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Can the US catch up with Europe on ESG?



Welcome to Moral Money. Today we have:

  • How a Biden win could push the US closer to Europe on ESG

  • Another deal in the red-hot ESG data sector

  • Estée Lauder jumps on the blockchain bandwagon to clean up its supply chain

  • Japan gets serious about sustainable energy

A Biden win could make US climate change strategy more European

Christine Lagarde rocked markets last week when she said the European Central Bank would consider ditching its market neutrality principle for corporate bond purchases and start taking climate change risks into account when buying companies’ debt.

Ms Lagarde, president of the central bank, had been under fire from environmentalists who argued that neutrality favoured polluters. It is a charge that Democrats have levelled against the Federal Reserve in the US.

Now, with Democratic presidential candidate Joe Biden leading in many polls and the election two weeks away, attention is turning to his strategies on climate change. Ms Lagarde’s gambit on using monetary stimulus to promote climate action looks like a starting point for the potential Team Biden.

Sarah Bloom Raskin (pictured above), a former deputy Treasury secretary, is whispered to be a contender for the department’s top job should Mr Biden win. Speaking on Monday on a call sponsored by Ceres, a sustainable business advocacy group, Ms Raskin said the ECB had been “really quite a bit ahead of where the US financial regulators have been”. In articulating what a sustainable future looks like, she echoed Ms Lagarde.

“It is a future where capital is allocated to firms that align with climate stability,” Ms Raskin said. “It is a future where capital is speeding to alternative and renewable technologies.” 

Tom Steyer (pictured below), a billionaire Democrat who briefly ran for president and is also reported to be a contender for a cabinet position should his party win the White House, believes Mr Biden would take swift action that would close the gap with Europe on climate action.

In an interview with Moral Money, Mr Steyer said that despite years of negligence on global climate leadership under President Donald Trump, the US could still become the global pacesetter on climate.

“The Biden campaign is talking about taking a very active and aggressive role internationally in terms of climate,” he said.

© Getty Images

With trade policies focused on limiting emissions and protecting workers, plus domestic support for electric vehicle production and broad research and development for clean technologies, “of course the US can lead,” he said.

The first order of business for the Biden administration should be to rejoin the Paris climate accord — a symbolic gesture to show “we are back”, Mr Steyer said.

From there, the next step would be to find a way to hit Mr Biden’s “aggressive” target of generating 100 per cent of the US’s electricity via clean energy by 2035, Mr Steyer said. This would certainly be a major step forward for the US, although given Mr Biden’s campaign rhetoric about protecting the fracking industry, it is not clear exactly how serious he is about achieving it.

For now, however, Mr Trump’s “America First” mantra still means “Europe ahead” on climate action. (Patrick Temple-West and Billy Nauman)

Demand for ESG data steams ahead

FactSet, a US data provider that competes with Bloomberg and Refinitiv, is acquiring Truvalue Labs, a data source for environmental, social and corporate governance. Tuesday’s deal is just the latest sign of a scramble to gobble up the number-crunchers profiting from the ESG investing wave.

Earlier this year, Morningstar bought Sustainalytics, an Amsterdam-based ESG data provider, while exchange operator Nasdaq bought OneReport, which also offers ESG data.

In November, S&P bought RobecoSAM, which offers reports to companies that want to see how their sustainability performance compares with competitors. Also last year, rival Moody’s bought a majority stake in Vigeo Eiris, a European ESG research company, and acquired Four Twenty Seven, a climate research boutique. 

FactSet has about 129,000 users, according to Morningstar, and with Truvalue Labs, it can offer them new data in its portfolio analytics suite. “The ability to marry this ESG content with client portfolios we see as something very exciting,” FactSet chief executive Phil Snow told Moral Money.

Demand for ESG data has been exploding, as investors continue to flood into the sector. MSCI has put ESG at the core of its growth strategy, but no single company has established itself as the market leader. Until there are some sort of ESG disclosure requirements and standards in place, data providers should have ample opportunity to compete — so it seems likely more deals like this are yet to come. (Patrick Temple-West)

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Estée Lauder tracks vanilla production with new tech

Blockchain may be the technology that “launched a million management consultancy reports” without actually delivering much of anything (as the Lex column so aptly put it this week), but it does still seem to be gathering momentum in one important area: supply chains.

