenario-Dataproduct-IEA.License:CreativeCommonsAttributionCCBY-NC-SA3.0IGOFigure3-IEANetZeroEmissionsby2050referencescenario-powerandutilitiessectorSource:InternationalEnergyAgency(2021),NetZeroby2050,IEA,Paris:NetZeroby2050Scenario-Dataproduct-IEA.License:CreativeCommonsAttributionCCBY-NC-SA3.0IGOHowdowedecideifabsoluteemissions,productioncapacity,oremissionsintensityunitsshouldbeused?Bothabsolutefinancedemissionsandfinancedemissionsintensitiesareemployedduringouranalysisoftheoilandgas,andpowerandutilitiessectors.ThisisinlinewithNZBAandTCFDguidelines.Absolutefinancedemissions,measuredinMtCO2e6fortheoilandgassector,aretheattributedshareoftotalGHGsemissionsforacounterpartyorportfolio.Physicalemissionintensitymetricsdescribetheattributedquantityof6Mt=Milliontonnes,t=metricton=tonne=1000kg=1000000g-5.010.015.020.025.030.035.040.020192020202120222023202420252026202720282029203020312032203320342035203620372038203920402041204220432044204520462047204820492050MtCO2eOilandgas-absoluteemissionsIEANetZeroEmissionsby2050scenario-0.100.10.20.30.40.520192020202120222023202420252026202720282029203020312032203320342035203620372038203920402041204220432044204520462047204820492050MtCO2e/TWhPower-emissionsintensityIEANetZeroEmissionsby2050scenario6emissionsreleasedperunitofproduction.Theunitofproductionvariesbasedonthesectorandspecificactivitydata.Foroilandgas,wemeasureMtCO2e/EJ.Forpowerandutilities,wemeasureMtCO2e/TWh7.MeasuringabsolutefinancedemissionsintheoilandgassectorpreservesadirectlinktoreducingGHGemissionsintherealeconomy,andallowsustoassessouralignmentwiththeNZEscenario.However,baseliningusingsolelyabsoluteemissionsforoilandgasasametricmaydisincentivisetheinnovationinefficiencygainsnecessaryforthenetzerotransition.Therefore,wealsouseemissionsintensitiestomeasurethetransitionofcounterpartiesrelativetothebenchmarkscenarioandeachother,irrespectiveofsizeorabsoluteemissionsfootprint.Forthepowerandutilitiessectorweuseanemissionsintensitymetric.Thishelpstoreflecttherealitythatoverthenextdecadeelectrificationoftransport,heatingandotheractivitiesarecentraltothedecarbonisationofthesesystems,andwilldriveacorrespondingincreaseinelectricitydemand.Overtime,ascleanenergysourcesmakeupmoreoftheenergymixofthegridaroundtheworld,globalGHGemissionswilldecouplefromelectricitydemand.Thiswillrequirerapidscalingupofinvestmentandfinancingforrenewableandotherlowemissionsourcesofelectricitytomeetincreasedelectrification.Assuch,theuseofanemissionsintensitymetricforthepowerandutilitiessectorallowsustoaccountfortheanticipatedincreaseindemandforelectricityaselectrificationoccurs,andtheneedtorapidlygrowtheproportionofrenewableenergyinelectricitygeneration.Wealsomeasuretheeconomicemissionsintensityemissionsreleasedperinvestedamount(tCO2e/$bn)foron-balancesheetfinancedemissions.7TWh=terawatthour=1000000000kWh7Step2.Assessingcounterparty-levelalignmentWhatscopeofemissionsdoweinclude?Intheenergysector,thevaluechaininscopeforouranalysisisshowninFigure4.Figure4-ValuechaininscopeTheGHGaccountingScopescoveredareScope1,2and3emissions8fortheoilandgassector,andScope1and2emissionsforthepowerandutilitiessector.ThisisbasedonthepartsofthesectorthatwebelievearemostmaterialintermsofGHGemissions,andwhereengagementandclimateactionhavethegreatestpotentialtoeffectchange.Fortheoilandgassector,wefocusedonupstream(e.g.,exploration,extractionanddrilling)companies,andintegratedordiversifiedenergycompanies.Midstream(e.g.,processing,storingandtransportationofcrudeproduct)anddownstream(e.g.,refininganddistribution)companiesareexcludedfromourscope.Byfocusingonupstreamanddiversifiedenergyproducers,andincludingScope3GHGemissionswebelieveweareaccountingforthemajorityofemissionsacrossthesector9,10,11,12.Thisincludesemissionsassociatedwiththeuseofoilandgasproductsasafuelsource.WehaveexcludedmidstreamanddownstreamcompanieswithintheoilandgassectorsinordertolimitdoublecountingwithinthesectorlevelanalysisandtoconcentrateengagementwithcustomerswhoseproductscontributemosttoGHGemissionsintheglobaleconomy.Forthepowerandutilitiessector,ouranalysisfocusedonupstream(e.g.,powergeneration)companies.Midstream(e.g.,transmissionanddistribution)anddownstream(e.g.,retail)companiesareexcludedfromourscope.Webelievepowergenerationiswherethemajorityofsectoremissionsoccurthroughtheiruseoffossilfuels(oil,gasandcoal)asasourceofenergy2.Forpowergenerationcompanies,theseareScope1GHGemissions.Inanalysingthepowerandutilitiessector,wedidnottakeaccountofupstreamScope3GHGemissionsbecausewebelievethemtobelessmaterial.WebelieveupstreampowerproducershavethemostpotentialtoreduceGHGemissionsbyshiftingtorenewablesandothersourcesoflow-emissionspowergeneration12.8WorldResourcesInstitute(2015),TheGHGProtocol-ACorporateAccountingandReportingStandard,USA9InternationalEnergyAgency(2018),CO2EmissionsfromFuelCombustion2018,IEA,Paris.10InternationalEnergyAgency(2018),WorldEnergyOutlook2018,IEA,Paris11McKinsey&company(2020),https://www.mckinsey.com/industries/oil-and-gas/our-insights/the-future-is-now-how-oil-and-gas-companies-can-decarbonize12PACTA(2020),PACTAforBanksMethodologyDocument,Version1.1.08AssetclassdefinitionOuranalysiscoversfinancingfromtheglobalbusinessesofGlobalWecalculateon-balancesheetfinancedemissionsusingtheapportionedvalueofon-balancesheetfinancingrelatedtowholesalecreditandlending,whichincludesbusinessloans,tradeandreceivablesfinance,andprojectfinance.Internalanalysisofallon-balancesheetlendingproductswasusedtodeterminewhichshouldbequalifiedforinclusionandwhichshouldbeexcluded.Weonlyincludefacilitieswithanoriginaldurationof12monthsorlonger,includingrevolvingloans,havingconsideredindustryguidance13,14.Producttypesthatwereexcludedareoverdrafts,limitedrecoursereceivablesfinance,andtradefinanceproducts(import,export,bills).Corporateactivitieswhicharenotlendingproducts,suchassavingsandcheckingaccounts,arealsoexcluded.Wecalculatefacilitatedemissionsusingtheapportionedvalueofunderwritingofdebtandequityissuances,andsyndicatedloans.Werefertothesecollectivelyascapitalmarketsactivities,andthescopeisdeterminedbasedonWelimitthecalculationtoattributablefundsloanedorunderwritteninwhichHSBCisabookrunner.WenotethatthePCAFStandard14doesnotyetdefineanattributionfactorforcapitalmarketactivities.Weplantostayabreastofindustrydevelopmentsandintendtoadaptourapproachasstandardisedmethodologiesaremadeavailable.Tothisend,wearecollaboratingwithindustrythroughaPCAFconsultation15.Ourcalculationoffacilitatedemissionsisbasedonthetransactionflowoverthereportingperiod(annualtransactionvolume).SectoralclassificationThescopeofclientsanalysedisdeterminedbasedonsectoralfilteringandincludesthecodesshowninTable2.Forthewholesalelendingportfolio,weuseNACE16codes.NACEcodesareassignedattheindividualcounterpartylevel,andwethendeterminethecounterpartygrouplevelNACEcodebyassessinglendinglimitsprovidedbyHSBCtoeachindividualcounterpartywithinthecounterpartygroup.TheNACEcodethatappliestotheindividualcounterpartywiththelargesttotallendinglimitisthenassignedtothecounterpartygroupasawhole.IncircumstanceswherethelargesttotallendinglimitisassociatedwithafinancialorholdingcompanyNACEcode,buttheprimaryeconomicactivityofthatcounterpartygroupisintheoilandgas,orpowerandutilitiessector,wewouldstillincludethecounterpartygroupinouranalysis.Asdataavailabilityimproves,weplantostrengthenouranalysisofcounterpartygroupsbyprovidinggreatergranularity,focusingouranalysisattheindividualcounterpartylevel.Forthecapitalmarketsportfolio,NAICS17industryclassificationsareusedinlinewithavailablevendordata.13Science-BasedTargets(2020),FinancialSectorScience-BasedTargetsGuidancePilotVersion.14PCAF(2020).TheGlobalGHGAccountingandReportingStandardfortheFinancialIndustry.Firstedition.15CapitalMarketInstrumentsDiscussionPaper2021,https://carbonaccountingfinancials.com/files/consultation-2021/pcaf-capital-market-instruments-paper.pdf16NACE(NomenclatureofEconomicActivities)istheEuropeanstatisticalclassificationofeconomicactivities.17NAICS(NorthAmericanIndustryClassificationSystem)isthestandardusedbyFederalstatisticalagenciesinclassifyingbusinessestablishmentsforthepurposeofcollecting,analysing,andpublishingstatisticaldatarelatedtotheU.S.businesseconomy.9Table2-SectorclassificationSectorNACEcodesanddefinitionsusedforwholesalelendingandprojectfinanceportfolioNAICSclassificationsusedforcapitalmarketsportfolioOilandgas61-ExtractionofcrudepetroleumOilandgasextraction62-Extractionofnaturalgas352-Manufactureofgas;distributionofgaseousfuelsthroughmainsPowerandutilities351-Electricpowergeneration,transmissionanddistributionElectricpowergenerationGHGcoverageRegardingthedifferenttypesofGHGmeasured,weincludeCO2andmethane(CH4),measuredinCO2e,fortheoilandgassectors,andCO2onlyforthepowerandutilitiessectorduetodataavailabilityandemissionsmateriality.CO2existsforalongtimeintheatmosphereandaccountsformorethantwo-thirdsofwarming18.MostoftheotherGHGshaveshorterlivesandcannotbetreatedwithacarbonbudgetapproachinthesameway.CH4isasignificantshareofScope1and2emissionsinoilandgas,mainlyduetogasflaring,andsoitiswithinscope.Conversely,powerandutilitiessectoremissionsarerecordedmostlyasCO2,throughthecombustionoffossilfuels.MethaneandCO2emissionsareaggregatedtotonnesofCO2equivalent(CO2e)usingtheGlobalWarmingPotential19.Whilstmeasuringmethaneemissionsseparatelywouldbepreferable,intheintermediatetermwehaveincludedmethaneemissionswithothergases,followingPCAFguidance.Wedonotincludeavoidedemissionsinourcalculations.Theseareemissionreductionsthatafinancedprojectproducesversuswhatwouldhavebeenemittedintheabsenceoftheproject(thebaselineemissions).Weperformedbaselininganalysisusing2019data,havingtakenintoconsiderationpotentialdistortionscausedbytheCovid-19pandemicin2020.Howisouremissionsbaselinequantified?On-balancesheetfinancedemissionsOn-balancesheetfinancedemissionsforwholesalecreditlendingincludingbusinessloans,tradeandreceivablesfinance,arecalculatedatacounterparty-levelbasedonPCAFguidance.ThePCAFStandardquantifiesemissionswhicharebeingproducedbyacounterparty,andattributesaproportionoftheseemissionstotheinstitutionresponsibleforfinancingthem.Thegeneralcalculation,shownbelow,usescounterpartyemissionsandanattributionfactortoassignemissionstoourfinancingactivities.𝑂𝑛-𝑏𝑎𝑙𝑎𝑛𝑐𝑒𝑠ℎ𝑒𝑒𝑡𝑓𝑖𝑛𝑎𝑛𝑐𝑒𝑑𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠=𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑓𝑎𝑐𝑡𝑜𝑟×𝑐𝑜𝑢𝑛𝑡𝑒𝑟𝑝𝑎𝑟𝑡𝑦𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠On-balancesheetfinancedemissionsforprojectfinancearecalculatedataproject-levelbasedonPCAFguidance.Thecalculationissimilarinconcepttowholesalecreditlendingincludingbusinessloans,andtradeandreceivablesfinance,exceptthatthecomponentsareproject-specific.Wherewedeterminethatdataisunreliable,wereverttotheapproachforwholesalecreditlendingreferredtoabove.