Why investors need not worry about climate risk?
Why investors need not worry about climate risk?
Lessons of HSBC banker's viral presentation and his subsequent suspension
At the start of the movie Jerry Maguire, Jerry (played by Tom Cruise), writes a mission statement titled “The Things We think But do Not Say,” and shares it across his company. Jerry’s late-night revelation was to call for his company to have fewer clients, to focus less on making money. That message was not well-received by his bosses. Jerry was quickly fired.
Last week, HSBC’s Stuart Kirk, the head of responsible investing in the bank’s asset management group, had a Jerry Maguire moment in the form of a short talk given at a corporate conference on sustainable investing. And just like Jerry, he has subsequently been suspended by the bank with his continued employment appearing unlikely. I’ve seen many presentations by corporate ESG (environmental, social and governance) leaders. Such presentations are generally platitudinous and focused on conveying the reality or the impression of responsible corporate behavior — typically to make existing clients happy or to recruit new clients.
Kirk’s presentation was different. It probably made no one happy and certainly didn’t gin up new business for HSBC. His talk was titled “Why investors need not worry about climate risk” and can be seen in full below. I’d wager that it has been viewed more times than any other corporate ESG talk.
The virality of Kirk’s remarks resulted not simply because the substance of his talk, but the way in which he delivered it — flippantly and with some comments seemingly designed for outrage, such as “Who cares if Miami is six metres under water in 100 years?” Even if offered in jest, anyone remotely familiar with discussions of climate will know that being seen to deemphasize or diminish the importance of climate action will be quickly targeted by climate activists.
It is thus not surprising that Kirk’s comments quickly led to calls for him to be fired from his job. For instance, Christiana Figueres, former executive secretary of the Framework Convention on Climate Change, called Kirk’s comments “outrageous” and demanded that he be fired (below).
On the one hand, I do have some sympathy for Kirk. Of course I do. Eight years ago I lost a job writing for Nate Silver at 538 after writing a column drawing on my peer-reviewed research which explained that the economic and human costs of disasters depend much more on what and where we build than on increasing extreme events. Nothing I wrote was wrong — indeed much of it came straight out of the IPCC — but I (and my publisher) were widely attacked for being out of sync with the climate zeitgeist. The remedy was for Silver to express contrition and to eliminate my voice.
But on the other hand, Kirk’s presentation was insulting, flippant and tone-deaf. Surely, Kirk should know that discussions of climate, and in ESG circles especially, are as much (if not more) about expressing a shared set of values and tapping into the enormous ESG market as they are about the math and science of risk. A charitable interpretation of Kirk’s talk was that he was telling his community that their emperor was naked, less charitably he was raising his middle finger to his professional peers and the broader climate movement. If this was Kirk’s goal, then the talk was a rip-roaring success.
His boss is not pleased. Over the weekend, the CEO of HSBC, Noel Quinn, felt compelled to take to social media to distance himself from Kirk and his remarks, calling them a distraction (below). No doubt Kirk will be looking for new employment sometime soon, and it is hard to see how he can continue to work in any capacity in corporate ESG.
But lost in the furor over Kirk’s remarks and his subsequent punishment is the fact that he raised some important issues that should be discussed openly among those responsible for public and private finance. This was perhaps the greatest failure of his talk — the delivery not only eclipsed the content, but it has also made it much harder to raise these issues in the future. Who in the ESG industry will dare to raise legitimate concerns or express doubts about methods and results? Finance is very often about risk, and understanding risk requires much more than expressions of what we value, but also hard questions, uncomfortable answers and open debate. I suspect we will have even less of these things in the ESG community going forward.
Let’s review some of the important issues raised by Kirk that have largely been ignored in the drama.
One important issue raised by Kirk is the amount of true hyperbole found in remarks given by leaders in finance. Kirk illustrated such remarks by calling out Mark Carney, the United Nations, Henry Paulson, the World Economic Forum and the Bank of England (below). Let me be clear, Kirk is not wrong to call out each of these statements as hyperbolic. Each of the statements that he highlights in the slide below are demonstrably and empirically wrong. You cannot find support for any of them in IPCC reports. However, it is one thing for a tenured full professor to call out such nonsense, it is another thing altogether for a participant in a $50 trillion-dollar industry to do the same.
