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UN kicks off climate summit on fifth anniversary of Paris accord



Welcome to Moral Money. Today we have:

  • A preview of this weekend’s big climate talks

  • Church of England teams with activist investors to reform ExxonMobil

  • Shipping industry’s carbon plans run aground

  • Starbucks’ ESG investments provide a jolt

  • Carbon pricing in the US?

Virtual summit sets stage for make-or-break climate talks

This weekend marks the fifth anniversary of the Paris climate accord, and all eyes will be on the UN-backed virtual Climate Ambition Summit, where countries including China and India (and, gasp, maybe even the US) are expected to announce new details on their net-zero plans.

These talks have been a cause for optimism among climate activists, especially considering the ambitious targets set out by the UK (which is co-hosting the summit). But so far, the biggest story has been from Brazil, where the nation’s environment minister drew the ire of green advocates by announcing a climate plan that reads more like a ransom note than a decarbonisation pledge.

It will be a dire weekend if the countries attending the event follow a similar track — but that seems unlikely given the deluge of encouraging announcements we have seen throughout the week.

(Pro-tip for any PR reps reading this: we understand the important symbolism of the Paris anniversary, but when everyone is spamming our inboxes on the same topic, it is harder than usual to read your pitches).

In the world of corporate sustainability, the most important bit of news has to be the fight brewing at ExxonMobil (see below for more). We also saw some corporate net-zero pledges that went beyond what we have come to expect (ie: committing to do more than plant a few trees). United Airlines investing in carbon-capture technology seems particularly noteworthy.

On Wednesday, the quarter-trillion-dollar New York State pension fund unveiled a sweeping fossil fuel divestment programme and a plan to push every other company in its portfolio to commit to net-zero emissions by 2040. A group of the world’s largest asset managers made a similar move. These initiatives will be especially important to watch, as they will ultimately answer the question of whether or not shareholder engagement can lead to meaningful climate action.

But even if this weekend’s talks are a roaring success, it would be premature to get too optimistic.

All of this action is building up to next year’s COP26 summit in Glasgow, which is still the real make-or-break moment for the climate. Things seem to be going in the right direction, but that was also the case before last year’s COP25 meeting, which ended in a huge disappointment.

Make sure to check tomorrow: we will be covering the summit closely and rolling out some great features examining what has happened since the Paris accord first came into effect. But don’t count any (green) chickens before they hatch. (Billy Nauman)

Green ‘barbarians’ join activist campaigns

© Getty Images

Catholics and Anglicans may not have always seen eye to eye, but with the Pope endorsing conscious capitalism and the Church of England diving into the fight to reform ExxonMobil, there appears to be no schism when it comes to sustainability.

The Church of England joined forces this week with US activist investor Engine No 1, which holds $40m worth of Exxon stock, and Calstrs, the second largest pension fund in America to support their campaign trying to shake up the oil major.

ExxonMobil, which is also under attack from activist hedge fund DE Shaw, has ignored concerns about strategy governance and climate change mitigation, Bess Joffe, the Church Commissioners’ head of responsible investment, said on Thursday.

The pairing of traditional activist investing with sustainability has not happened often, but it has a bit of a history. Engine No 1’s co-founder, Charlie Penner, has tried this tactic before when he was a partner at activist firm Jana. In 2018, Mr Penner joined with Calstrs to call on Apple to address concerns that iPhones were too addictive and were interfering with children’s development. 

And there is reason to believe this strategy may be deployed more often. Activists, the “barbarians at the gate”, are unloved agitators, and their profiteering can look especially improper now during the Covid-19 pandemic. But attacking companies on ESG grounds — rather than on pure financial performance — “could help activists avoid appearing insensitive to the crisis facing businesses and society”, consultancy Alvarez & Marsal said in a report. 

Optics aside, traditional activists are also coming to realise that ESG “is a way of improving the fundamental operation of the financial performance of the business”, Malcolm McKenzie, a managing director at Alvarez & Marsal, told Moral Money. The question remains, however, will the Church convert the heathens to embrace sustainability or will the barbarians storm the pearly gates? (Patrick Temple-West)

Foggy regulations leave the shipping industry lost at sea

© Getty Images

Five years after Paris, some execs in the shipping sector are still salty they never got an invite to the party, in the sense of being included in the accord.