𝑂𝑛-𝑏𝑎𝑙𝑎𝑛𝑐𝑒𝑠ℎ𝑒𝑒𝑡𝑓𝑖𝑛𝑎𝑛𝑐𝑒𝑑𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠=𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑓𝑎𝑐𝑡𝑜𝑟×𝑝𝑟𝑜𝑗𝑒𝑐𝑡𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠18WRI(2021),https://www.wri.org/insights/4-charts-explain-greenhouse-gas-emissions-countries-and-sectors19GHGProtocol(2020),GlobalWarmingPotentialValues,https://ghgprotocol.org/sites/default/files/ghgp/Global-Warming-Potential-Values%20%28Feb%2016%202016%29_1.pdf10FacilitatedemissionsFacilitatedemissionsarecalculatedandreportedseparatelytoon-balancesheetfinancedemissions.calculationoffacilitatedemissionsisbasedontheflow(annualtransactionvolume)ratherthanastock(outstandingamount).Thefacilitatedemissionscalculationisverysimilartotheon-balancesheetfinancedemissionscalculation𝐹𝑎𝑐𝑖𝑙𝑖𝑡𝑎𝑡𝑒𝑑𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠=𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑓𝑎𝑐𝑡𝑜𝑟×𝑐𝑜𝑢𝑛𝑡𝑒𝑟𝑝𝑎𝑟𝑡𝑦𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠AttributionfactorWeaccountforaportionoftheannualemissionsofthefinancedcounterpartybydeterminingtheratiobetweenouroutstandingamountofcounterpartyfinance(numerator)andtheeconomicvalueofthefinancedcounterparty(denominator).Thisratioiscalledtheattributionfactor.𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑓𝑎𝑐𝑡𝑜𝑟=∑𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔𝑎𝑚𝑜𝑢𝑛𝑡𝑒𝑐𝑜𝑛𝑜𝑚𝑖𝑐𝑣𝑎𝑙𝑢𝑒Theoutstandingamountsforon-balancesheetfinancedemissionsarerepresentedbythedrawnamountoffundsprovidedtocounterpartiesbasedontheendofyearbalancesheet(31December2021).Webelievethisbetterreflectscurrentfinancingandfundscurrentlycontributingtoactivityintherealeconomy.ItalignswiththePCAFStandardwhichrecommendsusingthevalueofdebtowedbyacounterparty,definedasthedisbursedamountminusanyrepayments.Economicvalueisrepresentedusingthreedifferentmeasuresinahierarchicalapproach:Tier1EVICisusedforlistedcounterparties]wheredataisavailable.Itiscalculatedastheenterprisevaluepluscashandcashequivalents.Dependingonthedatasource,itcanbecalculatedintwoways:𝐸𝑉𝐼𝐶=e𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒v𝑎𝑙𝑢𝑒+c𝑎𝑠ℎOR𝐸𝑉𝐼𝐶=m𝑎𝑟𝑘𝑒𝑡𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑠𝑎𝑡𝑖𝑜𝑛+𝑏𝑜𝑜𝑘𝑣𝑎𝑙𝑢𝑒𝑜𝑓𝑑𝑒𝑏𝑡Tier2-TotaldebtandequityWhenmarketvaluesarenotavailable,thetotalbookvaluesofdebtandequityareusedtocalculateenterprisevalue,basedonyear-endreportedfinancials:Debt+equity=sℎ𝑜𝑟𝑡𝑡𝑒𝑟𝑚𝑑𝑒𝑏𝑡+l𝑜𝑛𝑔𝑡𝑒𝑟𝑚𝑑𝑒𝑏𝑡+t𝑜𝑡𝑎𝑙𝑒𝑞𝑢𝑖𝑡𝑦𝑜𝑟𝑛𝑒𝑡𝑤𝑜𝑟𝑡ℎTier3-TotalassetsWhenneitherEVICdatanorthetotalbookvaluesofdebtandequityareavailable,wefollowPCAFguidancewhichstipulatesthatfinancialinstitutionsareallowedtofallbackonthetotalbalancesheetvalue(totalassets)asaproxyforcompanyvalue.Weperformanumberofcheckstovalidatedataunderpinningourfinancedemissionscalculation,includingworkingwithourbusinessfunctionsandstrategyteamstoreviewinputs.Portfolio-levelemissionsintensitiesOurfinancedemissionsintensitiesarecalculatedbyaggregatingfinancedemissionsforeachsectorperunitofphysicaldata(e.g.,MtCO2e/EJ,MtCO2e/TWh).Emissionsintensity=𝑜𝑛-𝑏𝑎𝑙𝑎𝑛𝑐𝑒𝑠ℎ𝑒𝑒𝑡𝑓𝑖𝑛𝑎𝑛𝑐𝑒𝑑𝑜𝑟𝑓𝑎𝑐𝑖𝑙𝑖𝑡𝑎𝑡𝑒𝑑𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠∑𝑡𝑜𝑡𝑎𝑙𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑒𝑑𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦11CounterpartyemissionsNotallcompaniesinouroilandgas,andpowerandutilitiesportfolioreportemissionspublicly.Ourcurrentoilandgas,andpowerandutilitiesportfolioreflectsourfinancingasoftheendof2019,andoftheseexposuresonlyapproximately1/3ofclientsbyexposurereportScope1and2emissionsdata.Inaddition,Scope3emissionsdataisonlyavailableforapproximately10%ofouroilandgasportfolio.Thismeansthatweneedtouseproxiestoestimateemissionswhenreportedemissionsdataisunavailable.Whencalculatingcounterpartyemissions,weadoptthePCAFdataqualityhierarchytohelpprovidetransparencyinourcalculationmethodologies.Proxiesarebasedonreportedemissions,physicalactivity-basedemissions,oreconomicactivity-basedemissions(seeTable3),anddataisprioritisedaccordingtosourceandrobustness.Forexample,whendataqualityscoresoftwoproxycalculationsaresimilar,proxiesareselectedbasedon:Availability-Arethereanydatagaps?Transparency-Whattypesofdatasourceswereidentifiedandinvestigated?Isthedatapubliclyavailable?Accuracy-Whataretheassumptionsmade?Howaccuratearetheresults?Simplicity-Howsimpleisthistoinputintothemodel?Isiteasilyreplicableacrossclients?Relevance-Howrelevantisthecalculationfordifferenttypesofclients?12Table3-EmissionsdatahierarchyforproxycalculationsPCAFdataqualityscore(score1=highestquality;score5=lowestquality)ProxytypeCalculationDatarequiredDescription1N/AN/ACounterpartyreportedemissionsdata(verified)2EstimateofphysicalintensityPrimaryphysicalactivityofcounterpartyconsumptionemissionsfactorsspecifictoprimarydataOutstandingamountprovidedtothecounterpartyTotalcounterpartyequityplusdebtEnergyconsumptionEmissionsfactorsspecifictoprimarydataEmissionsarecalculatedusingprimaryphysicalactivitydataforthecounterpartyenergyconsumptionorproductionandemissionsfactorsspecifictothatprimarydata.3PrimaryphysicalactivityofproductionconsumptionemissionsfactorsspecifictoprimarydataOutstandingamountprovidedtothecounterpartyTotalcounterpartyequityplusdebtCounterpartyproductiondata4EstimateofrevenueintensityCounterpartyrevenueemissionsfactorsforthesectorOutstandingamountprovidedtothecounterpartyTotalcounterpartyequityplusdebtCounterpartyrevenueorfinancialproxyforcounterpartyrevenueSector-basedemissionsfactors.Averagetakenusingrevenueintensityfactorsforallcounterpartieswheredataisavailable.5EstimateofassetintensityOutstandingamountinthecounterpartyemissionsfactorsforthesectorOutstandingamountprovidedtothecounterpartySector-basedemissionsfactors.Averagetakenusingassetintensityfactorsforallcounterpartieswheredataisavailable.13OilandgasScope3emissionsThemajorityofourclientsdonotyetreportthefullscopeofgreenhousegasemissionsincludedinouranalysis,inparticularScope3oilandgasemissions.TodetermineourScope3oilandgasemissions,weapplytwomethodologies.Thefirstproxymethodologyisappliedwhenproductiondataisavailable,andtheotherwhenitisnot.Whenwedohaveproductiondata,wecalculateScope3emissionsinthefollowingwayswhichyieldaPCAFdataqualityscoreof3:Ifproductiondataisavailable,andwehaveemissionsfactorsthatarereportedfromvendorsasScope1,2and3combined,wemultiplyproductionbyanaverageshareScope3emissionsfactortodeterminethetotalScope3emissions.Ifproductiondataisavailablethird-partydatavendors,wecalculateemissionsusingpubliclyavailableemissionsfactors.Whenwedonothaveproductiondatafromexternalsources,Scope3emissionsarecalculatedbyapplyingascalingfactortoknownScope1and2emissions.ThisyieldsaPCAFdataqualityscoreof5.OurPCAFdataqualityscoreexposure,correspondingtoeachproxytype,isshowninTable4andTable5.Table4-PCAFOilandgasdataqualityscoreexposurePCAFdataqualityscoreOn-balancesheetfinancedemissionsFacilitatedemissionsScope1and2Scope3Scope1and2Scope3Absoluteemissions1%exposureAbsoluteemissions1%exposureAbsoluteemissions1%exposureAbsoluteemissions1%exposure1--------21.538.4%5.120.6%2.478.4%6.727.8%34.042.5%2149.0%1.110.9%16.961.5%40.137.2%--0.010.4%--50.3711.9%3.830.4%0.4310.3%1.910.7%114Table5-PCAFPowerandutilitiesdataqualityscoreexposurePCAFdataqualityscoreOn-balancesheetfinancedemissionsFacilitatedemissionsScope1and2Scope1and2Absoluteemissions1%exposureAbsoluteemissions1%exposure1----23.035.2%2.443.1%36.539.3%1.09.0%40.1310.8%0.0022.1%50.4314.7%1.045.8%1Asdataavailabilityimprovesandsustainabilitydisclosuresbecomemandatory,ourPCAFdataqualityscoreshouldalsoimprove.Wewillcontinuetoworkwithcredibleexternalprovidersandourcustomerstoencourageandsourceclientself-reportedemissions.DatasourcesTheprimaryassumptionwithinthemodelisthatthedatausedisaccurateandthatmethodologiesusedtoremediatedatagapsareappropriate.Weenrichinternaldatawithexternaldatafromvendors.Table6providesthesourcesofthedataneededtocalculateourportfolioemissions.15Table6-DatasourcesDatatypeHSBCsystemsExternaldatavendorIEABEISandDEFRAScope1emissionsScope2emissionsScope3emissionsOilproductionGasproductionOil-equivalentproductionGas-equivalentproductionPowerproductionDrawnbalanceRevenueTotaldebtTotalequityTotalassetsEVICAssetleveldataCapitalmarketsdataProjectfinancedataProxydataScenariodataClienttargetdataVendorsprovidebothreportedemissionsquantitiesaswellasestimatedemissionsquantities,howevermostofourclientsdonotyetreporttheiremissions.Vendorssourcedatadirectlyfromstockexchanges,companyregistries,andothersources.ForseveralofthedatapointsusedtocalculateScope1and2emissions,multipledatasourcesareavailable.Weuseawaterfallanalysistoestablishahierarchyfortheseexternaldatasources,wherebydatasourcesareassessedandranked.Thedatasourcesarerankedbasedon:Dataavailability:Preferenceisgiventosourceswithahigherlevelofcoverageacrosstheportfolio;and16Marginoferroracrosssources:Atacounterpartylevel,emissionsarecomparedacrossdatasourcestoassessthevarianceindata.Spotchecksareconductedtoidentifythemostvaliddatapointswherepossiblebycomparingtheemissionstosourcedata(oftenfromannualreports)forasampleofcounterpartieswherelargedifferencesexist.Assetleveldataprovidesuswithasset-levelinformationforeachcounterparty,includingproductiondataforeachassetperyearandanemissionsintensitynumberforeachasset.Financialdataincludesinformationpresentinacounterpartycounterpartymarketvalue.Thisdataisusedforbothestimatingcounterpartyemissions,andforattributingemissionstoHSBC.Keyattributesarerevenueorannualsales,totaldebt,totalequityandtotalassets.Revenuerepresentstheamountofmoneymadethroughthesaleofproductsinayear,basedontheannualincomestatement.Weusetheseaspartoftheproxymethodologyforestimatingemissions.Totaldebtoutstandingrepresentstheamountacounterpartyhasborrowed,basedontheendofyearbalancesheet.Totaldebt,alongwithtotalequityandtotalassets,isusedinthedenominatoroftheattributionfactorwhereEVICisunavailable.Althoughweseektominimisetheuseofnon-counterpartyspecificdata,weapplyindustryaveragesinouranalysiswherecounterparty-specificdataisunavailable.Forexample,alackofstandardisationforemissionsintensityproxycalculationsbaseduponconversionfactorsmeansthatwehaveusedcertainUKbasedemissionconversionfactorsatagloballevel.Wewillseektoadoptamoreregionalapproach,asdatasetsbecomeavailable.Themethodologyanddatausedtoassessfinancedemissionsandsettargetsisnewandevolving,andweexpectindustryguidance,marketpractice,andregulationstocontinuetochange.Weplantorefineouranalysisusingthedatasourcesandmethodologiesavailableforthesectorsweanalyse.Weexpectourdataqualityscorestoimproveovertimeasclientscontinuetoexpandtheirdisclosurestomeetgrowingregulatoryandstakeholderexpectations.Ourinitialsetofbaselinesandtargetsmayrequireupdatingasdataavailabilitychangesovertimeandmethodologyandclimatescienceevolves.Weplantoreportfinancedemissionsandprogressagainstourtargetsannuallyandseektobetransparentinourdisclosuresaboutthemethodologiesapplied.However,financedemissionsfiguresmaynotbereconcilableorcomparableyear-on-yearandtargetsmayrequirere-evaluation.Howareforward-lookingemissionsestimated?