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Why Johnson’s wind power plan may be hot air



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


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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US banks could cut 200,000 jobs over next decade, top analyst says




US banks stand to shed 200,000 jobs, or 10 per cent of employees, over the next decade as they manoeuvre to increase profitability in the face of changing customer behaviour, according to a banking analyst. 

“This will be the biggest reduction in US bank headcount in history,” Wells Fargo analyst Mike Mayo told the Financial Times. If his forecast bears out, this year would mark an inflection point for the US banking sector, where the number of jobs has remained roughly flat at 2m for the past decade.

The jobs most at risk are those in branches and call centres as banks prune their sprawling networks to match the new realities of post-pandemic banking, Mayo’s report found. That is consistent with Department of Labor statistics that predict a 15 per cent decline in bank teller jobs over the next decade.

Historically, lay-offs, particularly for lower-paying jobs, have been a contentious issue for the banking industry, which is often held up by progressive politicians as an example of a wealthy industry prioritising profits over people.

But the threat of technology companies and non-bank lenders chipping away at the business of payments and lending, which have traditionally been dominated by banks, has intensified over the past year, making job cuts necessary, Mayo said.

“Banks must become more productive to remain relevant. And that means more computers and less people,” he said.

Most of the reductions can be achieved through attrition over the next 10 years rather than cuts, reducing the risk of a backlash, Mayo said.

The new research, reported first by the FT, comes on the heels of disappointing jobs data that showed the US economy added just 266,000 jobs last month, sharply missing estimates of 1m. Structural elements of unemployment like accelerated automation that took place during the pandemic could pose stronger than anticipated headwinds to a recovery in the labour, economic officials said following the report. 

Pandemic activity pushed headcount up roughly 2 per cent last year as banks hired staff to meet the sudden demand for labour-intensive mortgages and government-backed small-business loans. But that trend is likely to be reversed in the near-term as lenders refocus on efficiency to compete more effectively with technology companies that increased their share of business during the health crisis. 

Increased competition from unregulated companies such as PayPal and Amazon entering financial services was one of the principal concerns JPMorgan Chase chief executive Jamie Dimon outlined in his annual letter to shareholders last month. 

Mayo estimates that banks currently represent just a third of the overall financing market.

“Digitisation accelerated and that played to the strength of some fintech and other tech providers,” Mayo said. 

Many of the bank branches that were closed during the pandemic will probably stay that way, and even those that remain open are likely to be more lightly staffed as branches become more focused on providing advice than facilitating transactions. A large amount of back-office roles also stand to be automated but those numbers are harder to quantify, the report said. 

Mayo said his team 20 years ago was twice as large and responsible for half as much. Doing more with less was the new norm across the industry.

“If I was giving advice to my kids, I’d say you probably don’t want to go into the financial industry,” Mayo said, adding that technology and customer or client-facing roles are probably the only areas that will see growth. “It’s likely to be a shrinking industry.”

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Inflation wild card unsettles markets




Regime changes usually take a while to fully register among investors. The big talking point in markets at the moment surrounds the potential return of a more troublesome level of consumer price inflation and what protective action investors should take.

The underlying trend of inflation matters a great deal for financial markets and investor returns. The rise in both equity and bond prices in recent decades has occurred during a long period of subsiding inflation pressure and from recent efforts by central banks to arrest disinflationary shocks since the financial crisis. 

A year after the global economy abruptly shut down, activity is duly picking up speed. The logical outcome has been a surge in readings of inflation and this week, a measure of US core prices recorded its largest annual gain since 1996, running at a pace of 3 per cent*.

Core readings exclude food and energy prices and are deemed a smoother gauge of underlying inflation pressure, a point that many people outside finance find baffling when budgeting the cost of groceries and petrol.

So the significant jump in the core measure, and even accounting for the base effect of the pandemic’s brief deflationary shock a year ago, has understandably generated plenty of noise.

This will remain loud in the months ahead as activity recovers from lockdowns with a hefty tailwind of fiscal stimulus working its way through the broad economy.

But muddying the waters for investors is that the outlook for inflation is still difficult to judge at this stage.

“There is so much dislocation in the economy from the reopening and base effects from a year ago that it will take at least six to 12 months before we get a clear view of the underlying inflation trend,” said Jason Bloom, head of fixed income and alternatives ETF strategies at Invesco.

Investors who are now worried about an inflation shock face a dilemma. Some assets seen as traditional hedges against such a risk, like inflation-protected bonds and commodities, have already risen appreciably. Effectively a period of inflation running hot has been priced in to some degree.

And history does provide a cautionary note for those moving late to buy expensive inflation protection.

Past inflationary alarms, as economies recovered in the wake of the dotcom bust in the early 2000s and the financial crisis of 2008, proved false dawns. After a mercifully brief pandemic recession, the powerful and well entrenched disinflationary trends of ageing populations and falling costs associated with technological innovation are by no means in retreat.

For such reasons, a number of investors and the US Federal Reserve expect inflationary pressure this year will prove “transitory”. But stacked against deflationary forces is the immense scale of the monetary and fiscal stimulus of the past year.

The effects of monetary and fiscal stimulus means “inflation may settle into a pace of 2.5 per cent (annualised) and that would be different from the average of 1.5 per cent before the pandemic”, said Jason Pride, chief investment officer of private wealth at Glenmede Investment Management. “Inflation will be higher. At a dangerous level? No.”

