By Wolfgang Kuhn, Director Of Financial Sector Strategies
You are not having a deja-vu: ShareAction, together with over 100 institutional and private co-filers, is filing of a shareholder resolution concerning climate change at a UK bank.
It is 2021, and we are asking HSBC to come clean on how the bank is planning to reduce its involvement with the fossil fuel industry.
Your instant reaction to this may be “but hasn’t the bank just announced that they will do just that as part of their commitment to Net zero by 2050?”
And yes, they have. But while their commitment says they will reduce “the emissions [they] add to the atmosphere”, they haven’t told us how they are going to do that, not convincingly anyway.
And that is the issue.
Statements of ambition only go so far
We saw a flurry of such announcements in 2020 – including a pledge to become carbon neutral from the world’s largest fossil fuel financier, JP Morgan.
But without concrete steps to back up these ambitions, including a commitment to reduce financing of key fossil fuel actors, they are nothing short of a PR exercise.
No doubt others will follow in 2021. We believe it is healthy for investors to send the message that it is just not enough.
Next you might ask “isn’t HSBC doing a lot more than other banks regarding the greening of finance?” Again, yes, they are. Our own ranking of European banks last year put them near the top. The bank is doing well when it comes to governance structures and the provision of low-carbon financing. Unfortunately, the HSBC is also financing a lot of ‘high-carbon’ activity.
HSBC and fossil fuels
HSBC is Europe’s second-biggest finance provider for the fossil fuel industry, according to the Rainforest Action Network.
The bank is Europe’s second most active player in oil sands (and if you hadn’t thought about it, you can read here why using oil sands is really a very bad idea indeed).
HSBC provided billions in loans and underwriting to companies heavily exposed to coal and/or building new coal power plants since the signing of the Paris climate agreement The amounts are not significant in the context of HSBC’s enormous balance sheet. But they are enormous in the context of a carbon budget, which as I write this, is quickly heading to the red.
Moving beyond climate scenarios
Banks, not just HSBC, are quick to point to all their detailed work benchmarking their assets against scenarios – like those developed by the International Energy Agency (IEA) and others. These show how decarbonisation could be achieved by changing the mix of energy sources. But they come with probabilities of achieving certain temperature rise limits. One scenario has better odds than others. But that doesn’t change the fact that they are not forecasts.
“I commit to having done my homework by tonight with a likelihood of 66%” doesn’t work very well as a commitment. We have no issue with such analytical work as a way of understanding the problem. But scenarios are not a substitute for difficult (yet obvious) choices that lenders like HSBC need to make.
We know that we need to urgently reduce the burning of fossil fuels. As such, a company’s claim to net zero lack credibility if it has no plan to concrete plans to reduce its exposure to the fossil fuel sector.
The risk of inaction
As we have learnt over the last 12 months – and the global health crisis that has ripped through our lives – if you do not act decisively, you are probably not convinced of the threat in the first place.
Investors, bank managers and regulators are all starting to understand: Continuing to fund fossil fuels is a risk to a bank’s reputation and its balance sheet. Not to mention to the planet.
What if those scenarios we put so much weight on turn out to be wrong? Who is taking that risk? Society, for sure. Shareholders, most likely. And it won’t be 30 years before the blame for the consequences of inaction will be distributed.Whether you are focused on stranded assets, climate risk or the melting ice caps, the answer is the same: HSBC needs to make ambitious plans on how to tackle high-carbon sectors. And it needs to do so now.
Banks have two robust tools to drive change in the fossil fuel sector at their disposal: divestment (discontinuation of lending) and engagement. Both are needed.
We believe that banks should introduce robust project finance exclusions and corporate financing restrictions for companies that are heavily exposed to some of the most carbon-emitting sectors – such as coal.
They also need to use their influence to get other companies to publish credible transition plans in line with the 1.5C goal – and make their expectations for these companies clear, in line with the science, and with clear consequences if companies fail to listen to them after several attempts to engage.
HSBC: The potential to lead
A final question you might have is ‘isn’t HSBC’s business mainly in Asia? How can you apply European Standards to non-European regions?’.
A similar question was raised last year when we filed a climate change resolution at Barclays, which has lots of business in the US.
Our view is that this put HSBC in prime position to help Asian clients to leapfrog and to get ahead of the game. At the end of the day, even if regions are allowed to move at different speeds, the Paris Agreement is clear that the emissions curve has to be bent “as soon as possible”. Those companies that quickly move out of fossil fuels, and into the energy of the future will be better positioned in the long run.
HSBC is in a great position to become the uncontested leader in dealing with climate risks, to the benefit of shareholders.
But such a position is easily squandered by lack of ambition. By voting for the resolution, investors should make this point to the board of HSBC.