Science‐based analysis for climate action: how <scp>HSBC</scp> Bank uses the <scp>En‐ROADS</scp> climate policy simulation

Abstract

In 2018, the Intergovernmental Panel on Climate Change (IPCC, 2018) found that rapid decarbonization and net negative greenhouse gas (GHG) emissions by mid-century are required to “hold the increase in global average temperature to well below 2 °C above pre-industrial levels and pursue efforts to limit the temperature increase to 1.5 °C,” as stipulated by the Paris Agreement (UNFCCC, 2015, p. 2). Meeting these goals reduces physical climate-related risks from, for example, sea-level rise, ocean acidification, extreme weather, water shortages, declining crop yields, and other impacts.ii Physical risk includes the effects of severe climate-change-related weather events that can be either acute (e.g. damage to physical infrastructure from a storm) or chronic (e.g. reduced agricultural yield due to ongoing droughts). These impacts threaten our economy, security, health, and lives.iiii Recent studies that seek to quantify climate value at risk—“the size of loss on a portfolio of assets over a given time horizon, at given probability” (Dietz et al., 2016, p. 676)—include Bos and Gupta (2019), Dietz et al. (2016), Goldstein et al. (2019), McKinsey Global Institute (2020), Sen and von Schickfus (2020), and The Economist Intelligence Institute (2015). For example, Dietz et al.'s, 2016 study estimates a climate value at risk of global financial assets of US$2.5 trillion under a business-as-usual scenario. McKinsey's 2020 study, which assesses risks for certain regions, estimates that the average number of lost daylight working hours in India from increased temperatures could increase to the point where between 2.5 and 4.5 percent of GDP is at risk. At the same time, policies to mitigate these harms by rapidly reducing GHG emissions can create transition risks for businesses—for example, stranded assets and loss of market value for fossil fuel producers and firms dependent on fossil energy (Carney, 2019). Rapid decarbonization requires an unprecedented energy transition (IEA, 2021a) driven by and affecting economic players including businesses, asset managers, and investors in all sectors and all countries (Kriegler et al., 2014). However, GHG emissions are not falling rapidly enough to meet the goals of the Paris Agreement (Holz et al., 2018). The UNFCCC, 2021 found that the emissions reductions pledged by all nations as of early 2021 “fall far short of what is required, demonstrating the need for Parties to further strengthen their mitigation commitments under the Paris Agreement” (2021, p. 5). Businesses are faring no better. Despite high-profile calls to action from influential firms such as BlackRock (Fink, 2018, 2021), corporate action to meet climate goals has thus far fallen short (e.g. the Right, 2019 analysis of the German DAX 30 companies' emissions targets by NGO “right.”). Instead of implementing climate strategies that might mitigate the risks, managers are often caught up in “firefighting” and capability traps that erode the resources needed for ambitious climate action (Sterman, 2015). Firms may also exaggerate environmental accomplishments, leading to greenwashing (Lyon and Maxwell, 2011); implement policies that are vague, rely on unproven offsets, or are not climate neutral (e.g. Sterman et al., 2018); or simply take no action at all (Delmas and Burbano, 2011; Sterman, 2015). Adding to the confusion are difficulties evaluating the effectiveness of different climate policies. Misperceptions include wait-and-see approaches (Dutt and Gonzalez, 2012; Sterman, 2008), underestimating time delays and ignoring the unintended consequences of policies (Sterman, 2008), and beliefs in “silver bullet” solutions (Gilbert, 2009; Kriegler et al., 2013; Shackley and Dütschke, 2012). These beliefs arise in part because the climate–energy system is a high-dimensional dynamic system characterized by long time delays, multiple feedback loops, and nonlinearities (Sterman, 2011), while even simple systems are difficult for people to understand (Booth Sweeney and Sterman, 2000; Cronin et al., 2009; Kapmeier et al., 2017). Although senior executives might receive briefings on climate change, simply providing more information does not necessarily lead to more effective action (Pearce et al., 2015; Sterman, 2011). Alternatively, interactive approaches to learning about climate change and policies to mitigate it can trigger climate action (Creutzig and Kapmeier, 2020). Decision-makers require tools and methods grounded in science that enable them to learn for themselves how a low-carbon economy can be achieved and how climate policies condition physical and transition risks. The system dynamics climate–energy simulation En-ROADS (Energy-Rapid Overview and Decision Support; Jones et al., 2019b), codeveloped by the climate think-tank Climate Interactive and the MIT Sloan Sustainability Initiative, provides such a tool. Here we show how En-ROADS helps HSBC Bank U.S.A., the American subsidiary of U.K.