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US election: What it means for climate change and ESG



Welcome to Moral Money. Today we have:

  • US election’s impact on climate and ESG

  • EU looks to expand green taxonomy

  • Trump admin guts anti-ESG pension rule

  • UK companies’ dilemma over dividends

Climate and ESG on the ballot

We may not know who won the US election yet, but we do have a good idea of what either outcome would mean for US climate policy and ESG investing.

Here’s what we know. If Donald Trump stays in office, it would be terrible news for climate change. As Martin Wolf wrote: “The coming decades will determine whether the threat of damaging and irreversible change is averted, or not. Without active US engagement, success seems inconceivable.”

Under a second Trump term, it is safe to assume the US will not engage at a federal level. That’s very bad. But (at risk of sounding Pollyanna-ish), things could be worse.

For starters — it is clear that Mr Trump’s decision to back out of the Paris accord only served to further undercut the US’s deteriorating status as a global hegemon. Europe has remained committed to decarbonisation through the pandemic. And as we have seen in recent weeks, China, Japan and South Korea have set their own net zero pledges. Sceptics have questioned the seriousness of these plans, but the direction of travel is clear. By dropping out of Paris, Mr Trump did not inspire other countries to shirk their climate responsibility but instead made Europe the de facto standard setter.

There is still the problem of the US itself. It is the world’s second-largest emitter — and must transition away from fossil fuels. The rest of the world could try to push the US to clean up, but it is hard to see that having much effect. States such as California are taking steps to curb carbon that will have ramifications extending far beyond their borders (such as banning the sale of new fossil fuel powered cars). And Mr Trump’s failed attempt to resurrect the US coal industry shows that there are limits to what he can do. But his deregulatory agenda, which has been calamitous for the environment, will probably only speed up under a second term. A Trump win would also likely impede bipartisan market-based climate plans such as a carbon tax (or dividend).

Under Joe Biden, it would be a different story. He has promised to rejoin Paris immediately and enact a sweeping climate plan that would earmark $2tn for new clean energy projects. He has also threatened to impose a federal drilling ban that would significantly curtail US oil production. National (or global) carbon pricing would also be on the table. But it is unclear how his administration would follow through on his campaign rhetoric or the degree to which Mr Biden would rely on market incentives or regulation to fight climate change. The Democrats also must win the Senate (which looks unlikely) if he is going to get anything done.

As it stands now, the oil industry is not overly worried. A Biden win might make it “conceivable” that the world can avoid irreversible climate damage — as Martin Wolf put it — but it is no guarantee.

A Biden presidency also would auger well for the sustainable investing industry. It is possible that a Democratic administration would set up some regulatory standards on environmental, social and governance disclosures — similar to the EU’s non-financial reporting directive and green taxonomy.

This would be welcome for investors and companies. Regulation is a “missing piece” of the ESG puzzle right now, said Vikram Gandhi, professor at Harvard Business School. But even without regulatory oversight, US investors are already pushing for better, more standardised, so-called “non-financial” information disclosure and there’s no reason to think that will stop.

No matter what happens in the election it is unlikely that the growth of ESG would slow down. Despite hostility toward responsible investing in the Trump administration, it has done little to stop its expansion (see Patrick Temple-West’s piece below for more).

“I think people are starting to realise that ESG is simply the new quality factor,” said Martin Jarzebowski, director of responsible investing at investment manager Federated Hermes. “When you’re evaluating any of these different companies, and you’re focused on what’s relevant and what’s financially material, it’s just a natural extension of the primary research that any good active fundamental investors should be doing.” (Billy Nauman)

UK companies’ dividend payment dilemma

Here’s a moral conundrum for C-suites in the era of Covid-19: should companies that used furlough support schemes refund taxpayers before restarting dividends?

Some believe they should. This week, London-listed kitchen supplier Howden Joinery committed to repay the £22m it received from the UK government’s Coronavirus Job Retention Scheme. Shareholder pay will only be considered once the company has caught up on its local tax bills and deferred pension contributions.

