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Al Gore quizzed on election regrets, greening UK pensions, ESG investors grill companies

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Top ESG thinkers, investors and chief executives headline inaugural Moral Money Summit

Does Al Gore, the former US vice-president, regret having conceded the 2000 presidential contest? That is not a question often asked at sustainability conferences.

But when the FT hosted its inaugural Moral Money Summit this week we were thrilled that so many influential chief executives, policymakers, investors, lawyers — and, yes, Mr Gore — joined (thank you).

Mr Gore, pictured, was asked about that 2000 controversy, not (just) because of current election fights, but because of the tremendous practical difference that a Gore presidency might have made to climate policy. Sadly, he danced around the question of “regret” (while stressing that if Donald Trump loses, he must leave). But here is one important point investors should note: Mr Gore is in close contact with Joe Biden about climate policy and says the Democratic presidential contender will implement “very aggressive” plans that “place climate at the centre” of his presidency if he wins. This is probably not yet fully priced into markets.

Ahead of any possible US policy shift, financiers such as Anne Richards of Fidelity and Roger Ferguson of TIAA said they were overhauling their investment decisions to prioritise ESG. Ultimately, sustainable finance is about “pricing the future into the present”, and that covers environmental and social concerns, BNP Paribas’s Hervé Duteil said at the summit.

The same applies to private companies, argued Stephen Badger, two-time chairman of Mars: his company is now turning its long-held concept of “mutuality” into a business blueprint for students at the University of Oxford’s Saïd Business School and elsewhere, in another twist on “stakeholder” mandates. It uses it internally, too. “We hold managers to account for more than just financial results,” Mr Badger said.

Carlos Brito, CEO of AB InBev, said that while his company was obsessed with efficiency (it holds internal contests to collect cost-cutting ideas), it thought that sustainability, supporting the supply chain and worker retention were crucial for the group’s bottom line.

Meanwhile, Andy Haldane, chief economist at the Bank of England, suggested it was time to reform company law in the UK in light of the shifting social zeitgeist. Participants also warned that companies needed to rethink their lobbying efforts and give investors drastically more transparency. Crypto-guru Mike Novogratz headlined a panel outlining how companies could fight for criminal justice reform. Accountants are overhauling their systems too: Ronald Cohen revealed startling metrics that he had developed with Harvard Business School about companies’ carbon footprints within “impact-weighted accounting” systems.

However, as the demand for sustainable finance grows, so does concern about green- and sustainability-washing. The “fake it until you make it” mentality is over because the market has got smarter, said Rosa Sangiorgio, head of ESG at Pictet Wealth Management. Or as Lisa Gralnek, principal and founder of LVG & Co, observed: “To avoid the greenwashing that’s been happening now for 50 years, we have to use agile principles — to be able to test and learn quickly.” ESG, in other words, is getting ever more granular and practical.

To hear all these crucial debates, register at moralmoney.live.ft.com. Video on demand will be available for 90 days. Use code FTMM to watch for free.

Building a green nest egg

© REUTERS

A little nudge can yield surprising rewards. Nobel Prize-winning economist Richard Thaler showed that encouraging young people to invest in retirement savings could help them build a formidable nest egg. Millions of Britons have stashed away cash for their golden years thanks to a 2012 programme that automatically enrols people in a pension plan. 

Now there is a nudge to combine pension savings with global warming prevention. Aviva, the UK-based insurance and savings group, wants the pension schemes bill working its way through the UK parliament to be amended so that the automatic enrolment funds are required to achieve net-zero carbon emissions status by 2050.

The UK is already advancing the ball on climate reporting. The pension schemes bill would require explicit consideration of climate change goals, including the Paris agreement. This year, the National Employment Savings Trust, the largest UK pension scheme with 9m savers, pledged to be net zero by 2050 and cut carbon emissions in its portfolio in half by 2030.

Aviva is a member of a group of investment funds that have pledged to be net zero by 2050. Danish pension fund PFA and the HESTA Australian superannuation fund have also joined the march toward net-zero emissions by 2050.

