Financial Market

Letter: HSBC contrarian sticks to ‘markets know best’ mantra

Stuart Kirk’s comments accusing policymakers of climate change hyperbole (“HSBC saga shows the flaw in climate finance debate”, Opinion, May 25) are simply a reflection of an industry that refuses to question its financial valuation models despite their well-known poor predictive capabilities.

When Kirk, who before his suspension was the global head of responsible investing at HSBC’s asset management division, says climate risk is too far into the future to matter for most industries and mocks the idea of “stranded assets”, he is simply bowing to the concepts of risk-adjusted discount rates and net present value analysis.

When he says central banks need to add a significant risk premium to the discount rate for climate risk to have an effect on valuation, he (and most of the financial industry) believes that all risks, regardless of their source, can be somehow reflected in the discount rate.

There is simply no room for questioning the valuation model. Although UN Special Envoy for Climate Action Mark Carney’s warning about the risks posed by climate change is a step in the right direction, until the financial industry starts questioning the basic tenets of valuation, his efforts may not bear fruit.

Since Kirk cannot accept the valuation model is wrong, then it is easy to understand why he believes that climate risk can be reflected in the price; all we need is thousands of people (the market) calculating the value of an asset to arrive at the correct answer. The market knows best — aka “the wisdom of crowds”.

I am glad scientists question everything. Nothing is sacred. All models are subject to constant testing and, if needed, revisions. That’s how real progress is made.

Otherwise, I would probably be writing this comment on a piece of paper, mailing it to FT, and crossing my fingers it would get published before we are “under six metres of water”, to quote the HSBC contrarian.

David Espinoza
Senior Principal, Geosyntec Consultants, Washington, DC, US

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