Howden Joinery joins a growing list of blue-chips including housebuilder Taylor Wimpey, engineer Weir Group and bookmaker William Hill, whose improving fortunes have prompted them to return emergency funds taken during the pandemic’s first wave.

Others have taken a different tack. A review of public documents and comments by FT sister title Investors Chronicle found at least 10 FTSE 350 companies that accessed furlough support schemes during the pandemic have since declared £877m or more in dividends — despite keeping (or only partially repaying) the wage subsidies’ economic benefit.

Advertiser WPP, listed private equity firm 3i and building materials company CRH are among the dividend-paying multinationals that have not paid back all furlough support claimed by their businesses or wholly-owned subsidiaries.

In doing so, the companies have not broken any conditions attached to the wage subsidies, though the UK government has now said it expects large employers to renounce dividend payments when using its new job support scheme.

That highlights the challenge for businesses eager to take all available state help amid a second round of lockdowns — all while keeping civil society and long-term dividend investors onside. (Alex Newman and Oliver Telling)

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An EU rainbow taxonomy?

© Bloomberg

Europe’s green taxonomy might soon embrace more colours, given the hints emerging from European Commission officials. On Tuesday Marcel Haag, head of the commission’s directorate for growth, jobs and investment, told the Financial Times that social factors would soon be incorporated into environmental reporting.

“The success of the climate transition depends on our ability to make this a just transition,” he told the FT’s Investing for Good summit in Europe. “ESG is not limited to environmental issues. We created it starting out focusing on green economy and environmental objectives, but now is the time to look into the social dimension.” Mr Haag added that the commission has asked its 50 stakeholders to play a role in factoring “social aspects into our taxonomy”. 

This shift might make some critics wince, given how hard it is to define — let alone measure — social factors compared with, say, carbon emissions. But ever since the gilets jaunes protests in France against fossil fuel tax hikes, European politicians have been worrying about how to balance issues of equity and social inclusion with environmental reform. The Covid-19 recession is intensifying this. Expect to hear a lot more about “just transition” this winter; whether or not it sparks a multicoloured taxonomy. (Gillian Tett)

Trump’s ESG rule: More bark than bite

© AP

Asset managers scored a win at the US labor department on Friday over a regulation aimed at limiting the scope of ESG investing in private pension plans.

The final version of the widely criticised rule removed ESG language specifically, and broadly requires pension advisers to select investments based on financial factors — something they are largely required to do already.

With the final rule, the labor department (headed by Eugene Scalia, pictured above) opted “to no longer focus on ESG funds at all,” said Joshua Lichtenstein, a partner at Ropes & Gray.

Another lawyer following the rule put it more bluntly: the labor department “gutted its own rule”.

Still, the rule has a chilling effect and will discourage companies from adding ESG funds to their retirement savings plans. Only a tiny number of US companies offer ESG funds in their retirement plans, the labor department said.

“This does nothing to encourage ESG analysis,” said Aron Szapiro, head of policy research at Morningstar. “It still makes it very difficult to include sustainability factors” in an investment strategy. (Patrick Temple-West)

Chart of the week

Chart showing that the top five emitters can deliver most of the needed reductions in emissions

Co-operation among the world’s five largest emitters is key to controlling climate change. But, as Martin Wolf notes, it looks unlikely that China, the US, the EU, India and Japan will band together to curb emissions.

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.

Shell’s plan to transition to clean energy is a key part of its marketing strategy — but a recent attempt to bolster its self-styled green image on Twitter blew up in its face as US congresswoman Alexandria Ocasio-Cortez, Swedish climate activist Greta Thunberg, and thousands of others blasted the oil major after it asked people what they were “willing to change to help reduce emissions”.

