Stuart Kirk, Global Head of Responsible Investment at HSBC Asset Management, last month asked investors: ​“Who cares if Miami is six metres underwater in 100 years?” His widely-reported comments demonstrate the grave risks of relying on the financial sector to voluntarily report and take action on the climate crisis.

Evidence continues to mount that the currently prevailing market-led approach to greening finance suffers from deep systemic issues. In late May, German police raided the offices of asset manager DWS and its owner Deutsche Bank on suspicions of greenwashing, following a whistleblower’s tip that DWS claimed its investments were more sustainable than they were. Meanwhile, the CEO of giant asset manager Blackrock, Larry Fink, pushed back against the idea that private investors should ensure the companies they invest in act to combat the climate crisis. Fink further argued against considering indirect emissions that occur in a company’s value chain, such as those generated by company investments, which tend to be by far the largest part of company emissions.

These developments fit the growing trend to question the validity of claims that the private financial sector is incorporating environmental, social and governance factors (ESG) in its investment decisions. Besides recent controversies, hard numbers on financial flows going towards fossil fuels tell an even more unambiguous story. The recent Banking on Climate Chaos 2022 report documents that the world’s 60 largest banks provided US$4.6tn in fossil fuel financing in the six years since the Paris agreement, including US$185.5bn for the 100 companies doing the most to expand the fossil fuel sector in 2021 alone.

UK-based HSBC offers a case in point. While the Group CEO, Noel Quinn, claimed that he ​“did not agree at all” with Kirk’s remarks about Miami, the bank’s activities suggest otherwise. HSBC remains the 13th largest funder of fossil fuels globally, Europe’s top funder of the expansion of the oil and gas sector, and only last year it lobbied the Net-Zero Banking Alliance to delay and dilute its climate rules.

HSBC remains the 13th largest funder of fossil fuels globally.

Continued huge levels of fossil fuel financing indicate that investors currently don’t believe that the values of their fossil fuel investments will be threatened by governments following through with their climate commitments (known as stranded assets). On the contrary, in April, investment strategist Lynn Alden’s stock pick of the week was new oil and gas pipelines, reflecting the belief that high fossil energy prices, weak climate action by regulators and recent disturbing dash for gas by governments will make these lucrative investments. While this remains the case, expecting the financial sector to voluntarily and rapidly shift away from dirty investments when given more information about climate-related risks is a dangerous fantasy.

Unfortunately, current predominant approaches to greening finance, exemplified in the recommendations by the Task Force on Climate-Related Financial Disclosures (TCFD), rely on that very assumption. The TCFD was created in 2017, and both HSBC and Deutsche Bank are among a growing number of financial firms publishing TCFD-aligned disclosures on climate-related financial risks – while at the same time continuing to finance fossil fuels or engage in suspected greenwashing of their products. In the UK, the government’s approach, centred on implementing the Sustainability Disclosure Requirements (SDRs), follows the same paradigm. And the Bank of England, despite it’s early leadership in putting climate on the central bank agenda, so far remains reluctant to go beyond data gathering and stress testing, seeing its role primarily as understanding the risks linked to the transition and seeking to protect the financial sector from climate change – rather than protecting climate from finance.

To avoid a planetary disaster, we need to rapidly reduce emissions, and quickly shift financial flows away from dirty fossil fuels and towards renewables, home retrofits, energy efficiency and related investments supporting the transition. Market-led approaches, such as disclosures or questionable net zero goals, such as those under the Glasgow Financial Alliance for Net Zero (GFANZ) umbrella, won’t deliver this – certainly not at the pace or scale required.

The evidence of banks’ actual lending practices suggests that HSBC’s Kirk is far from alone in seeing climate as the ​“work these people made me do”, – another box-ticking exercise. Instead of relying on markets self-adjusting, we need mandatory alignment of the financial sector with the Paris Agreement. The Bank of England and the government must coordinate to implement proactive credit guidance policies, actively intervening in the markets to shift financial flows away from harmful activities, through measures like higher capital requirements on dirty lending, and by incentivising lending towards desirable activities.

ECB president Christine Lagarde said last week that central banks need to ​“have an open mind” about bolder policies such as targeted green funding programs – since “‘if we don’t try, then, we have no chance of succeeding”.

Photo: iStock