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 FT.com 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
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
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?
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.
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.
US stocks make gains on Fed message of patience over monetary policy
Stocks on Wall Street reversed earlier losses after Jay Powell, the Federal Reserve chairman, reiterated the central bank’s desire to stick with accommodative policies during his second day of testimony to Congress.
The tech-heavy Nasdaq Composite ended the day up 1 per cent, having fallen almost 1 per cent at the opening bell. The S&P 500 climbed 1.1 per cent, marking the blue-chip benchmark’s second consecutive rise after five sessions of back-to-back losses.
A morning sell-off in US Treasuries also faded, with the yield on the 10-year note having climbed as much as 0.07 percentage points to slightly less than 1.43 per cent, its highest level since February last year, before settling back to 1.37 per cent.
Treasuries have been hit by expectations that US president Joe Biden’s $1.9tn stimulus plan will stoke inflation, which erodes the cash value of the debt instruments’ interest payments. However, the more recent rise in yields has also been accompanied by a rise in real rates, which are more indicative of the return investors make after inflation and signal an improving growth outlook for the economy.
Higher yields, which move inversely to the price of the security, also knock-on to equity valuations by affecting the price-to-earnings multiples investors are willing to pay for companies’ shares. A higher yield, analysts say, makes fast-growth companies whose earnings represent a slim proportion of their stock market value less attractive in comparison.
Shares in the 100 largest companies on the Nasdaq are valued at a multiple of 37 times current earnings, against 17 times for the global FTSE All-World index of developed market equities.
“When bonds yield close to zero, you are not losing out by investing in those companies whose cash flows could be years into the future,” said Nick Nelson, head of European equity strategy at UBS. “[But] as bond yields start to rise, that cost of waiting [for companies’ earnings growth] increases.”
Earlier on Wednesday, investors’ retreat from growth stocks rippled into Asia. Hong Kong’s Hang Seng index sank 3 per cent, its worst daily performance in nine months. Chinese investors using market link-ups with bourses in Shanghai and Shenzhen dumped Hong Kong-listed shares at a record pace, selling a net HK$20bn ($2.6bn) on Wednesday. China’s CSI 300 index fell 2.6 per cent. Japan’s Topix slipped 1.8 per cent, dragged down by tech stocks.
European equity markets closed higher, with the Stoxx 600 regional index rising 0.5 per cent and London’s FTSE 100 index up 0.5 per cent. UBS’s Nelson said European equities were less vulnerable to rising yields because European stocks generally traded at lower valuations than in Asia and the US. “We have fewer big technology companies here.”
While the bond market ructions have unsettled many equity investors, some believe this should not affect stock markets because the inflation expectations that have driven the Treasury sell-off are linked to bets of a global recovery.
“Rising bond yields and rising inflation from low levels provide a historically attractive environment for equities,” said Patrik Lang, head of equity strategy and research at Julius Baer. Traditional businesses whose fortunes are linked to economic growth, such as “industrials, materials and especially financials”, should do better in a reflationary environment than tech stocks, added Lang.
Fed needs to ignore ‘taper tantrums’ and let longer rates rise
The writer is chief executive officer and chief investment officer of Richard Bernstein Advisors
The Ferber Method, a sleep training technique, teaches babies to self-soothe and fall asleep on their own. It’s as much a training technique for new parents to ignore their baby’s crying as it is for the child to learn to cope by themself.
The US Federal Reserve should consider Ferberising bond investors and ignore future “taper tantrums” like the market disruption that occurred when the central bank signalled tighter monetary policy in 2013. The long-term health and competitiveness of the US economy may depend on bond investors’ self-soothing ability to cope with reality.
The slope of the yield curve is a simple model of the profitability of lending. Banks pay short-term rates on deposits and other sources of funds and receive longer-term rates by issuing mortgages, corporate loans, and other lending agreements.
A steeper curve, therefore, is a simple measure of better bank profit margins, and has in past cycles spurred greater willingness to lend. Historically, the Fed’s Survey of Senior Bank Lending Officers shows banks have been more willing to make loans to the real economy when the yield curve has been steeper.
With that simple model of bank profits in mind, textbooks highlight the Fed’s control of short-term interest rates as a tool to control lending. The Fed reduces banks’ cost of funding and stimulates lending when it lowers interest rates. But it increases funding rates and curtails lending when it raises short-term rates. Coupling lower short-term rates with a steeper yield curve can be a powerful fillip to bank lending.