-based multinational financial services company HSBC Holdings plc, focus its global sustainability strategy on activities with higher impact and relevance, communicate and implement the strategy, understand transition risks, and better align the strategy with global climate goals. We show how the versatility and interactivity of En-ROADS increases its reach throughout the organization. Finally, we discuss challenges and lessons learned that may be helpful to other organizations. En-ROADS is grounded in state-of-the-art climate and energy science and is fully documented and freely available via Climate Interactive's (2021a) website. It is calibrated against historical data (e.g. BP, 2019; IEA, 2021a; IRENA, 2020; Lazard, 2020) and to future scenarios generated by large climate models, including the Integrated Assessment Models (Calvin et al., 2017; Fricko et al., 2017; Fujimori et al., 2017; Kriegler et al., 2017; van Vuuren et al., 2017). Since its launch in December 2019, more than 81,000 people in 86 nations have participated in interactive briefings or role-play simulations using En-ROADS, including over 1000 business leaders (including C-suite executives and investor groups), more than 150 elected officials (including senators, governors, and state legislators) and 200 congressional staff members in the United States, and dozens of leaders at nonprofits and foundations around the world (as of November 2021). Its interactive design enables En-ROADS users to explore a wide range of assumptions, policies, and actions as they create their own scenarios (Figure 1). En-ROADS can be used in multiple modes, including the Climate Action Simulation (Rooney-Varga et al., 2020), a role-playing game in which participants take the roles of global stakeholders at a mock UN climate summit and negotiate agreements to mitigate climate change, and the En-ROADS Climate Workshop (Jones et al., 2018), an interactive group learning experience. Both are well-suited for use in companies. HSBC supports the objectives of the Paris Agreement (UNFCCC, 2015) and is committed to the transition to a low-carbon economy through its climate change and sustainable financing strategy (HSBC, 2020a, 2020b). To deliver its commitments, the bank's corporate-sustainability function uses a variety of tools and methods, among which En-ROADS has a central position. In the following, we show how HSBC uses En-ROADS to improve employee understanding of the risks of climate change, particularly transition risks, and catalyze action at senior levels. En-ROADS stimulates dialogue on sustainability and fosters collaboration on climate change with partners and across industries. To date, more than 2600 HSBC employees across different organizational levels and regions have experienced En-ROADS, with more than 300 in En-ROADS workshops and over 2300 as part of a risk-management training. En-ROADS Climate Workshops at HSBC run for approximately 1 hour. Workshops begin with a brief grounding in climate science and risks and a demonstration of the model before moving into interactive exploration using En-ROADS. Employees relate HSBC's climate commitments to levers in En-ROADS and mentally simulate and express their thoughts about the possible effect on climate change if the bank's commitments were achieved at global scale. A facilitator then runs the model, exploring the results together with the group. The workshop closes with a debrief in which participants discuss their insights and share their reactions and feelings, which evaluative research has found to be an important contributor to its impact (Rooney-Varga et al., 2018). Post-workshop evaluations show that participants feel more confident in their ability to “speak climate,” better understand HSBC's sustainability commitments, and are more energized and inspired to take climate action. Interactive exploration through En-ROADS enables people to develop their own scenarios and reflect on the implications and impacts of different policies, stimulating their thinking about HSBC's and their own role in solutions. Because En-ROADS is transparent and grounded in the latest scientific research, the debate and discussion around corporate action are strengthened. These outcomes arise through the collaborative learning process that En-ROADS fosters. Facilitators “hand over” En-ROADS to the participants so they can learn together with colleagues across the organization, enabling them to debate and challenge their assumptions about climate change. Since engagement with En-ROADS began in May 2018, originally with a development version, more than 300 HSBC employees at different organizational levels and functions within HSBC in the United States, the United Arab Emirates, France, and Germany have participated in 30 intensive En-ROADS workshops. These