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Why Johnson’s wind power plan may be hot air

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One thing to start . . . has Jane Fonda outsmarted Jamie Dimon? Perhaps. The celebrity recently made viral videos lambasting JPMorgan Chase for its financing of fossil fuel companies. Now, the banking behemoth has responded: it announced on Tuesday that it is cutting its exposure to fossil fuels. That won’t placate critics. But it shows the zeitgeist is shifting. “Today’s announcement is significant. The world’s largest lender to the fossil fuel industry has clearly signalled that the fossil fuel game is coming to an end,” said Alec Connon, co-ordinator of the Stop the Money Pipeline Coalition that Fonda backs. Brace yourself for more unexpected signals of change at the IMF meetings in the coming days.

This week we also have:

  • Breaking down Boris Johnson’s wind plan

  • Vale rides ESG improvements to boost credit score

  • European regulator casts doubt on Big 4’s ESG data plan

  • Data centres — a critical link to cutting tech emissions

  • New Zealand mandates TCFD disclosures

Boris Johnson sails with wind

With billowing language that referenced the British sailors Drake, Raleigh and Nelson, UK prime minister Boris Johnson on Wednesday pledged that offshore wind capacity will be increased to 40 gigawatts in 10 years — enough to power every home in the country. The government will invest £160m in ports and factories to manufacture turbines, he said, and floating windmills will be built to add one gigawatt of energy by 2030.

His statements at the Tory party conference drew praise, but also, alas, must be met with scepticism. The FT’s editorial board noted that increasing offshore wind generation within 10 years could require billions of pounds more than what Mr Johnson proposed.

“The UK does not appear to have grasped the scale of the task,” the FT editors wrote. “What is missing is a coherent plan.”

Naval pedigree is not a prerequisite for harnessing the wind. The EU is developing its own wind energy opportunities. As part of the “green deal”, the European Commission is working on an offshore energy strategy that includes wind, wave and tidal power. The plan is expected to be adopted by the end of this year.

For all its cleanliness, wind power is controversial. In Germany, some citizens have fallen out of love with the electricity source and have been fighting new turbine construction. Before he became US president, Donald Trump castigated a planned offshore wind farm near his luxury golf resort in Aberdeenshire as “ugly monstrosities” and “horrendous machines”. It will be interesting to see how British voters respond. (Patrick Temple-West)

ESG lifts credit rating at Vale after mine disaster

© REUTERS

ESG issues usually push credit ratings down not up — but not so for one Brazilian miner.

Last week, Vale regained an investment grade rating from Moody’s, marking a significant milestone in the company’s rehabilitation from a deadly mine disaster that killed 270 people in January 2019.

Moody’s said the upgrade to Baa3 reflected improvements in Vale’s ESG practices. It cited enhanced risk management and governance oversight of tailings dams, including the appointment of a safety and operational excellence officer, which it said “materially reduced the risk of a similar accident in the future”. Tailings dams are used to hold waste material from mines.

It also highlighted changes to Vale’s remuneration policy, in which ESG targets are now an “important component” of the annual pay packages of senior executives.

In an interview with Moral Money, Vale’s chief financial officer Luciano Siani Pires said he was pleased the company’s efforts had been recognised by Moody’s but the journey was not complete.

“They want to continue to see progress to continue to upgrade our rating,” he said.

But from a “purely” financial standpoint, Mr Siani said Vale should have a similar credit rating to rival iron ore producer Rio Tinto, which is rated single A.

Both Vale and Rio are generating huge amounts of cash with the price of the steelmaking commodity above $120 a tonne. However, Vale could be hit with further fines for the Brumadinho tragedy. (Neil Hume)

Critics take aim at Big 4’s ESG plan

One of the biggest stories to come out of the UN General Assembly this year was the Big 4 accounting firms joining forces to clear up the alphabet soup of environmental, social and governance disclosure standards.

It sounds encouraging. However, now that critics have had time to examine the plan, some worry that it may not actually improve ESG disclosures in a meaningful way.

The plan has some notable weaknesses around emissions reporting, said Bas Eickhout, a Green MEP from the Netherlands.

Emissions reporting is typically broken down into three levels or “scopes” — as explained in this document from the Greenhouse Gas Protocol:

  • Scope 1: direct emissions from owned or controlled sources

  • Scope 2: indirect emissions from the generation of purchased energy

  • Scope 3: all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions

The problem is that the framework — developed in conjunction with the World Economic Forum’s International Business Council — mandates only scope 1 and scope 2 disclosure, said Mr Eickhout. “That is the easiest part,” he explained. “The more important part is [scope 3] where you see the emissions over the entire chain. And there they say, ‘OK, report where applicable’ and that makes it voluntary.”

