Time to stop worrying about climate risk?

The HSBC executive spoke at the Financial Times’ Moral Money summit with an air of calculated provocation: “Who cares if Miami is six metres underwater in 100 years? Amsterdam’s been six metres underwater for ages and that’s a nice place.”

Three days later, Stuart Kirk, global head of responsible investing at HSBC’s asset management division, had been suspended. While the bank’s chief executive publicly disagreed with his remarks, the FT reports that the theme and content had been agreed internally at HSBC.

So what does Kirk’s candour tell us about the financial sector’s attitude to climate change?

• Risky assets are worth more to investors. Kirk said: “Despite the hyperbole… the more people say the world is going to end…  the higher and higher and higher risk assets go.” 
  
  This is accurate, in that companies with higher emissions have lower valuations, and investors therefore expect higher returns. Patrick Bolton, Professor of Finance and Economics at Imperial College Business School, says: “This has been increasingly visible after the Paris Agreement. Markets are beginning to price in carbon transition risk. From the point of view of an investor who has risk appetite, they may be investments to look at.” It also means the cost of raising capital is higher, of course.

• Banks’ horizons are short term. As Kirk put it, since the average length of a loan is six years, “what happens to the planet in year seven is actually irrelevant to our loan book”. In the global north, at least, climate-related risks are still seen as distant threats. Research on property sales in south Florida found that while many of the houses would not outlast their mortgages without damage, and resale was likely to have become difficult, the market did not appear to have integrated the long-term risk. There may be an assumption that governments will provide a back-stop in case of disasters – the US National Flood Insurance Programme provides affordable insurance and works to mitigate risk, for example. But not all kinds of disasters are covered.

• Markets struggle to price complex risks. “My final point I guess is an optimistic one… humans are spectacularly good at managing change,” Kirk said, illustrating his point with a slide that showed the long-run return to the S&P 500 through two world wars, an oil crisis, the financial crisis and the pandemic. “It goes up and up and up… climate change won’t change that either.”
  
  But climate risk, with interlocking threats, may be a different kind of challenge to these previous crises. Humans are among the most adaptable species on the planet, and the hard limit of our adaptability may be some way off, but there are significant costs to society before that point is reached. While climate change is certain, the precise nature of its impact and intensity remains unclear, making it difficult for markets and lenders to adjust.

Kirk’s presentation suggested that he, and perhaps many other financiers in private, had become jaded with the fear of climate change: immune to it, like the car alarm that goes off all the time. “The constant reminder that we are doomed… it’s become so hyperbolic that no-one really knows how to get anyone’s attention at all,” Kirk said.

This suggests a misunderstanding of the current consensus in climate science. The IPCC’s latest estimate is of 3ºC of warming above pre-industrial levels. This is very bad and will mean extreme storms, heatwaves, droughts and flooding. But it doesn’t mean an entirely uninhabitable planet. It is surprising that HSBC’s global head of responsible investing should conjure this up as a prospect for the future, even if he does so in order to insist on business as usual.

A final thought: diverting flows of finance will be essential to getting to net zero quickly. How many of Kirk’s colleagues agree with him – and do they have good reasons for doing so?

Green transition
Will the war in Ukraine accelerate or derail Europe’s transition away from fossil fuels? In an interview with Al Jazeera on the fringes of the World Economic Forum in Davos, the executive director of the International Energy Agency, Fatih Birol and the president of Cop26, Alok Sharma said their piece, warning governments against investing in fossil fuels as they try to withdraw from Russian supplies. Instead, they encouraged governments to seize the moment to invest in renewables. It remains to be seen whether governments will take heed: the EU currently has plans for €12 bn of investment in new oil and natural gas infrastructure.

Harbouring doubts
The biggest oil and gas producer in the North Sea, Harbour Energy, has warned the government against imposing a windfall tax on the burgeoning profits of the UK fossil fuel sector. Harbour, which planned to invest $6bn in the North Sea between now and 2024, told Kwasi Kwarteng, the business secretary, that a tax could make some of the projects less viable just at the moment when ministers hope to boost domestic energy production and limit reliance on imports. Harbour made $2.4 billion before taxes last year. It plans to extract 210,000 barrels of oil equivalent from the North Sea daily throughout 2022, and promotes itself as focusing on “emerging and underexplored plays in proven hydrocarbon basins around the globe”. (It’s not the only one – a safety consultant working with Shell quit yesterday, citing the conflict between the company’s expressed commitment to net zero, but actual plans for ongoing exploration). The IPCC warned that no new oil and gas fields should have been developed from the end of 2021 if the world is to hit its emissions goals.

Extreme weather
It isn’t yet monsoon season in Bangladesh and northern India, but heavy rain is already falling, with severe effects. At least 33 people have died in Bihar state, which borders Nepal, and in Assam, the state between Bangladesh and Bhutan, at least 14 have been killed and 91,518 people have escaped floods to relief camps. In Bangladesh itself, 4,300 families have been displaced, 10 people killed, and over two million impacted. These parts of the world are prone to heavy rain – but will suffer more in future. Climate change will make extreme rain more likely, and unplanned urban expansion and environmental degradation (increasing the odds of landslides) will make them more dangerous to human life. 

Feeling generous?
MPs, scientists and campaigners have asked the Charity Commission to strip the Global Warming Policy Foundation (GWPF) of its charitable status. Charities are entitled to a range of tax breaks, including on donations, but the label is intended only for organisations run “for the public benefit”. The GWPF is a London-based lobby group that has consistently argued against the government’s climate change policies. Its trustees include the UK’s former Tory chancellor Nigel Lawson and backbencher Steve Baker, who corrals climate-sceptic MPs under the banner of the Net Zero Scrutiny Group. Last month, an investigation by OpenDemocracy revealed that the group’s funding was closely linked to fossil fuels. For its part, GWPF said the claims were unfounded. 

Thanks for reading.

Jeevan Vasagar

@jeevanvasagar

Additional reporting by Ellen Halliday.

With thanks to our coalition members: a network of organisations similarly committed to achieving Net Zero