When the history of this week is written, it may reveal the depth of the divide between regulators and banks on efforts to counter the advance of climate change.
The Bank of England warned Tuesday that banks and insurers could face higher capital requirements and see a 10% to 15% dip in annual profits if they don’t prioritize managing climate risks.
Across the pond, the Securities and Exchange Commission (SEC) voted Wednesday to issue two proposals. One would expand the two-decade-old “names rule” to encompass ESG funds — such that a fund must invest at least 80% of its holdings in certain industries or investment types to give itself labels such as “ESG,” “sustainable” and “low-carbon.”
The second would require funds that consider ESG in their investment processes to disclose how they measure progress toward that goal.
“What we’re trying to address is truth in advertising,” SEC Chair Gary Gensler said Wednesday, according to The Wall Street Journal.
Hester Peirce, the SEC’s sole Republican, voted against both proposals, saying they would impose undue burdens on asset managers.
The SEC will take public comments on the measures for 60 days.
Wednesday's move comes as the SEC begins to crack down in earnest on “greenwashing,” the exaggeration of efforts to limit harm done to the environment. The regulator imposed a first-of-its-kind penalty on a BNY Mellon subsidiary Monday — a $1.5 million fine for misstating in prospectuses that its mutual funds received ESG quality reviews when that wasn’t always the case.
And yet, the most lasting narrative of the past few days with regard to banks’ ESG concerns may be comments the global head of responsible lending for HSBC’s asset-management division made at a “Moral Money” conference Thursday.
On climate change’s effect, HSBC’s Stuart Kirk said, “You’ve got to out-hyperbole the next guy, but I feel like it’s getting a little bit out of hand."
“The constant reminder that we are doomed. The constant reminder that within decades, it’s all over,” he told attendees. “[A previous presenter at the conference] said we’re not going to survive, and indeed no one ran from the room. In fact, most of you barely looked up from your mobile phones at the prospect of non-survival.”
In his presentation, Kirk noted that as media reports more frequently characterize climate change as catastrophic, the price of risk assets climbs. He suggested that either climate risk is negligible, that climate risk is already accounted into price, or that central bankers must demonstrate that everyone in finance is underestimating climate risk.
“What bothers me … is the amount of work [regulators] make me do” to account for climate risk, Kirk said Thursday. “I work at a bank that’s being attacked by crypto. … We’ve got the China problem, we’ve got a housing crisis looming, we’ve got interest rates going up, we’ve got inflation coming down the pipes and I’m being told to spend time and time again looking at something that’s going to happen in 20 or 30 years hence. The proportionality is completely out of whack.”
The average loan length is six years, Kirk noted, asserting that whatever happens in Year 7 is irrelevant to the loan book.
HSBC has suspended Kirk, the Financial Times reported Sunday. And executives at the British bank took to social media to decry his presentation. The title of Kirk’s presentation — “Why investors need not worry about climate risk” — had been agreed upon two months earlier, according to the outlet.
“I do not agree – at all” with Kirk’s comments, HSBC CEO Noel Quinn wrote on LinkedIn over the weekend, calling the presentation “inconsistent” with the bank’s strategy.
“I hope my colleagues, customers and others will all know, from our work and my public comments, that HSBC is absolutely committed to a net zero future,” Quinn wrote. “Given our global reach and capabilities we have an obligation to lead.”
Nuno Matos, head of HSBC’s wealth and personal banking business, likewise posted “in complete agreement” with Quinn’s stance.
Blowback against Kirk’s comments isn’t limited to inside HSBC.
“He represents yesterday’s bank executive,” Paul Clements-Hunt told Bloomberg. Clements-Hunt helped coin the acronym ESG in the mid-2000s.
“Flippant, off-the-cuff remarks don’t do any favors,” another executive told the Financial Times.
However, Hendrik du Toit, CEO at asset manager Ninety One, told the Financial Times that Kirk’s remarks have “given us all food for thought and encouraged healthy debate around the biggest existential topic of our time,” adding, “it doesn’t change the fact that we need to address” climate change.
Sasja Beslik, a veteran of sustainability units at ABN Amro Asset Management and Nordea Asset Management, told Bloomberg that Kirk was “expressing what many bankers think when the media isn’t around.”
Public face vs. inside voice
Kirk noted central banks have argued the effect of climate change will take 2.5% to 5% away from gross domestic product 80 years from now.
“What they fail to tell everyone else … is that by the year 2100 … the world is going to be between 500% and 1,000% richer,” Kirk said Thursday. “You lop 5% off that in 2100, who cares? You will never notice.”
By Kirk’s logic, the $1.5 million penalty the SEC handed BNY Mellon on Monday would not, on its own, serve as a motivator for the bank to stay on the right side of climate regulation — nor justify “the amount of work” involved. (BNY Mellon Investment Adviser, the unit affected by the fine, held more than $380 billion in assets as of March, according to the Financial Times.)
Right-of-center views like Kirk's aren't the only ones on ESG to take fire. Lawmakers in the U.S. Senate derailed Sarah Bloom Raskin's nomination to serve on the board of the Federal Reserve in March over concerns that her personal opinion on policies allowing oil, gas and coal companies to take government-backed emergency relief would bleed into central bank policy.
For those fears to be founded and for Kirk’s comments to be justified, regulators may need to stiffen their penalties.
Meanwhile, the banking sphere may have to reconcile its public-facing embrace of ESG policy with the inside voice that Kirk’s comments let out.
“I welcome a contrarian view as sometimes the ESG market is overly one way,” Desiree Fixler, a former head of sustainability at DWS, told the Financial Times. “We’re living in a world where ESG executives are paid on PR statements and aspirations rather than on actual impactful results.”