- HSBC boss says bank won't choose between "two extremes" on all fossil fuels
- Follows outcry over anti-ESG comments from HSBC responsible investing head
Polarising discussions about the use of green finance will do little to help the transition to a lower carbon economy, the head of HSBC said as investors re-evaluate oil and gas spending in light of the energy crisis.
The 157-year-old lender financed much of the existing industrial base and now wants to back its transition to lower carbon-intensive activities, but chief executive Noel Quinn said there were few easy answers.
“The world at the moment is very binary – green is good, brown is bad and you have to choose between those two extremes. I firmly do not believe in that proposition,” Quinn told a Future Investment Initiative (FII) event in London last week.
Although HSBC is happy to back purely green businesses, “we have to put even more finance into those businesses that are on a transition journey”, he said. “As a CEO of a PLC where there are lots of commentators saying ‘you have to choose – walk away from brown, walk into green’, I’m saying I’m not going to do that.”
HSBC has come under scrutiny for its continued financing of coal, gas and oil projects and in March said it would "phase down" financing of fossil fuel activities in order to align with the Paris Agreement goal of keeping global warming under 1.5 degrees.
The bank was the centre of a discussion this week about how serious the financial world is taking environmental, social, and governance (ESG) standards after it suspended the global head of responsible investing at its asset management arm, Stuart Kirk, who told the Financial Times' Moral Money Summit last week that central bankers were overstating the financial risks associated with climate change.
Quinn said in a subsequent LinkedIn post that he did not agree with Kirk’s comments, adding that he wanted the lender to be “the leading bank in supporting the global economy transition to net zero”.
Transition ramp
The finance industry needs to “engage with the companies who are making the transition” to net zero rather than shunning them, London Stock Exchange (LSEG) chief executive David Schwimmer said at the FII event.
“We’ve got 80 per cent of the world’s economy relying on fossil fuels. We can’t just flick that off,” he said.
“Working with companies in extractive resources – oil and gas, metals and mining – has to be the solution,” he said. The top companies in the FTSE 100 remain extractives companies, with Shell (SHEL) the largest by market capitalisation, and BP (BP.), Rio Tinto (RIO) and Glencore (GLEN) in the top 10.
Having told shareholders in his annual letter two years ago that “climate risk is investment risk”, BlackRock’s Larry Fink told the FII conference that the same document also said hydrocarbons shouldn’t be divested, arguing it was better to work with companies in the sector than against them.
There are now additional issues around energy security and reliability of sourcing following Russia’s invasion of Ukraine, but these will resolve themselves and the resulting increase in prices will accelerate investment into renewables, Fink said.
“Higher energy prices actually bring down the green premium,” he said.
Investments into ESG have slowed in recent months. New money flows into ESG funds fell by 38 per cent quarter on quarter to $97bn (£77.7bn) during the first three months of this year, according to Morningstar data. ESG debt issuance also dropped by 15 per cent year on year to $330bn in the first four months, according to the Institute of International Finance.
The Future Investment Initiative, founded by Saudi Arabia’s sovereign wealth fund, launched a new framework for scoring ESG investments at the event. It argued that less than 10 per cent of the $41tn of current ESG investments have been made in emerging markets, despite them being home to half of the world’s GDP and 90 per cent of its population.
Laura Lutton, global head of ESG research at Sustainalytics, an ESG ratings agency owned by Morningstar, rejected the notion that existing ratings were a barrier to investment, saying that it rates 170 sovereigns and about 13,000 corporate issuers around the world. It uses an absolute rating so that clients can make meaningful comparisons across markets, she said.
Country risk will be a factor when assessing company ratings, because in many emerging markets it will heighten the investment risk, she said.
“The methodology certainly favours countries that have stable governments, strong environmental policies and so forth.”
Country-specific risks around corruption and the rule of law are important considerations for investors, said James Alexander, chief executive of the UK Sustainable Investment Finance Association.
“It’s such a tragedy of our age that the areas that need investment the most are among those that are suffering from wider governance challenges and therefore the money doesn’t flow as it should.”
Only three of the 20 countries deemed to be the least corrupt in the world are emerging market economies, according to Transparency International's Corruption Perceptions Index.
