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Students push for university climate change divestments

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When environmentalist Bill McKibben hit the road in 2012 to preach the gospel of sustainable investing, few would have guessed that his bio-fuel-powered bus tour of US universities would spark a worldwide divestment movement.

But eight years later, the work of Mr McKibben and others has led more than 1,250 institutional investors with $14.5tn in assets to commit to cut fossil fuels from their portfolios, and inspired a new generation of activists to take the fight to companies profiting from climate change.

Their message caught on quickly with students. If the world was going to keep global warming in check, energy companies would need to leave the vast majority of their fossil fuel assets in the ground. Therefore, university endowments that held fossil fuel stocks, as Mr McKibben argued in Rolling Stone magazine, are investing in a way “that guarantees [their students] won’t have much of a planet on which to make use of their degree”.

At first, many school administrators and endowment managers were not so easily persuaded. The early adopters were the type of institutions one would expect — the first to take the fossil-free pledge was Unity College, a liberal arts school in Maine that calls itself America’s Environmental College.

But while the campaign found quick success with these types of schools, as well as religious institutions and charitable foundations, most large universities were reluctant to join — citing both political and financial reasons.

Bill McKibben (centre) has long preached the gospel of sustainable investing © Julia Schmalz/Bloomberg

Students have kept up the pressure and things are changing. By January 2020, more than half of the public universities in the UK had committed to divest, and both Cambridge and Oxford joined the group later in the year.

In the US, Brown University became the first Ivy League school to sign up in March 2020. Cornell University followed suit in May.

Yet the efficacy of the campaign is still an open question. Before the pandemic struck, the world had not meaningfully cut its emissions and critics are quick to point out there is little evidence to show that investor pledges to eschew fossil fuel companies have hurt the energy sector.

As Bill Gates, the billionaire founder of Microsoft, told the Financial Times last year: “Divestment, to date, probably has reduced about zero tonnes of emissions. It’s not like you’ve capital-starved [the] people making steel and gasoline.”

Mr McKibben is insistent that the detractors have missed the point: the campaign was not designed to cut off fossil fuel companies’ access to capital, but rather to replicate the successful anti-apartheid divestment campaign of the 1980s.

“The divestment work was very specifically designed to start stigmatising this industry — to take away its social licence to operate,” he says.

By focusing on universities, divestment campaigners were also looking to inspire more young people to join the broader fight against climate change, which was floundering after the failed Copenhagen climate summit of 2009.

“In terms of recruiting new people into the movement, divestment was one of the greatest tools in the history of the struggle,” says Yossi Cadan, global campaign manager of 350.org, the climate activist organisation co-founded by Mr McKibben.

Yossi Cadan © Noga Cadan

The next phase for the movement will be to squeeze the financing of the fossil fuel industry, says Mr Cadan. This could mean that divestment advocates collaborate more with shareholder engagement groups, which argue that divesting erodes their power to influence company behaviour.

Divestment backers are adamant that engaging with fossil fuel companies is a fool’s errand.

“The only meaningful change [for fossil fuel companies] is burning less fossil fuels,” says Connor Chung, a Harvard student and press co-ordinator of the Fossil Fuel Divest Harvard movement. “That’s not a question of business practice. It’s a question of business model, and there’s just no clear evidence that shareholder engagement is good at changing the latter.”

But Mr Chung does believe engagement actions can work when they target issues that are tangential to a company’s core business model. This means that even when an investor has ditched fossil fuels, it can still influence the industry by calling on companies in other sectors to curb their use of “dirty” energy.

This model is being implemented by Oxford university — which may provide a blueprint for other large institutions signing on to divest.

In addition to cutting its direct fossil fuel exposure, Oxford is demanding that every business in its portfolio have a credible net-zero carbon strategy, says Kaya Axelsson, a former member of the Oxford Student Union, who helped develop the school’s sustainability strategy.

“We didn’t even have that much energy exposure in our portfolio,” she says. “We needed to make it wider than that. So now our fund managers are required to engage with any company in which Oxford has an investment . . . so that’s where we’re driving climate action across all businesses, not just in the energy sector.”



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Gensler raises concern about market influence of Citadel Securities

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Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that “healthy competition” could be at risk.

In testimony released ahead of his appearance before the House financial services committee on Thursday, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume.

“One firm, Citadel Securities, has publicly stated that it executes about 47 per cent of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,” Gensler said.

“History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration,” he said. “Market concentration can also lead to fragility, deter healthy competition, and limit innovation.”

Gensler is scheduled to appear at the third hearing into the explosive trading in GameStop and other so-called meme stocks in January.

Trading volumes in the US surged that month as retail investors flocked into markets, prompting brokers such as Robinhood to introduce trading restrictions that angered investors and drew the attention of lawmakers.

The market activity galvanised policymakers in Washington and investors. Lawmakers have focused much of their attention on “payment for order flow”, in which brokers such as Robinhood are paid to route orders to market makers like Citadel Securities and Virtu.

That practice has been a boon for brokers. It generated nearly $1bn for Robinhood, Charles Schwab and ETrade in the first quarter, according to Piper Sandler.

Gensler noted that other countries, including the UK and Canada, do not allow payment for order flow.

“Higher volumes of trades generate more payments for order flow,” he said. “This brings to mind a number of questions: do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?”

Gensler also said he had directed his staff to consider recommendations for greater disclosure on total return swaps, the derivatives used by the family office Archegos. The vehicle, run by the trader Bill Hwang, collapsed in March after several concentrated bets moved against the group, and banks have sustained more than $10bn of losses as a result.