If one were to look at this cynically, it would seem like the Big 4 and the WEF are attempting to get ahead of binding regulation that might require companies to make some “painful” changes, said Mr Eickhout.

Yet if the standards are inadequate to meet either the regulators’ or market’s expectations, they may have the opposite effect — and only make ESG disclosure standards messier than they are now. “If they aren’t making [scope 3 disclosure] obligatory, it is useless,” said Mr Eickhout. “Everyone will have their own judgment about what is applicable. I think that shows you need regulation.” There will be more debate about this around the IMF and World Bank meetings. (Billy Nauman)

Data centres tap sustainable financing as Big Tech’s green plans trickle down into supply chain

To see just how important scope 3 emissions are (as Mr Eickhout noted above), look to the tech industry. Apple’s, Google’s and Microsoft’s headquarters may not have smokestacks like the dark, satanic mills of yore — but that does not mean the sector is inherently clean. Even sending emails can pump a staggering amount of carbon into the atmosphere.

For tech companies’ climate pledges to actually mean anything, they need to go down into their supply chain and push the companies that manufacture their products and run their data centres to make their operations more sustainable. As Katie Koch, co-head of fundamental Equity at Goldman Sachs told us a few months ago, this creates a huge investment opportunity for green investors.

And we are already seeing that happen. Late last month, Aligned Energy, a US data centre company, became the first company of its kind to tap into the sustainability-linked credit market with a $1bn facility.

The terms on the deal will be linked to Aligned’s ESG disclosures, workplace safety, and its goal of shifting to 100 per cent renewable energy by 2024.

This will not just help the company win business from the largest tech companies either, said Andrew Schaap, chief executive of Aligned Energy. Companies of all stripes are moving their operations to the cloud and are looking to do so sustainably.

“We have a couple of travel companies and obviously those companies are thinking about how to use less jet fuel,” he said. “But when we come in and talk about the data centre sustainability, it changes the discussion. Now we’re not just a service provider, and we might be helping them achieve certain sustainability goals and objectives that they have internally.” (Billy Nauman)

Tips from Tamami

Nikkei’s Tamami Shimizuishi helps you stay up to date on stories you may have missed from the eastern hemisphere.

While large countries in the Asia-Pacific region have been struggling to get rid of their “brown” labels, one small nation is leading the way to achieve a greener future.

New Zealand aims to become the first country in the world to make climate risk reporting mandatory, using the Task Force on Climate-related Financial Disclosures (TCFD) framework. Prime minister Jacinda Ardern’s administration announced the move last month.

“Many large businesses in New Zealand do not currently have a good understanding of how climate change will impact what they do”, said James Shaw, the country’s minister for climate change. But Mr Shaw, leader of the Green party, explained that the changes the government is proposing would bring “climate risks and resilience into the heart of financial and business decision” and make the disclosure of climate risk “clear, comprehensive and mainstream.”

Many green advocates have applauded the proposal. “Once again, New Zealand is leading the world”, said Joseph Stiglitz, a Nobel laureate in economics, in a video message. When New Zealand pioneered an inflation-targeting framework in the late 20th century, the concept ended up being adopted all over the world. More recently, Mr Stiglitz praised the country’s handling of the Covid-19 pandemic as well as climate change as great examples of how democratic countries can manage such global issues.

Once approved by the parliament, the policy will apply to up to 90 per cent of the country’s assets under management as early as 2023.

The parliamentary approval won’t happen until after the general election on October 17. But impact investors in the region think that the announcement has already been making an impact on financial institutions and companies in New Zealand and beyond.

“The market is now preparing for [mandatory TCFD disclosures] to be legislated post election,” said Simon O’Connor, chief executive of the Responsible Investment Association Australasia. Mr O’Connor also said that New Zealand’s decision “sets a strong global precedent in requiring the largest financial sector organisations, as well as listed companies, to report under the TCFD”.

Grit in the oyster

He was once a bestselling author for moral leadership and corporate ethics. Now, Dov Seidman, founder of LRN, has been accused of cheating investors out of millions of dollars when he sold his business ethics consultancy to a private equity firm. The cast of characters involved in this tale include former US president Bill Clinton, and you can read more about this ethical dilemma in the FT here.

Chart of the day

Column chart of Billions of dollars per year showing Clean race: China vs US spending on renewables

China has outspent the US on renewable energy investments. But a $2tn clean-energy programme proposed by Democratic presidential challenger Joe Biden could, if he is elected in November, help the US compete with its Asian rival. Please read our Energy Source colleague Derek Brower’s article here, and sign up for the FT’s must-read energy newsletter here.

