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May 24, 2022updated 19 Jul 2022 8:13am

HSBC ‘climategate’ set to sharpen investor due diligence

Asset owners have been sharply ramping up their ESG-related scrutiny of fund managers in the past year. Controversial comments made last week by HSBC Global Asset Management’s now-suspended head of responsible investment are expected to accelerate that trend.

By Joe Marsh

HSBC’s senior management have sought to distance the bank from comments made by Stuart Kirk at an event sponsored by the group. (Photo: Chris Ratcliffe/Bloomberg via Getty Images)
  • Stuart Kirk, HSBC Global Asset Management‘s currently suspended head of responsible investment, last week argued that climate risk was heavily overplayed.
  • Kirk’s comments – and moves by HSBC to distance itself from them – have been widely criticised by asset owners and others, and raised concerns about how widespread such thinking is in the financial sector.  
  • Institutional investors (and regulators) had been increasing their scrutiny of asset managers and that trend is expected to further ramp up as a result.

“You probably don’t expect a speech titled like this at a conference like this.” That was, as it turns out, a massive understatement by HSBC Global Asset Management’s then head of responsible investment.

Last Thursday (19 May), Stuart Kirk gave a presentation at the Financial Times’s (FT) Moral Money Summit entitled ‘Why investors need not worry about climate risk’. His core arguments were that climate was not a risk that financial firms needed to worry about given its very long-term nature, and that human adaptation would in any case solve the climate crisis.

Given Kirk’s position and the seemingly offhand tone of some of his comments, it left many – campaigners, politicians, consultants and investors alike – utterly bemused, and some even calling for his sacking. Yesterday, it emerged that he had been suspended pending an internal investigation.

What is particularly worrying for many is that Kirk’s comments appear – at least to some degree – to reflect wider thinking on climate risk within HSBC. After all, the group sponsored the FT event as a ‘strategy partner’ and its branding was all over Kirk’s presentation, plus he referred to views held by the bank during the speech.

As many in the market have noted, this casts major doubt on assertions by HSBC group CEO Noel Quinn, asset management CEO Nicolas Moreau and wealth management CEO Nuno Matos that Kirk’s comments do not reflect HSBC’s views or strategy on climate.

Rising due diligence

Nonetheless, while the episode may have revealed a good deal about HSBC’s – and quite possibly other financial groups’ – approach to climate risk, it has put their clients on higher alert.

Asset owners should – and probably now will – increase their due diligence of where fund managers stand on climate risk, Mike Clark, founder and head of Ario Advisory, tells Capital Monitor. The UK-based responsible investment advisory company works with asset owners and managers, policymakers and regulators.

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Arguably, Kirk’s comments will, rather than convincing investors and regulators that climate risk is overplayed, lead to them increasing their already growing focus on this area. After all, many commentators, such as Adam McGibbon, UK campaign lead at non-government organisation Market Forces, feel Kirk’s comments are a truer reflection of HSBC’s real attitude to climate, given their continued heavy financing of fossil fuels, including coal.

Simon O’Connor, CEO of the Responsible Investment Association of Australasia, says Stuart Kirk had expressed “an outdated, narrow and short-term view of climate [risk]”. (Photo courtesy of RIAA)

As Simon O’Connor, chief executive of the Responsible Investment Association of Australasia (RIAA), which represents nearly 500 members with some $29trn in assets, tells Capital Monitor: “Scrutiny of asset managers by asset owners – and indeed by retail and wholesale clients – has been rising dramatically in the past year, with net-zero commitments adding further impetus to this trend.

Asset owners have become much more discerning in their monitoring, in setting mandates and in the reporting they are expecting of asset managers, says O’Connor. Such activity is raising the bar for managers to substantiate action commensurate with their climate change commitments, he adds.

“A big blow for HSBC”

Most asset owners that Capital Monitor approached declined to comment for this article, but one senior responsible investment executive agreed to give her views on condition of anonymity.

Kirk’s comments represent “a big blow for HSBC Asset Management and one they now need to manage very carefully lest they damage their reputation”, she tells Capital Monitor.

