On December 14, 2022, HSBC, the largest bank in Europe, announced it will no longer finance new oil and gas projects as part of its updated climate policy. The change comes after 2021 garnered the largest annual increase in global emissions ever recorded and Russia’s invasion of Ukraine created the first global energy crisis. Earlier this year, the International Energy Agency said investments in new coal mines and oil and gas wells need to end immediately to have a chance at obtaining the goals laid out in the 2015 Paris Agreement.

While many are commending HSBC, activists and environmental groups are quick to point out that the policy change hasn’t gone far enough. HSBC will continue to finance existing fossil fuel projects that are “in line with current and future declining global oil and gas demand,” as well as provide services to its energy sector clients. With all this in mind, we asked SIS professor David Simpson about HSBC’s announcement and the impact it will actually have on climate change.

Why do you think HSBC is phasing out fossil fuel financing?

There are likely many reasons. Large banks have a particularly visible (if not necessarily, for the reasons addressed next, always commensurately influential) role in international environmental and social issues. Bill McKibben, a noted climate activist, has credited HSBC for breaking ranks with other big banks that finance fossil fuel industries. This can have a significant public relations value. HSBC might also be looking for an opportunity to offset the negative publicity that arose when Stuart Kirk, its former head of responsible investing, gave a presentation in May 2022 titled “Why Investors Need Not Worry about Climate Risk.” Kirk was quoted saying: "There's always some nut job telling me about the end of the world," and “Who cares if Miami is six metres underwater in 100 years?” The bank may have felt some damage control was called for with the fallout.

What effect will HSBC withdrawing its finances from the fossil fuel industry actually have?  

HSBC’s announcement will lead to some real changes in financing practices at the bank but will likely be more symbolic than of practical importance. While HSBC is the world’s 13th-largest financier of fossil fuel projects, its market share is relatively small. Its roughly $20 billion USD annual lending to fossil fuel projects constitutes only about 2.7 percent of global lending to the sector. Perhaps HSBC’s move will put pressure on its competitors to make similar pledges, but unless they do, HSBC’s action alone may have little effect.

If other large banks do feel compelled to follow HSBC’s lead, the action might be more effective. HSBC and eight other US, British, and Canadian lenders account for some 40 percent of all fossil fuel-related lending. However, the roughly $750 billion USD in global fossil fuel-related lending is less than one-half of one percent of the $180 trillion USD in world banking assets. A lot of lending to other sectors could be diverted to the fossil fuel sector. Moreover, the four largest banks in the world are in China. While the Bank of China, China’s largest lender to the fossil fuel sector, ranks 16th in the world, Chinese banks hold about a quarter of total world banking assets. The Chinese economy is running short on good domestic investment prospects (videos of the demolition of unfinished Chinese apartment blocks constitute their own genre on YouTube), and the demand for power in China—and other countries—continues to grow. Other countries may well provide financing for fossil fuel development if Western banks decline.

Could HSBC’s announcement hurt more than it helps?

While it might even prove counterproductive, financing is a blunt instrument to address a pollution problem. Finding, extracting, developing, and consuming fossil fuels are capital-intensive and financing provides the capital. Contraction in sources of financing may not mean that fossil fuels are not extracted and used; it could mean that they will be extracted and used less efficiently. Less efficient power plants emit more carbon dioxide to produce less electricity. Coal and gas extraction and transport also release methane, a greenhouse gas almost 30 times as potent as carbon dioxide. Fossil fuels are bad for the planet but extracting and burning fossil fuels while using less-than-state-of-the-art technology may be even worse.

If this climate policy is largely symbolic and unlikely to have much impact, what could HSBC do to address climate change more effectively?  

Global warming is a failure of capitalism. Private businesses operating under the free enterprise system have contributed too much to pollution (as have state-owned enterprises in other economic systems, but that’s a subject for another time). This does not mean, however, that global warming can be best countered through capitalism’s most iconic institutions: its banks.

Polluters are, by and large, not held to account for the pollution they emit. Until governments get serious about regulating or taxing greenhouse gas emissions, trying to starve polluters of financing may not accomplish much. In addition, there are insufficient incentives to innovate. The ultimate resolution of the climate crisis must be to invent and deploy new technologies that generate energy without emitting pollution. The recent breakthrough in nuclear fusion technology is an example of what can be done with large-scale expenditure on research, but it will likely be decades before it can be commercialized. In the shorter term, two other zero-emission power technologies, solar and wind, have experienced exponential declines in costs and show what can be accomplished when public funding for research is teamed up with commercial finance for deployment. There is more to be done to improve energy storage and transmission to fully realize the potential of these renewable generation technologies. HSBC and other banks will do far more good if they not only reduce the three-quarters of a trillion dollars a year they now devote to fossil fuel-related finance but also redirect much of that sum to developing and deploying renewable energy.