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Boris Johnson faces uphill battle to make UK global green finance hub

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Boris Johnson has injected enthusiasm into the UK’s green bond market, but analysts say the country has a challenge ahead to catch up with rivals across the English channel.

Transforming the City of London into the global centre for green finance is a key tenet of the prime minister’s vision for rebuilding the pandemic-stricken economy in a more sustainable way.

His 10-point economic plan unveiled in the Financial Times last month included vows to boost the City’s role in green bonds and carbon trading and to introduce new corporate disclosure requirements.

Analysts said that should help institutions in London increase their focus on sustainable finance, but added that the UK still had a long way to go.

“There’s no doubt about it, continental Europe is far, far ahead of the UK in terms of green bond issuance,” said Trevor Allen, sustainability research analyst at BNP Paribas.

Still, the prime minister’s plans told investors that “this is going to be a growth market”, said Mr Allen. In the context of Brexit, it also signalled to European policymakers that the UK was “an ally in climate change”, he added.

Green bond sales have exploded

The UK is keen to present itself as a green leader ahead of hosting next year’s COP26 climate change summit. But the EU is leading the way in terms of green government bond issuance.

This year, the continent’s benchmark bond issuer, Germany, launched its first green sovereign bonds, following the likes of Poland, France, the Netherlands and Ireland. The UK, meanwhile, announced only in November that it would start its own green gilts programme.

Meanwhile, UK-domiciled companies account for a small slice of green bond indices. French companies make up 24 per cent of an iShares exchange traded fund that tracks the green bonds of top-rated borrowers, with the US and Germany making up about 11 per cent and the UK less than 2 per cent of the debt.

Plans for the UK’s first green sovereign bonds should be a boon to Britain’s market, given the country is a major issuer and its debt is considered to be among the safest in the world, say analysts.

“Issuers will be inclined to align themselves with these developments by transforming their entities into climate-compatible operations, and investors will be encouraged to commit funds to green investment strategies if there is a steady supply of available paper,” said the Climate Bonds Initiative’s latest green bond market report.

Matthew Kuchtyak, an analyst at Moody’s, said Mr Johnson’s 10-point plan made the direction of travel much clearer by outlining priority areas such as renewable energy and zero-emissions vehicles. Before the announcement, there had been some uncertainty about “the level of commitment”, which had held issuers back, he added.

There are also policy hurdles to overcome. Although London is home to an array of bankers and investors dedicated to green finance, it is the EU, from which the UK will be fully cut adrift at the end of this year, that sets the standards for the region.

The UK government has said it plans to implement its own “green taxonomy,” a framework for determining what can be classed as environmentally sustainable finance, which will be based on the scientific metrics in the EU’s version.

More “robust” environmental disclosure standards will also be mandatory from 2025, to enable investors and businesses to better understand and price climate-related risks, the details of which were published last month.

The UK is also set to leave the EU’s system for trading regulatory allowances for carbon emissions in January, and is planning to launch its own system linked to that of the EU — if agreed — or else pursue a carbon tax.

There was already substantial expertise in green finance in the City, and experts would welcome the greater clarity that new sustainable investing frameworks would bring, said Mr Allen.

While London-based investors had tended to look to mainland Europe for green products, “I would not say that green investors [in the UK] are behind” or less sophisticated than their European counterparts, he added.

The euro has to date been the most popular currency for sustainable debt, with 42 per cent of all outstanding green and sustainability bonds globally denominated in the currency, compared with just 2 per cent in sterling, according to the International Capital Market Association.

The dominance of the euro in part reflected its greater popularity among borrowers from a range of countries for all types of debt issuance, but had also been helped by strong policy support for the transition to a greener economy in mainland Europe, said Emre Tiftik, director of sustainability research at the Institute of International Finance.

But the incoming Biden administration in the US could help shift the tide in favour of the UK. The president-elect is set to focus more resources than his predecessor on making the economy more environmentally sustainable. This could boost the green finance sectors on both sides of the Atlantic, said Mr Tiftik, as London grabs a share of that dollar-denominated issuance.

“Once the dollar starts to become much more dominant, which I foresee, London will benefit,” he added, noting the city’s status as “a great financial intermediary”.