“We were strong advocates for shipping to be a part of the Paris climate agreement. Now there’s an urgent need but no enforced environmental regulation,” said Simon Bergulf, Maersk’s head of regulatory affairs.

Only 18 per cent of transport companies have set carbon reduction plans in line with a path to keep global warming to 2C or below by 2050, according to a recent Transition Pathway Initiative report.

The industry has “normalised industry-wide evasion of corporate responsibilities” over the past 40 years, said HEC Paris Professor Guillaume Vuillemey.

For its part, Maersk has been working with the International Maritime Organization and the Science Based Targets initiative to steer the industry towards implementing meaningful carbon plans. “But we are disappointed with the [IMO’s] ambition and it is moving too slow,” Mr Bergulf said.

By the end of the decade, Maersk has committed to having the “first zero-carbon ship on the sea”. But for Mr Bergulf, having just one carbon-neutral ship in a fleet of 700 isn’t enough. “The lifetime of a ship is 25-30 years, so we’re already behind.” (Kristen Talman)

Can Republicans learn to love Paris?

© Bloomberg

Is there any chance of a bipartisan deal to curb climate change under the leadership of US president-elect Joe Biden? Could the Republicans ever embrace the Paris accord? Those are questions provoking speculation among environmentalists in America right now. And while the answer seemed “definitely not” under the administration of Donald Trump, the Aspen Institute has published a report this week on America’s economic future that covers environmental policy — and lays the ground for some policy dialogue.

Co-chaired by Hank Paulson (pictured), the former Republican Treasury secretary and Erskine Bowles, the former Democratic White House chief of staff, the report underlines the severity of climate change threats and calls for a series of measures that promote decarbonisation and reduce emissions through radical behaviour change. It acknowledges that there needs to be regulatory action — but also calls for amplified private sector incentives through the introduction of a carbon “dividend” (better known as a “tax” sugar-coated to sell to voters).

Many of these ideas have been laid out before by groups such as the bipartisan Climate Leadership Council and, more recently, by the G30 report co-written by Janet Yellen (incoming Treasury secretary). But the Aspen report is a good reflection of the rising drumbeat of concern on both sides of the political aisle — and the degree to which some voices in the Republican party are calling for some rightwing policy response.

Don’t discount more moves in this respect soon. After all, Roberton Williams from the CLC notes recent years have shown the degree to which the Republican party can change (ie embrace Trump); change might yet occur in the other direction, he suggests, as the cost of climate change becomes clear. “Conservatism and conservation [in the sense of environmental protection] have the same root,” he notes. Here’s hoping. (Gillian Tett)

Starbucks paints a cup-half-full picture of ESG investments

Starbucks was an ESG convert long before the acronym became as ubiquitous as overpriced lattes, and has remained a vocal advocate even as critics questioned whether its tax bills and impact on smaller coffee shops jarred with its social responsibility claims. 

That history and a lot of frothy talk about its passion for a “planet-positive” future leave many sceptical, but this was a landmark week for the chain’s environmental, social and governance commitments. 

Starbucks’ biennial investor day pitched its recent increases in baristas’ wages and eco-friendly investments in everything from oat milk to regenerative agriculture as nothing short of key to its growth strategy. 

The group also differentiated itself from a peer group that has been slow to diversify boards of directors by announcing that Mellody Hobson would be its next chairperson, becoming only the second black woman (after Ursula Burns at Xerox) to chair an S&P 500 company. 

Speaking to the FT before the event, chief executive Kevin Johnson admitted that investments in wages and environmental initiatives had contributed to its quarterly loss at the depths of the Covid-19 crisis but said that they also built trust — as much with shareholders as with employees and customers. 

In China, he noted, “they call this the good-good” — both good for the company and good for the planet. 

But how much pushback did he get from shareholders for spending their money this way? “None. In fact the opposite. We had our largest shareholders say ‘we fully support what you’re doing’. They understand the importance of our culture.”