workshops help elevate the priority of sustainability work within these areas, particularly at senior levels. Bespoke En-ROADS sessions held with members of the C-suite and their direct reports help embed sustainability thinking in their business units and functions, connect their work to HSBC's sustainability strategy, and ensure that relevant messaging cascades through their units. Participants explore the bank's commitments relevant to their roles using En-ROADS. For example, following a discussion about the effect on global warming of energy efficiency and renewables, the Chief Operating Officer and the Head of Corporate Real Estate were better able to express to each other the importance of the bank's objective to reduce emissions from energy use in its offices and data centers. Working with En-ROADS helps HSBC employees understand the urgency of large emissions cuts and how different actions connect to specific elements of HSBC's sustainability strategy. For example, improving energy efficiency and reducing GHG emissions from its operations is an important component of the bank's strategy to achieve net zero GHG emissions. En-ROADS workshop participants explore how much faster efficiency and the electrification of the built environment must improve, globally, along with other actions, to achieve the Paris climate goals. En-ROADS workshops are tailored to the goals and responsibilities of the participants to foster deeper discussions on aspects of climate change that are of particular relevance to them. For example, participants in a session with credit-risk managers and bankers who manage power-sector clients explored the effect of taxes, subsidies, regulations, and market conditions on existing fossil fuel infrastructure and the risk of stranded assets. They also examined the impact of technological breakthroughs that could reduce the cost of carbon capture and storage technologies. Another session with members of the strategy team explored carbon-price scenarios with different carbon prices and phase-in schedules, helped them assess how they could reduce the bank's exposure to the resulting transition risks in carbon-intensive sectors, including stranded assets, loss of market value, write-downs, and increases in nonperforming loans. HSBC and other large corporations consider a variety of sustainability challenges and opportunities beyond the physical impacts of climate change, including the economic impacts of climate change, the social co-benefits of climate action, and the climate implications of the COVID-19 pandemic. En-ROADS supports exploration of these themes. The COVID-19 pandemic changed global patterns of energy demand, leading to CO2 emissions reductions of 17 percent in the first half of April 2020 (Le Quéré et al., 2020), which was then followed by a substantial rebound toward prior levels and is expected to climb to record highs in 2021 (IEA, 2021b). Clearly, disease, death, and economic depression are not acceptable ways to cut emissions. Instead, the terrible toll of the pandemic should foster policies for recovery that simultaneously promote a healthy environment, a healthy society, and a healthy economy (Sterman, 2020). Many initiatives to “build back better” take this approach (Climate Interactive, 2021b; United Nations, 2020; World Bank, 2020). While the model is not detailed enough to capture the specifics of all such actions, En-ROADS helps people explore how they might affect the climate–energy system. HSBC facilitators relate different pandemic recovery proposals to policy options in En-ROADS. For example, the German stimulus package (approximately €130 billion) includes at least €40 billion in climate-related action (Bundesministerium für Finanzen, 2020), including funding for public increase efficiency in energy efficiency in energy efficiency in and electrification of and energy for for the and infrastructure for electrification in and In the United States, in December 2020 and and proposals for infrastructure in include a range of climate policies such as for energy a and policies to reduce the environmental harms to of 2021b). participants to reflect on their in the debrief that were more and about a world than they was inspired to run for a in following with En-ROADS. HSBC also uses En-ROADS in workshops to the latest for scientific to better understand their impact on the For example, et al. 2020) that is the effective strategies for et al., p. work and to the to a trillion 2020). To the of in HSBC uses Jones et and Sterman and En-ROADS of (Figure 2). They found that has climate due to the long time required for to large enough to of CO2 from the (Figure Although reduces expected global average temperature by °C by to the (Figure the required to on the et al. is about the size of India (Figure about and the impacts on people who that for and other Participants in En-ROADS workshops often how much the transition to an emissions with °C that the are and that it is not or the En-ROADS workshops foster discussion of these The of reducing GHG emissions must be against the of the physical damage by climate change. These include harms to health, and economic through declining crop yields, more extreme weather, ocean acidification, and other impacts (IPCC, Integrated capture these harms through a that reduces GDP as warming of the damage function et al., 2015; Dietz and 2015; 2017; 2012). 