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The problem with zero carbon pledges

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“Ambitions tend to remain undisturbed by realities.”

It was an observation first made in a work of science fiction by the author Frank Herbert 44 years ago. But it is arguably now borne out in works of science fact, by the corporate thought leaders of today. “Ambitions” to combat climate change, by reducing carbon emissions, are expressed in almost every company press release and annual report. On closer reading, though, some appear a lot more real than others.

For the wealth managers charged with ensuring clients’ shareholdings are aligned with their environmental principles, that is a problem.

Investors in HSBC, for example, were recently told of its “net-zero ambition” on carbon emissions. An announcement from the Asia-focused bank said it would reduce “financed emissions from our portfolio of customers” in line with the goals of the Paris Agreement on climate change. It used the word “ambition” or “ambitious” no fewer than five times.

However, climate campaigners said the reality was somewhat less inspiring, as HSBC gave no firm timeline for reducing its financing of coal, oil and gas projects before 2050.

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“This is zero ambition, not ‘Net-Zero Ambition’,” retorted activist group Market Forces. Fund Our Future UK, a network of campaign groups, suggested it was “like saying you’ll give up smoking by 2050, but continuing to buy a pack a week, or even smoking more”.

But HSBC shareholders at least have some idea of the goal. Investors in many other banks are offered no such commitment. A survey by PwC this year found just 29 per cent of UK lenders had “a science-based or net-zero climate target”. Jon Williams, a PwC UK partner who focuses on climate change, said while there was “a great willingness” to address this issue, “more needs to be done to turn this into feasible action”.

At oil and gas companies, there is not even much willingness, according to ClientEarth, an environmental charity run by lawyers. In October, it cited a report from the Transition Pathways Initiative, which monitors climate action, showing that none of the world’s biggest oil and gas companies were on track to meet climate goals, despite public commitments to do so. ClientEarth concluded there was “a clear gap between ambition and action”. “Unless these targets are supported by strategies that are reasonable, transparent and include strong accountability mechanisms, there is a significant risk that stakeholders will be misled,” says ClientEarth lawyer Daniel Wiseman.

Yet many stakeholders — in particular, wealthy private shareholders — already want to be led down a greener path. In a survey published in October by Barclays Private Bank, 87 per cent of the world’s wealthiest individuals, families, family offices and foundations said the effects of climate change played a part in their investment choices.

Their portfolio managers therefore need a way of ensuring those choices are right. For Austin Whitman, chief executive of Climate Neutral — a non-profit organisation aiming to bring transparency to carbon “ambitions” — that means asking investee companies three simple questions about cutting their carbon output: “How much, how soon, and how.”

He says the obvious answers to questions one and two are “more” and “sooner” but, where a net-zero ambition is more than five years out, expects a company to commit to “clear annual progress reporting”. Question three is best answered with “a pragmatic combination” of measurable actions, he suggests.

Simon Hallett, head of the European endowment and foundation practice at Cambridge Associates, agrees. “A net-zero target for some far-off date — say 2050 — can be meaningless if it doesn’t come with nearer-term milestones — say 2025.” He says interim targets must be set aggressively enough to hold a company’s management to account, “including through executive compensation”.

Long-term targets based on unproven new technologies should simply be ignored, Hallett suggests. “Many net-zero commitments are either limited in scope or to a goal the company doesn’t yet know how to achieve,” he warns. “To protect clients from greenwashing, we look for transparency into how much is achievable today versus what requires different technologies . . . hope is not a strategy here.”

Many wealth managers now do all the checking themselves. Karina Funk, portfolio manager and chair of sustainable investing at Brown Advisory, wants to see companies define their ambitions using standard frameworks, such as the Science Based Targets Initiative (SBTI), set up by environmental research bodies. Similarly, Amy Clark, chief impact officer at wealth firm Tribe Impact Capital, expects carbon commitments to be compliant with the Oxford Offsetting Principles — a new and more exacting set of guidelines from the UK university. That way, clients can be sure ambitions are not simply “a gesture to give a positive impression”.