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Stocks on Wall Street notch first back-to-back slide since March

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Global stock markets dropped on Tuesday, with companies whose fortunes are tied closest to the reopening of the global economy hardest hit.

Wall Street’s blue-chip S&P 500 index, which hit a high last week, fell 0.7 per cent to notch its first back-to-back declines since late March. The technology-focused Nasdaq Composite slipped 0.9 per cent.

Shares of travel and leisure companies led the retreat as global coronavirus cases rose. An index of stocks that Goldman Sachs estimates “stand to benefit the most in a reopening scenario” fell 2.6 per cent, with shares of hotel operator Marriott International declining 4 per cent and American Airlines falling 5 per cent.

Bank and financial stocks also slid after the European Central Bank gave a downbeat assessment of credit conditions in the pandemic-scarred bloc.

The declines come during what is expected to be a bumper quarterly earnings season. Blue-chip US companies are projected to report quarterly earnings growth of about 25 per cent year on year on the back of a strong economic recovery from the coronavirus.

But lofty equity valuations and a longstanding expectation that this earnings season would be stellar left little room for further improvements, said Trevor Greetham, investment strategist at Royal London.

“With stock markets, it is often better to travel than to arrive,” he added.

European equities also dropped on Tuesday after the region’s fragile economic recovery was called further into question by a survey suggesting that bank lending in the bloc was declining.

The Stoxx Europe 600 index closed down 1.9 per cent and the UK’s FTSE 100 dropped 2 per cent. The declines followed a survey from the ECB that raised questions over the durability of the region’s fragile economic recovery.

The report from the central bank, which comes ahead of its next monthly meeting on Thursday, showed that European lenders may restrict access to credit in the second quarter of this year.

“This reflects banks’ uncertainty regarding the severity of the economic impact of the third wave of the pandemic,” the ECB said.

The ECB has committed to spending €1.9tn on bonds, stepping up its purchases in recent weeks. Yet analysts fear policymakers may not communicate strongly enough how they plan to soften the blow from the health crisis.

“We do not expect to hear anything inspiring” from the ECB after Thursday’s meeting, said Nadège Dufossé, head of cross-asset strategy at fund manager Candriam.

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Analysts at Bank of America also forecast “no additional guidance for the months ahead” from the ECB. This, they said, could leave “room for market jitters ahead of the June meeting” while “the risk of a hawkish policy mistake can’t be ruled out”.

US government bonds strengthened as equities shifted lower. The yield on the 10-year Treasury, which moves inversely to its price, slipped 0.04 percentage points to 1.56 per cent.

The yield, which has climbed from about 0.9 per cent since the start of the year, influences borrowing costs worldwide and is highly sensitive to expectations about the central bank’s future interest rate decisions.

The US dollar climbed 0.1 per cent against a basket of peers but remained near its lowest level since early March. The euro was flat against the greenback at $1.2031 while sterling lost 0.4 per cent against the dollar to trade at $1.3933.

Brent crude settled 0.7 per cent lower at $66.57 a barrel.



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ExxonMobil proposes carbon storage plan for Texas port

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ExxonMobil is pitching a plan to capture and store carbon dioxide emitted by industrial facilities around Houston that it said could attract $100bn in investment if the Biden administration put a price on the greenhouse gas.

The oil supermajor is touting the scheme ahead of the US climate summit starting on Thursday, where President Joe Biden plans to announce more aggressive national emissions targets and hopes to spur world leaders to increase their own carbon-cutting goals.

Carbon capture and storage, or CCS, “should be a key part of the US strategy for meeting its Paris goals and included as part of the administration’s upcoming Nationally Determined Contributions”, said Joe Blommaert, head of Exxon’s low-carbon focused business, referring to the targets that countries are required to submit under the 2015 Paris climate agreement.

Oil and gas producers have sought to highlight their commitments to tackle emissions ahead of this week’s climate talks, which promise to heap pressure on the fossil fuel industry. BP pledged to stop flaring natural gas in Texas’ Permian oilfields by 2025, while EQT, the country’s largest natural gas producer, said it backed federal methane regulations.

The International Energy Agency has called carbon capture and storage, which uses chemicals to strip carbon dioxide from industrial emissions, “critical for putting energy systems around the world on a sustainable path”.