However, policies in this cycle have been unique. As US short-term interest rates are near zero, the Fed has attempted to further stimulate the economy by buying longer-dated bonds and lowering long-term interest rates. Those actions have indeed lowered long-term borrowing costs in the economy, but banks’ willingness to lend has been constrained because lending margins have been narrow and risk premiums small.
Banks in past cycles might have been willing to lend despite a relatively flat yield curve because they could enhance narrow lending margins by using leverage. However, regulations after the financial crisis now limit their ability to use leverage.
This policy and regulatory mix has fuelled some of the growth in private lending. Private lenders are not subject to regulated leverage constraints and can accordingly lend profitably despite a flat curve. The growth in private lending effectively reflects an unintended disintermediation of the traditional banking system. This has meant liquidity destined for the real economy has largely been trapped in the financial economy.
The yield curve has started to steepen, and the Fed should freely allow long-term interest rates to increase for monetary policies to benefit the real economy more fully. Allowing long-term rates to increase would not only begin to restrain financial speculation as risk-free rates rise, but could simultaneously foster bank lending to the real economy.
Thus, the need for the Fed to Ferberise bond investors. Banks’ willingness to lend is starting to improve as the curve begins to steepen, but some economists are suggesting the central bank should continue its current strategy of lower long-term interest rates because of the potential for a disruptive “taper tantrum” by bond investors. The Fed needs to ignore investors’ tantrums and allow them to self-soothe.
The investment implications of the Fed allowing longer-term interest rates to rise seem clear. Much of the speculation within the US markets is in assets such as venture capital, special purpose acquisition vehicles, technology stocks and cryptocurrencies. These are “long-duration” investments that have longer-time horizons factored into their valuations. They underperform when longer-term rates rise because investors demand higher returns over time. Capital would be likely to be redistributed to more tangible productive assets.
Investors and policymakers should be concerned that monetary policy is fuelling speculation rather than supporting the lending facilities needed to rebuild the US’s capital stock and keep the country’s economy competitive.
Like a new parent to a baby, the Fed should not rush to coddle bond investors’ tantrums and should let the financial markets soothe themselves. Short-term financial market volatility might cause some sleepless nights, but the Fed could unleash the lending capacity of the traditional banking system by letting the yield curve steepen further.
What we’ve learned from the Texas freeze
One thing to start: While the freeze in Texas caused havoc for most, some companies have reaped big rewards. Australia’s Macquarie Group said yesterday full-year profits could rise by up to 10 per cent as a result of a surge in demand for its natural gas shipping business.
Welcome to today’s newsletter, where Texas remains in focus. In our first item, Derek Brower asks if oil’s modest price rise in reaction to last week’s events signals that the rally will soon run out of steam.
Further rises, after all, will only tempt America’s shale producers to dive into growth mode. For our second item, Justin Jacobs speaks to Devon boss Rick Muncrief about when the taps will be turned back on.
Elsewhere we round up the key reading on the Texas fallout from the FT and beyond; ask how the appointment of a general to head up Brazil’s Petrobras has gone down in the markets (hint: not well) and bring you the latest on the proxy battle to green ExxonMobil.
Thanks for reading. Please get in touch at email@example.com. You can sign up for the newsletter here. — Myles
Is the oil rally nearing the end of the road?
Texas’s cold snap last week lifted oil prices — yet still brought a warning for the market’s bulls. The Permian Basin, the world’s most prolific oil-producing region, froze up. US production fell by 2m barrels a day, according to Wood Mackenzie. Kpler, a data provider, estimates the country’s total output in February will be down by 1m b/d.
By Tuesday morning, after it emerged that producers would take weeks to fully restore flows, US oil futures were trading for around $62.50 per barrel, just $2.50 or so more than its price on the eve of the snowstorm. Hardly an Abqaiq-style oil-price leap.
One explanation is that huge volumes of refining capacity are offline too, removing a big source of demand and neutralising some of the supply disruption. But the market’s relative calm also begs questions about how resilient oil’s rally is — especially with an Opec meeting next week, when the cartel must decide how much, if any, of its 7m barrels a day or more of offline supply it will begin restoring.
Many analysts remain bullish. Goldman Sachs, Wall Street’s most influential oil-price forecaster, upped its expectations by $10 a barrel this week. It now expects Brent, which was above $66 on Tuesday morning, to hit $75 in the third quarter.
