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Europe meets resistance as it sets the rules of the ESG road



Welcome to Moral Money. Today we have:

  • EU’s green agenda may come with unintended consequences

  • GE’s climate goal highlights difficulties of decarbonisation

  • Starbucks ties exec pay to ESG

  • Climate stress tests

EU green rules risk starving emerging markets of capital

Another week, another wave of debates around the European Commission’s green taxonomy. No wonder: as I detailed in a column this week, one unintended consequence of the Trump administration’s reluctance to embrace ESG is that the EU is becoming the de facto ESG standard setter for global finance, since any global group with EU exposure needs to comply with its rules.

This echoes what has happened with data privacy — and is ironic given the Trump administration’s desire to avoid non-American bodies influencing what American companies do.

However, as the commission presses ahead, some details of its taxonomy and other regulatory plans are provoking growing unease. As Daniel Hanna, head of sustainability at Standard Chartered, told the Institute of International Finance this week, the binary labelling of assets as “green” or “brown” jars with the reality of a corporate world that is often trying to transition activities along a spectrum of brown to green (or “olive”, if you like).

Nor does it capture the trade-offs around other factors such as inequality. The pandemic recession is making these so important that Nick Robins, a London School of Economics professor, told a separate panel organised by investment manager Candriam that it was better to focus on a “just transition” framework, that balances social issues against environmental factors, rather than green criteria alone.

Then there is another issue that deserves more debate: if the EU rules penalise banks that lend to dirty industries in emerging markets, as Mr Hanna points out, that will remove capital at the very moment that EM businesses need it to create growth — or (hopefully) transition from brown to green.

In an ideal world the gap would be plugged with multilateral assistance or blended finance (ie: public-private partnerships). In the real world that has been depressingly slow to emerge in a form that private finance can back. “It is not a lack of money but a lack of investible projects that is holding us back,” Oliver Bäte, CEO of Allianz (pictured above), told a UN panel this week. Or, as Munir Akram, president of ECOSOC, echoed: “We need the development of a sustainable infrastructure facility as a public-private partnership.”

It remains to be seen whether this can emerge from the meetings of the multilateral agencies this week — or if the EU will modify its taxonomy to reflect these issues, as economies ail. Watch this space. (Gillian Tett)

GE’s pledge shows that decarbonisation won’t be easy

© AFP via Getty Images

GE has joined the growing list of companies pledging to go carbon-neutral. Thursday’s announcement was an important step forward for the industrial giant, but some critics were quick to say that it did not go far enough. Either way, it is an interesting case study that shows just how complicated decarbonising the economy will be.

On the plus side, the fact that GE set its deadline as 2030 is encouraging. When companies say they will be carbon-neutral by 2050, it is “almost a meaningless target”, said Paula DiPerna, special adviser to CDP (formerly known as the Carbon Disclosure Project). But a goal just 10 years away should fall within the lifetime of the present board, making it easier to hold leadership responsible if they come up short, she added.

It is also worth noting that GE has already been working to slash its direct emissions, taking steps to divest from oil and gas company Baker Hughes and rid its portfolio of coal.

However, given that jet engines and gas turbines are still important business lines for GE, many climate activists argue they are not doing as much as they should.

GE’s pledge focuses solely on the greenhouse gases put into the atmosphere via its own operations and the power it purchases (in ESG jargon these are known as Scope 1 and Scope 2 emissions). It does not extend to emissions created by its customers when they use GE products (Scope 3 emissions).

Cutting back on Scope 1 and 2 emissions is an important part of preparing for increasing carbon taxes. It will also be key to maintaining business relationships with customers in countries such as China, which have made their own pledges to cut carbon.

But how much do the Scope 1 and 2 cuts really matter if a company is still building products designed specifically to burn more fossil fuels? Is GE significantly different from the much-lambasted Norwegian shipping company that issued a green bond last year to build more fuel-efficient oil tankers?

This is not to say GE should not be praised for its progress. GE is also quick to point out it is developing more efficient technology than other companies (like airlines) can use in their decarbonisation plans.

