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UK’s new green rules, dirty meat suppliers, China gender diversity



One thing to start: With the US expected to rejoin the Paris climate accord under Joe Biden, this opens the door for the Federal Reserve to join the Network for Greening the Financial System. Speaking before senators on Tuesday, Randy Quarles, vice-chair of the Fed, said of NGFS membership: “I suspect it will be granted.” The Fed “could probably join before the spring [of 2021]”, he said.

Today we have:

  • UK’s giant leap on green finance

  • Meat supply chains undercut food industry emission targets

  • Generation draws up blueprint for investing in Paris goals

  • ESG investors scrutinise gender diversity in China

Amid UK green gilts announcement, a climate disclosure regime emerges

Britain is vying to become the first G20 country to make large companies report their climate change exposures by 2025, a post-Brexit tactic to bolster the UK’s global green reputation. 

The Financial Conduct Authority said on Monday that by January 1, large “premium” listed companies would have to comply with the Task Force on Climate-Related Financial Disclosures’ framework.

Though it will not be mandatory at first, a company will need to comply with the new disclosure rule or explain to regulators why it does not. 

The FCA’s news, which was tucked into chancellor Rishi Sunak’s green sovereign bonds announcement made the same day, proposed an expansion of the disclosure rule to include more companies, asset managers and pension providers by 2022. And it will consider moving to mandatory disclosure.

The FCA’s announcement pushes climate considerations further to the fore for UK board directors, said Vanessa Havard-Williams, a partner at Linklaters.

For corporate leaders, “you will need to think about how to weave climate change into your enterprise risk management”, she told Moral Money. Climate considerations will need to include executive pay and lobbying, she said. “Whatever you are deciding to do, ensure your activity is aligned across the board.”

For asset managers, the FCA said it was working on disclosure principles to combat “greenwashing” that were expected to be finalised in 2021. Consumer experiments to understand what information influences behaviour in picking sustainable products would be run later this year, the FCA said.

More work needs to be done quickly. Auditors, for example, need to test and even challenge a board and management’s climate change financial statements, the Financial Reporting Council said in a report on climate considerations for companies and investors that published Tuesday.

“I know that this is a difficult time to ask for more, but now is the time for all of us to raise the bar,” FRC chief executive Jon Thompson said.

(Patrick Temple-West)

ESG investors need clearer path to Paris

A growing number of the world’s largest investors are pushing companies to cut their carbon emissions to net-zero — but just how effective have these efforts been?

Despite the threat of shareholder resolutions, dissenting votes on board members and even divestment, a new study from J Safra Sarasin shows that businesses are nowhere near where they need to be to meet the Paris goals.

According to Sarasin’s analysis, businesses’ emissions are putting the planet on track for a 4C rise (rather than the 1.5C or 2C trajectories outlined in Paris). A separate study from Japan’s Government Pension Investment Fund last year (which basically owns the entire market) found its portfolio was on track for a 3C or higher increase.

This has led to questions over whether ESG investing can work to solve climate change. David Blood, senior partner at Generation Investment Management, is convinced it can.

But before investors can truly push businesses to do better, they need to “get their house in order,” said Mr Blood.

“The asset management and the asset owner community is not holding up their end of the bargain,” he said. “We frankly need more action as opposed to talk at this point. And I believe that’s exactly what we’re going to see.”

Most investors struggle to fully understand their own climate impact — let alone gauge whether or not they are pushing companies in the right direction, he said.

A key to fixing this would be to look at a “degree warming metric”, which (similar to Sarasin’s research) “shows a potential global temperature rise associated with the greenhouse gas emissions from a given company or portfolio.”

Yet as Generation notes in a new report, these metrics are notoriously difficult to construct. There are seven different methods commonly used to make these calculations — and they all rely on data that can be unreliable and difficult to find.

To fix this, regulators and investor coalitions such as the Net Zero Asset Owner Alliance, the Climate Action 100+ and the Investor Group on Climate Change need to “come together and begin to harmonise the reporting that they require and [standardise their own reporting] on their alignment relative to the Paris accord,” Mr Blood said.

Generation believes its report can provide a good road map — and Mr Blood is optimistic that the tough questions around disclosure can be settled by next year’s COP26 meeting. If so, that should then empower investors to more effectively push their portfolio companies to change.

Given the failure of COP 25 in 2019, it can be easy to question Mr Blood’s optimism. But with the UK’s new TCFD policy, the US likely to rejoin Paris and net-zero pledges from China, Japan and South Korea, Mr Blood is optimistic that green finance will have a strong tailwind heading into next year’s summit. (Billy Nauman)

Food companies’ carbon ambitions hampered by dirty meat suppliers

© Bloomberg

Restaurants can roll out as many vegan burgers as they like, but as long as they still sell meat they bought from high-emitting suppliers their pledges to cut carbon will fall flat, according to the Farm Animal Investment Risk & Return, a climate action group formed by private equity manager Jeremy Coller.

Despite “laudable” climate pledges from companies such as McDonald’s and Nestlé, FAIRR’s research shows that these companies still buy meat from suppliers that do not disclose their emissions, or have “no public targets to reduce them”.

McDonald’s says its climate strategy extends to its supply chain — and that it is “encouraging all companies to work collaboratively on solutions” and is “actively encouraging [its] suppliers to set targets, measure and report emissions and take action to make reductions.”