With all these funds de-smogging their portfolios, energy companies are nervous, and it is easy to see why the Trump administration wants to keep climate considerations out of US retirement plans. This year, The US labour department proposed a rule to prevent pension funds from including ESG options.

A little nudge can yield a strong pushback too. (Patrick Temple-West)

Businesses grapple with big rise in investors’ ESG questions

It’s hard to find a big investor that isn’t talking about ESG these days. From BlackRock in the US to Legal and General Investment Management in Europe, the world’s biggest asset managers say they are putting pressure on companies over issues from climate change to diversity like never before.

What does that mean in practice? A lot more questions for businesses to deal with, according to a survey from Citigate Dewe Rogerson. Almost 80 per cent of companies surveyed reported an increase in ESG-related questions from investors this year, with 27 per cent reporting a significant increase despite the pandemic.

The poll of 377 investor relations officers at leading companies around the world also revealed just how the US and Europe were diverging when it came to sustainable investing. While more than a third of companies in Europe (40 per cent in the UK) reported experiencing a significant increase in ESG questions over the past year, in North America that figure was just 10 per cent.

Sandra Novakov, head of investor relations at Citigate Dewe Rogerson, said: “Rather than putting ESG issues on the backburner, the Covid-19 pandemic has accelerated the long-term shift towards sustainable investing, particularly outside North America.”

As Moral Money has reported, the coronavirus crisis and Black Lives Matter protests have highlighted the importance of social issues in particular. According to the Citigate survey, 67 per cent of companies said there was increased investor focus on issues including diversity, data protection and privacy, employee engagement, labour standards and human rights.

With more investor attention on ESG, almost two-thirds of those polled plan to improve ESG disclosure over the coming year, up from 47 per cent 12 months ago. (Attracta Mooney)

B Lab sparks a debate on making benefit governance mandatory

© REUTERS

For more than a decade, B Lab’s founders have advocated the idea that companies should benefit more stakeholders than their investors alone. B Lab certified its first B Corp in 2007 and there are now 3,500 such companies whose fiduciary duties give them a legal mandate to consider all stakeholders in their decisions. 

Now, though, B Lab is setting its sights on a much more ambitious target, calling on US lawmakers and regulators to make “benefit governance” mandatory across the private sector. 

B Lab’s report, which its CEO Andrew Kassoy discussed at our summit, argues that voluntary pledges to rethink corporate purpose will fail without changing the fiduciary obligations of fund trustees, money managers, corporate directors and executives. 

Investors, the authors say, should be obliged to protect “the broad interests of their beneficiaries”, rather than driving the highest possible risk-adjusted returns from each company in their portfolio. Corporate leaders, in turn, should be required (and incentivised) to protect the interests of shareholders and stakeholders alike. 

B Lab said the proposals were informed in part by Leo Strine (pictured), but the former Delaware chief justice’s new boss sounds less enamoured. Marty Lipton, who hired Strine to Wachtell Lipton this year, said they represented “a significant step toward state corporatism”. 

But Mr Lipton, a leading proponent of US companies voluntarily adopting a stakeholder focus, warns institutional investors and asset managers that now is the time for them to do the same, if they are to avoid new legislation or regulation. (Andrew Edgecliffe-Johnson)

Chart of the day

Line chart of Installed capacity (MW) showing Solar expands in California power mix

US electricity markets are exploring carbon pricing, an economically simple but politically fraught tool, to address the greenhouse gas emissions that drive global warming.

Some states are contemplating carbon prices for electricity as they also promote zero-carbon energy in other ways, such as through financial credits for wind, solar and nuclear generators that are ultimately funded by utility customers. For more, please read Greg Meyer’s article here.

Grit in the oyster

Axa, the French insurance company, released its latest risk report on Thursday — and it makes for sobering reading for climate warriors. In recent years, the survey of 20,000 people has named climate change as the top-10 global risk. This year, the pandemic has topped that, pushing climate into second place. No surprise there, perhaps, and Thomas Buberl, Axa chief executive, argued this “is temporary”. But here is one striking detail to note: there has been a “drastic drop” in the ranking of climate change issues in American risk perceptions, Axa found. Americans are less concerned, it seems — even as alarm among Europeans remains high.