By applying this scrutiny at the stockpicking level, choices become easier. Although more than 1,000 companies have ambitions for net-zero emissions by 2050, as part of the UN Race To Zero campaign, the reality is that significant reductions will be driven by a much narrower subset. “Only a small handful are leading the charge towards a net-zero future,” says Charlotte Cook, vice-president at wealth manager Kingswood.

Microsoft president Brad Smith, chief financial officer Amy Hood and CEO Satya Nadella announce the software group’s plan to be carbon negative by 2030 © Microsoft

So which companies are realistically ambitious? Microsoft is chosen by Cook for taking steps to make itself and its supply chain carbon-negative by 2030 and then, over the next 20 years, to remove all the carbon it ever emitted since it was founded in 1975. It aims to do so through reforestation, soil carbon sequestration, and carbon capture and storage. Clark also picks the US tech giant for “building on a net-zero base footprint . . . to become a ‘carbon sink’ . . . they have set themselves apart as a pioneer in the race to zero and beyond”. Funk also names Microsoft, as well as sportswear group Nike, for its SBTI emissions target, and coffee chain Starbucks, for aligning its carbon emission measures with those required to limit the global temperature rise to 1.5C. She describes Starbucks’ ambition as “a meaningful target requiring substantial emission reduction”.

Computer hardware maker Logitech, pharma group Novartis and outerwear co-operative Recreational Equipment also provide the right answers to Whitman’s three questions on how they will reach their net-zero ambitions.

Which companies’ ambitions appear too unreal? Oil majors meet with understandable scepticism. “Shell’s campaign around a net-zero world by 2070 is one example — too vague, too far away in time,” says Whitman. BP’s aim to get there by 2050 is even more difficult for others to buy into. As one wealth manager points out, “given its ambition does not currently include plans to cut oil and gas output, it seems hard to imagine this target as realistic”.

Telecoms group AT&T’s pledges to be neutral on direct and indirect carbon emissions, but not on asset and supply chain assets, are “not enough; too far away in time” in Whitman’s book.

However, it is the ambition of banks and finance houses Clark finds insufficiently disturbed by reality. “Any company that sets a net-zero target without addressing the elephants in the room about their overall social and environmental impact will, by default, be less meaningful,” she says. “Recently we’ve seen some finance houses declaring net-zero investment emissions intentions with no follow-through on lending policies to fossil-fuel industries or those industries with clear links to deforestation.” Tribe Impact Capital does not single out any banks, but campaigners have recently criticised Barclays as well as HSBC for continuing to finance coal projects.

As a result, wealthy investors might achieve more by aiding the largest emitters, rather than heeding the loudest committers. That is certainly the conclusion reached by the multifamily office Stonehage Fleming. Its head of equity management, Gerrit Smit, has welcomed the net-zero commitments made by multinationals L’Oréal, Adidas and Givaudan.

But he makes this telling observation: “Nestlé currently alone generates over 20 times the total of these companies’ combined emissions. We cannot expect Nestlé to have an imminent zero target, but the company has committed itself to cut emissions by a third by the time the other three companies expect to be at a net-zero level. Nestlé’s savings alone will still exceed all of these companies’ total savings by more than six times.”

Smit makes a similar point about industrial gases group Air Products, which has committed to cut its carbon emissions by a third by 2030. “The ‘most guilty’, when it comes to releasing emissions, can make the best contribution to reducing emissions,” he says. And certainly the most real.

This article is part of FT Wealth, a section providing in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investment



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Oil hits highest price since April 2019 before moderating

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The price of crude oil briefly hit its highest level for more than two years on Monday, lifting shares in energy companies, as traders banked on strong demand from the rebounding manufacturing and travel industries.

Brent crude crossed $75 a barrel for the first time since April 2019 before falling back slightly, while energy shares were the top performers on an otherwise lacklustre Stoxx Europe 600 index, gaining 0.7 per cent.

The international oil benchmark has risen around 50 per cent this year, underscoring strong demand ahead of next week’s meeting of the Opec+ group of oil-producing nations.

US manufacturing activity expanded at a record rate in May, according to a purchasing managers’ index produced by IHS Markit. Air travel in the EU has reached almost 50 per cent of pre-pandemic levels, ahead of the July 1 introduction of passes that will allow vaccinated or Covid-negative people to move freely.