However, it is also important to remember that no company operates in a vacuum, and voluntary corporate promises to do better are no substitute for the systemic changes needed to curb the use of fossil fuels. As the saying goes, the road to hell (or, at least, an uninhabitable world) is paved with good intentions. (Billy Nauman)

When ESG comes for your bonus

© Bloomberg

On Wednesday, coffee giant Starbucks pledged to have at least 30 per cent of its corporate-level workforce comprised of people who are black, indigenous or broadly people of colour (a group represented in the popular acronym BIPOC) by 2025.

It is a Venti-sized goal.

Currently only 3.7 per cent of Starbucks’ corporate workforce is black, and only 7.4 per cent identify as Hispanic or Latino, according to the company.

So to get there, Starbucks sweetened the drink: diversity goals will be part of executives’ bonus starting next year. 

Incorporating some sort of ESG metric into bonus pay is becoming more common for company boards. About 62 per cent of Fortune 200 companies include ESG measures in their executive bonus plans, according to a report from consultancy Semler Brossy. The definition of these “ESG metrics” can be quite flimsy (is customer satisfaction really an ESG quality?) And only about 10 per cent of Fortune 200 companies include a diversity and inclusion metric with a formal weighting in executive bonus plans, Semler Brossy said.

Other companies have added environmental criteria to bonuses. In 2018, Shell bowed to intense shareholder pressure and said it would link executive pay to carbon emissions targets.

Starbucks did not specify how much of its executives’ bonuses the diversity metrics would influence. When companies do tie rewards to ESG metrics, the weighting is often a tiny sliver of other bonus criteria such as share price and profit increases.

For example, Chevron last year added the management of greenhouse gas emissions to its executives’ pay scores. But the GHG evaluation is coupled with personnel and environmental safety goals, which together account for just 15 per cent of an executive’s bonus composition. AbbVie, the pharma company, has linked 10 per cent of executives’ short-term bonuses to reputation and sustainability metrics such as business ethics, Semler Brossy said.

Looking ahead to 2021, investors are keen to keep pressuring companies on their environmental and social progress after a record year for petitions in 2020. Investors would be wise to turn their attention to ESG bonus criteria to ensure the impact of these schemes adds up to more than the cost of a coffee. (Patrick Temple-West)

Climate stress tests are not just a matter for banks


Europe’s central banks will soon be moving forward with financial sector stress tests to ferret out climate change vulnerabilities. French banks’ results should be available in April 2021 and those for UK banks in 2022, according to Fitch Ratings. The European Central Bank has said it wants banks to include climate risks in certain capital cushion assessments, and the European Banking Authority is considering including climate change risks in 2021 stress tests for the first time, Fitch said.

Sarah Breeden, executive director for UK deposit takers supervision at the Bank of England, told a conference this week that the pressure the central banks were putting on the financial sector was intended to permeate through the business community. “What we hope our stress tests will do,” Ms Breeden said, is to “require them to get the data and have the conversation with their customers so that they understand what this possible climate scenario might mean”. 

From real estate to agriculture and industrial companies, it matters where the assets lie, she told the Institute of International Finance. “It matters whether a company has a plan to get to net zero.”

It is clear that banks are reacting (just see JPMorgan’s fossil fuels announcement last week). But companies appear to be adapting as well (see GE’s moves, above). “It will be a whole balance sheet exercise,” Ms Breeden said. (Patrick Temple-West)

Chart of the day

Chart showing that emissions decline across sectors

Global emissions fell 8.8 per cent in the first half of 2020 as the coronavirus crisis restricted movement and economic activity, according to a study in the scientific journal Nature Communications. Please read Leslie Hook’s article about the report here.

Smart reads

  • The National Association of Corporate Directors’ annual summit this week left some in the audience disgruntled and deeply offended after the author and columnist Anand Giridharadas claimed that board members had flaunted baseless commitments to combat the climate crisis, the opioid crisis and growing wealth inequality. In a conversation with Gillian Tett, Mr Giridharadas asked the audience, filled with corporate directors: “Where were you in the run-up to the climate crisis?” and argued that “we need to change how power works”.

  • For more evidence of Europe’s status as the global authority on climate policy, see this story on Ford, the US carmaker, which has had to strike up an alliance with rivals across the pond to help it meet its emissions targets and avoid being fined by Brussels. (FT)

Further reading

  • JPMorgan Asset Management plans ESG ETFs for Asian clients (FT)

  • Time for investors to score portfolios on investing horizon (FT)

  • Pandemic reverses progress on workplace equality (FT)

  • Unregulated ‘greenwashing’? ESG investing is under the microscope as the money rolls in (CNBC)

  • The Great Barrier Reef Has Lost Half Its Corals (NYTimes)

  • Climate change is wreaking havoc on the power grid in ways you never knew (LATimes)

  • Christopher Marquis, a Cornell management professor, writes in Better Business that he has considered the B Corp the most impressive business innovation he has encountered for more than a decade. But that timeline points to a problem: adoption has been slow. (FT business books: October edition)

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Copper hits record high with demand expected to rise sharply




Copper prices hit a record high on Friday in the latest leg of a broad rally across commodity markets sparked by the reopening of major economies and booming demand for minerals needed for the green energy transition.

Copper, used in everything from electric vehicles to washing machines, rose as much as 1.2 per cent to $10,232 a tonne, surpassing its previous peak set in 2011 at the height of a previous commodities boom.

The price has more than doubled from its pandemic lows in March last year due to voracious demand from China, the biggest consumer of the metal, and also investors looking to bet on a big uptick in the global economy and protect their portfolios against potential for rising inflation.

Government stimulus packages and the shift towards electrification to meet the goals of the Paris agreement on climate change are expected to fuel further demand for the metal, which analysts and industry executives believe could hit $15,000 a tonne by 2025.

“Capacity utilisation rates of our customers are the highest in a decade and that’s before stimulus money both in Europe and the US has started to flow,” said Kostas Bintas, head of copper trading at Trafigura, one of the world’s biggest independent commodity traders. “That will be significant.”

The US and Europe were becoming significant factors in the consumption of copper for the first time in decades, he added. “Before, it’s effectively been a China-only story. That is changing fast.”

Concerns about the long-term supply of copper due to lack of investment by large miners has also pushed up prices. There are only a few large projects in a development, while most of the world’s easily produced copper has already been mined.

“The current pipeline of projects likely to start producing in the next few years represents only 2.3 per cent of forecast mine supply,” said Daniel Haynes, analyst at banking group ANZ. “This is well down on previous cycles, including 2010-13 when it reached 12 per cent.”

The upward march of other raw materials is showing no signs of abating. Steelmaking ingredient iron ore traded above $200 a tonne for the first time as China returned to work after the Labour Day holidays in early May. 

In spite of production cuts in Tangshan and Handan, two key steelmaking cities in China, analysts expect output to remain solid over the next couple of quarters. 

“Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise with steel supply being restricted,” said Erik Hedborg, a principal analyst at CRU Group.

“Iron ore producers are enjoying exceptionally high margins as around two-thirds of seaborne supply only require prices of $50 a tonne to break even.”

Elsewhere, tin on Thursday rose above $30,000 a tonne for the first time in a decade before easing. Tin is used to make solder — the substance that binds circuit boards and wiring — and is benefiting from strong demand from the electronics industry, which has been lifted by growing numbers of stay-at-home workers.

US wood prices continued to race higher ahead of the peak in the US homebuilding season in the summer with lumber futures rising to a record high above $1,600 per 1,000 board feet length, up from $330 this time last year.

Agricultural commodities also continued to rally as a result of a particularly dry season in Brazil, concerns about drought in the US and Chinese demand. Strong increases in food prices have started to affect global consumers. Corn rose to a more than eight-year high of $7.68 this week, while coffee has risen almost 10 per cent since the start of month, hitting a four-year high of $1.54 a pound this week.

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Wall Street stocks waver as investors await US jobs data




Wall Street stock markets wavered, with tech losses dragging down some indices, but remained close to record highs ahead of US jobs data on Friday that could pile pressure on the Federal Reserve to rethink its ultra-supportive monetary policies.

The S&P 500 was up 0.2 per cent in the afternoon in New York, hovering slightly below its all-time high achieved late last month. The peak was reached following a long rally supported by the Fed and other central banks unleashing trillions of dollars into financial markets in pandemic emergency spending programmes.

