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Investors electrify South African banks’ sustainability push



When South Africa’s Standard Bank became the country’s first company to table a climate-related shareholder resolution last year, few expected investors to back moves forcing the bank to adopt and disclose policies on loans to new coal mines and power plants in Africa.

The bank is the largest lender to a continent that is both desperate for energy and exposed to climate change. At the same time, the bank’s home country relies heavily on coal to generate most of its power.

Garnering 55 per cent support, the vote passed “to everyone’s shock, including our own . . . it was the first time we had done this”, says Tracey Davies, executive director of Just Share, a non-profit group that promotes shareholder activism and responsible investing in South Africa.

The vote for a coal lending policy marked a watershed moment, although only 38 per cent of shareholders at the meeting backed wider climate disclosures by the bank.

© Dean Hutton/Bloomberg

In the year since, there has been a wave of public commitments by South African banks to incorporate climate risk into lending — a shift with profound implications for access to capital for energy projects in the region.

Recent climate risk resolutions that were tabled by South African banks themselves, including Investec and Nedbank, all had overwhelming votes in favour — “a strong indication that shareholders want banks to provide them with climate disclosures”, particularly with regard to the share of loans that have climate risks, according to Ms Davies.

In October, Standard Bank published its own disclosures, which revealed R67bn ($4.2bn), or 4.4 per cent, of the bank’s credit exposures were linked to fossil fuels, versus R12bn to renewables.

“There’s been a very rapid shift at all of the banks in understanding that this is a serious risk, and that they need to up their game in terms of disclosure. They have all done a lot,” says Ms Davies.

This year, Investec became South Africa’s first bank to detail a financing policy across all fossil fuels, and Standard Bank is preparing to release a similar policy by early next year.

What looks like sudden change reflects the build-up of quiet, behind-the-scenes shifts over time, says Wendy Dobson, Standard Bank’s head of group corporate citizenship. “We have reached a tipping point,” she says. South Africa’s financial regulators have taken more interest in climate risk in the banking system and institutional investors have added their voice, she says.

Standard Bank’s latest climate disclosures allow investors “to get a sense of what kind of risk appetite the bank is taking in these sectors . . . that allows them to make decisions about what they want to be invested in”, says Ms Dobson. The disclosures are also intended as a work in progress, she adds. “We still don’t have a definitive approach to definitions and methodologies . . . This is very much something that is evolving.”

The biggest question may be defining how these new policies will relate to Africa’s own challenges, with both global temperature rises and the need for its economies to catch up.

Standard Bank’s latest disclosures hint at how it believes climate change could ravage African economies and drive banking losses, including a warning that R111bn of agricultural lending is exposed to “elevated physical risk”.

At the same time, less than half of Africans have access to grid electricity, and fewer gigawatts have been installed south of the Sahara desert than in Spain.

“We are in a different context in Africa — we are still dealing with fundamental challenges of people having access to power,” Ms Dobson says. Standard Bank is being guided by the Paris Agreement, which allows poorer countries more time to make a transition away from fossil fuels, she adds.

© Gideon Mendel/Corbis via Getty Images

None of the South African banks’ policies forbid loans to build new African coal mines or power stations outright, even though coal is generally a small part of their energy portfolios.

Investec — which has less than one-fifth of its energy portfolio in coal — “will only finance new coal mining transactions or the expansion of ongoing operations if there is a comprehensive socio-economic motivation” that senior leadership has agreed is valid, according to its new financing policy.

“A lot of these policies will exclude South Africa’s current plans — but basically say that if the opportunity arose elsewhere in Africa, we would consider it,” says Robyn Hugo, director of climate change engagement at Just Share.

In any case, Ms Hugo says, oil and gas are overtaking coal as the next big area of contention for banks’ climate policies in Africa. Natural gas in particular is being classed by banks as a “transition fuel” that can help economic development while producing relatively fewer greenhouse gases than coal.

At stake are some of the biggest capital projects in the continent. They range from LNG (liquefied natural gas) development in Mozambique, where France’s Total recently arranged the region’s largest debt financing at $15bn, to the world’s longest heated oil pipeline in eastern Africa that would link oilfields in Uganda to ports in Tanzania. Standard Bank is lending to both.

South Africa’s latest energy plan also signalled a greater role for natural gas to speed the country’s transition from ageing coal plants.

Activists argue that many African countries will see little energy security benefit from oil pipelines and LNG terminals focused on exports to rich nations — and that far from being a transition fuel, natural gas will become deadweight infrastructure given the pace of change in global emissions targets.

© Photothek via Getty Images

These activists also argue that African bankers should be fleshing out renewables lending policies instead, as prices for solar, wind and other sources drop and reliability of such projects increases. Lenders “are still relying on old arguments about fossil fuel baseload” or favouring coal, oil and gas to supply bedrock demand, Ms Davies says.

Standard Bank’s latest climate disclosure says that renewables “provide great potential for African energy utilities”, but it adds that renewables generation in the region is still limited and that hydropower — Africa’s biggest renewable — supplies only 16 per cent of the continent’s power.