This week Estée Lauder, the cosmetics manufacturer, announced it had implemented a new pilot programme to digitally track the vanilla it sources from Madagascar via blockchain. We’ll spare you the technical details, but the gist is that a digital tracking system will allow the company to both verify the quality of the ingredients it receives and ensure that their suppliers are operating sustainably. 

Supply chains, of course, are a huge ESG issue. Look no further than Boohoo to see why it is important to keep track of how a product is made. Companies sourcing materials from developing countries, where labour and environmental standards may not be as strict, need to be especially careful. Volvo Cars recently launched a similar blockchain initiative to track the materials it uses in its electric vehicles.

For now, Estée Lauder’s programme is limited to its Aveda subsidiary — a US haircare label — but it could serve as a blueprint for the entire business. “We’ve actually looked at all of our materials and we’ve identified the ones that we would call the most sensitive,” said Greg Polcer, executive vice-president for Estée Lauder’s global supply chain, explaining that the company hoped to expand the programme in the near future.

And cleaning up the supply chain is not just about protecting a company’s reputation, either. If major corporations such as Estée Lauder or Volvo Cars refuse to buy ingredients from dirty suppliers, the companies providing the raw materials have little choice but to improve on social and environmental issues.

Blockchain may have fallen far short of its “revolutionary” promises, as Lex noted. But these programmes show it may still have some potential. (Billy Nauman)

Grit in the oyster

While many companies are taking extraordinary steps to pitch in for the greater good, that is only part of the story. Here’s a little corporate grit in the oyster

Loyal Moral Money readers will no doubt have seen many investment companies promising to do better on equality, but a new survey from London-based consultancy Redington found just 47 per cent of managers looked at gender diversity in their investment analysis. Read more in FT Specialist publication FundFire.

Chart of the day

Chart showing responses of US voters (%) to questions about climate change issues and global warming

Climate change is becoming a bigger worry for both Democrats and Republicans in the US. More voters from both parties have concerns about global warming — up to 69 per cent from 53 per cent before the last presidential election in 2016, according to a recent report from Bank of America.

Tips from Tamami

Nikkei’s Tamami Shimizuishi keeps an eye on Asia to help you stay up to date on stories you may have missed from the eastern hemisphere

Japan’s green transformation has been gaining momentum, thanks to a strong push from both politicians and businesses.

“[I] would like to list up all regulatory obstacles and review them one by one [in order to promote renewable energy]”, Taro Kono, minister of administrative reform, said in an interview with Nikkei published this week.

In his first online interview since joining Prime Minister Yoshihide Suga’s cabinet in September, Mr Kono argued that investment in renewable energy would unleash economic growth, and said that he had directed every ministry involved in the field to co-ordinate and engage in the process.

Mr Kono’s move reflected the business community’s demand to cut “red tape” around wind and solar power. According to a Nikkei survey of 100 executives, deregulation in the sector is among the areas where businesses most want to see government action. The minister added: “I have heard [complaints that businesses] cannot make investments because of too many restrictions.”

Earlier this year, the Japan Association of Corporate Executives (Keizai Doyukai), a leading business association, recommended that 40 per cent of Japan’s energy supply should be renewable by 2030 — up from the fiscal 2018 level of 17 per cent. The share of renewable remains about 30 per cent in European countries.

Japan’s current energy plan commits to creating an energy mix of 22 to 24 per cent from renewables, 26 per cent from coal, and 20 to 22 per cent from nuclear power by 2030. The plan is due to be updated in 2021 and the administration is reportedly looking to raise renewables’ share to more than 30 per cent.

But green energy advocates think that Japan can aim higher.

According to Renewable Energy Institute, a Tokyo-based think-tank, renewable energy has reached 23 per cent of the mix in the first half of 2020, hitting the government’s current 2030 target, partially due to the constant decline of nuclear power after the Fukushima nuclear disaster in 2011.

