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ESG data explosion, investors demand diversity, policymakers fight climate change

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Welcome to Moral Money. If you have not already, check out the FT’s new climate hub page. And remember you can keep track of Moral Money in between newsletters at our hub page here. This week we have:

ESG data explosion shows surging importance of ‘non-financial’ data

CDP, the non-profit formerly known as the Carbon Disclosure Project, has seen a big jump this year in the number of companies disclosing sustainability data, which is a strong indicator of investors’ growing interest in “non-financial” environmental, social and governance information.

The group received data from more than 9,600 companies, which is 14 per cent more than last year and 70 per cent more than five years ago. Considering everything else going on in 2020, that is quite striking. 

It also highlights another crucial point that investors should remember as they ponder the implications of the US election: whatever does (or does not) emanate next from Washington in terms of American federal policy on the environment, the momentum in the private sector to embrace environmental issues is swelling almost in spite of government.

Moreover, the nature of “E” is shifting. Next up for CDP is to expand its survey beyond its current questions on carbon emissions, deforestation and water security to include a “full range” of environmental factors, said chief executive Paul Simpson. Soon it will begin asking for data to track companies’ impact on nature or biodiversity — which is the next frontier for sustainable investors. 

CDP is playing a critical role in steering the future of ESG disclosure, working with a group of peers such as the Sustainability Accounting Standards Board and the Global Reporting Initiative to set out a harmonised reporting framework — which may well be adopted by regulators in Europe.

But even without mandatory disclosure, its work is having an impact. Although the US is miles behind Europe on ESG, 75 per cent of the S&P 500 sent data to CDP, said Mr Simpson. Given the country’s uncertain political future at the moment, this is a welcome reminder that ESG investors can play an important role in pushing for climate action, no matter what ends up happening in Washington.

“We know that CDP disclosure really works,” Mr Simpson said. “Companies, when they’re first disclosing, only 38 per cent of them have an emissions reduction target. By their third year of disclosure that’s up to 69 per cent. So that process of measuring and disclosing actually is [effective].”

He added: “The markets are driving this, and that data is really coming now in unprecedented amounts . . . We think we need to see mandatory disclosure evolve around the world as quickly as possible. But it is important to note that market leavers can actually drive change. Sometimes a lot faster than the regulation.” (Billy Nauman)

Investors to companies: expect no let-up on diversity pledges

© AP

After all their pledges in response to this summer’s protests, will company boards lose focus on advancing racial equality as other challenges compete for directors’ time and resources?

That has been the concern, but a new survey from the Conference Board suggests that US investors are not about to let companies off the hook on this issue. 

The US business research organisation spoke to shareholders representing more than $12tn in assets under management and found that race was the socio-economic issue they were most focused on. 

“There’s a clear consensus that something more is required from companies,” particularly around disclosure, Paul Washington, executive director of the Conference Board’s ESG centre, told Moral Money. 

That is likely to result in actions that go beyond votes on shareholder proposals, affecting director elections and — in the case of active funds — capital allocation, he said. Nominating committee members of boards that fall short could be particularly vulnerable, he added, maybe not immediately but certainly by next year. 

The Conference Board advises companies to err on the side of transparency. As its report puts it: “If companies don’t identify their own shortcomings, someone else will.” (Andrew Edgecliffe-Johnson)

Wanted: student social investment projects: We are looking for innovative student-led ESG/social impact investment activities in business schools. Submit your examples here by November 15. The best will be cited in the FT and can attend our Investing for Good US summit.

Lagarde and Bailey, now Weidmann

© REUTERS

European central bankers are rallying behind the idea that monetary policy can tilt against global warming — and their statements might be resonating across the pond too.

This year, Andrew Bailey, governor of the Bank of England, and François Villeroy de Galhau, governor of the Banque de France, wrote that central banks “must use our financial stability mandates and expertise to ensure climate risks are effectively managed in the financial system”.