Does that reflect a crowding-out effect in America? (or attention deficit disorder?) Or does it reflect the Trump administration’s policy shift? It is not clear. But ESG activists should take note.

Smart reads

© AFP via Getty Images

The UN’s big biodiversity summit also kicked off this week in New York (mostly virtually, of course). The event, which the Guardian has chronicled exhaustively, is an important step on the road to a big multilateral push — akin to the Paris climate accord — to protect nature. It is also an indicator, as Gillian noted last week, that natural capital will be one of the hottest sustainability topics in the future. Other than a fiery speech by Brazilian president Jair Bolsonaro, defending his country’s natural resource policies, the most notable development was a pledge signed by 72 countries vowing to reverse biodiversity loss by 2030. The real action will take place next year at a gathering in China where countries will hammer out global targets and a plan of action.

Further reading

  • Avoiding ‘sin stocks’ is no longer enough for ESG ETFs (FT)

  • Green revolution set to shake up investing further (FT)

  • Big business is no longer the planet’s biggest problem (FT)

  • Cambridge university to dump fossil fuel investments by 2030 (FT)

  • China’s net-zero target is a giant step in fight against climate change (FT)

  • Why ‘Biodegradable’ Isn’t What You Think (NYT)

  • Urged to back up pledges for racial justice, 34 major firms commit to disclose government workforce data (WashPost)



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Why it might be good for China if foreign investors are wary

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Chinese economy updates

The writer is a finance professor at Peking University and a senior fellow at the Carnegie-Tsinghua Center for Global Policy

The chaos in Chinese stock markets last week was exacerbated by foreign investors selling Chinese shares, leaving Beijing’s regulators scrambling to regain their confidence while they tried to stabilise domestic markets. But if foreign funds become more cautious about investing in Chinese stocks, this may in fact be a good thing for China.

In the past two years, inflows into China have soared by more than $30bn a month. This is partly because of a $10bn-a-month increase in the country’s monthly trade surplus and a $20bn-a-month rise in financial inflows. The trend is expected to continue. Although Beijing has an excess of domestic savings, it has opened up its financial markets in recent years to unfettered foreign inflows. This is mainly to gain international prestige for those markets and to promote global use of the renminbi.

But there is a price for this prestige. As long as it refuses to reimpose capital controls — something that would undermine many years of gradual opening up — Beijing can only adjust to these inflows in three ways. Each brings its own cost that is magnified as foreign inflows increase.

One way is to allow rising foreign demand for the renminbi to push up its value. The problem, of course, is that this would undermine China’s export sector and would encourage further inflows, which would in turn push China’s huge trade surplus into deficit. If this happened, China would have to reduce the total amount of stuff it produces (and so reduce gross domestic product growth).

The second way is for China to intervene to stabilise the renminbi’s value. During the past four years China’s currency intervention has occurred not directly through the People’s Bank of China but indirectly through the state banks. They have accumulated more than $1tn of net foreign assets, mostly in the past two years.

Huge currency intervention, however, is incompatible with domestic monetary control because China must create the renminbi with which it purchases foreign currency. The consequence, as the PBoC has already warned several times this year, would be a too-rapid expansion of domestic credit and the worsening of domestic asset bubbles. 

Many readers will recognise that these are simply versions of the central bank trilemma: if China wants open capital markets, it must give up control either of the currency or of the domestic money supply. There is, however, a third way Beijing can react to these inflows, and that is by encouraging Chinese to invest more abroad, so that net inflows are reduced by higher outflows.

And this is exactly what the regulators have been trying to do. Since October of last year they have implemented a series of policies to encourage Chinese to invest more abroad, not just institutional investors and businesses but also households.

But even if these policies were successful (and so far they haven’t been), this would bring its own set of risks. In this case, foreign institutional investors bringing hot money into liquid Chinese securities are balanced by various Chinese entities investing abroad in a variety of assets for a range of purposes.

