We Need To Talk About ESG

Did a recent speech by Stuart Kirk, Global Head of RI at HSBC, provide a glimpse into an inherent hostility towards climate change policies among asset managers, or was it a plea to focus on investments rather than exclusions?

A recent speech by Stuart Kirk, Global Head of Responsible Investing at HSBC Asset Management, about climate risk and the impact on investment portfolios didn’t go down well with…, well, just about anybody.

Kirk addressed the FT Live Moral Money Summit Europe conference and was lambasted for referring to climate crisis warnings as ‘unsubstantiated’ and ‘shrill’.

His speech was so controversial that his employer suspended him, pending an investigation into his remarks.

As a journalist, this piqued my interest.

I have written about environmental, social and governance (ESG) issues for a good 15 years and climate change is a topic close to my heart.

But the first lesson I was taught as a journalist was to always be specific.

So what did Kirk actually say?

Kirk addressed the question of whether climate change poses a financial risk to investment portfolios.

This is a very different question to asking whether climate change is real or whether the science behind it is legitimate.

It is an important distinction to make, because it seems that most of the criticism focused on this second issue, rather than the question of risk.

In my reading of the speech, Kirk’s main point was that he regarded the financial risks to investment portfolios stemming from climate change as overstated.

He made a couple of points to support his assessment.

One focused on time frames. He argued that it is nearly impossible to assess how a company will be impacted beyond seven years.

Since climate change will play out over a much longer period, it is not possible to see how this impacts companies – not even coal companies, he said.

Secondly, he made the argument that markets adapt. Looking back at the last 100 years or so, he showed that regardless of war, pandemics, or financial crises, equity markets have shown, on average, an upwards trend. Chances are, he said, this will be the case going forward too.

Perhaps you agree with him, or you don’t and believe that his thinking is merely the result of a misplaced conservatism in which our tomorrows are likely to be the same as our yesterdays.

But whether you agree or not, it is certainly a discussion you would expect your investment manager or pension fund to have had.

Risk is the foundation of any investment decision and should be viewed from every angle imaginable.

Maybe the financial impact of climate change on investment portfolios is overstated, or maybe it is understated.

What about the financial impact of net zero policies? Perhaps it helps investors avoid stranded assets, or maybe it is introducing a skew to your portfolio that causes underperformance?

Anecdotal evidence suggests that decarbonisation methodologies introduce a quality/growth bias to the investment portfolio. This would have been great in the 10 years up to the invasion of Ukraine, but not so much after and who knows what it will do going forward?

But wherever you might land on these issues, risk should be a continuous debate.

Perhaps it was Kirk’s sense of humour that just rubbed people the wrong way.

He was obviously trying to provoke a little when he said: “Who cares if Miami is six metres underwater in 100 years? Amsterdam has been six metres underwater for ages and that’s a really nice place.”

As a Dutchie, who has previously lived in Amsterdam for some time, I had to chuckle at his remark – even with the realisation that if Miami would be six metres below sea level, then Amsterdam would almost be 20 metres under, which seems a rather daunting engineering problem.

Yet, it is important to point out that, in his speech, Kirk did not deny climate change or the science behind it. In fact, he seemed to acknowledge both towards the end of his talk.

His gripe was with the perceived financial impact of climate change and Kirk made the case that instead of spending valuable time and resources on trying to predict risks that he regarded as nearly impossible to quantify, we should focus on investing in the opportunities that will arise from the energy transition, a tangible event that will require new technologies and lots of money.

In this sense, Kirk was just a typical banker who called for less red tape and more freedom to invest.

Agreed, it was an unusual way to make the case for sustainable investing, but ultimately that was exactly what he did.

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