But the technology has struggled to gain traction as costs have remained persistently high. The most recent setback in the US came last year with the mothballing of the Petra Nova project, the country’s largest, which captured carbon from a Texas coal-fired power plant.

Many environmental groups have been critical of the oil and gas industry’s focus on carbon capture, arguing it is used to justify continued investment in oil and gas production and is not economical, especially as the costs of zero-carbon wind and solar power have plummeted.

Exxon said that establishing a market price on carbon — which has been attempted by a handful of US states, Texas not among them — would be important. The US government should “implement policies to enable CCS to receive direct investment and incentives similar to those available to other efforts to reduce emissions”, Blommaert said.

Exxon declined to comment on the carbon price it thought was needed to justify the investment, but said its plan would generate $100bn of investment from companies and government in the Houston region.

The company’s plans call for a hub that would capture emissions from the 50 largest emitting industrial facilities along the Houston Ship Channel, such as oil refineries and petrochemical plants, and ship the carbon by pipeline to reservoirs for storage deep under the sea floor of the Gulf of Mexico.

The project could capture and store about 100m tonnes of CO2 a year by 2040 if developed, Exxon said. That is 2 per cent of the roughly 4.6bn tonnes of US energy-related carbon emissions in 2020, according to the Energy Information Administration.

Exxon has been under intense pressure from investors, including a proxy fight with the activist hedge fund Engine No 1, to bolster its strategy for the transition to cleaner fuels. In February, it created a low-carbon business line that it said would spend about $3bn over the next five years.

Biden’s $2tn clean-energy focused infrastructure plan would expand carbon capture and storage tax credits. The administration said it would back 10 projects focused on capturing carbon from heavy industry, but it did not endorse a price on carbon.

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European stocks hit record after strong US earnings and economic data

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European equities hovered around record levels, the dollar dropped and government bonds nudged higher on Monday as markets continued to cheer strong economic data while also banking on continued support from the US Federal Reserve.

The regional Stoxx Europe 600 index gained 0.3 per cent during the morning to set a new record, before falling back to trade flat.

This follows a week of upbeat earnings from US banks as investors await results from big businesses including Coca-Cola and IBM later on Monday. Data released last week showed US homebuilding surged to a near 15-year high in March while retail sales increased by the most in 10 months.

The dollar, as measured against a basket of currencies, fell 0.4 per cent as bets on higher interest rates receded. The euro rose 0.4 per cent against the dollar to buy at $1.203. Sterling also gained 0.4 per cent to €1.389.

Federal Reserve chair Jay Powell told the Economic Club of Washington DC last week that the central bank would not taper its $120bn of monthly asset purchases until it saw “substantial further progress” towards full employment.

Haven assets such as government debt remained in demand. As prices ticked up, the yield on the benchmark 10-year US Treasury note fell 0.02 percentage points to 1.557 per cent, while the yield on the equivalent German Bund slid 0.01 percentage points to minus 0.271 per cent.

Investing convention assumes that US Treasuries and global equities move in opposite directions to cushion against falls in either asset class, but both have now rallied in tandem for an unusually sustained period.

The S&P 500, the blue-chip US stock index, has risen for four consecutive weeks to set new records. The yield on the 10-year Treasury has fallen from about 1.74 per cent at the end of March to just under 1.56 per cent on Monday as investors bought the debt. Treasuries and US stocks not have risen together for so long since 2008, according to Deutsche Bank.

Futures markets indicated the S&P would drift 0.2 per cent lower as Wall Street trading opens.

“I am not saying it’s a rational time in the markets,” said Yuko Takano, equity fund manager at Newton Investment Management. A reason for caution, she added, was signs of “bubbles” in alternative assets such as cryptocurrencies and non-fungible tokens. “There is really an abundance of liquidity. There will be a correction at some point but it is hard to time when it will come.”

“Markets may have become temporarily overbought,” strategists at Credit Suisse commented. “For now, we prefer to keep equity allocations at neutral” rather than buying more stocks, they said.

In Asia, Hong Kong’s Hang Seng index closed up 0.5 per cent and Japan’s Topix slid 0.2 per cent.

Global oil benchmark Brent crude fell 0.3 per cent to $66.57 a barrel.



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