This would leave China with a classic developing-country problem: a mismatched international balance sheet. This raises the risk that foreign investors in China could suddenly exit at a time when Chinese investors are unwilling — or unable — to repatriate their foreign investments quickly enough. We’ve seen this many times before: a rickety financial system held together by the moral hazard of state support is forced to adjust to a surge in hot-money inflows, but cannot adjust quickly enough when these turn into outflows.

As long as Beijing wants to maintain open capital markets, it can only respond to inflows with some combination of the three: a disruptive appreciation in the currency, a too-rapid rise in domestic money and credit, or a risky international balance sheet. There are no other options.

That is why the current stock market turmoil may be a blessing in disguise. To the extent that it makes foreign investors more cautious about rushing into Chinese securities, it will reduce foreign hot-money inflows and so relieve pressure on the financial authorities to choose among these three bad options.

Until it substantially cleans up and transforms its financial system, in other words, China’s regulators should be more worried by too much foreign buying of its stocks and bonds than by too little.



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Square to acquire Afterpay for $29bn as ‘buy now, pay later’ booms

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Square Inc updates

Payments company Square has reached a deal to acquire Australian “buy now, pay later” provider Afterpay in a $29bn all-stock transaction that would be the largest takeover in Australian history.

Square, whose chief executive Jack Dorsey is also Twitter’s CEO, is offering Afterpay shareholders 0.375 shares of Square stock for every share they own — a 30 per cent premium based on the most recent closing prices for both companies.

Melbourne-based Afterpay allows retailers to offer customers the option of paying for products in four instalments without interest if the payments are made on time.

The deal’s size would exceed the record set by Unibail-Rodamco’s takeover of shopping centre group Westfield at an enterprise value of $24.7bn in 2017.

The transaction, which was announced in a joint statement from the companies on Monday, is expected to be completed in the first quarter of 2022.

Afterpay said its 16m users regard the service as a more responsible way to borrow than using a credit card. Merchants pay Afterpay a fixed fee, plus a percentage of each order.

The deal underscored the huge appetite for buy now, pay later providers, which have boomed during the coronavirus pandemic.

“Square and Afterpay have a shared purpose,” said Dorsey. “We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles.”

Adoption of buy now, pay later services had tripled by early this year compared with pre-pandemic volumes, according to data from Adobe Analytics, and were particularly popular with younger consumers.

Rivalling Afterpay is Sweden’s Klarna, which doubled its valuation in three months to $45.6bn, after receiving investment from SoftBank’s Vision Fund 2 in June. PayPal offers its own service, Pay in 4, while it was reported last month that Apple was looking to partner with Goldman Sachs to offer buy now, pay later facilities to Apple Pay users.

Steven Ng, a portfolio manager at Afterpay investor Ophir Asset Management, said the deal validated the buy, now pay later business model and could be the catalyst for mergers activity in the sector. “Given the tie-up with Square, it could kick off a round of consolidation with other payment providers where buy now, pay later becomes another payment method offered to their customers,” he said.

Over the past two years Afterpay has expanded rapidly in the US and Europe, which now account for more than three-quarters of its 16.3m active customers and a third of merchants on its platform. Afterpay said its services are used by more than 100,000 merchants across the US, Australia, Canada and New Zealand as well as in the UK, France, Italy and Spain, where it is known as Clearpay.

Square intends to offer the facility to its merchants and users of its Cash App, a fast money transfer service popular with small businesses and a competitor to PayPal’s Venmo.

“It’s an expensive purchase, but the buy now, pay later market is growing very rapidly and it makes a lot of sense for Square to have a solid stake in it,” said retail analyst Neil Saunders.

“For some, especially younger generations, buy now, pay later is a favoured form of credit. Afterpay has already had some success with its US expansion, but Square will be able to accelerate that by integrating it into its platforms and payment infrastructure — that’s probably one of the justifications for the relatively toppy price tag of the deal.”

Square handled $42.8bn in payments in the second quarter, with Cash App transactions making up about 10 per cent, according to figures released on Sunday. The company posted a $204m profit on revenues of $4.7bn.

Once the acquisition is completed, Afterpay shareholders will own about 18.5 per cent of Square, the companies said. The deal has been approved by both companies’ boards of directors but will also need to be backed by Afterpay shareholders.

