Investors hold real climate change power
Europe’s largest bank will no longer finance new coalfired power plants, oil sands projects or Arctic drilling, but was this decision driven by politics or risk?
The answer is that one sped recognition of the other, and the energy industry had better take notice.
HSBC announced the new policy the day before a shareholder meeting where activists were expected to demand polices that recognized both the environmental and financial risk presented by climate change.
Daniel Klier, head of strategy and sustainable finance at HSBC, said the bank would make an exception for coal plants in Indonesia, Bangladesh and Vietnam over the next five years because there are no viable alternatives. But after that, HSBC would be out of what environmentalist call the extreme fossil fuel business.
“We recognize the need to reduce emissions rapidly to achieve the target set in the 2015 Paris Agreement to limit global temperature rises to well below 2 degrees Celsius and our responsibility to support the communities in which we operate,” Klier said in a statement.
HSBC, though, is by no means a leader when it comes to climate change. The bank invested $2.1 billion in coal-fired plants over
the last three years, while ING, BNP Paribas and BBVA have led the way in refusing to finance projects that will make it harder to slow global warming.
“HSBC’s restriction on corporate finance for tar sands extraction and pipeline companies is a step forward, and further evidence that the sector as a whole will steadily become unbankable,” said Paddy McCully, climate and energy program director for the Rainforest Action Network.
North American banks don’t seem to think so. The environmental group studies investment patterns and gave all major U.S. banks a failing grade for the fossil fuels in their portfolios. JPMorgan, the biggest U.S. bank by assets, increased tar sands investment by 400 percent last year from 2016 levels, the group found.
U.S. banks find it easy to ignore climate change because Republicans have politicized the science that clearly shows human activity is rapidly warming the planet. Cabinet members like Secretary of Energy Rick Perry may acknowledge the problem in congressional hearings, but they oppose efforts to do anything about it.
Conservative Republicans, though, can’t change the reality that sea levels are rising, storms are stronger and the last few years have been the warmest on record. Homes at sea level in Miami are dropping in value, and Houston must spend billions to prepare for more powerful hurricanes.
Smart investors know that when more Americans feel the effects of climate change, GOP climate denial will dissipate and U.S. policy will respond accordingly.
Policy uncertainty makes a 20-, 30- or 40-year investment in a coal-fired power plant, tar sands project or Arctic well very risky. Who knows what climate effects people will experience in 2028, which party will control the government and what new restrictions on greenhouse gases will be imposed?
BlackRock, the world’s biggest asset manager with $6 trillion, wants companies to answer these questions and assess the risk climate changes poses to their future revenues. BlackRock was a major force behind Exxon Mobil Corp. reporting the climate risk to its business.
And BlackRock is not alone — 225 investment funds with $26 trillion in assets under management are also demanding that companies report the risks to their business brought by climate change and potential regulations to reduce greenhouse gases.
“Climate risk is an example of a slowly developing and highly uncertain risk—the kind that tests the strength of a board’s oversight and risk governance,” William McNabb III, CEO for the Vanguard Group, wrote to the boards of companies where it has invested.
“We believe it is incumbent on all market participants — investors, boards, and management alike — to embrace the disclosure of sustainability risks that bear on a company’s long-term value creation prospects,” the letter added.
Companies are responding and recognizing the growing likelihood of increased regulation. Even fossil fuel companies are changing their ways.
BP pledged last week to reduce emissions of methane, a greenhouse gas much more dangerous than carbon dioxide. Royal Dutch Shell bought an electric vehicle charging company last year and is investing in carbon capture technology.
Climate deniers like to dismiss corporate action on global warming as political pandering, and some of it may be just that. But the world’s biggest and smartest investors recognize that climate change is real and will hurt returns.
Investors worried about losing their money wield far more power over corporations than regulators, and their pressure will likely do more to save the planet than any set of regulations.