The technology-heavy Nasdaq Composite, however, which is stacked with growth companies sensitive to changing interest rate expectations, was down 0.5 per cent by the afternoon in New York, the fifth straight losing session for the index.

The divergence of the two indices followed patterns from earlier this year, when investors sold out of growth companies over fears of rising rates and poured into more cyclical plays. That trade has been more muted recently but could be coming back, said Nick Frelinghuysen, a portfolio manager at Chilton Trust.

“It’s been a bit more ambiguous . . . in terms of what regime is leading this market higher, is it quality and growth or is it value and cyclicals?” Frelinghuysen said. “We’re in a little bit of a wait-and-see mode right now.”

The 10-year Treasury yield, which rose rapidly earlier this year amid inflation fears, declined 0.05 percentage points to 1.56 per cent on Thursday.

In Europe, the Stoxx 600 closed down 0.2 per cent, hovering just below its record high reached in mid-April.

With the US economy close to recovering losses incurred during coronavirus shutdowns, economists expect the US government to report on Friday that the nation’s employers created 1m new jobs in April. Investors will scrutinise the non-farm payrolls report for clues about possible next moves by the Fed, which has said it will continue with its $120bn a month of bond purchases until the labour market recovers.

Up to 1.5m jobs would “not be enough for the Fed to shift”, analysts at Standard Chartered said. “Between 1.5m and 2m, there is likely to be uncertainty on Fed perceptions.”

Central bankers worldwide had a strong “communications challenge” around the eventual withdrawal of emergency monetary support measures, said Roger Lee, head of UK equity strategy at Investec.

“If it is orderly, then you can expect a gentle continuation of this year’s stock market rotation” from lockdown beneficiaries such as technology shares into economically sensitive businesses such as oil producers and banks, Lee said. “If it is disorderly, it will be a case of ‘sell what you can’.”

On Thursday the Bank of England upgraded its growth forecasts for the UK economy but stopped short of following Canada in scaling back its asset purchases.

The BoE maintained the size of its quantitative easing programme at £895bn, while also keeping its main interest rate on hold at a record low of 0.1 per cent. The British central bank added that while its asset purchases “could now be slowed somewhat” after it became the dominant buyer of UK government debt last year, “this operational decision should not be interpreted as a change in the stance of monetary policy”.

Sterling slipped 0.1 per cent against the dollar to $1.389.

The dollar, as measured against a basket of trading partners’ currencies, weakened 0.4 per cent. The euro gained 0.4 per cent to $1.206.

Brent crude fell 1.1 per cent to $68.17 a barrel.

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Gensler raises concern about market influence of Citadel Securities




Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that “healthy competition” could be at risk.

In testimony released ahead of his appearance before the House financial services committee on Thursday, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume.

“One firm, Citadel Securities, has publicly stated that it executes about 47 per cent of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,” Gensler said.

“History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration,” he said. “Market concentration can also lead to fragility, deter healthy competition, and limit innovation.”

Gensler is scheduled to appear at the third hearing into the explosive trading in GameStop and other so-called meme stocks in January.

Trading volumes in the US surged that month as retail investors flocked into markets, prompting brokers such as Robinhood to introduce trading restrictions that angered investors and drew the attention of lawmakers.

The market activity galvanised policymakers in Washington and investors. Lawmakers have focused much of their attention on “payment for order flow”, in which brokers such as Robinhood are paid to route orders to market makers like Citadel Securities and Virtu.

That practice has been a boon for brokers. It generated nearly $1bn for Robinhood, Charles Schwab and ETrade in the first quarter, according to Piper Sandler.

Gensler noted that other countries, including the UK and Canada, do not allow payment for order flow.

“Higher volumes of trades generate more payments for order flow,” he said. “This brings to mind a number of questions: do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?”

Gensler also said he had directed his staff to consider recommendations for greater disclosure on total return swaps, the derivatives used by the family office Archegos. The vehicle, run by the trader Bill Hwang, collapsed in March after several concentrated bets moved against the group, and banks have sustained more than $10bn of losses as a result.

Market watchdogs have expressed concerns that regulators had little or no view of the huge trades being made by Archegos.

“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds,” Gensler said.

“Issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail.”

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