As part of the deal, Square will establish a secondary listing on the Australian Securities Exchange to provide Afterpay shareholders with an option to receive Square shares listed on the New York Stock Exchange or the ASX. Square may elect to pay 1 per cent of the purchase price in cash.

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Biden puts workers ahead of consumers

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US economy updates

For the past 40 years in America, competition policy has revolved around the consumer. This is in part the legacy of legal scholar Robert Bork, whose 1978 book The Antitrust Paradox held that the major goal of antitrust policy should be to promote “business efficiency”, which from the 1980s onwards came to be measured in consumer prices. These were considered the fundamental measure of consumer wellbeing, which was in turn the centre of economic wellbeing.

But things are changing. A White House executive order on competition policy, signed last month, contains some 72 discreet measures designed to stamp out anti-competitive practices across nearly every part of the US economy. But it isn’t about low prices as much as it is about higher wages.

Like the Reagan-Thatcher revolution, which took power from unions and unleashed markets and corporations, Biden’s executive order may well be remembered as a major economic turning point — this time, away from neoliberalism with its focus on consumers, and towards workers as the primary interest group in the US economy.

In some ways, this matters more than the details of particular parts of the order. Many commentators have suggested that these measures, on their own, won’t achieve much. But executive orders aren’t necessarily about the details — they are about the direction of a government. And this one takes us completely away from the Bork era by focusing on the connection between market power and wages, which no president over the past century has acknowledged so explicitly.

“When there are only a few employers in town, workers have less opportunity to bargain for a higher wage,” Biden said in his announcement of the order. It noted that, in more than 75 per cent of US industries, a smaller number of large companies now control more business than they did 20 years ago.

His solutions include everything from cutting burdensome licensing requirements across half the private sector to banning and/or limiting non-compete agreements. Firms in many industries have used such agreements to hinder top employees from working for competitors, as well as to make it tougher for employees to share wage and benefit information with each other — something that Silicon Valley has done in nefarious ways.  

This gets to the heart of the American myth that employees and employers stand on an equal footing, a falsehood that is reflected in such Orwellian labour market terms as the “right to work”. In the US this refers not to any sort of workplace equality, but rather to the ability of certain states to prevent unions from representing all workers in a given company.

But beyond the explicitly labour-related measures, the president’s order also gets to the bigger connection between not just monopoly power and prices, but corporate concentration and the labour share.

As economist Jan Eeckhout lays out in his new book The Profit Paradox, rapid technological change since the 1980s has improved business efficiency and dramatically increased corporate profitability. But it has also led to an increase in market power that is detrimental for people in work.

As his research shows, firms in the 1980s made average profits that were a tenth of payroll costs. By the mid 2000s that ratio had jumped to 30 per cent and it went as high as 43 per cent in 2012. Meanwhile, “mark-ups” in profit margins due to market power have also risen dramatically (though it can be difficult to see this in parts of the digital economy that run not on dollars but on barter transactions of personal data).

While technology can ultimately lower prices and thus benefit everyone, this “only works well if markets are competitive. That is the profit paradox,” says Eeckhout. He argues that when firms have market power, they can keep out competitors that might offer better products and services. They can also pay workers less than they can afford to, since there are fewer and fewer employers doing the hiring.

The latter issue is called monopsony power, and it is something that the White House is paying particularly close attention to.

“What’s happening to workers with the rise in [corporate] concentration, and what that means in an era without as much union power, is something that I think we need to hear more about,” says Heather Boushey, a member of the president’s Council of Economic Advisors, who spoke to the Financial Times recently about how the White House sees the country’s economic challenges. 

The key challenge, according to the Biden administration, is that of shifting the balance of power between capital and labour. This accounts for the emerging ideas on how to tackle competition policy. There are many who regard the move away from consumer interests as the focus of antitrust policy as dangerously socialist — a reflection of the Marxian contention that demand shortages are inevitable when the power of labour falls.

But one might equally look at the approach as a return to the origins of modern capitalism. As Adam Smith observed two centuries ago, “Labour was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labour, that all wealth of the world was originally purchased.” Reprioritising it is a good thing.

rana.foroohar@ft.com



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