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En-ROADS an to with other and HSBC uses En-ROADS to with clients and other HSBC's facilitators on En-ROADS and systems thinking to help these partners better understand how their sustainability strategies align with the Paris reduce and climate risks. These sessions on climate what is possible throughout the value between clients and and align their more with the bank's climate goals. HSBC also events at its stimulating on and For example, an HSBC facilitator a World Climate Simulation with 150 energy at the 2019 World in as well as an En-ROADS Climate which the among events in a at the for sustainability in the United with En-ROADS at HSBC catalyze insights into the climate–energy understanding of HSBC's engagement on climate action, and about what is possible for HSBC employees better understand how financial can help the meet its environmental and social goals (e.g. and They are also more of the between climate and risk. En-ROADS has a for bankers to business opportunities on climate solutions and how they may within HSBC's strategy and the bank's for risk. For example, HSBC has a to the leading and has a to HSBC's Corporate Sustainability team has through a number of challenges in the process of En-ROADS into its training. The lessons may be relevant to other firms to use En-ROADS. is The Corporate Sustainability team senior with not members of the who participated for En-ROADS workshops in their and functions, that not to other areas, the number of employees to all senior leaders early in the process is could take the of sessions with senior leaders or a session with the and the of learning and we to use En-ROADS the resources and for a time At the and learning process from to the approximately HSBC by the team at Climate Interactive, a of workshops with to 30 staff in relevant functions, the session on the feedback from each Despite the time required, the process was effective in a and to the and to with the of We against to up faster than the can a team of En-ROADS model to (Sterman, the system dynamics the of faster than the required to deliver can be (e.g. and Sterman, Sterman, 2015). of the must develop facilitator HSBC's Corporate Sustainability team originally a of facilitators En-ROADS workshops across the However, of the of climate science and the dynamics of the model, a understanding of the bank's sustainability strategy, and the ability to on is a into design and the Corporate Sustainability team that enough facilitators could not be fully given the time To the team the to a number of by the lead and However, opportunities to HSBC employees the United the was to En-ROADS workshops with members of the Corporate Sustainability in other countries through the bank's global Corporate Sustainability to be an effective of the These were with colleagues who the and to facilitators and were then by the lead on En-ROADS, leading to facilitator and workshops at HSBC in France, and the United Arab by En-ROADS in the over 2300 HSBC employees around the world experienced En-ROADS. En-ROADS into existing can help its En-ROADS capability A collaboration with Climate Interactive or En-ROADS Climate who have with Climate Interactive (approximately as of November development of with a and workshop is not En-ROADS facilitators may need to roles in the same and facilitators with may be Workshop should be through feedback (e.g. with tools such as the net and facilitators should debrief and reflect on each session to should with to assess the process to policy or change. studies are more they are an important for future The En-ROADS model for its use to with in climate science and from including in and along with and helps the for For example, the model could be to include and physical climate such as energy and and people to with to these impacts more for particular including financial and can be to help these stakeholders better relate the model to the challenges and opportunities they Finally, En-ROADS might opportunities for other systems thinking and system dynamics model in companies. While corporations that climate change is is confusion about how to achieve the Paris climate goals. Here we how a global in the uses En-ROADS to its employees to learn more about climate change and to understand HSBC's climate strategy. We lessons learned through the use of En-ROADS at lessons that may help other En-ROADS and other systems thinking We an for feedback to the to and