Further reading

  • Japan business lobby denies climate change sabotage claim (FT)

  • How to make business fix supply chain flaws (FT)

  • Conscience investors put their values into stocks (FT)

  • Investors hit out at Samsung over $14bn in coal financing (FT)

  • BlackRock ETF thrusts climate change into political sphere (FT)

  • Fungus may be fall’s hottest fashion trend (NYT)

  • The right formula for managing a socially responsible company? There is none. (WashPost)

  • Big fossil fuel groups all failing climate goals, study shows (FT)

  • Exxon’s Plan for Surging Carbon Emissions Revealed in Leaked Documents (Bloomberg)



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Wall Street stocks follow European and Asian bourses lower

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Equities updates

Wall Street stocks followed European and Asian bourses lower on Friday after markets were buffeted this week by jitters over slowing global growth and Beijing’s regulatory crackdown on tech businesses.

The S&P 500 closed down 0.5 per cent, although the blue-chip index still notched its sixth consecutive month of gains, boosted by strong corporate earnings and record-low interest rates.

The tech-focused Nasdaq Composite slid 0.7 per cent, after the quarterly results of online bellwether Amazon missed analysts’ forecasts. The tech conglomerate’s stock finished the day 7.6 per cent lower, its biggest one-day drop since May 2020.

According to Scott Ruesterholz, portfolio manager at Insight Investment, companies which saw significant growth during the pandemic may see shifts in revenue as consumers move away from online to in-person services.

“[Consumers are] going to start spending more on services, and so those businesses and industries which have benefited in the last year, companies like Amazon, will be talking about decelerating sales growth for several quarters,” Ruesterholz said.

The sell-off on Wall Street comes after the continent-wide Stoxx Europe 600 index ended the session 0.5 per cent lower, having hit a high a day earlier, lifted by a bumper crop of upbeat earnings results.

For the second quarter, companies on the Stoxx 600 have reported earnings per share growth of 159 per cent year on year, according to Citigroup. Those on the S&P 500 have increased profits by 97 per cent.

But “this is likely the top”, said Arun Sai, senior multi-asset strategist at Pictet, referring to the pace of earnings increases after economic activity rebounded from the pandemic-triggered contractions last year. Financial markets, he said, “have formed a narrative of peak economic growth and peak momentum”.

Column chart of S&P 500 index, monthly % change showing Wall Street stocks rise for six consecutive months

Data released on Thursday showed the US economy grew at a weaker than expected annualised rate of 6.5 per cent in the three months to June, as labour shortages and supply chain disruptions caused by coronavirus persisted.

Meanwhile, China’s regulatory assault on large tech businesses has sparked fears of a broader crackdown on privately owned companies.

“It underlines the leadership’s ambivalence towards markets,” said Julian Evans-Pritchard of Capital Economics. “We think this will take a toll on economic growth over the medium term.”

Hong Kong’s Hang Seng index closed 1.4 per cent down on Friday, while mainland China’s CSI 300 dropped 0.8 per cent, after precipitous slides earlier in the week moderated.

Japan’s Topix closed 1.4 per cent lower, after the daily tally of Covid cases in Tokyo surpassed 3,000 for three consecutive days. South Korea’s Kospi 200 dropped 1.2 per cent.

The more cautious investor mood on Friday spurred a modest rally in safe haven assets such as US government debt, which took the yield on the 10-year Treasury, which moves inversely to its price, down 0.04 percentage points to 1.23 per cent.

The Federal Reserve, which has bought about $120bn of bonds each month throughout the pandemic to pin down borrowing costs for households and businesses, said this week that the economy was making “progress” but it remained too early to tighten monetary policy.

“Tapering [of the bond purchases] could be delayed, which in many ways is not bad news for the market,” said Anthony Collard, head of investments for the UK and Ireland at JPMorgan Private Bank.

The dollar, also considered a haven in times of stress, climbed 0.3 per cent against a basket of leading currencies.

Brent crude, the global oil benchmark, rose 0.4 per cent to $76.33 a barrel.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday



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US regulators launch crackdown on Chinese listings

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US financial regulation updates

China-based companies will have to disclose more about their structure and contacts with the Chinese government before listing in the US, the Securities and Exchange Commission said on Friday.

Gary Gensler, the chair of the US corporate and markets regulator, has asked staff to ensure greater transparency from Chinese companies following the controversy surrounding the public offering by the Chinese ride-hailing group Didi Chuxing.

“I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” Gensler said in a statement.

He added: “I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies.”

The SEC’s new rules were triggered by Beijing’s announcement earlier this month that it would tighten restrictions on overseas listings, including stricter rules on what happens to the data held by those companies.

