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HSBC is to put $100bn into the noble cause of reducing greenhouse gas emissions. The British-based, Asia-focused lender announced recently that over the next eight years it would spend the money on backing low-carbon technology, other forms of sustainable development and making itself entirely reliant on renewable energy.
It is easy to be sceptical — not least because the announcement came just a few days after HSBC’s latest embarrassment, when Peter Hain, the former UK cabinet minister, said regulators should be investigating the bank for “possible criminal complicity” in facilitating money laundering by South Africa’s Gupta business family. The crisis also appears to be deepening by the day. On Friday, an analysis of previously leaked documents suggested that Gupta-related companies may have used HSBC accounts in Hong Kong and the Middle East for kickbacks. The allegations are also a stain on claims by the bank to have cleaned up its act following $1.9bn of fines from the US authorities in 2012 related to illegal activity ranging from Iranian sanctions breaches to the laundering of Mexican drug money.
So is HSBC’s environmental pledge just a large bucket of greenwash designed to paint over bad news?
In part, perhaps. And yet $100bn is both a firm commitment and a lot of money. Assuming the financing is measurable and disclosed, the media, environmental groups and other interested parties can hold the bank accountable. Rivals have made similar pledges. A few months ago, JPMorgan Chase, the US bank, said it would invest $200bn in clean energy projects, also by 2025.
Banks, though, are only one part of the green finance story. Other links in the financial services chain have more power — and more self-interest — to change the world.
Consider the news 10 days ago that Warren Buffett’s Berkshire Hathaway insurance group is set to make a loss in 2017 for the first time in 15 years, thanks to a $3bn hit from the latest natural catastrophes. The recent US hurricanes and Mexican earthquakes have made this one of the worst “natcat” periods ever. August’s Hurricane Harvey alone caused nearly $200bn of damage, making it the worst natural disaster in US history. An estimated $35bn has been wiped off insurers’ profits in the third quarter of the year.
Whatever President Trump might think, insurance groups have long been convinced of the scientific correlation between man-made global warming — largely caused by the burning of fossil fuels — and ever more severe natural catastrophes. Reinsurance group Munich Re has been warning of global warming since 1973.
First, let us set aside some of the bizarre quirks of underwriting pricing. Few like to shout about it, but there is nothing a reinsurer relishes more than a horrible disaster. A period of very large insured losses allows underwriters to bump up prices and offset downward competitive pressures. Then, there is the perverse incentive that comes from the prevalence of natural disasters in emerging markets. Again with questionable taste, underwriters delight in hurricanes and earthquakes hitting countries with minimal insurance cover. Not only do they not suffer losses from the incidents but they can market future cover to a population nervous about the likelihood of repeat events.
These oddities apart, it cannot be in the long term interest of underwriters to see the world’s natural disasters get ever more severe. Sure enough, there have been some low-key initiatives to tackle the issue, particularly from the two big reinsurers — the insurance sector’s insurers — both of which wield huge market heft.
Munich Re has launched its own sustainable energy investment project, though at €2.8bn (barely 1 per cent of total assets under management) it hardly looks on a par with the big banks’ pledges. Swiss Re is switching its entire investment portfolio to benchmarks that focus on environmental, social and governance criteria. In addition it does not underwrite Arctic oil drilling and has threshold standards for doing business with fracking, oil sands and shale oil operators. From next year it plans to limit its exposure to coal and mining. All very laudable.
But these companies could go further. As sustainable energy risk falls, the cost of underwriting — and bank credit — should come down, potentially to substantially below conventional energy providers. That is when environmental finance pledges really go beyond greenwash.