“This is a higher consuming part of the year,” said Pictet multi-asset investment manager Shaniel Ramjee, referring to the summer travel season. “And the oil market is pricing in strong near-term demand that is better than previous expectations.”

In stock markets, the Stoxx Europe 600 dipped 0.3 per cent while futures markets signalled Wall Street’s S&P 500 share index would add 0.1 per cent at the New York opening bell.

The yield on the 10-year US Treasury was steady at 1.494 per cent. Germany’s equivalent Bund yield gained 0.02 percentage points to minus 0.154 per cent.

Equity and bond markets have consolidated after an erratic few sessions since US central bank officials last week put out forecasts indicating the first post-pandemic interest rate rise might come in 2023, a year earlier than previously thought.

US shares tumbled last week, while government bonds rallied, on fears of tighter monetary policy derailing the global economic recovery.

Wall Street equities then bounced back on Monday, with a follow-on rally in some Asian markets on Tuesday, as sentiment got a boost from more dovish commentary from Fed officials.

Fed chair Jay Powell, in prepared remarks ahead of congressional testimony later on Tuesday said the central bank “will do everything we can to support the economy for as long as it takes to complete the recovery”.

John Williams, president of the Federal Reserve Bank of New York, also said that the US economy was not ready yet for the central bank to start pulling back its hefty monetary support.

Jean Boivin, head of the BlackRock Investment Institute, said that “the Fed’s new outlook will not translate into significantly higher policy rates any time soon”.

“We may see bouts of market volatility . . . but we advocate staying invested and looking through any turbulence,” Boivin added.

The dollar index, which measures the greenback against trading partners’ currencies and has been boosted by expectations of US interest rates moving higher before other major central banks take action, was steady at around a two-month high.

The euro dipped 0.1 per cent against the dollar to purchase $1.1901, around its lowest level since early April. Sterling also lost 0.1 per cent to $1.3909.



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Wall Street rebounds as markets adjust to Fed rate rise outlook

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Wall Street stocks bounced back and government bonds softened on Monday following tumultuous moves last week after the Federal Reserve took a hawkish shift on interest rates and inflation.

The S&P 500 added 1.2 per cent in early New York dealings. The share index’s resurgence came after it posted its worst performance in almost four months last week in the wake of Fed officials signalling the central bank could raise rates to tame inflation sooner than investors had expected.

The yield on the benchmark 10-year US Treasury bond dropped sharply last week as investors viewed the Fed as ready to control surges in inflation that erode the returns from fixed interest securities. On Monday it rose 0.02 percentage points to 1.472 per cent.

Fed policymakers on Wednesday projected that interest rates would rise from record-low levels in 2023, from their earlier median forecast of 2024. James Bullard, president of the St Louis Fed, told television network CNBC on Friday that the first rate increase could come as soon as next year as inflation grew.

However, Gregory Perdon, co-chief investment officer at private bank Arbuthnot Latham, urged caution. “The facts are that the Fed hasn’t done anything yet. Wall Street loves to climb the wall of worry.”

Fed officials’ statements last week prompted fears of rapid policy tightening by the world’s most powerful central bank that could derail the global economic recovery from Covid-19. Investors also backed out of so-called reflation trades, which had involved selling government bonds and buying shares in companies that benefit from economic growth, such as materials producers and banks.

On Monday, however, energy, basic materials and banking stocks were the best performers on the S&P 500. The technology-focused Nasdaq Composite index was also up, gaining 0.7 per cent in early dealings.

The Russell 2000 index of smaller US companies, whose fortunes are viewed as pegged to economic growth, gained 1.7 per cent. Europe’s Stoxx 600 share index rose 0.7 per cent, with materials stocks at the top of its leaderboard.

The yield on the 30-year Treasury briefly fell below 2 per cent on Monday morning for the first time since February 2020 before bouncing back to 2.065 per cent.

Investors last week had taken profits on reflation trades that had become “crowded” and “expensive”, said Salman Baig, portfolio manager at Unigestion.

Baig added that, following the initial shocks after the Fed meeting, markets would probably return to betting on “a cyclical recovery as economies reopen”.

Other analysts said the bond market reaction had been too pessimistic, predicting a broad-based economic slowdown in response to Fed rate increases that had not happened yet.

The fall in long-term yields “is only justified if the Fed is making a policy error, choking the economy”, said Peter Chatwell, head of multi-asset strategy at Mizuho. “We think this is far from the truth — the Fed has simply sought to prevent inflation expectations from de-anchoring.”

Elsewhere in markets, the dollar index, which measures the greenback against other major currencies, dropped 0.3 per cent after gaining almost 2 per cent last week.

Brent crude, the international oil benchmark, rose 0.9 per cent to $74.18 a barrel.

Additional reporting by Tommy Stubbington in London

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Saudis agree oil deal with Pakistan to counter Iran influence

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Saudi Arabia has agreed to restart oil aid to Pakistan worth at least $1.5bn annually in July, according to officials in Islamabad, as Riyadh works to counter Iran’s influence in the region.

Riyadh demanded that Pakistan repay a $3bn loan last year after Islamabad pressured Saudi Arabia to criticise India’s nullification of Kashmir’s special status.

But the acrimony between the two longtime allies has eased after Imran Khan, the prime minister, met Saudi Crown Prince Mohammed bin Salman in May.

News of the oil deal with Pakistan comes as Saudi Arabia embarks on a diplomatic push with the US and Qatar to build a front against Iran, said analysts. Riyadh lifted a three-year blockade of Qatar in January in what experts said was an attempt to curry favour with the newly elected Joe Biden.

Pakistan had shifted closer to Saudi Arabia’s regional rivals Iran and Turkey, which, along with Malaysia, have sought to establish a Muslim bloc to rival the Saudi-led Organisation of Islamic Cooperation.

Khan has developed a strong rapport with President Recep Tayyip Erdogan, encouraging Pakistanis to watch the Turkish historical television series Dirilis Ertugrul (Ertugrul’s Resurrection) for its depiction of Islamic values.

Ali Shihabi, a Saudi commentator familiar with the leadership’s thinking, said that “bad blood” had accumulated between Riyadh and Islamabad, but recent bilateral meetings had “cleared the air” and reset relations to the extent that oil credit payments would restart soon.

A senior Pakistan government official said: “Our relations with Saudi Arabia have recovered from [a downturn] earlier. Saudi Arabia’s support will come through deferred payments [on oil] and the Saudis are looking to resume their investment plans in Pakistan.”

The Saudi offer is less than half of the previous oil facility of $3.4bn, which was put on hold when ties frayed.

But Fahad Rauf, head of equity research at Ismail Iqbal Securities in Karachi, said: “Any amount of dollars helps because time and again we face a current account crisis. And with these prices north of $70 a barrel anything helps.”

Pakistan’s foreign reserves were more than $16bn in June compared with about $7bn in 2019 before it entered its $6bn IMF programme.

Robin Mills at consultancy Qamar Energy said: “Saudi Arabia and Pakistan are allies, but their relationship has always been rocky. And the Pakistan-Iran relationship is better than you might think.”

Mills said that the timing of the Saudi gesture was “interesting” given that Iran was preparing to step up oil exports with the US considering easing sanctions.

“The Saudis are on a bridge-building mission more generally. They have sought to mend fences with the US and there is also the resumption of relations with Qatar,” he said.

Ahmed Rashid, an author of books on Afghanistan, Pakistan and the Taliban, said that there were a variety of factors that might have spurred Riyadh to restart the oil facility.

It may be “partially linked to the American need for bases” to launch counter-terrorism attacks in Afghanistan from Pakistan, he said, but added that its priority was probably to prevent Islamabad from falling under Tehran’s influence.

Rashid pointed out that Pakistan was caught between China, which has invested billions of dollars in infrastructure projects, and the US.

“Pakistan has to play it carefully, it is dependent on China for the Belt and Road, dependent on the west for loans,” said Rashi. “This is a very complex game.”

Anjli Raval in London and Simeon Kerr in Dubai



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