Kirk also identified a paradox that comes straight out of the IPCC and is found across the scientific literature. The climate-GDP paradox is that climate change is often warned to be among the world’s greatest financial risks (examples above) and yet if you look at the projections of the IPCC and the associated scenarios, every single one of them — even the most extreme — project a future of incredible global and individual wealth. Kirk illustrated this point in his presentation with the following chart, which shows global GDP growth to 2100 after ~doubling the IPCCs extreme assumptions or the impact of climate change on GDP this century.
We have identified the climate-GDP paradox in our recent work and it is perfectly understandable and reasonable that an expert in global finance would raise this issue. It is a legitimate paradox in the work of the IPCC and the expert climate community. The larger issue here is that the scenarios of the IPCC generally do not consider climate impacts on growth (i.e., as a feedback within scenarios) and thus lead to what we have called “obvious internal inconsistencies” — such as regions projected to be uninhabitable in 2100 are also projected to have incredible wealth:
For instance, the [extreme] SSP5-8.5 baseline projects currently-developing regions will have substantially higher GDP per-capita by 2100 than currently-developed regions have today (Dellink et al 2017, IIASA 2018), while at the same time other studies project that a forcing level of 8.5 W m−2 in 2100 would render many of these same regions uninhabitable by 2100 (Mora et al 2017).
The reality is that under most methods applied across the literature to project future climate change, the associated impacts are generally small. Swiss Re, the global reinsurance company, dealt with the climate-GDP paradox by simply multiplying projected future impacts by a factor of 10 “to simulate the increasing severity of outcomes from nonlinearities.” This certainly amps up future impacts but at the same time it is of course a completely ridiculous methodological approach to projecting risk.
Indeed, as Kirk was giving his talk last week the Network For Greening the Financial System released the results of a survey of financial institutions and credit rating agencies, which found a lack of evidence in risk differences in ESG investing versus non-ESG investing:
Results from the survey show that conducting risk differential analysis between green and non-green activities and/or assets is not a straightforward exercise and that there is still no clear historical evidence of such risk differentials.
With climate or transition risk not yet identifiable in existing and historical portfolios, and IPCC projections that future financial impacts of climate change will be absolutely dwarfed by future GDP growth, it is of course appropriate for those in the ESG community to raise some questions about the tools we are using to peer into the cloudy future. Silencing uncomfortable questions will not make the issues go away, any more than Donald Trump’s wacky proposals to stop COVID-19 testing would have made the pandemic go away. I have no doubt that some of the furor over Kirk’s remarks is being used to overshadow the legitimate points that he did raise.
Kirk also calls out unrealistic assumptions used by central banks to project future financial risks associated with a transition to a green economy. Again, Kirk is right to identify certain assumptions as being unrealistic or implausible, meaning that the subsequent analysis or stress testing may be misleading. Indeed, I have made similar arguments on the pages of the Financial Times about how central banks systemically misuse implausible emissions scenarios in their analyses of financial risks. The misuse of extreme scenarios is endemic in the ESG community and beyond when discussing climate and transition risks. It is right to highlight these issues, because the misuse of scenarios is itself a major risk to global finance.
Kirk also raises issues related to the importance of adaptation in responding to climate, and how it is overshadowed by mitigation. This of course has been a challenge in climate policy for decades. However, like the other worthwhile points raised by Kirk, this one was lost in the irate reactions to the offensiveness of his presentation.
In one sense, Kirk is just the latest person to get crossways with the climate lobby and to suffer career repercussions as a result. In another sense, far more significantly, this episode is indicative of the deep pathologies of a community that often seems to value political fealty over intellectual substance. Kirk may indeed be the wrong messenger to head up a major ESG practice, but the questions he raises should be taken seriously by the ESG community nonetheless.
ESG may once have been a reasonable and laudable objective, but it has long since become a cult and a scam reminiscent of the indulgences doled out by Mother Church in Medieval times - see Chaucer's "The Pardoner's Tale". It is something not just worthy of criticism, but scorn, ridicule, and derision. In that sense, I think Kirk's delivery was spot on - the idea that his presentation would, and should, trigger any sort of self-doubt amongst the dogmatic is nonsense - they are by definition impervious and closed to other perspectives. The audience he most effectively engaged was the public, by laughing at bankers and ESG fans on their home turf. Bravo!
It should be interesting to have someone explain the difference in effects between 'climate change' and weather... Other than at the political level.