Last month, Christine Lagarde said the European Central Bank would consider ditching its market neutrality principle for buying corporate bonds and scrutinise assets for climate risk.

Also in October, climate activist groups published a letter they received from Germany’s central bank chief Jens Weidmann (pictured above with Ms Lagarde) in which he addressed climate action for central banks head-on.

“Central banks can do more to cope with climate change than they have done so far,” he wrote in a letter to climate activist groups including Urgewald, a German non-profit environmental and human rights organisation.

Climate policy is primarily a matter for elected governments, he said. But Europe’s central banks should ensure that financial risks from climate change are made transparent, Mr Weidmann said. The Euro-system should consider requiring that securities purchased or accepted as collateral meet certain climate-related reporting obligations, he added.

“Climate-related risks could be a possible criterion when deciding which securities to buy or which securities to use as collateral for monetary policy refinancing operations,” Mr Weidmann said.

His comments were applauded, but came with reservations. “Just more reporting and transparency on climate risks are nothing more than a first step, if, for example, fossil fuel companies’ shares and bonds in banks portfolios are still accepted as security without restriction,” Regine Richter, a campaigner at German environmental lobby group Urgewald, told Moral Money.

The European ideas are being heard in Washington with perhaps increasing interest as Joe Biden looks likely to win the presidency. The Federal Reserve is expected to protect the public from material risks, and “climate change is one of those risks”, chair Jay Powell said on Thursday. The Fed is working with central bank colleagues on climate change risks, he added. “We are watching what other countries are doing.”
(Patrick Temple-West)

Has 2020 truly been a game-changer for impact investing? Please join Billy Nauman and the FT for a webinar on November 18: Impact Investing in 2020. This event will discuss and seek to answer questions about impact investment this year and beyond.

Chart of the day

MSCI's booming ESG growth

The growth of ESG investing has become a dominant theme of 2020 (some might say it is a bubble). And investors need look no further for evidence of this phenomenon than the books of one company: MSCI, the New York-based index provider. 

MSCI makes money on ESG data with index subscriptions and licensing fees for ESG exchange traded funds. More than 11 per cent of MSCI’s revenue comes from BlackRock, which is launching 27 new ESG ETFs this year alone.

In the third quarter of 2020, MSCI ESG indices were linked to $71bn of assets, up from $25bn a year ago, according to Morningstar. Organic subscription growth for MSCI’s ESG and climate products surged 46 per cent, up from 41 per cent and 36 per cent in the first quarter and second quarters of 2020. 

And there is room to grow. In a November 4 investor presentation, MSCI said under 20 per cent of the signatories to the UN PRI were ESG research clients. 

Smart reads

  • California voters’ decision to let Uber and other gig economy companies continue to treat their workers as independent contractors has dealt a crushing blow to campaigners and legislators and paved the way for the companies to remake labour laws across the US, writes the FT’s Dave Lee. The FT’s editorial board said the vote, while a victory that sent Uber and Lyft share prices soaring, “is a loss not only for workers but also for good policymaking. The risk is that it starts to shape laws elsewhere in the US.”

  • Japan’s ethical capitalism has lessons for the world on ESG, writes Jim McCafferty, head of Asia Pacific equity research at Nomura. “For westerners focused on ESG investing, Japan provides a model for shareholders who coexist with other stakeholders,” he said.

Further reading

  • US formally withdraws from Paris climate agreement (FT)

  • Exclusive: European Development Finance group to exit fossil fuel investments by 2030 (Reuters)

  • New ESG Hedge Fund Tops Activist List in Third Quarter (Bloomberg)

  • California Bars Insurers From Dropping Policies in Wildfire Areas (New York Times)

  • San Francisco voters approve taxes on CEOs, big businesses (AP)

  • Climate change turns up the heat for property owners (FT)

  • Consumer goods makers trail on plastic recycling (FT)





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Earnings beats: lukewarm reaction shows prices are stretched

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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

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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

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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

laurence.fletcher@ft.com



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