(momentumpathway)Forwardlookingprojectionsofclienttransitionpathwaysarerequiredtodelivertheinsightsneededforportfolioalignment,capitalallocationandriskmanagement.Amomentumpathwayisdevelopedforeachsectorportfoliotoinforminternaldecision-making.Thispathwayaclientemissionstargets,whereavailablefromexternaldatavendors,andindustryaverages,toprojectabsoluteemissionsandemissionsintensitiesto2030ataportfoliolevel.TheSTEPSscenarioassumestheglobaleconomydecarbonisesataratedeterminedbyexistingpoliciesonly.Thescenarioactsasaconservativereferenceforestimatedforward-lookingdecarbonisationofindividualcounterpartiesbasedoncurrentcorporate,stateandsupranationalcommitments.WeintegrateclientemissionstargetswithourhistoricaldataandtheSTEPSscenarioasfollows(seeTable7):1.Whereclientshavesettargets,counterpartylevelemissionsdatafromanexternalvendorareusedtoforecastthefuturepredictedchangeinemissionsshowninTable7.2.Forholdingsinclientswheretheyhavenotsetemissionreductiontargets,weusetheSTEPSrateofchangeforemissionsandproductiontocalculateemissionsintensitiesusingIEAdata20.20IEA(2021),GlobalEnergyReview:CO2Emissionsin2020,IEA,Paris17Table7ClienttargetselectioncriteriaTargetsetbefore2030Weassumeapathwaytothatdatebasedonthesettarget,andapathwayto2030basedontheannualrateofchangeforemissionsintheSTEPSScenario.Clienttargetssetfor2030UseprovidedtargetClienttargetssetforbeyond2030Weuseastraight-lineinterpolationtocalculatea2030equivalentforthetargetAtpresentweassumeclientsmeetstatedtargetswheretheydeclarethem.Thisassumptionwillneedadjustmentinfuturereportingyearsasforward-lookingprojectionsshouldnotbebasedsolelyonstatedtargets.Ideally,projectionsshouldincorporatemultipledatasourcestoinformacredibilityanalysisofinterimtargets(wheretheyexist)alongsidetheavailabilityofnecessarytechnologyandpolicylevers.Weareworkingonenhancingourcapabilitiestogathergranulardatatomoreeffectivelyassessclienttransitionplansandmomentumin-linewithavailablescience.Howisalignmentmeasured?Forouron-balancesheetfinancedemissions,wehavesettargetsfor2030andplantosetfurthertargetsinfive-yearincrementsthereafter,inaccordancewithNZBAguidance.Weassessoilandgasportfolioalignmentbycomparingthereductionofon-balancesheetfinancedemissionsWeassesspowerandutilitiesportfolioalignmentbycomparingon-balancesheetfinancedemissionsintensityrelativetothebenchmarkscenarioat2030.Forfacilitatedemissions,wehavenotsetanytargetsastheindustryguidanceforcalculatingtheemissionsbaselineisstillbeingdeveloped.Wewillmonitordevelopmentsandintendtoadaptourapproachasprogressismadeinthisfield.Weplantoannuallymeasureandreportcurrentfinancedemissions,andprogressagainstourtargets,inourannualreportandaccountsandrelateddisclosures.18Step3.Assessingportfolio-levelalignmentHowisalignmentexpressedasametric?InlinewithNZBAguidelines,weexpressalignmentusingthefollowingforward-lookingmetrics:Oilandgas-Absoluteon-balancesheetfinancedemissionspercentagereductionby2030froma2019baseline.Powerandutilities-Physicalon-balancesheetfinancedemissionsintensityat2030.Our2030targetsarebasedonIEANetZeroEmissionsby2050scenarioreferences.Foroilandgas,theIEAindicatesinitsscenarioareductionof34%inglobalsectorScope1,2and3emissions(MtCO2e)to2030froma2019baseline.Forpowerandutilities,theIEAindicatesaglobalsectorScope1and2emissionsintensityat2030of0.14MtCO2e/TWhelectricityproduced.Wesetanabsolutereductiontargetforoilandgastoavoidrewardingclientswhomightachieveemissionsintensityreductionswithoutreducingoutput,hadwechosentosetanintensitytarget.Moreover,webelieveitpromotesdiversificationandrecognisesthatupstreamoilemissionscannotbedecarbonisedbelowacertainamount,atagivenlevelofoutput.Wechoseanemissionsintensitymetric,ratherthanabsoluteemissionsforthepowerandutilitiesportfoliotoreflecttheneedtoreduceglobalGHGemissionsfrompowergenerationwhilstalsomeetinggrowingelectricitydemandduetoincreasedelectrification.Howarecounterparty-levelemissionsaggregated?Ouranalysisisperformedatthecounterpartygrouplevel.Asdataavailabilityimproves,wemayadaptourapproachtomoregranularindividualcounterparty-levelanalysis.Counterpartygroupscoresareaggregatedatasectorlevel.Wecanalsoaggregategeographicallytoprovidemoreinformationabouthowtheportfolioisperformingwithinaregion.Whencalculatingtheportfolio-levelemissionsintensities,weaggregatecounterpartyfinancedemissionsandproductionvaluesusingaportfolio-weightedapproach.𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦=∑𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑓𝑎𝑐𝑡𝑜𝑟×𝐺𝐻𝐺𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠𝑐𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑐𝑐19ModelgovernanceThemodelwehavedevelopedtocalculateourfinancedemissionsbaselineissubjecttoagovernanceprocessthatincludesinputfrommodelusersandpeerreviewfromexternalconsultantsandseniorstakeholdersacrossourbusinessesandfunctions.SubjectmatterexpertsfromGBMandCMBreviewedandchallengedmodeldesignchoicesandassumptionsthroughaseriesofworkshops.Modeldevelopmentandoutputsaregovernedbytheacrossgloballinesofbusiness(GBMandCMB)andbusinessfunctions(CorporateSustainability,GlobalFinance,GlobalRiskandCompliance,DataArchitectureOffice,Legal,InvestorRelations).Subjectmatterexpertsandexternalconsultantsarealsoinvitedwhereappropriate.TheCAFSteeringCommitteeisoverseenbytheClimateBusinessCouncilwhichreportstotheGroupExecutiveCommitteeandtheGroupESGDataForumonclimate-relatedtopics.20CautionarystatementThisdocumentcontainsbothhistoricalandforward-lookingstatements.Allstatementsotherthanstatementsofhistoricalfactare,ormaybedeemedtobe,forward-lookingstatements.Forward-lookingstatementsmaybemilarexpressions,orbydiscussionsofstrategy.Theseforward-lookingstatementsincludestatementsrelatingtobecominganetzerobankandtargetsandmethodologiesformeasuringfinancedemissions.Achievingtheseaimsisinherentlyuncertainandissubjecttoanumberofrisksanduncertainties,includingtheinmanagingandmitigatingclimatechange;societalshiftsincustomerfinancingandinvestmentneeds;delaystothepaceofchange;developmentanduseofnewtechnology;abilitytoexploitgrowthorinvestmentopportunities;changesinpublicexpectationsandotherchangestobusinessconditions;adversechangesinregulatorycapitalandtaxregimes;dataqualityandtheavailabilityanddevelopmentofmethodologiesformeasuringfinancedandfacilitatedemissions;andtheotherrisks,uncertaintiesand--Ffortheyearended31December2020,filedwiththeSECon24February2--KfurnishedtoorfiledwiththeSECsubsequenttothe2020Form20--fiscalyearended31December2021availableatwww.hsbc.comandwhichweexpecttofilewiththeSEConForm20--reviseanyforward-lookingstatements,whetherasaresultofnewinformation,futureeventsorotherwise.Inlightoftheserisks,uncertaintiesandassumptions,theforward-lookingeventsdiscussedhereinmightnotoccur.Investorsarecautionednottoplaceunduerelianceonanyforward-lookingstatements,whichspeakonlyasoftheirdates.Athe2020Form20-F,SubsequentForm6-Ksandthe2021Form20-F.
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