You wouldn’t expect a Starbucks CEO to say that there was any trade-off between people, planet and profits but the fact that its shares hit a new high this week adds an extra shot to his argument. (Andrew Edgecliffe-Johnson)

Grit in the oyster

CDP, formerly the Carbon Disclosure Project, on Wednesday published its list of companies that are leading on environmental transparency. More than 9,500 groups participate in CDP’s questionnaire on climate change, forests and water security, but concerningly, more than 3,700 failed to disclose any data when requested by investors or customers. Ouch.

Last call for your long-term insights

Thanks to all the readers who have sent in their insights into how to combat short-termism for our first Moral Money Forum report, which will appear early next year. If you’ve not yet shared your thoughts on how investors and companies can encourage long-term behaviour in a world of short-term pressures please do so here.

Smart read

Thirty of the world’s biggest asset managers, which collectively oversee $9tn, have set a goal of achieving net-zero carbon emissions across their investment portfolios by 2050 in a move expected to have huge ramifications for businesses globally, the FT’s Attracta Mooney wrote today. The group, which includes Fidelity International, Legal & General Investment Management, Schroders, UBS Asset Management, M&G, Wellington Management and DWS, said they would work with their clients to cut emissions across their investments.

Further reading

  • BlackRock vows to back more shareholder votes on climate change (FT)

  • Amazon fires fuel investor concern (FT)

  • Why Big Brands Are Investing in Sustainability Start-Ups (BoF)

  • Biden’s presidency could be a game changer for impact investing. Here’s what experts are watching (CNBC)

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BNP under fire from Europe’s top wine exporter over lossmaking forex trades




BNP Paribas is facing allegations that its traders mis-sold billions of euros of lossmaking foreign exchange products to Europe’s largest wine exporter, the latest accusations in a widening controversy that has also enveloped Goldman Sachs and Deutsche Bank.

J. García Carrión, founded in Jumilla in south-east Spain in 1890, is in dispute with the French lender over currency transactions with a cumulative notional amount of tens of billions of euros. It claims the lossmaking trades were inappropriately made with one of its former senior managers between 2015 and 2020, according to people familiar with the matter.

BNP is one of several banks facing complaints from corporate clients in Spain over the alleged mis-selling of foreign exchange derivatives, which pushed some companies into financial difficulties.

Deutsche Bank has launched an internal investigation of the alleged mis-selling that this week led to the departure of two senior executives, Louise Kitchen and Jonathan Tinker.

An internal investigation at JGC found that BNP conducted more than 8,400 foreign exchange transactions with the company over the five-year period, equivalent to about six each working day.

That level of activity was far higher than what the company would have needed for normal hedging of exchange-rate risk on international wine exports, the people said, adding that the Spanish company had shared the results of its internal probe with BNP.

While the vast majority of the lossmaking trades related to euro-dollar swaps that moved against the bank, some were in currency pairs where JGC has little or no operations, such as the euro-Swedish krona.

As a direct result, the €850m-revenue company made about €75m of cash losses in those five years, while BNP could have made more than €100m of revenue from transactions, the people added. Many of the deals were made through trading desks in London.

Executives have demanded compensation for at least some of the losses, arguing that BNP’s traders or compliance department should have spotted and reported the disproportionately high level of transactions and profits from a single client, according to multiple people with knowledge of events.

JGC says the deals were designed as bets on currency markets, rather than for hedging, and is considering a lawsuit to try to recover some of the money, one of the people said.

“BNP Paribas complies very strictly with all regulatory obligations relating to the sale of derivatives and foreign exchange instruments,” the bank said in a statement. “We do not comment on client relationships.”

JGC declined to comment.

Separately, the Spanish wine producer is suing Goldman Sachs in London’s High Court for a partial refund of $6.2m of losses caused by exotic currency derivatives. Goldman has maintained the products were not overly complex for a multinational company with hedging needs and were entered into with full disclosure of the risks.

In Madrid, the wine company has also brought a case against a former senior executive who was responsible for signing off the lossmaking deals. JGC alleges this person conducted the deals in secret and covered them up internally by falsifying documents and misleading auditors.

In the London lawsuit, JGC alleges its executive was acting “with the encouragement and/or pursuant to the recommendations” of Goldman staff “for the purposes of speculation rather than investment or hedging”.

Deutsche Bank has been investigating for months whether its traders in London and Madrid sidestepped EU rules and convinced hundreds of Spanish companies to buy sophisticated foreign exchange derivatives they did not need or understand.