In an environment of firmer growth and moderate inflation pressure, equities will benefit, led by companies that have earnings more influenced by the economic cycle. Investors also will seek companies that have the ability to pass on higher prices to customers in the near term and offset a squeeze on profit margins.

Still, a troublesome period of elevated inflation cannot be easily dismissed. The “transitory” argument could be challenged if economic growth continues to run hot into next year, accompanied by a trend of higher wages from companies finding it hard to attract workers.

Before reaching that point, expected inflation priced into the bond market may well push past the peaks of the past two decades and enter uncharted territory in the US and also for other developed markets in the UK and Europe.

Bond market forecasts of future inflation pressure over the next five to 10 years have already risen sharply in recent months. But the rebound is from a low level and for now, expected inflation is not far beyond the Fed’s long-term target of 2 per cent.

“It is the change in inflation expectations that drives asset returns,” said Nicholas Johnson, portfolio manager of commodities at Pimco. Assessing almost 50 years of data, a portfolio holding equities and bonds underperforms during bouts of elevated inflation, while real assets including inflation-linked bonds and commodities prosper, according to the asset manager.

“Most investors have not experienced a period where inflation surprised to the upside,” added Johnson. Clients are asking more questions about insulating their portfolios, but their present exposure to commodities and other assets show that in broad terms investors are “not paying much of an inflation premium”.

That can change and the prospect of inflation regime change remains a wild card for investors.

*The value of core inflation has been changed since first publication.

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How traders might exploit quantum computing




If you had a sports almanac from the future as did Biff Tannen, the brutish bully of the time-travelling Back to the Future movie trilogy, how might you be inclined to take advantage of the foresight buried within it?

The obvious temptation would be to place sure bets in the market that make you rich. In Biff’s case, the wealth is then used to change the world into a dystopian reality in which he himself exists as “America’s greatest living hero”.

That sort of thing used to be considered fiction. But the dawn of so-called “supremacy” of quantum computing over conventional technology raises the possibility that one day soon someone might be able to effectively see into the future.

This is because quantum computers, when they become fully capable, are likely to be uniquely good at crunching probability scenarios. They are based on the mysterious world of quantum physics. Quantum bits or qubits are the basic units of information in quantum computers. Unlike the binary bits of traditional computing, which must be either zero or one, qubits can be both at the same time.

This gives quantum computers super powers that will allow them to solve probability-based tasks that would previously have been impossibly hard for conventional counterparts in realistic timeframes. If the problem at hand was a game of football, adding quantum computers to the mix is like allowing footballers to use their hands to get the ball into the net, say quantum experts.

It’s a prospect that poses an entire new set of challenges for market regulators and participants. If super quantum computers really can help institutions see into the future, the information advantage will be unprecedented.

It might also represent an entirely new type of front-running and market manipulation risk, one that regulators can’t necessarily even identify unless they too have a quantum computer at hand.

In Back to the Future, the almanac gave Biff a 60-year insight advantage over everyone else in his home 1955 timeline. With quantum computers, the edge might only be nanoseconds. But in the fast and furious world of high-frequency trading, that could be enough to sweep up.

The reassuring news — at least for now — is that we’re still at least five years away from quantum computers being powerful enough to compete with existing supercomputers on much simpler problems. Prediction might not even be their initial forte.

Goldman Sachs research recently noted, as and when quantum computers are rolled out, they are far more likely to be deployed on crunching options pricing conundrums or running Monte Carlo simulations that value existing portfolios than they are on predicting future movements of asset classes.

According to Tristan Fletcher, of artificial intelligence-forecasting start-up ChAI, that’s because prediction is ultimately about solving a very specific, deep problem by understanding the nuances of the data that matters.

“We are already at the limits of what any system that isn’t actually listening to Opec meetings and five-year plans is capable of,” he said. It’s not the complexity of the calculation that is the issue as much as the breadth of the data sample at hand. That means prediction wouldn’t necessarily get more accurate with quantum power.

The appeal to focus on “brute-force” problems such as optimising portfolio analysis or cracking cryptographic problems such as those that underpin bitcoin, the cryptocurrency, is far greater.

But this poses its own problems. If cryptographic systems can be broken, exceptionally sensitive data held across the financial system could be exposed and taken advantage of in unfair and market manipulative ways.

Rather than being able to better predict the market, the true pay off in the arms race might lie in achieving quantum-level encryption-breaking capability and using it subtly to seize the information that can get a trader ahead. Experts say the chances someone is already up to this, however, are low. If quantum supremacy had been achieved, the news of it would leak pretty quickly.

“We don’t know what we don’t know,” said Jan Goetz, chief executive of IQM, a quantum computing builder. “But generally the community is very small so everyone knows what’s going on. The status quo is clear.”

Nonetheless, the financial sector seems to be waking up to this quantum computing issue. Many banks and institutions are introducing teams to think exclusively about how quantum computing will affect their business. How far ahead they are on making their systems quantum secure is harder to say. It’s a secretive issue. For now, most agree, the threat level is low, not least because — as the hacking of the Colonial pipeline shows — system security is low enough to ensure far cheaper and simpler ways to hijack digital systems.

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