But FAIRR is sceptical that the food industry is doing enough.

“Today’s findings suggest that the climate pledges of major high-street brands are being severely undermined by the animal protein supply chain’s failure to act on climate change,” FAIRR wrote.

“We want them to meet their targets and we hope that they put policies in place that allow them to really understand their opaque supply chains and build this into their contracts,” said executive director Maria Lettini. “But in the event that they don’t. Well, you know, the spotlight’s really on them.” (Billy Nauman)

ESG in China: growing awareness to gender diversity

© AP

China’s recent promises to cut carbon emissions drew widespread attention in September. But a little-noticed October announcement from China’s State Council could be equally important to foreign investors eager to apply ESG investing analyses to Chinese companies.

China’s State Council said it wanted domestic companies to improve ways for institutional investors to participate in corporate governance. To do so, companies must address stock pledge risk, whereby shares are pledged to banks as collateral to secure funds — an ongoing concern in China — the State Council said. Punishment for market manipulation and insider trading should also be stepped up, the authority said.

Investors are also pushing for better governance standards in China.

After launching ESG screens for Chinese companies last year, Morgan Stanley has added a metric to measure the number of female members of a company’s board. Gender diversity now accounts for 6-7 per cent of the company’s overall ESG score.

Though female representation on boards is low around the world, Morgan Stanley’s research has found that companies with high gender diversity marks perform better financially than non-diverse companies.

In China, women comprised about 11 per cent of total corporate board director seats in 2019, up from 8.5 per cent in 2016, according to MSCI. Of 126 companies in the MSCI World Index with no female directors, nine were China or Hong-Kong listed. (By comparison, 108 were Japanese).

Chinese leaders are determined to increase foreign inflows, and ESG transparency will probably be critical in attracting that cash, Morgan Stanley said.

“As China opens up to global investors, those investors are going to bring the same criteria that they are assessing companies on to Chinese companies as well,” said Jessica Alsford, Morgan Stanley’s head of global sustainability research. (Patrick Temple-West)

The FT’s ETF Hub is nearly two months old and already proving a hit with users who like its easy-to-access data on exchange traded funds and its education centre. Top billing remains its free-to-read coverage of the industry. This week, Emma Boyde did a great piece that ESG investors should not miss — on how big data and artificial intelligence will “expand the reach of thematic ETFs, which allow investors to focus on anything from Christian values, to water shortages or particular social issues.”

Tips from Tamami

Nikkei’s Tamami Shimizuishi helps you stay up to date on stories you may have missed from the eastern hemisphere.

Despite the global push for decarbonisation, Australia’s prime minister Scott Morrison has not budged from his pro-coal attitude so far.

But with the recent wave of carbon neutral commitments from the country’s top coal importers, such as China, Japan and South Korea, and the outcome of the presidential election in the US, specialists in Australia see signs of change down under.

“Morrison nonetheless is increasingly acknowledging the importance of alignment to the Paris objectives including a net-zero goal, stating [earlier] this week that he’d prefer to set out the plan to achieve that goal before setting the goal,” said Simon O’Connor, chief executives of Responsible Investment Association Australasia.

“Australia is close to the US in many policy areas and climate change cannot be an exception given its economic significance,” said Howard Bamsey, Australia’s former special envoy on climate change and a member of Climate Policy Initiative’s board.

An analysis from the Investor Group on Climate Change estimates that more than 70 per cent of the country’s two-way trade would be with countries pursuing net-zero goals, once Joe Biden takes office in the US next year.

Mr Bamsey called for the Australian government’s quick response to the changing world landscape, saying: “Delay in matching the commitments of trading partners will confuse the private sector in Australia and elsewhere, and provoke consideration of border tax adjustments and other such measures by those concerned about free riding.”

Both Mr Bamsey and Mr O’Connor foresee Australia declaring its commitment to net-zero within a year — ahead of the next UN conference on climate change (COP26) scheduled for November 2021 — assuming the government will react to mounting global and domestic pressure.

Chart of the week

Global social bond issuance

Social bonds issuance has exploded this year in response to the Covid-19 pandemic as investors looked to fund social projects, such as those that “address rising unemployment, income inequality, and strains on housing, healthcare, and education systems,” according to S&P Global Research.

Smart reads

  • Rishi Sunak has set out his post-Brexit vision for the City of London, hailing a “new chapter for financial services” with a heavy emphasis on green initiatives. The chancellor on Monday pledged the launch of Britain’s first “green gilt”.

  • Make sure to check out the latest Moral Money special report on entrepreneurs. It covers a wide range of topics including diversity in hiring at tech companies, fundraising during a pandemic and green innovation.

Further reading

  • Do US power companies’ carbon pledges add up? (FT)

  • Negative Screening Loses Favor as ESG Investors Embrace More ‘Inclusive’ Approaches (FundFire)

  • Toshiba stops taking orders for coal-fired power plants (Nikkei)

  • What Is Greenwashing? Here Is What Investors Need to Know (WSJ)

  • How a Biden Administration Will Boost ESG and Impact Investing (Barron’s)

  • Trump Administration Removes Scientist in Charge of Assessing Climate Change (NYTimes)

  • Barclays under fire over fossil fuel finance (FT)

  • Biden presidency to hasten global switch from coal to renewables (FT)

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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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