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(Bloomberg) -- The new head of sustainability at HSBC Holdings Plc says the time has come for banks to stop penalizing clients that have a large carbon footprint.
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Julian Wentzel, who was appointed chief sustainability officer at Europe’s largest bank this month, says an overly restrictive policy toward fossil fuels puts at risk the reliable supply of energy and may even undermine the transition to a low-carbon future.
“Too many people have been negatively biased towards the carbon economy without acknowledging that the carbon economy plays a very important role from an energy security perspective,” Wentzel said in an interview.
The comments show how the concept of climate finance is evolving. Less than half a decade ago, HSBC and its peers in Europe, the US and Asia signed up to net zero emissions goals that obliged them to align their portfolios with a scenario of 1.5C of global warming. But as scientists warn that the world is now on track for roughly 3C by the end of the century, banks and investors have started challenging a number of net zero assumptions.
To accelerate the transition to a future in which economic growth requires a much smaller carbon footprint, policymakers and the private sector need to figure out how to ratchet up spending on low-carbon activities, and worry less about restricting capital flows to fossil fuels, Wentzel said.
“A lot of focus has been on how does one constrain or constrict the carbon economy rather than on how one can grow or facilitate the new world energy economy,” said Wentzel. “If the world spent more time focusing on that side of the equation, I think the transition will happen faster and capital will flow more easily.”
For now, banks aren’t close to the 4-to-1 ratio of green-to-brown capital allocations that BloombergNEF says is needed if the industry is to align its business with the goal of limiting warming to 1.5C. At the end of 2023, the industry’s so-called energy-supply banking ratio, which includes debt and equity underwriting, was 0.89 to 1, BNEF said in January. HSBC performed better than the industry average, with a ratio of 1.49, BNEF estimates.
Meanwhile, banks’ fossil-fuel clients are facing intense investor pressure to double down on their core strategies. On Wednesday, BP Plc announced a major pivot that will see the UK oil major step up focus on its fossil-fuel business while cutting investment in renewable energy. The changes are intended to appeal to disgruntled shareholders, which include activist Elliott Investment Management.