The Financial Times has reported that the German bank has settled many complaints brought against it in private and avoided going to court.

People familiar with the matter told the FT that the departures of Kitchen and Tinker were linked to the probe into the alleged mis-selling, which appears to have occurred in units that at the time were overseen by the two.

The bank declined to comment. Kitchen and Tinker did not respond to requests for comment.

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Will the Fed dare to mention tapering?




Will the Fed dare to mention tapering?

When Federal Reserve officials convene on Tuesday for their latest two-day monetary policy meeting, questions over whether the central bank should start talking about tapering its $120bn monthly bond-buying programme will lead the agenda.

Since the US central bank last met in late April, several senior Fed policymakers, including vice-chair Richard Clarida, have cracked the door more widely open for a discussion about eventually winding down the pace of those purchases, which include US Treasuries and agency mortgage-backed securities.

The recent comments align with those referenced in the latest Fed meeting minutes, which indicated that “a number of participants” believed it might be “appropriate at some point in upcoming meetings” to begin thinking about those plans if progress continued towards the central bank’s goals of a more inclusive recovery from the pandemic.

Recent economic data support this timeline. Consumer prices in the US are rising fast, with 5 per cent year-on-year gains in May revealed in last Thursday’s CPI report — the steepest increase in nearly 13 years. Additionally, last month’s jobs numbers, while weaker than expected, still showed signs of an improving labour market.

Most investors still expect the Fed to only begin tapering in early 2022, with guidance on the exact approach delivered in more detail around September this year at the latest. Goldman Sachs predicts a more formal announcement will come in December, with interest rate increases not pencilled in until early 2024.

“The Fed is signalling they are going to start talking about it,” said Alicia Levine, chief strategist at BNY Mellon Investment Management. “They are softening up the market to expect [something] this summer.” Colby Smith

Are inflation risks rising for the UK?

Consumer prices in the UK have risen at an annual rate of less than 1 per cent for most of the pandemic due to low demand for goods and services and weak wage pressure.

However, with the recent easing of Covid-19 restrictions releasing pent-up consumer demand, the nation’s headline inflation figure doubled in April from the previous month.

When core consumer price inflation data for May are released on Wednesday, some analysts expect an even bigger leap, predicting that annual CPI growth will jump to the Bank of England’s target of 2 per cent.

Robert Wood, chief UK economist at the Bank of America, said such an inflation surge would add to the BoE’s hawkishness. He also forecast further rises later this year as commodity price increases continued to elevate energy and food costs.

Additional price pressure would come from supply chain disruptions and higher transport costs that push up input costs.

“The upside risks to our inflation forecast are growing from all angles,” said Paul Dales, chief UK economist at Capital Economics, who expected consumer price levels to peak at 2.6 per cent in November.

“The reopening may result in prices in pubs and restaurants climbing quicker than we have assumed,” Dales added, while labour shortages in some sectors, such as construction and hospitality, were also starting to push up wages and prices.

However, both analysts expect the increased price strain to be temporary.

“Once higher commodity prices have fed through to consumer prices, inflation will fall back again,” said Wood, forecasting that UK inflation would drop back below the BoE’s target in late 2022. Valentina Romei

Line chart of Annual % change on consumer price index showing UK consumer price inflation is set to rise above target

Will the BoJ keep its rates policy on hold?

Japan’s economic recovery has diverged from Europe and the US this year as it struggles with its Covid vaccination campaign and big cities such as Tokyo continue to be partially locked down under states of emergency due to the pandemic.

Although the nation’s wholesale prices rose at their fastest annual pace in 13 years last Thursday on surging commodity costs, Japan has otherwise faced a lack of price pressures compared with the US.

That means that when the Bank of Japan concludes its two-day meeting on Friday, analysts believe it will not alter monetary policy.

“I don’t expect any change in policy,” said Harumi Taguchi, principal economist at IHS Markit in Tokyo. “They increased flexibility in March and I expect they will continue to watch that.”

After a policy review, Japan’s central bank in March scrapped its pledge to buy an average of ¥6tn ($54.8bn) a year in equities, and the pace of its exchange traded fund purchases dropped sharply in April and May. The moves signalled a shift away from aggressive monetary stimulus in favour of what the BoJ termed a more “sustainable” policy.

