Don’t Bank On It

Last month, 99.7% of HSBC shareholders agreed to the bank’s new climate pledge. The lender plans to phase out financing to coal projects entirely by 2040. It was proposed following a recent report showing HSBC had funnelled approximately $15bn to coal between 2018 and 2020.

HSBC had previously been critiqued for having a target of net-zero emissions by 2050 while still financing coal. Extinction Rebellion reportedly smashed “at least 19” windows at its London offices on Earth Day.

So, will the firm’s plan to de-finance coal be greeted with gusto? Or will it be seen as paying lip service to the growing prominence of sustainability concerns?

There has been much written about the downfalls of relying on “ESG” as a “catch-all” label denoting sustainable corporate activity.

It’s easy to get trapped by the acronym’s three pillars. You have to demonstrate to stakeholders that your business is environmentally conscious. You have to disclose the diversity of staff, set new targets, demonstrate awareness of your social impact. Good governance – often the lest-talked about pillar of ESG – needs to be abundantly clear.

None of this is bad. Perhaps it even sounds like your company?

But what investors and stakeholders really care about when they flag the importance of ESG factors is whether you’re taking non-financial risks into account. Are you able to spot and address potential pitfalls not yet obvious on your balance sheet?

Let’s return to HSBC. The lender is making adjustments to improve its environmental footprint. It’s also reportedly linking executive compensation to meeting certain diversity targets. These are both steps an ESG-friendly firm should be taking. It demonstrates awareness of the non-financial risks the lender faces.

But the bank has also been critiqued for its support for China’s Hong Kong security law. Protesters in Hong Kong have targeted its offices in demonstrations. More windows have been smashed.

Without making any geopolitical point, it’s possible to say that HSBC faces an additional “off-balance sheet” risk. How will it be treated in the UK and US if it keeps its stance towards China? Will the bank continue to be the target of demonstrations and will clients potentially take their business elsewhere?

Given its recent actions, it’s likely that anyone running an ESG screen of the bank would turn up positive results. There’s no doubt it’s making progress – as a lot of businesses are. Plans to phase out coal financing and set diversity targets may see it score highly, even if its position on China was also taken into account.

And here’s the problem about simply trying to be an “ESG-friendly” firm – you’re potentially ignoring risks that can have an equally disruptive impact on your business.

This doesn’t for one moment mean ESG considerations should just be cast aside. There is real value in reducing emissions, increasing social impact and continuing to assure robust governance. Of course.

However, it is wise to occasionally stand back from your business and, with a cool head and common sense, identify reputational risks that don’t neatly fit in an E or an S or a G. These risks defy measurement but demand mitigation.