HSBC banker Stuart Kirk has done the world of green finance a tremendous service. He has exposed widespread, muddled thinking about a central aspect of climate change: financial risk. It is not the lesson that he intended, nor one that many in the industry wish to take, but it is a start.
Kirk, the global head of responsible investing at HSBC’s asset management division, gave a brief but riveting presentation at an FT Moral Money event last week that he titled “Why investors need not worry about climate risk”.
Climate finance conferences rarely provoke, amuse or shock. Kirk managed to do all three, spectacularly, as he argued central bankers and other financial leaders were over-egging the threats posed by climate change.
“Unsubstantiated, shrill, partisan, self-serving, apocalyptic warnings are ALWAYS wrong,” said one slide. “Nut jobs” had been warning of the Y2K computer glitch and other calamities for decades, he added, assuring offence well beyond the financial world.
By Sunday, Kirk, who used to edit the FT’s Lex column, had been suspended as the bank investigated his presentation — the theme and content of which had been agreed internally. HSBC has since been variously accused on social media of punishing a courageous truth-teller, and promoting a dangerous climate sceptic to its senior ranks.
Both pictures are flawed. But the larger problem this affair reveals is the enduring depth of misunderstanding about a key reason why global warming is unlike any other public policy problem: the profound level of uncertainty.
As economists Gernot Wagner and Martin Weitzman wrote in their 2015 book Climate Shock, climate change is “almost uniquely global, uniquely long term, uniquely irreversible, and uniquely uncertain”.
We know that emitting more greenhouse gases raises average global temperatures and, if emission rates persist, there is a chance the world will be transformed into a state unseen for millions of years. What we cannot know is precisely how this transformation might unfold, nor exactly what responses could ultimately emerge to address it.
Rising heatwaves, drought and floods may disrupt food and energy supplies and displace populations enough to prompt vaulting carbon prices, fossil fuel bans and more. Or they may not. But regulators think companies, including banks, should try to quantify and disclose their exposure to these potential risks.
Kirk thinks such risks are too distant to imperil big banks such as HSBC, which he said had an average loan length of just six years. But his broader objection is rooted in a belief that humans are likely to withstand whatever global warming throws at them.
As he said last week, some climate researchers project that up to 5 per cent of global gross domestic product could be lost by 2100 if temperatures warm considerably. “What they fail to tell everybody, of course, is that between now and 2100, economies are going to grow a lot,” he said. “The world is going to be between 500 or 1,000 per cent richer. You lop 5 per cent off that in 2100, who cares? You will never notice.”
The same went for stock markets, he added, putting up a chart that showed S&P 500 returns steadily rising from 1930 to 2020. “It goes up and up and up and it will continue to rise at 6.5 per cent [in] real [terms] for as long as toast is toast,” he said.
“Climate change won’t change that,” he added. “Humans are spectacularly good at managing change.”
They are and let’s hope he is right. Let’s also hope he is correct to say it does not matter if Miami is six metres under water in 100 years because “Amsterdam has been six metres under water for ages and that’s a really nice place. We will cope with it”. I suspect the coping will look different in non-OECD countries, but you never know.
And that is the point: none of us know. The uncontrolled experiment that humans are conducting on the planet by continuing to burn the fossil fuels that drive a large share of warming has no parallel.
It is impossible for Kirk to know that the financial risks are as small as he claims. Yet he is not alone. His confidence, and frustration, with climate regulation is quietly shared by many in the finance industry who think of global warming as another fashionable but financially irrelevant concern that will pass.
They are wrong. Addressing climate risk has nothing to do with hyperbole, greenwashing or nuttiness. It is, quite simply, needed.
Climate Capital
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