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ESG: a trend we can’t afford to ignore



What is the ideal soundtrack for ESG (environmental, social and governance) investors? There is one classic song that has been covered by some of the greats — Frank Sinatra, Diana Ross, Ray Charles and Van Morrison, to name a few. But in my opinion the original performer has never been bettered. 

Kermit the Frog first sang “It’s not easy bein’ green” in 1970. Voiced by Muppets creator Jim Henson, it became a hit, telling a sweetly thoughtful tale of how Kermit’s doubts over his colour dissipate as he comes to recognise the positives in his appearance. 

If you’ll forgive the leap, it is also rather a good metaphor for sustainable investing — an idea we can no longer expect to arrive some time in the future, but is already here with us.

Back in the 1970s, the notion of being green was largely a fantasy. The oil shortage was looming, which in the UK gave us the three-day week. That traumatic period demonstrated the dangers of global overdependence on fossil fuels but the lesson was not learnt. The revolution had begun but took decades to take hold.

It is a different story today. This year the pace of green change has rapidly accelerated as a byproduct of the pandemic. Car usage plummeted and business and long-haul holidays were suspended, deferred or cancelled. Some of this travel is unlikely to return, even with a successful vaccine programme.

Deliveries of shopping and goods were made in bulk. Instead of 50 people driving to the shops, one van delivered. Amazon never left my street, but neither did the cars.

These trends have their corollary in investment. Being green is becoming so ordinary that a 2020 study by the US SIF foundation, a membership organisation focused on sustainability, found that roughly one out of three dollars invested in the US — or $17.1tn — has a sustainable mandate. That is a lot of green. 

As a wealth manager, I can also say the trend has been driven not only by the investment industry but by its clients. In conversations over the past 18 months with families and individuals I advise, green investing has become a big priority for them, either because they wish to invest in a future-proof way, or because their children have asked probing questions about where their money is invested — and millennial and Gen Z children are keener than ever not to inherit what they think of as “dirty money”.

Another motive can be a guilty conscience. One client sought a sustainable investment portfolio for the money they had made from the sale of their business — a cement manufacturing business that had caused years of environmental damage. 

Opportunities for sustainable investment used to be scarce, but today it is hard to find a company that does not have an ESG policy. Nine out of 10 of companies in the S&P 500 index produced sustainability reports in 2019. This creates a fresh set of problems: how do you decide when a business is genuinely motivated by these concerns and when its ESG claims are hot air?

For professional investors, it means company visits and interrogating management and the financials. For private investors without privileged access, it can be far harder to sort the green from the greenwash. Take those firms that trumpet their carbon neutrality by trading off the harmful parts of their business with offsetting green initiatives. Investors must ask hard questions of these activities. Are today’s emissions, for instance, really justified by tree planting that will take 30 years to deliver benefits? 

Some companies fall into the category of businesses that are set up with the aim of doing good. Among the investments in my firm’s sustainable fund, for example, is Renewable Infrastructure Group, an investment trust with assets generating 8tn watts of clean energy a year and avoiding 1m tonnes of CO2 emissions. Or there is Greencoat UK Wind, an investment fund focused on UK wind farms. Another is Equinix, a data storage company aiming to reduce carbon-intensive paper production.

What about the rest, though? Should investors expunge all those companies that have yet to show themselves sufficiently committed to the ESG agenda? 

Not always. Many sustainable fund managers — including our own — reserve a portion of the portfolio for actively intervening in companies that need an extra nudge, using the voting rights that share ownership affords them to try to change the companies from within. This may mean exerting pressure when it comes to strategy, remuneration or governance rules. 

This approach can be a bone of contention when I speak to clients who want to put more of their money into ESG. They ask for any ethically unproven companies to be excluded. But the more bars are applied to a portfolio, the harder it is to make money and find appropriate investments. What is more, applying the principles of ESG to specific companies can reveal stark differences of opinion between investors over what constitutes a “good” or “bad” business. 

Many sustainable funds, for instance, include credit card companies in their investments, on the grounds that they provide lower income families with a vital financial lifeline as they struggle to make ends meet from week to week. Others see these companies as levying a tax on the poor, charging exorbitant interest rates and leading people down the road to debt. The truth is that there are few investments that will leave everyone feeling entirely comfortable. 

Which brings me to the question I still hear regularly from clients: How much performance do I need to give up?

In my view, the answer is none. ESG fund managers are capitalists. They are investing to make money — they might do some good, but that good has to lead to return. The evidence supports this: a study in June by Morningstar found that most sustainable funds had outperformed non-ESG funds over one, three, five and ten years. 

So look at your investments and ask yourself — are they ready for the 2020s and can you help change the world? I am not advocating going vegan — I’ll leave that column to Miss Piggy. But ESG is here to stay. As Kermit concludes: “I am green and it’ll do fine. It’s beautiful, And I think it’s what I want to be.” He accepted the green revolution. Will you?

Michael Martin is private client manager with Seven Investment Management (7IM). The views expressed are personal. Twitter: @7IM_MichaelM

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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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