HSBC’s barrier uncapped notes on ESG index, clean energy ETF offer access to hot asset class

By Emma Trincal

New York, July 29 – HSBC USA Inc. priced $689,000 of 0% barrier uncapped market participation securities due July 30, 2026 tied to the least performing of the S&P 500 ESG index and the iShares Global Clean Energy exchange-traded fund, according to a 424B2 filing with the Securities and Exchange Commission.

If the return of each asset is positive, the payout at maturity will be par plus 1.47 times the return of the least-performing asset.

If either asset falls but neither falls by more than 30%, investors will receive par.

Otherwise, investors will be fully exposed to the least-performing asset’s decline from its initial value.

Not enough of these

Steve Doucette, financial adviser at Proctor Financial, said he was glad to see a note tied to what is known as “impact” investing.

“It’s been a while since I’ve seen clean energy and ESG in a note. It’s a space that’s done very well in the past decade,” he said.

The product would easily fit in an equity portfolio.

“If you have an allocation to ESG, you take this five-year, you put it in there. You get almost 1.5 times, no cap.

“That’s a nice note,” he said.

“I’m surprised I’m not seeing more of those types of notes. There are too many people who want ESG assets or clean energy. If you ignore that type of demand as a financial adviser, you run the risk of being precluded from a large pool of potential clients.”

Rich but popular

Doucette said investors are unlikely to balk at the asset class simply because of its rich valuations.

The S&P 500 ESG index, which launched in January 2019, posted a 52-week intraday high on Thursday, a 38.3% gain from its 52-week low of a year ago.

The iShares Global Clean Energy ETF has appreciated even more. Its closing price on Thursday remained 60% higher than its July low, despite a 33% drop from its January peak.

“Tesla has jumped 230% in a year. People are still buying it,” he said.

While ESG investing is in the headlines and has become increasingly widespread, not every investor is showing interest in it.

“We’ve had some requests but very few. We haven’t opened our ESG due diligence shop yet because demand is not there from our existing clients,” he said.

“But we’re thinking about it.”

Solar panels

Part of this adviser’s hesitation relates to fundamentals.

“It’s a new, popular asset class. But you really have to sit down and do your due diligence,” he said.

“If I look at the top 10 of the Clean Energy ETF, I’m only familiar with two names – Enphase and Solaredge.

“And that’s because as a residential customer, I use solar panels for my house.”

Both Emphase Energy Inc. and SolarEdge Technologies, Inc are solar stocks.

Going into details

Doucette said that companies that compose the ETF and underlying index are not necessarily mainstream names. Investors need to spend the time to educate themselves about the technology behind the products those companies are selling.

“You’re buying a concept. But the fundamentals are more complicated,” he said.

“These indices allocate to a number of different industries. You have to be familiar with each of those and understand what each company does, what their growth prospects are and what their balance sheet looks like. It requires a lot of research.”

It’s not always clear why some stocks are climbing more than others, he said.

“Emphase has been running through the roof. But you have to look at what’s driving the run,” he said.

This company’s stock price has more than tripled in a year.

Shrinking tax credits

In some cases, profits rely on governmental subsidies.

A lot of the demand for solar panels is the result of the Federal tax credits, he said, adding that consumers could grow too dependent on the incentive.

“The credits unfortunately are phasing out, and that could be an issue,” he said.

Solar panel projects that occurred between 2006 and 2019 benefited from a 30% tax credit. The credit dropped to 26% for 2020 and to 22% for this year. The tax credit will be reduced to 10% for any project commencing after Dec. 31, according to the U.S. Department of Energy.

“I like the note. It’s a great deal. But you have to know what you’re investing in,” he said.

Mainstream

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he liked the notes as well.

“It’s timely and it follows a robust, popular trend. Impact investing is becoming mainstream,” he said.

“The environmental, socially responsible investing has been a hot topic for quite some time, probably even more so now with the current political environment.”

Medeiros said that his firm has been focused on impact investing assets for a while.

“We have an over 10-year track record managing money in the space,” he said.

Price, term

But he said that the valuations of the notes’ underlying were a concern.

“Those underliers are pricing if not at all-time highs, at least at very high prices. That’s something you need to look at,” he said.

On the other hand, the length of the notes mitigated some of the risk.

“I like the five-year tenor. Hopefully it will provide enough time for these investments to go through a complete business cycle,” he said.

“In the event of a pullback, we should be able to recover on time.”

Another structural benefit attached to the note was the enhanced return.

“We’ll see more and more leveraged notes because return expectations in equities are much lower than normal. With lower returns, the leverage provides a nice return enhancement,” he said.

“People can definitely use that boost.”

Medeiros said that the barrier level was acceptable based on the term of the investment.

“I would be concerned if it was a shorter note. But over five year, I’m not too worried about the 70% barrier,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes will settle on Friday.

The Cusip number is 40439JEY7.

The fee is 3.625%.

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