Managements of banks and other financial institutions should tear up their net-zero pledges, which hurt shareholders and won’t help the climate anyway.
Stuart Kirk is the former head of “responsible investment” at the asset-management arm of HSBC.
He got in trouble earlier this year for saying things out loud that should not be said out loud, namely, that climate change posed no significant risk to financial markets or, for that matter, most investors. This is not, incidentally, the same as saying that there is no such thing as climate change. To use that absurd and sinisterly derogatory term, Kirk is no “denier.” To oversimplify, he was merely pointing out that the potential effects of climate change will not be financially material within the normal investment horizon.
Economist John Cochrane has been making a similar point for a while now, but with more emphasis on systemic financial risk, including a piece for Capital Matters last year.
I wrote in more detail about Kirk’s heresy here. You’ll see that he also talks about the adaptability of our species and about the relative insignificance of the loss that climate change may cause by 2100 when compared with the likely size of global GDP in that year.
Stuart Kirk no longer works for HSBC.
No surprise.
HSBC continues to develop its business in China, something that necessarily involves cooperating, to a greater or lesser extent, with the regime in Beijing.
No surprise.
Kirk has now returned to the fray, this time in the Financial Times:
Of all the claptrap forced upon me as head of responsible investment at a global asset manager, the most egregious was net zero targets.
Kirk does not appear to have mellowed.
In his new article, Kirk discusses the involvement of financial institutions in the “race to zero” greenhouse-gas emissions. The starting point for this was, he relates, the idea that investors “must play their part in the energy transition,” a notion with which he agrees. And so would I, except that I would delete that “must.” If this transition generates potential investment opportunities offering the prospect of an economic return that’s attractive enough to appeal to investors, then great.
However, the idea that investors should play their part rapidly metastasized into the notion — climate policy is like that — that financing GHG emitters is, in Kirk’s words, “akin to polluting itself, and hence capital should have net zero targets too.”
Again, Kirk appears to be not unsympathetic to this idea in principle, but it’s the practice that seems to make him pause.
He explains:
400 asset managers and owners — responsible for some $70tn — have rushed to join the Net Zero Asset Managers Initiative and its asset owner equivalent. Signatories promise to reduce financed emissions by some percentage by a particular date. Robeco, for example, has committed to a 30 per cent reduction by 2025, and aims to reach 50 per cent by 2050.
But “the numbers are hokum.”
Oh.
That’s bad, but what is worse is
the fact that pledges are made without many clients’ knowledge or permission. Big institutions know what’s up. But retail investors probably do not. Thought you were buying a European small cap fund? Sorry, you’re now saving the planet.
Fiduciary duty, anyone?
And, in Kirk’s view, you are not saving the planet either:
What rankles most is the claim that these initiatives help reduce emissions. No distinction is made between financing and trading. Sure, private equity assets can align with net zero goals, likewise direct loans or venture capital — you just stop giving money to polluting companies. But such primary sources of funding only make up a fraction of most manager and owner assets.
Mostly they own secondary market securities. Permanent capital such as equity cannot be withdrawn, it only changes hands. Real world impact: zero. And with traded asset classes, the Institutional Investors Group on Climate Change’s demand for total industry alignment is a fallacy. If I’ve sold my oil shares, the buyer of them is now misaligned.
In fairness, if enough investors decline to buy such stocks in the secondary market, that should decrease their price. That means that if those companies in those stigmatized sectors then want to issue new shares, they would not get such a good price for them, thereby raising their cost of capital. That would make it less likely that they will be willing or able to finance new projects.
To climate policy-makers that’s a desirable result (to consumers of such products — oil or gas, say — not so much). But that doesn’t change the logical fallacy that Kirk is highlighting about these pledges. Nor does it deal with the problem that investors’ money is being invested, often without their knowledge, in a way in which economic return is being subordinated to other objectives.
In Kirk’s view these initiatives are “pure virtue signaling.” For the reason I’ve just given, I don’t think that’s quite right, although it comes close. But if it is virtue-signaling (or even something close to it), it’s virtue-signaling, for the most part, with other people’s money.
Kirk (my emphasis added):
A bigger worry for some investors is that making money seems increasingly an afterthought too. The Net Zero Investment Framework Implementation Guide is clear that financial objectives are to be “supplemented” with half a dozen climate change objectives. The word “return” only appears twice in 30 pages.
If you are looking for evidence that we are witnessing an example of the harnessed capitalism so characteristic of some of the less benign forms of corporatism, look no further.
But if you are able to peer behind the FT’s paywall, do read further to see what more Kirk has to say about the nonsense running through these net-zero pledges. It doesn’t make pretty reading.
It also adds more weight to the notion that those making these type of pledges might be running greater legal risks than they think. I discussed another aspect of this — the way that such pledges might give rise to trouble with the SEC if the agency’s proposed climate disclosure rules go through — here.
It’s long past time for the managements of banks and other financial institutions to remember the duty they owe to their shareholders (a category of investor that, for these purposes, ought to include investors in funds that invest in these companies) and their clients (including investors who have entrusted their money to those clients) and tear up their pledges.
After all, it won’t make much, or maybe any, difference to the climate.