This blog was initially published in Spanish on the Social Investor website here.
Stuart Kirk, global head of responsible investing at HSBC, was fired for downplaying the market impact of climate change. But his intervention describes what is going on around fossil fuels
The month of May has given us signals that all that glitters in the ESG arena is not all gold, neither for sustainability icons like Tesla, nor for financial giants like BlackRock or HSBC.
Of the three signals, Elon Musk’s outrage over Tesla’s removal from the S&P500 The ESG index, a key company in the development of electric mobility, probably received the most media attention. But putting aside his outrage over Exxon Mobile’s presence among the index leaders, I think it’s important to take another look at a tweet in which he made a comment important note about ESG reports.
Elon Musk said that “they measure the dollar value of the risk-return equation. Individual investors who entrust their money to ESG funds may not know that their money can be used to buy shares of companies that are making climate change worse, not better.”
This is a well-informed assessment and the key to understanding and relating what happened in Tesla, Blackrock or HSBC. Most indices rate companies as responsible from an investment perspective, hence their focus on risk, rather than from a social or environmental perspective.
This in itself is not a problem, as they were created to protect investors against the risks associated with ESG factors. The problem arises when they capitalize on confusion, and instead of advertising themselves as a fund that analyzes the ESG risks of any activity to improve its profitability, they advertise or ‘sell’ themselves as sustainable funds. That’s where the pitfall lies.
This double play was clearly visible in the presentation and the subsequent resignation of Stuart Kirk, global head of responsible investing at HSBC. Speaking at the FT Moral Money conference, he downplayed the impact of climate change on the market and classified current forecasts as alarming.
He said adaptation was more effective than mitigating climate change, noting that meeting regulatory and reporting requirements created an unnecessary workload.
Although HSBC’s CEO pushed back against the statements and emphasized that the bank’s ambition is to become the leading entity supporting the global economy’s transition to the Net Zero standard, doubts remain. Even more so when HSBC is among the top institutions that have provided the most fossil fuel financing in the six years since the Paris Agreement (Bloomberg).
Unfortunately, this is not the only case. According to Banking in the climate chaosDuring that period, fossil fuel financing by the world’s 60 largest banks amounted to $4.6 trillion.
For example, twenty of the sixty largest banks, also founders of the Net-Zero Banking Alliance, financed expansion projects of the major oil and gas companies.
Paradox, attitude, double standards?
It is an analysis and a debate that needs to be had. Especially if this double game was played before the energy crisis erupted as a result of the invasion of Ukraine. The International Energy Agency stated in May 2021 that if the world is to reach net zero by 2050, no new oil and gas exploitation projects should be approved for implementation after 2021.
a recent report has mapped out major fossil fuel extraction initiatives and identified 425 projects that are carbon bombs. That is, each of them would potentially emit more than 1 Gigaton of CO2 if their reserves were fully extracted and burned.
The carbon pumps that are operational represent a significant percentage of the world’s fossil fuel extraction, but 40 percent has not yet started extraction!
Many steps are being taken to reduce the use of fossil fuels from the consumption front, such as the sustainable alternative promoted by Tesla, the use of renewable energy sources in production and consumption, optimization of routes and production processes, public awareness…
But what happens on the supply side? Not activating these pumps would undoubtedly be a key element in reducing and closing the gap between expected fossil fuel production and adequate production to meet the Paris Agreement.
From a scientific perspective, the oil and gas sector, as well as the downstream chemical industry, have the knowledge leading the global transition to a low-carbon world: their chemists understand the molecular challenges of capturing and sequestering carbon and producing clean substitutes for oil and gas, such as biofuels and green hydrogen; and their geologists and seismologists are well positioned to crack the code on geothermal energy.
If the knowledge and funding are available, why is there no firm commitment to moving away from fossil fuels?
In September 2021, the Net Zero standard for oil and gas was published so that companies can present comparable ESG data and real facts in the race to net zero emissions. We will have to wait for the results of its application in the sector.
However, a shadow of doubt is cast over the sector. The guard recently reported that the world’s twelve largest oil companies will already spend $130 million a day on the exploration of new oil and gas for the rest of the decade.
Coal mines and oil and gas fields, especially those of the size of a carbon pump, require years of planning, regulatory approval and securing financial support. It is estimated that it will take more than 10 years to recoup your initial investment.
This means that they can only pay for themselves if countries fail to drastically reduce CO2 emissions. In other words, the oil companies and financiers involved in these projects appear to be betting against them.
In this struggle to meet emissions reduction targets, it is also sobering to note that G20 countries have spent more new resources on fossil fuels than on clean energy since the start of the pandemic (The production GAP).
So is the commitment to fossil fuel sustainability a sham or bureaucracy? States, investors, banks, companies in the sector, ESG indices… seem to be giving brick by brick, even before the energy crisis caused by the invasion of Ukraine.
Was Stuart Kirk’s speech an exercise in honesty? Whether we like it or not, especially those of us who have been committed to sustainability for years, his approach perfectly describes what is happening among the key players in the financial, oil and gas sectors.