“This also puts into question HSBC’s well-publicised partnership with [climate change investment and advisory company] Pollination on natural capital investment, and I expect clients to seriously question the firm’s credentials following this revelation,” the executive adds.

“It is surprising that someone in a high-profile responsible investment job would have this view and would feel it appropriate to voice it at an influential event,” she says.

However, she was less surprised that a financial services executive in general might hold this view. “It still happens even now, when the climate science is irrefutable and financial materiality of climate change, both in the shorter term in terms of transitional risk and longer-term physical risk (and opportunities), are facts of life and embedded in investment decisions by the majority of global investors.”

Taking a similar line is Wolfgang Kuhn, an independent consultant and the former director of financial sector strategies at responsible investment campaign group ShareAction. Many in the industry will hold views similar to Kirk’s, he tells Capital Monitor, “otherwise we would see more action [on climate], and divestment [of polluting assets] wouldn’t be questioned constantly”.

“But [if I were] a client of HSBC, I would be very concerned that the organisation is not taking risk seriously,” Kuhn adds. “[Kirk] saying all this almost begs for the regulator to sit down with them.”

As with many in the market, RIAA’s O’Connor expresses surprise at a senior responsible investment executive at a major international bank airing such views.

And he was unequivocal in his criticism of Kirk’s comments, branding them “an outdated, narrow and short-term view of climate [risk] that is inconsistent with how the vast majority of our investor colleagues and members view this issue today”.

“These comments appear to miss the multifaceted and systemic nature of climate change risks that are today – and will for decades to come – intersecting [with] investment portfolios at multiple levels.

“It is for this very reason that our members – and indeed global governments, central banks and regulators – are spending so much time to understand, manage and avoid the impacts of climate on their investments and economies,” O’Connor adds.

Climate risk “hyberbole”?

Kirk’s comments very much went against this grain.

He labelled the likes of UN special envoy on climate and finance Mark Carney and Deloitte global board chair Sharon Thorne – who had spoken at the event earlier the same day – as peddlers of hyperbole on environmental issues. Financial firms are, he argued, being forced by regulators to spend too much time on climate risk when there are far more pressing issues at hand.

Kirk pointed to rising interest rates and inflation, a looming housing crisis, regulatory probes in the US and concerns over China, among other things. “And I’m being told to spend time… looking at something that’s going to happen in 20 or 30 years hence? The proportionality is completely out of whack,” he said.

After all, Kirk added, the average length of loans provided by big banks such as HSBC is six years. “What happens to the planet in year seven is actually irrelevant to our loan book.”

He argued that the Intergovernmental Panel on Climate Change’s widely cited warnings on the economical and societal consequences were overdone. And that central banks – most notably those of England and the Netherlands – are also overplaying the risks.

Kirk’s core argument was that humans have adapted to climate change in the past and will continue to do so in the future.

“If economic growth continues how I expect it to grow, we can solve this through adaption,” he said. “One of the tragedies of this whole debate – and which is what we obsess about at HSBC – is we spend way too much on [climate] mitigation finance and not enough on adaptation finance.”

Suspension question

As for the question of whether Kirk should have been suspended, with many arguing he has unfairly been made a scapegoat, O’Connor says only that the move was not surprising.

The trouble, adds Clark, is that “we don’t know where HSBC stands”, despite the public comments by Quinn, Matos and Moreau. “It is clear that Kirk said what he said. But if the messaging [in the presentation] was signed off, it was probably unfair to suspend him as he [will have] thought he had organisational cover.

“The public story is that he’s been suspended, and that it was signed off internally [as reported by the FT],” Clark adds. “Well, if it was signed off internally, then HSBC Asset Management – at least – have got some explaining to do.”

HSBC declined to comment on whether the presentation had been pre-approved.

Whatever is the true situation, as has been pointed out, there appears to have been a failure of governance somewhere along the line at HSBC. And that only underscores the need for tighter due diligence both internally and by clients. That, at least, is one positive to emerge from the debacle.

Additional reporting by Vibeka Mair.

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