(Bloomberg) -- The new head of sustainability at HSBC Holdings Plc says the time has come for banks to stop penalizing clients that have a large carbon footprint.

Julian Wentzel, who was appointed chief sustainability officer at Europe’s largest bank this month, says an overly restrictive policy toward fossil fuels puts at risk the reliable supply of energy and may even undermine the transition to a low-carbon future.

“Too many people have been negatively biased towards the carbon economy without acknowledging that the carbon economy plays a very important role from an energy security perspective,” Wentzel said in an interview.

The comments show how the concept of climate finance is evolving. Less than half a decade ago, HSBC and its peers in Europe, the US and Asia signed up to net zero emissions goals that obliged them to align their portfolios with a scenario of 1.5C of global warming. But as scientists warn that the world is now on track for roughly 3C by the end of the century, banks and investors have started challenging a number of net zero assumptions.

To accelerate the transition to a future in which economic growth requires a much smaller carbon footprint, policymakers and the private sector need to figure out how to ratchet up spending on low-carbon activities, and worry less about restricting capital flows to fossil fuels, Wentzel said.

“A lot of focus has been on how does one constrain or constrict the carbon economy rather than on how one can grow or facilitate the new world energy economy,” said Wentzel. “If the world spent more time focusing on that side of the equation, I think the transition will happen faster and capital will flow more easily.”

For now, banks aren’t close to the 4-to-1 ratio of green-to-brown capital allocations that BloombergNEF says is needed if the industry is to align its business with the goal of limiting warming to 1.5C. At the end of 2023, the industry’s so-called energy-supply banking ratio, which includes debt and equity underwriting, was 0.89 to 1, BNEF said in January. HSBC performed better than the industry average, with a ratio of 1.49, BNEF estimates.

Meanwhile, banks’ fossil-fuel clients are facing intense investor pressure to double down on their core strategies. On Wednesday, BP Plc announced a major pivot that will see the UK oil major step up focus on its fossil-fuel business while cutting investment in renewable energy. The changes are intended to appeal to disgruntled shareholders, which include activist Elliott Investment Management.

As oil companies dig in their heels, banks have been increasingly vocal in calling out what they characterize as a fixation on restrictive fossil-fuel policies. Back in 2023, JPMorgan Chase & Co. said that “a singular focus on fossil fuels won’t successfully achieve the necessary transition of the global energy system.” Instead, the largest US bank said the focus should be on “supporting the rapid build-out of zero-carbon power,” which in turn would “help replace fossil fuels and reduce emissions.”

Last week, HSBC walked back some of its earlier emissions goals, a move it said was necessary because of the slow pace of decarbonization in the wider economy. Implicit in HSBC’s decision was an acknowledgment that both politics and physics are working against existing climate goals. 

And as the Trump administration takes a wrecking ball to pro-climate policies, scientists say it’s now a virtual certainty that the world has missed its chance to limit global warming to 1.5C.

“We live in a dynamic world, and we have to reflect the environment and the world we live in,” said Wentzel, who was previously head of global banking for the Middle East, North Africa, and Turkiye at HSBC. “I can’t ignore the political weather.”

Net zero is fast losing support in key corners of global finance. In North America, the biggest banks have all pulled out of the industry’s largest net zero alliance. And the US government under Donald Trump has made clear it will seek to stamp out policies friendly to net zero, with US Energy Secretary Chris Wright going so far as to dub the concept “sinister” and “terrible.”

Wentzel said HSBC remains committed to reaching net zero financed emissions by 2050 and aligning itself with a 1.5C pathway, even though the scenario is looking increasingly challenging.

“We’ve always said that we’d be science-aligned and there is absolutely a scientific basis to being 1.5C-aligned,” he said. “However, what we’re starting to see is the challenge in the global economy and the environment as a whole that that anchor is going to be harder and harder to achieve.”

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