“Forty per cent by 2030 is an achievable goal,” said Mika Ohbayashi, the institute’s director. Corporate Japan is getting serious about renewable energy transition.

Smart reads

The cries for ESG standardisation are growing louder, as companies become more frustrated with the subjective nature of how they are graded. Vitaly Nesis, chief executive of Polymetal, the biggest London-listed gold producer, said this week that rating agencies “lack a robust analytical framework”, which can be detrimental as a growing number of investors come to rely on these ratings. Markets would “benefit hugely” from a common set of rules similar to the International Financial Reporting Standards, he said. (FT)

Further reading

  • ESG funds forecast to outnumber conventional funds by 2025 (FT)

  • The world must counter China’s dominance of rare earths (FT)

  • As ‘impact-washing’ concerns grow, managers turn to third-party verifiers (FundFire)

  • More electric vehicle companies are coming to market. None of them have any real revenue. (Barron’s)

  • CEOs increasingly see sustainability as path to profitability (WSJ)

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European stocks stabilise ahead of US inflation data




European equities stabilised on Wednesday after a US central banker soothed concerns about inflation and an eventual tightening of monetary policy that had driven global stock markets lower in the previous session.

The Stoxx 600 index gained 0.4 per cent and the UK’s FTSE 100 rose 0.6 per cent. Asian bourses mostly dropped, with Japan’s Nikkei 225 and South Korea’s Kospi 200 each losing more than 1.5 per cent for the second consecutive session.

The yield on the 10-year US Treasury bond, which has dropped in price this year as traders anticipated higher inflation that erodes the returns from the fixed interest securities, added 0.01 percentage points to 1.613 per cent.

Global markets had ended Tuesday in the red as concerns mounted that US inflation data released later on Wednesday could pressure the Federal Reserve to start reducing its $120bn of monthly bond purchases that have boosted asset prices throughout the Covid-19 pandemic.

Analysts expect headline consumer prices in the US to have risen 3.6 per cent in April over the same month last year, which would be the biggest increase since 2011. Core CPI is expected to advance 2.3 per cent. Data on Tuesday also showed Chinese factory gate prices rose at their strongest level in three years last month.

Late on Tuesday, however, Fed governor Lael Brainard stepped in to urge a “patient” approach that looks through price rises as economies emerge from lockdown restrictions.

The world’s most powerful central bank has regularly repeated that it will wait for several months or more of persistent inflation before withdrawing its monetary support programmes, which have been followed by most other major global rate setters since last March. Investors are increasingly speculating about when the Fed will step on the brake pedal.

“Markets are intensely focused on inflation because if it really does accelerate into this time near year, that will force central banks into removing accommodation,” said David Stubbs, global head of market strategy at JPMorgan Private Bank.

Stubbs added that investors should look more closely at the month-by-month inflation figure instead of the comparison with April last year, which was “distorted” by pandemic effects such as the price of international oil benchmark Brent crude falling briefly below zero. Brent on Wednesday gained 0.5 per cent to $69.06 a barrel.

“If you get two or three back-to-back inflation reports that are very high and above expectations” that would show “we are later into the economic recovery cycle,” said Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management.

He added that the pandemic had sped up deflationary forces that would moderate cost pressures over time, such as the growth of online shopping that economists believe constrains retailers’ abilities to raise prices. Widespread working from home would also encourage more parents and carers into full-time work, he said, “increasing the labour supply” and keeping a lid on wage growth.

In currency markets on Wednesday, sterling was flat against the dollar, purchasing $1.141. The euro was also steady at $1.214. The dollar index, which measures the greenback against a group of trading partners’ currencies, dipped 0.1 per cent to stay around its lowest since late February.

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Potash/grains: prices out of sync with fundamentals




The rising tide of commodity prices is lifting the ricketiest of boats. High prices for fertiliser mean that heavily indebted potash producer K+S was able to report an unusually strong first quarter on Tuesday. Some €60m has been added to the German group’s full year ebitda expectations to reach €600m. Its share price has gone back above pre-pandemic levels.

