Banks take hugely varying approaches in their commitments to tackling climate change. But there’s at least one point of consensus. You have to be seen to be taking it seriously.
A talk entitled “why investors need not worry about climate risk” from an HSBC executive hints at disharmony in the ranks.
Predictably, HSBC has moved to suspend Stuart Kirk, the global head of responsible investment for its asset management division, who delivered the speech at a Financial Times event last week. HSBC’s bosses have since disclaimed its contents — despite indications the title and theme were known internally in advance.
There is a narrow problem here for the bank, about who knew how much about the talk and what their response was. The best-case scenario for HSBC is perhaps that no one scrutinised it very carefully. Worse would be if they read it and failed to appreciate the upset it would cause. The better the internal checks, the bigger the issue for the bank.
There’s a slightly wider issue for HSBC too. Climate change is a bigger business risk for the bank than for some of its UK rivals. It has a significant presence in Asia and thermal coal, which makes the task of cutting its exposure to clients’ emissions more challenging than for a domestically focused lender such as NatWest or Lloyds Banking Group. Like Barclays, it is already in investors’ sights over its climate change commitments because of the sheer amount of financing it provides to fossil fuel groups.
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HSBC’s net zero policies so far haven’t always proved to be up to scratch either. It committed to phasing down coal to stave off a shareholder resolution at last year’s annual meeting, then left loopholes in the policy it published. It set targets to reduce its exposure to oil and gas companies, but only included lending, not capital markets activity. The bank has pledged improvements, after investors threatened action at its annual meetings. It faces lingering credibility concerns.
But to make this all about Kirk or HSBC is a mistake. So too is pushing back on the various facts that Kirk uses to make his case that investors do not need to worry about climate risk in their portfolios.
Because while Kirk’s may be a lone public voice, we can be confident he is not the only one in the industry expressing such views in private. That points to a broader issue about the work the banking and asset management sector has to do to win the climate argument internally.
Kirk might be right that climate risk is too far in the future to matter for investors in many companies when you look narrowly at valuations, or for HSBC if you look at the average length of one of its loans. That is partly because of the way the regulatory regimes are set up, argues James Vaccaro of the Climate Safe Lending Network, with too much focus on disclosure and not enough on the wider financial impact of banks’ financing practices.
“There is little disincentive or regulatory pushback to financing the things that are contributing to the climate crisis”, he says. Stress tests are focused on the risk to the bank, not the financial impact the bank has on the world. And until the results of such tests dictate capital requirements, their impact will in any case be limited.
To deal effectively with the broader societal problem of climate change, banks and asset managers have to incentivise their employees to look beyond a short-term professional horizon. That is a cultural question for institutions to solve.
If the dissent expressed by Kirk represents broader resistance, it will not be possible to simply shut it down by pushing out individual employees or hushing it up. Management will need to recognise they have work to do to align the incentives of those lower down the hierarchy with the views of executives at the top. The industry will have a far better chance of achieving its stated aim of reducing the emissions it finances if it accepts there are still those internally who need persuading, and creates the incentives needed to convince them.
Do not kid yourself this is a one person or one institution problem.
Stuart Kirk is a former Financial Times journalist, but not one with whom Cat overlapped