Even after the past year of change, it is unclear whether shareholders in South African banks will continue to thrash out climate issues at annual general meetings.

After the breakthrough vote by its shareholders in 2019, Standard Bank did not table climate risk resolutions put to it by Just Share and the Raith Foundation this year. It said its board’s decision “not to allow the usurping of its role by stakeholders that do not have any fiduciary responsibilities to the company does not suggest that the board is deviating from its environmentally responsible . . . path”.

Despite the wrangling, the terms of the debate have changed and bank shareholders can now compare climate policies across lenders, Ms Davies says. “Certainly, we have come a long way.”

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Emerging Markets

South Korea looks to fintech as household debt balloons to $1.6tn




South Korea Economy updates

After her family business of ferrying drunk people home was hit by closures of bars due to Covid-19 curfews and social distancing, Lee Young-mi* found herself juggling personal debts of about Won30m ($26,000).

The 56-year-old resident of Suncheon in South Korea was already struggling to pay off or refinance four credit cards, but now faces the prospect of those debts rapidly multiplying after her husband was diagnosed with cancer.

“We’ve had little income for more than a year as not many people are out drinking until late into the night,” said Lee. “Now my husband won’t be able to work at all for the next three months after his surgery.”

Lee’s story is playing out across Asia’s fourth-largest economy as self-employed workers, who make up nearly a third of the labour force, have seen their incomes reduced sharply due to coronavirus restrictions. Now, after struggling for years to keep a lid on household debts that hit a record Won1,765tn ($1.6tn) in March, Seoul is looking to fintech companies and peer-to-peer lenders for answers. 

Chart showing increase in South Korea's household debt

Among them is PeopleFund, which touts tech-based investment products backed by machine learning that allow borrowers to refinance their higher-interest loans from banks and credit card companies.

The company has loaned at least $1bn to more than 7,500 customers since it was established in 2015. Its products allow borrowers to switch their debts to fixed-rate, amortised loans at annual interest rates of about 11 per cent, a change from the riskier floating rate, interest-only loans common in South Korea. 

PeopleFund has received about Won96.7bn in financing from brokerage CLSA, and along with Lendit and 8Percent is one of the first among the country’s 250 shadow banks to win a peer-to-peer lending licence. 

“The country’s most serious household debt problem is with unsecured non-bank loans, whose pricing has been too high. We can offer more affordable loans to ordinary people unable to receive bank loans,” Joey Kim, chief executive of PeopleFund, told the Financial Times.

The proliferation of digital lenders and fintechs in South Korea, where higher-risk borrowers are often cut off from bank financing, has been encouraged by the country’s government.

“We hope that P2P lenders will help resolve the dichotomy in the credit market by increasing the access of low-income people to mid-interest loans,” said an official at the Financial Supervisory Service.

South Korea’s household debt situation has become more pressing since the onset of the pandemic, with increases in borrowing for mortgages, to cover stagnating wages and to invest in the booming stock market. South Korean households are among the world’s most heavily indebted, with the average debt equal to 171.5 per cent of annual income.

South Korea’s household debt-to-GDP ratio stood at 103.8 per cent at the end of last year, compared with an average 62.1 per cent of 43 countries surveyed by the Bank for International Settlements.

Much of the new debt has been risky. Unsecured household loans from non-bank financial institutions were Won116.9tn as of March, up 33 per cent from four years ago, according to the Bank of Korea, much of it high interest loans taken out by poorer borrowers.

Getting on top of the problem has taken on national importance. In a rare warning in June, the central bank said the combination of high asset prices and excessive borrowing risked triggering a sell-off in markets and a rapid debt deleveraging.

“If financial imbalances increase further, this could dent our mid-to-long-term economic growth prospects,” BoK governor Lee Ju-yeol said in July.

The country’s economic planners, however, are struggling to contain debt-fuelled asset bubbles without undermining South Korea’s fragile economic recovery.

The government has attempted to address the danger by tightening lending rules. Regulators in July lowered the country’s maximum legal interest rate that private lenders can charge their customers from 24 to 20 per cent.

Economists caution that rising debt levels increase South Korea’s vulnerability to an economic shock. 

They also warn that the asset quality of financial institutions could be hit by a jump in distressed loans when the BoK rolls back monetary easing, expected in the fourth quarter.

“Monetary tightening is needed to curb asset bubbles but this will increase the household debt burden, holding back consumption further,” said Park Chong-hoon, head of research at Standard Chartered in Seoul. “The government is facing a dilemma.”

For Lee Young-mi, however, the 11 per cent rate offered by the PeopleFund is still too high. “I am not sure how to pay back the debt.”

*The name has been changed

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Emerging Markets

European and Chinese stocks rise after calming words from Beijing




Chinese equities updates

European shares chased gains in China after calls from Beijing for greater co-operation with Washington helped sooth jitters over a regulatory crackdown in the world’s biggest emerging market.

Europe’s Stoxx 600 index rose 0.7 per cent on Monday to hit new all-time highs, while the UK’s FTSE 100 rose 1 per cent led by economically sensitive stocks including banks and energy groups. London-listed lender HSBC gained 1 per cent after it reported second-quarter figures that easily beat analysts’ expectations.