“I sure am willing to call out the fossil fuel companies for knowingly destroying future living conditions for countless generations for profit and then trying to distract people and prevent real systemic change through endless greenwash campaigns,” Ms Thunberg wrote. (The Guardian)

Smart reads

China’s announcement that it will be carbon neutral by 2060 is one of the most important climate stories of the year, but a closer look at the country’s coal “addiction” raises questions about how it will actually achieve its goal and whether its government can be trusted as a climate leader. (FT)

Sign up to Swamp Notes, our newsletter on US politics and power, to receive our special post-election edition on Wednesday afternoon.

Further reading

  • Australia’s banks stop funding coal as trading partners decarbonise (FT)

  • GSK/ESG funds: flower power (FT Lex)

  • VW within ‘1 gramme’ of compliance with EU carbon targets (FT)

  • Climate change: how China can achieve its pledge of zero emissions (FT)

  • AllianceBernstein Takes Global Position on Modern Slavery, Climate Change (FundFire)

  • South Korea joins Japan in making 2050 carbon-neutral pledge (Nikkei Asia)

  • Australian super fund agrees to factor climate crisis into decisions in ‘groundbreaking’ case (The Guardian)

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Earnings beats: lukewarm reaction shows prices are stretched




Investors are picking over first-quarter results for signs of economic recovery and proof that record market highs can continue. Stock markets have only been this richly valued twice before — in 1929 and 2000. Bulls hope strong corporate earnings and rising inflation can pull prices higher still. But pricing for perfection means even good results can be met with indifference.

L’Oreal illustrated this trend on Friday. The French cosmetics group stated that sales in the first quarter of the year rose 10.2 per cent. This was a better performance than expected. Yet the announcement sent shares down by around 2 per cent. Weak cosmetics sales were seen as a veiled warning that consumers emerging from lockdowns might not spend as freely as hoped.

Online white goods retailer AO World, a big winner from pandemic home upgrades, also offered a positive update this week. In the quarter that marked the end of its financial year, sales were £30m ahead of forecasts. But even upbeat commentary from boss John Roberts could not stop shares slipping 3 per cent.

Banks are not immune. Their stocks have outperformed the market by 7 per cent in Europe and 12 per cent in the US this year. But stellar Wall Street results were not enough to satisfy investors this week.

JPMorgan Chase, the biggest US bank, smashed expectations for the first quarter. Even adjusting for the release of large loan loss reserves, earnings per share beat expectations by 12 per cent because of higher investment banking revenues. Bank of America earnings also rose thanks to the release of loan loss reserves. Yet shares in both banks ended the week down. Goldman Sachs had to pull out its best quarterly performance since 2006 to hold investor interest.

On multiple metrics, stock valuations look steep. On price to book, banks are now back to the pre-crisis levels recorded at the start of 2020. Living up to the expectation implicit in such valuations is becoming increasingly hard.

Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up.

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Barclays criticised for underwriting US private prison deal




Barclays has attracted criticism for underwriting a bond offering by the US company CoreCivic to fund the building of two new private prisons, in a new dispute over Wall Street’s relationship with the controversial sector.

The UK-based bank said two years ago that it would stop financing private prison companies, but the commitment did not extend to helping them obtain financing from public and private markets.

About 30 activists and investors, among them managers at AllianceBernstein and Pax World Funds, have signed a letter opposing the $840m fundraising for two new prisons in Alabama, which was due to be priced on Thursday.

The signatories said the bond sale brings financial and reputational risk to those involved and urged “banks and investors to refuse to purchase securities . . . whose purpose is to perpetuate mass incarceration”.

Activists and investors who pay attention to environmental, social and governance issues have sought to cut off companies that profit from a US criminal justice system that disproportionately incarcerates people of colour. As well as raising ethical issues, many also say such financing may be a bad investment because legislators are increasingly calling for an end to the use of private players in the prison system.

While Barclays is not lending to CoreCivic, activists and investors attacked its decision to underwrite the deal, which is split between private placements and public issuance of taxable municipal bonds. The arrangement is “in direct conflict with statements made two years ago” when the bank announced it would no longer finance private prison operators, according to the letter.