“Japan is one of the few countries whose property prices have not risen, and since rent is a major component of the consumer price index, it is not likely to see much inflation ahead,” said John Vail, chief global strategist at Nikko Asset Management in Tokyo.

“Interest rates can remain extremely low, which in turn keeps the yen on a weak trend,” Vail added. Robin Harding

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday

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Dollar traders chill after the tantrum




It was a classic case of buy the rumour, sell the fact.

In February this year, investors and analysts were concerned that the US economy was beginning to hot up, sparking fears that inflation would pick up and force the Federal Reserve to quicken its policy tightening. This, in turn, led to a surge in US government yields, which propelled the dollar to the year’s high against its peers a month later.

Fast-forward to the end of the first half of the year and inflation in the US is running at its fastest pace since the global financial crisis, but the dollar has weakened for two straight months after appreciating in the first quarter.

Most of the shift is down to US central bankers who rushed to reassure investors that they would keep conditions extremely accommodating, soothing the flare-up in Treasury yields and the dollar’s exchange rate.

As a result, analysts are pretty confident that Fed chair Jay Powell and his board will “look through” the rise in prices at the central bank’s rate-setting meeting next week, keeping the dollar on its current weakening path.

“The combination of steady Fed expectations and a broadening global economic recovery should allow recent dollar weakness [to] continue,” said Zach Pandl, co-head of foreign exchange strategy at Goldman Sachs, in a research note. He expected the euro to benefit the most against the US currency.

Still, some strategists cannot help but wonder whether they should stick to selling the fact, or if it is time to start buying the rumour — and the dollar — again. Despite inflation powering to above 5 per cent year on year, yields on 10-year Treasuries fell to their lowest in three months, in a counterintuitive reaction fuelled by the anticipation that policymakers will shrug off the building heat in the economy.

“Getting US inflation right may be the most important market call for the rest of the year,” said Athanasios Vamvakidis, global head of currency strategy at Bank of America in London.

A decision from the US central bank to keep its policy unchanged would allow the dollar to continue with its weakening path, but maybe not as much as traders anticipated at the beginning of 2021. Vamvakidis notes that currency markets are quietly pricing in less dollar weakness than at the start of the year, with the consensus view now calling for the euro to trade at around current levels $1.21 by the end of December rather than at $1.25.

“For now, high US inflation and a still dovish Fed keep real US rates highly negative and this supports the euro. The question is for how long this is sustainable if US inflation proves persistent,” he said, adding that the bank expected the euro to finish the year at $1.15.

Line chart of Dollar index (DXY) showing The dollar has weakened after first-quarter gains

There are signs that investors might be getting too relaxed. Options markets display little nervousness about the Fed meeting, and Mark McCormick, global head of currency strategy at TD Securities said negative bets on the dollar had begun to build up heavily again in recent weeks.

This adds to the risk of a sharp snapback in the currency’s exchange rate if the Fed does hint at tapering its asset purchases on Wednesday or before analysts expect.

“Don’t expect much more dollar weakness into the summer,” said McCormick.

There are also some offbeat signs that there is a risk of traders betting too heavily on the Fed’s commitment to keeping liquidity ample. Analysts at Standard Chartered noted that Treasury secretary Janet Yellen, a former Fed chair, mentioned the potential benefits of a higher interest rate environment twice in recent weeks.

John Davies, a US rates strategist at Standard Chartered, said that it was most likely that the Treasury chief was defending the Biden administration’s fiscal plans rather than criticising Fed policy, but it was highly unusual.

“It is still striking when the Treasurer of a public or private entity argues for higher borrowing costs,” said Davies.

Investors now expect the US central bank to start cutting its asset purchase amounts in the first quarter of next year, with an announcement pencilled in for potentially September, when the Fed meets for its annual symposium at Jackson Hole, according to Oliver Brennan, head of research at TS Lombard.

But while an earlier than expected announcement would cause some ructions, the real risk is that investors will have to start anticipating the timing of rate increases in the US, which could come sooner and harder than they anticipated.

“The taper sets the clock ticking for the first rate hike and real rates rise [and] big changes in Fed policy are rarely smooth-sailing,” said Brennan.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday

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