Market watchdogs have expressed concerns that regulators had little or no view of the huge trades being made by Archegos.

“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds,” Gensler said.

“Issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail.”



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European markets recover after tech stock fall

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European equities rebounded from falls in the previous session, when fears of a US interest rate rise sent shares tumbling in a broad decline led by technology stocks.

The Stoxx 600 index gained 1.3 per cent in early dealings, almost erasing losses incurred on Tuesday. The UK’s FTSE 100 gained 1 per cent.

Treasury secretary Janet Yellen said at an event on Tuesday that rock-bottom US interest rates might have to rise to stop the rapidly recovering economy overheating, causing markets to fall.

Yellen then clarified her remarks later in the day, saying she did not think there was “going to be an inflationary problem” and that she appreciated the independence of the US central bank.

Investors had also banked gains from technology shares on Tuesday, after a strong run of quarterly results from the sector underscored how it had benefited from coronavirus lockdowns. Apple fell by 3.5 per cent, the most since January, losing another 0.2 per cent in after-hours trading.

Didier Rabattu, head of equities at Lombard Odier, said that while investors were cooling on the tech sector, a rebound in global growth at the same time as the cost of capital remained ultra-low would continue to support stock markets in general.

“I’m seeing a healthy correction [in tech] and people taking their profits,” he said. “Investors want to be much more exposed to reflation and the reopening trades, so they are getting out of lockdown stocks and into companies that benefit from normal life resuming.”

Basic materials and energy businesses were the best performers on the Stoxx on Tuesday morning, while investors continued to sell out of pandemic winners such as online food providers Delivery Hero and HelloFresh.

Futures markets signalled technology shares were unlikely to recover when New York trading begins on Wednesday. Contracts that bet on the direction of the top 100 stocks on the technology and growth-focused Nasdaq Composite added 0.2 per cent.

Those on the broader S&P 500 index, which also has a large concentration of tech shares, gained 0.3 per cent.

Franziska Palmas, of Capital Economics, argued that European stock markets would probably do better than the US counterparts this year as eurozone governments expand their vaccination drives.

“While a lot of good news on the economy appears to be already discounted in the US, we suspect this may not be the case in the eurozone,” she said.

Brent crude, the international oil benchmark, was on course for its third day of gains, adding 0.7 per cent to $69.34 a barrel.

Despite surging coronavirus infections in India, the world’s third-largest oil importer, “oil prices have moved higher on growing vaccination numbers in developed markets”, said Bank of America commodity strategist Francisco Blanch.

Government debt markets were subdued on Wednesday morning as investors weighed up Yellen’s comments with a pledge last week by Federal Reserve chair Jay Powell that the central bank was a long way from withdrawing its support for financial markets.

The yield on the 10-year US Treasury bond, which moves inversely to its price, added 0.01 of a percentage point to 1.605 per cent.

The dollar, as measured against a basket of trading partners’ currencies, gained 0.2 per cent to its strongest in almost a month.

The euro lost 0.2 per cent against the dollar to purchase $1.199.



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Yellen says rates may have to rise to prevent ‘overheating’

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US Treasury secretary Janet Yellen warned on Tuesday that interest rates may need to rise to keep the US economy from overheating, comments that exacerbated a sell-off in technology stocks.

The former Federal Reserve chair made the remarks in the context of the Biden administration’s plans for $4tn of infrastructure and welfare spending, on top of several rounds of economic stimulus because of the pandemic.

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” she said at an event hosted by The Atlantic magazine.

“So it could cause some very modest increases in interest rates to get that reallocation. But these are investments our economy needs to be competitive and to be productive.”

Investors and economists have been hotly debating whether the trillions of dollars of extra federal spending, combined with the rapid vaccination rollout, will cause a jolt of inflation. The debate comes as stimulus cheques sent to consumers contribute to a market rally that has lifted equities to record levels.

Jay Powell, the Fed chair, has said that he believes inflation will only be “transitory”; the central bank has promised to stick firmly to an ultra-loose monetary policy until substantially more progress has been made in the economic recovery.

The possibility of interest rates rising has been a risk flagged by many investors since Joe Biden’s US presidential victory, even as markets have continued to rally.

Yellen’s comments added extra pressure to shares of high-growth companies, whose future earnings look relatively less valuable when rates are higher and which had already fallen sharply early in Tuesday’s trading session. The tech-heavy Nasdaq Composite was down 2.8 per cent at noon in New York, while the benchmark S&P 500 was 1.4 per cent lower.

Market interest rates, however, were little changed after the remarks, with the yield on the 10-year Treasury at 1.59 per cent. Yellen recently insisted that the US stimulus bill and plans for more massive government investment in the economy were unlikely to trigger an unhealthy jump in inflation. The US treasury secretary also expressed confidence that if inflation were to rise more persistently than expected, the Federal Reserve had the “tools” to deal with it.

Treasury secretaries generally do not opine on specific monetary policy actions, which are the purview of the Fed. The Fed chair generally refrains from commenting on US policy towards the dollar, which is considered the prerogative of the Treasury secretary.

Yellen’s comments at the Atlantic event were taped on Monday — and she used the opportunity to make the case that Biden’s spending plans would address structural deficiencies that have afflicted the US economy for a long time.

Biden plans to pump more government investment into infrastructure, child care spending, manufacturing subsidies and green energy, to tackle a swath of issues ranging from climate change to income and racial disparities.

“We’ve gone for way too long letting long-term problems fester in our economy,” she said.



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