The Chinese internet regulator specifically accused Didi, which had raised $4bn with a New York flotation just days earlier, of violating personal data laws, and ordered for its app to be removed from the Chinese app store.

Beijing’s crackdown spooked US investors, sending the company’s shares tumbling almost 50 per cent in recent weeks. They have rallied slightly in the past week, however, jumping 15 per cent in the past two days based on reports that the company is considering going private again just weeks after listing.

The controversy has prompted questions over whether Didi had told investors enough either about the regulatory risks it faced in China, and specifically about its frequent contacts with Chinese regulators in the run-up to the New York offering.

Several US law firms have now filed class action lawsuits against the company on behalf of shareholders, while two members of the Senate banking committee have called for the SEC to investigate the company.

The SEC has not said whether it is undertaking an investigation or intends to do so. However, its new rules unveiled on Friday would require companies to be clearer about the way in which their offerings are structured. Many China-based companies, including Didi, avoid Chinese restrictions on foreign listings by selling their shares via an offshore shell company.

Gensler said on Friday such companies should clearly distinguish what the shell company does from what the China-based operating company does, as well as the exact financial relationship between the two.

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” he said.

He added that companies should say whether they had received or were denied permission from Chinese authorities to list in the US, including whether any initial approval had then be rescinded.

And they will also have to spell out that they could be delisted if they do not allow the US Public Companies Accounting Oversight Board to inspect their accountants three years after listing.



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Wall Street stocks climb as traders look past weak growth data

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Equities updates

Stocks on Wall Street rose on Thursday despite weaker than expected US growth data that cemented expectations that the Federal Reserve would maintain its pandemic-era stimulus that has supported financial markets for a year and a half.

The moves followed data showing US gross domestic product grew at an annualised rate of 6.5 per cent in the second quarter, missing the 8.5 per cent rise expected by economists polled by Reuters.

The S&P 500, the blue-chip US share index, closed 0.4 per cent higher after hitting a high on Monday. The tech-heavy Nasdaq Composite index climbed 0.1 per cent, rebounding slightly after notching its worst day in two and a half months earlier in the week.

The dollar index, which measures the US currency against those of peers, fell 0.4 per cent to its weakest level since late June after the GDP numbers.

“Sentiment about the economy has become less optimistic, but that is good for equities, strangely enough,” said Nadège Dufossé, head of cross-asset strategy at fund manager Candriam. “It makes central banks less likely to withdraw support.”

Jay Powell, the Fed chair, said on Wednesday that despite “progress” towards the bank’s goals of full employment and 2 per cent average inflation, there was more “ground to cover” ahead of any tapering of its vast bond-buying programme.

“Last night’s [announcement] was pretty unambiguously hawkish,” said Blake Gwinn, rates strategist at RBC, adding that Powell’s upbeat tone on labour market figures signalled that the Fed could begin tapering its $120bn a month of debt purchases as early as the end of this year.

The yield on the 10-year US Treasury bond, which moves inversely to its price, traded flat at 1.26 per cent.

Line chart of Stoxx Europe 600 index showing European stocks close at another record high

Looking beyond the headline GDP number, some analysts said the health of the US economy was stronger than it first appeared.

Growth numbers below the surface showed that consumer spending had surged, “while the negatives in the report were from inventory drawdown, presumably from supply shortages”, said Matt Peron, director of research and portfolio manager at Janus Henderson Investors.

“This implies that the economy, and hence earnings which have also been very strong so far for Q2, will continue for some time,” he added. “The economy is back above pre-pandemic levels, and earnings are sure to follow, which should continue to support equity prices.”

Those upbeat earnings helped propel European stocks to another high on Thursday, with results from Switzerland-based chipmaker STMicroelectronics and the French manufacturer Société Bic helping lift bourses.

The region-wide Stoxx Europe 600 benchmark closed up 0.5 per cent to a new record, while London’s FTSE 100 gained 0.9 per cent and Frankfurt’s Xetra Dax ended the session 0.5 per cent higher.

In Asia, market sentiment was also boosted by a move from Chinese officials to soothe nerves over regulatory clampdowns on the nation’s tech and education sectors.

Beijing officials held a call with global investors, Wall Street banks and Chinese financial groups on Wednesday night in an attempt to calm nerves, as fears spread of a more far-reaching clampdown. Hong Kong’s Hang Seng rose 3.3 per cent on Thursday, although it was still down more than 8 per cent so far this month. The CSI 300 index of mainland Chinese stocks rose 1.9 per cent.

Brent crude, the global oil benchmark, gained 1.4 per cent to $76.09 a barrel.



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