As queues formed outside Northern Rock in September 2007, customers had one thing on their minds. Are my savings safe? Similar concerns spread quickly across major markets during the Financial Crisis, resulting in government bail-outs, mounting budget deficits and years of economic contraction. Investors in these banks lost trillions[1].
While the underlying drivers for how the banks got themselves into such exposed positions are multi-faceted, one lesson was clear: banks’ financial statements need to provide a prudent view of the entity’s capital position, taking into account likely losses and liabilities, whatever the source.
This week, Sarasin & Partners and six other investors wrote to the UK’s Financial Reporting Council asking for a review of HSBC’s 2025 Financial Statements and PwC’s audit of those accounts. The concern is that, at a time of rising climate risk and accelerating decarbonisation in key industries, a failure by HSBC to account for probable losses or liabilities could put investor capital at risk.
While attention today is rightly turned to increasingly unpredictable geopolitical ructions, this does not make climate risks go away, but rather adds to them.
HSBC is clear in its latest financial statements, as it was last year, that “while the effects of climate change are a source of uncertainty, as at 31 December 2025 management did not consider there to be a material impact on our critical judgements and estimates from the physical, transition and other climate-related risks in the short to medium term.”
In short, the Bank believes it is safe to leave climate-related risks out of its financial statements. This is despite its clear identification of climate change as a ‘Principal Risk’ in its 2025 Annual Report and its commitment to align its financing with the Paris Agreement[2].
The two stances are, in our view, not consistent.
By assuming away climate change and decarbonisation as material risks, the Bank is free to ignore climate-related risks in its financing activities. Lending to fossil-fuel industries would, thus, likely appear more profitable than otherwise. Lending to newer lower-carbon activities would be relatively less attractive. The provision of longer-term real estate loans like mortgages – which account for almost half of HSBC’s loan book – may be pursued without pricing in the impacts from anticipated severe weather events or sea level rise. Indeed, HSBC continues to conclude that retail mortgages and commercial real estate will face “minimal losses” even under a severe “downside physical risk” scenario of 4°C warming.
Today, therefore, based on public reporting we cannot find evidence that HSBC is systematically incorporating climate-related risks into the credit terms offered to customers, for instance, resulting in credit being denied or costs rising.
The key rationale for this apparent inconsistency is time-frames. HSBC believes climate change will cause severe disruption, but not until after 2030 (its medium-term limit – interestingly brought forward from last year’s 2035).
We have three concerns with this logic.
First, the Bank provides little evidence as to how it reached this conclusion.
Second, HSBC like other banks is endogenous to the system. Its financing decisions today, if excessively carbon-intensive, will fuel future climate instability, raising long-term risks to capital.
Third, the approach is not prudent, with potentially dangerous consequences given the non-linearities associated with climate systems. As powerfully summed up by experts at Exeter University and Carbon Tracker[3]:
“…climate change introduces forms of risk that exceed the design assumptions of existing economic and financial frameworks. The appropriate response is not to wait for perfect models, but to recalibrate governance toward precaution, robustness, and transparency, recognising that avoiding irreversible outcomes is ultimately less costly than attempting to price them after the fact.”
On the supervisory side, the UK’s Prudential Regulation Authority and the Financial Reporting Council have been on the leading edge of raising awareness of the risks posed by climate change and decarbonisation. They have also set out clear expectations for proactive risk mitigation and disclosures. The International Accounting Standards Board has likewise been underlining how climate-related risks must be captured under existing accounting rules since 2019, and in 2025 published concrete examples, including for banks.
The safety and soundness of the financial system rests on prudent forward-looking accounting. Through this letter to the FRC, we hope to catalyse closer scrutiny of this matter, not just by HSBC and its auditor PwC, but by all banks and auditors.
[1] https://www.adb.org/news/global-financial-market-losses-reach-50-trillion-says-study; https://mnb.hu/letoltes/imf-gfsr.pdf
[2] See ARA2025, pp. 36, 170
[3] Exeter University and Carbon Tracker (Feb 2026)
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