The gains came after the China Securities Regulatory Commission, Beijing’s market regulator, called on Sunday for closer co-operation with Washington, stressing the country’s efforts to improve transparency and predictability after a crackdown on tutoring groups obliterated the market value of the $100bn sector’s biggest companies.

Chinese listings in the US have become a geopolitical flashpoint as Beijing has sought to exert greater control over the country’s powerful tech sector. The US Securities and Exchange Commission said on Friday that Chinese groups that sought to sell shares in America would be subject to stricter disclosures.

Shares in China rebounded after their worst month in almost three years, with China’s CSI 300 benchmark of Shanghai- and Shenzhen-listed blue-chips rose 2.6 per cent on Monday, while Hong Kong’s Hang Seng index added 1.1 per cent. The city’s Hang Seng Tech index, which tracks big internet groups including Tencent and Alibaba, reversed early losses to rise 1 per cent. Futures tracking Wall Street’s benchmark S&P 500 index climbed 0.6 per cent.

Last month, China’s cyber-security regulator announced plans to review all foreign listings by companies with data on more than 1m users after top leaders in Beijing called for an overhaul of how the country regulates initial public offerings in the US. The crackdown came just days after the $4.4bn listing of ride-hailing group Didi Chuxing.

The intensifying scrutiny of how Chinese groups access capital markets has pummelled stocks, delivering the worst month for China tech groups listed in the US since the global financial crisis. The Hang Seng Tech index fell 17 per cent last month.

“While we do not consider it prudent to completely avoid investments in China, further volatility can be expected until the first quarter of 2022, by which time we believe most regulatory changes may already be in place,” analysts at Credit Suisse wrote in a note on Monday.

Meanwhile, data released by China at the weekend showed that factory activity grew at the slowest pace in 15 months in July as demand contracted for the first time in more than a year.

Government bonds were steady with the yield on the benchmark German 10-year Bund, which moves inversely to its price, gaining 0.01 percentage points to minus 0.45. The equivalent US 10-year yield was steady at 1.234 per cent.

Bond yields have been falling in recent weeks, despite higher than expected inflation readings in the US and indications from the US federal Reserve last week that it was moving a step closer to the day when it would start tapering its $120bn in monthly asset purchases.

The euro rose 0.1 per cent against the dollar to $1.1885, while the pound gained 0.1 per cent to purchase $1.3924. Prices for global oil benchmark Brent crude fell 1 per cent to $74.66.

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Turkey battles to quell wildfires as residents and tourists flee




Turkey updates

Turkey has contained more than 100 wildfires after a series of blazes near its Mediterranean coastline killed six people and forced thousands of residents and foreign tourists to flee holiday resorts, the government said on Sunday.

Winds gusting at 50km per hour, low humidity and temperatures hovering near 40C have made controlling the fires difficult, Bekir Pakdemirli, the forestry minister, said on Twitter and in comments reported in state-run media.

The fires began on July 28, and the simultaneous start of so many conflagrations raised suspicions they may have been deliberately set, Pakdemirli said, although he did not offer evidence of arson.

About 100 Russian nationals were evacuated from the Bodrum peninsula in western Turkey on Saturday and moved to hotels elsewhere, the Russian consulate in the city of Antalya said in a statement, according Sputnik, a Russian state media outlet. Local tourists were also among the evacuees, with some forced to leave by sea as the blaze cut off other escape routes.

Flights from Russia, Turkey’s biggest source of tourists, only resumed in late June after Moscow suspended charter trips amid a record outbreak of Covid-19 cases in Turkey in the spring. Coronavirus-related travel restrictions to Turkey have hammered its tourism sector, which directly and indirectly accounts for about 13 per cent of gross domestic product.

Villagers water trees to stop the wildfires that continue to rage in the forests in Manavgat, Antalya, Turkey © AP

The forestry ministry website showed at least 15 active fires on Sunday. Villagers and forestry workers were among the six people who died, according to Turkish media. Mehmet Oktay, mayor of the resort town of Marmaris, said one volunteer firefighter had died and another 100 people had been injured in a spate of fires that have scorched more than 10,000 hectares near the town.

A half-dozen fires continued to sear areas mostly inaccessible by road, and the number of blazes across Turkey meant not enough firefighting planes were available, he said. “It’s heartbreaking, and I am fighting back tears to concentrate on the emergency at hand. It will take more than a decade to restore this land,” he said.

Thousands of farm animals and untold numbers of wild animals also perished in the fires, which one meteorologist estimated reached 200C.

Wildfires are an annual occurrence in south-west Turkey’s pine forests, and one expert told CNN Turk television that 95 per cent are deliberately or accidentally sparked by people.

Yet the scale of the current conflagration is remarkable, and some are blaming climate change for the disaster. Turkey recorded its highest ever temperature in a south-eastern town last month, and much of the country has been gripped by drought this year, while deadly floods struck north-east Turkey last month.

Several other Mediterranean countries are battling blazes this summer, including Cyprus, Greece, Lebanon and Italy, and scientists have said the extreme weather events across the globe this summer may be the result of global warming.

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