Barclays said its commitment to not finance private prisons “remains in place”, adding it had worked alongside representatives from the state of Alabama to finance prisons “that will be leased and operated by the Alabama Department of Corrections for the entire term of the financing”.

CoreCivic said the Alabama facilities will be “managed and operated by the state — not CoreCivic. These are not private prisons. Frankly, we believe it is reckless and irresponsible that activists who claim to represent the interests of incarcerated people are in effect advocating for outdated facilities, less rehabilitation space, and potentially dangerous conditions for correctional staff and inmates alike.”

Barclays’ 2019 commitment to limit its work with private prison companies came as other banks, including Wells Fargo, JPMorgan Chase and Bank of America, also said they would stop financing the sector.

Critics said they were not sure why Barclays is differentiating between lending and underwriting.

“You’ve already taken the stance, the right stance, that private prisons and profiting from a legacy of slavery is bad,” said Renee Morgan, a social justice strategist with asset manager Adasina Social Capital, one of the signatories of the letter. “But then you’re finding this odd loophole in which to give a platform to a company to continue to do business.”

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Hedge funds post best start to year since before financial crisis




Hedge funds have navigated the GameStop short squeeze and the collapse of family office Archegos Capital to post their best first quarter of performance since before the global financial crisis.

Funds generated returns of just under 1 per cent last month to take gains in the first three months of the year to 4.8 per cent, the best first quarter since 2006, according to data group Eurekahedge. Recent data from HFR, meanwhile, show funds made 6.1 per cent in the first three months of the year, the strongest first-quarter gain since 2000.

Hedge fund managers, who often bet on rising and falling prices of individual securities rather than following broader indices, have profited this year from a rebound in the cheap, beaten-down so-called “value” stocks and areas of the credit market that many of them favour. Some have also been able to profit from bouts of volatility, such as the surge in GameStop shares, which turbocharged some of their holdings and provided opportunities to bet against overpriced stocks.

“We’re going into a market environment that is going to be more fertile for most active trading strategies, whereas for most of the past decade buying and holding the index was the best thing to do,” said Aaron Smith, founder of hedge fund Pecora Capital, whose Liquid Equity Alpha strategy has gained around 10.8 per cent this year.

The gains are a marked contrast to the first three months of 2020, when funds slumped by around 11.6 per cent as the onset of the pandemic sent equity and other risky markets tumbling. However, funds later recovered strongly to post their best year of returns since 2009.

This year, managers have been helped by a tailwind in stocks and, despite high-profile losses at Melvin Capital and family office Archegos Capital, have largely survived short bursts of market volatility.

It’s a “good market for active management”, said Pictet Wealth Management chief investment officer César Perez Ruiz, pointing to a fall in correlations between stocks. When stocks move in tandem, it makes it more difficult for money managers to pick winners and losers.

Among some of the biggest winners is technology specialist Lee Ainslie’s Maverick Capital, which late last year switched into value stocks. Maverick has also profited from a longstanding holding in SoftBank-backed ecommerce firm Coupang, which floated last month, and a timely position in GameStop. It has gained around 36 per cent. New York-based Senvest, which began buying GameStop shares in September, has gained 67 per cent.

Also profiting is Crispin Odey’s Odey European fund, which rose nearly 60 per cent, having lost around 30 per cent last year, according to numbers sent to investors.

Odey’s James Hanbury has gained 7.3 per cent in his LF Brook Absolute Return fund, helped by positions in stocks such as pub group JD Wetherspoon and Wagamama owner The Restaurant Group. Such stocks have been helped by the UK’s progress on the rollout of the coronavirus vaccine, which has raised hopes of an economic rebound.

“We continue to believe that growth and inflation will come through higher than expectations,” wrote Hanbury, whose fund is betting on value and cyclical stocks, in a letter to investors seen by the Financial Times.

Additional reporting by Katie Martin

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