In May 2022, Stuart Kirk, head of responsible investment at HSBC, assured investors that they need not worry about climate risk. "Climate change is a not a financial risk we need to worry about," he argued. He also expressed his dissatisfaction with the heavy workload that sustainable regulations imposed on his department.
Sceptics
In an extremely controversial speech, Stuart argued that humans are adaptable, and climate risks will have a negligible effect on the future growth of the world economy. He did not deny climate change but emphasised that warnings about the risks it poses to the financial system are highly exaggerated.
Stuart is not alone in his views, as Christopher Waller, a member of the board of governors of the Federal Reserve System, recently presented similar arguments. Both of them faced heavy criticism, but their positions highlight that senior executives and policymakers are questioning the value of sustainable investing.
While acknowledging the existence of climate change, they do not believe that the risk it poses to financial stability is immediate or sufficient. This contradicts the mainstream argument that immediate action on climate change is necessary to avoid financial disaster in the future.
Flaws
Even those who agree that investors should be concerned about climate change risk can see flaws in our current approach. Primarily, there is insufficient data to determine the impact of the substantial resources invested in sustainable investing.
Instances of greenwashing have led to strict regulations that define which products can be classified as sustainable. Compliance with these regulations requires significant resources, and the scientific basis for the disclosures is subject to debate.
On a more fundamental level, there is no consensus on how to incorporate climate risks into asset valuation models. It remains unclear what data should be used and how to apply it. This further raises doubts about the sustainability of products offered to investors.
Success
Despite these challenges, the marketing success of sustainable products is undeniable. ESG-type funds have consistently experienced positive yearly net inflows, capturing a growing share of total assets under management (AUM). The fees generated by sustainable products have been beneficial for the industry.
Sustainable investing is also democratising our approach to climate change, as investors are now voting with their wallets to support future projects. This shift is expected to accelerate the transition to a greener economy and a less polluted environment.
Our financial system may not be at risk, our current approach may be dubious, but sustainable investing is definitely worth it.
Gregory Kennedy is a columnist for Investment Officer Luxembourg. His columns appear every other Wednesday. He also works as a business development manager at Finsoft Luxembourg.