Demand for agricultural commodities has pushed prices for corn and soyabeans from decade lows to near decade highs in less than a year. Chinese grain consumption is at a record as the country rebuilds its pork herd. Meanwhile, the slowest Brazilian soyabean harvest in a decade, according to S&P Global, has led to supply disruptions. Fertiliser prices have risen sharply as a result.

But commodity traders have positioned themselves for the rally to continue for some time to come. Record speculative positions in agricultural commodities appear out of sync even with a bullish supply and demand outlook. US commodity traders have not held so much corn since at least 1994. There are $48bn worth of net speculative long positions in agricultural commodities, according to Saxo Bank.

Agricultural suppliers may continue to benefit in the short term but fundamentals for fertiliser producers suggest high product prices cannot last long. The debt overhang at K+S, almost eight times forward ebitda, has swelled in recent years after hefty capacity additions in 2017. Meanwhile, utilisation rates for potash producers are expected to fall towards 75 per cent over the next five years as new supply arrives, partly from Russia. 

Yet K+S’s debt swollen enterprise value is still nine times the most bullish analyst’s ebitda estimate, and 12 times consensus, this year. Both are a substantial premium to its North American rivals Mosaic and Nutrien, and OCI of the Netherlands, even after their own share prices have rallied.

Any further price rises in agricultural commodities will depend on the success of harvests being planted in the US and Europe. Beyond restocking there is little that supports sustained demand.

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Amazon sets records in $18.5bn bond issue




Amazon set a record in the corporate bond market on Monday, getting closer to the level of interest paid by the US government than any US company has previously managed in a fundraising. 

The ecommerce group raised $18.5bn of debt across bonds of eight different maturities, ranging from two to 40 years, according to people familiar with the deal. On its $1bn two-year bond, it paid just 0.1 percentage points more than the yield on equivalent US Treasury debt, a record according to data from Refinitiv.

The additional yield above Treasuries paid by companies, or spread, is an indication of investors’ perception of the risk of lending to a company versus the supposedly risk-free rate on US government debt.

Amazon, one of the pandemic’s runaway winners, last week posted its second consecutive quarter of $100bn-plus revenue and said its net income tripled in the first quarter from the same period a year ago, to $8.1bn.

The company had $33.8bn in cash and cash equivalents on hand at the end of March, according to a recent filing, a high for the period.

“They don’t need the cash but money is cheap,” said Monica Erickson, head of the investment-grade corporate team at DoubleLine Capital in Los Angeles.

Spreads have fallen dramatically since the Federal Reserve stepped in to shore up the corporate bond market in the face of a severe sell-off caused by the pandemic, and now average levels below those from before coronavirus struck.

That means it is a very attractive time for companies to borrow cash from investors, even if they do not have an urgent need to.

Amazon also set a record for the lowest spread on a 20-year corporate bond, 0.7 percentage points, breaking through Alphabet’s borrowing cost record from last year, according to Refinitiv data. It also matched the 0.2 percentage point spread first paid by Apple for a three-year bond in 2013 and fell just shy of the 0.47 percentage points paid by Procter & Gamble for a 10-year bond last year.

Investor orders for Amazon’s fundraising fell just short of $50bn, according to the people, in a sign of the rampant demand from investors for US corporate debt, even as rising interest rates have eroded the value of higher-quality fixed-rate bonds.

Highly rated US corporate bonds still offer interest rates above much of the rest of the world.

Amazon’s two-year bond also carried a sustainability label that has become increasingly attractive to investors. The company said the money would be used to fund projects in five areas, including renewable energy, clean transport and sustainable housing. 

It listed a number of other potential uses for the rest of the debt including buying back stock, acquisitions and capital expenditure. 

In a recent investor call, Brian Olsavsky, chief financial officer, said the company would be “investing heavily” in the “middle mile” of delivery, which includes air cargo and road haulage, on top of expanding its “last mile” network of vans and home delivery drivers.

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