Yet the bull case increasingly depends on many things coming true at once, points out Neil Atkinson, an independent analyst who was formerly head of oil markets at the International Energy Agency. Sanctioned Iranian barrels must remain offline; US supply must remain constrained; and economies must rebound quickly. Above all, Opec must keep cutting.
Current prices are in a “sweet spot” for the cartel, said Atkinson. But any further price rises could prompt a response from shale (see below) and test Opec’s discipline, prompting a response from its biggest producer.
“Over the years, Saudi Arabia has shown its willingness to shift policy and maximise output if compliance falls and/or if the perceived costs of co-operation exceed the perceived benefits,” wrote Bassam Fattouh, head of the Oxford Institute for Energy Studies and a Saudi oil-policy expert, in an article explaining the kingdom’s recent decision unilaterally to deepen its owns cuts.
“Thus, Saudi Arabia can easily swing in the opposite direction in response to low compliance and given the relatively low level of Saudi production, the size of the upward swing could be quite substantial, as was the case in April 2020.”
American oil market eyes production boost
After the oil-price surge of recent weeks, the big question hanging over the US shale patch, and broader oil market, is when American producers will start loosening the purse strings and opening up the taps.
That point might now be visible on the horizon. “If we do see commodity prices rapidly increase back to $70 or $80 a barrel, you’re going to be generating a lot of free cash and that gives you a lot of optionality on things you could think about,” Rick Muncrief, chief executive of Devon Energy, a major Permian producer, told ES last week.
For now, Muncrief’s company is keeping a 5 per cent cap on production growth and promising a windfall for shareholders if prices keep climbing. “First things first, we want to make sure we stay disciplined,” Muncrief said.
But his comments to ES point to when companies might ditch the capital discipline mantra and become more vocal about their ability to both accelerate output growth and keep cash flowing to shareholders.
Robert Kaplan, head of the Dallas Fed, also talked about the potential for oil producers to pivot away from capital discipline as prices rise. “I’ve learned sometimes if prices get high enough mindsets can change,” he told an International Energy Forum conference yesterday.
“To get back to 13m barrels a day, yes, you would need a change in mindset. Probably spurred by higher prices. Can I predict whether that will or won’t happen? No I can’t predict it, but I think we should be on watch for it,” Kaplan said.
We will get more of an idea of the mood in the shale patch later this week, after Pioneer Natural Resources, EOG Resources, Diamondback Energy, Occidental Petroleum and Apache have all reported earnings.
Expect a lot of talk about when producers might start getting back into the growth game. (Justin Jacobs)
What to read on the Texas freeze
A weeklong catastrophe left millions without power and heat amid some of the coldest weather the state has seen in a century.
The failure of the state’s electric grid caused immense human suffering, financial pain for consumers (and gain for some energy companies), and has spawned a wide-ranging conversation about where things went wrong and how to prevent it from happening again. Here are the key pieces to read:
Start with Bloomberg’s in-depth account of the early hours of Monday morning, when the state’s grid operator, the Electric Reliability Council of Texas, was forced to plunge millions into darkness as power generation seized up.
The International Energy Agency put the pieces together here in a broad overview of how the grid broke down — and points out that the lessons from Texas should be learned far and wide, especially as the world becomes increasingly electrified and vulnerable to disruptions.
Gregory Meyer and I covered the financial fallout from the storm, including the story of one family in Burleson, Texas, which saw their electric bill suddenly spike to more than $8,000. We also explored who the winners and losers were in a $50bn bonanza of power trading.
Some companies that cashed in on the crisis are being accused of profiteering. The gas producer Comstock Resources said surging natural gas prices were like “hitting the jackpot”.
The crisis sparked an inevitable debate pitting renewables advocates against fossil fuel backers. This green versus brown debate generated much more heat than light. But the issue of intermittent renewables’ reliability is a critical one. The FT’s editorial board argued that frozen wind turbines were hardly the main cause of the grid’s collapse as the natural gas system, which has the largest share of the power market, also failed.
A less sexy but probably more important issue is why so much of Texas’ energy system was so easily felled by temperatures that much of the rest of the country sees on a regular basis. This excellent Texas Tribune story looks at why “winterising” power plants, pipelines and wells might not be as easy or cheap as state officials hope.
Finally, there is a fascinating debate over the role climate change did or did not play in the Arctic blast. My colleagues Leslie Hook and Steven Bernard have a nice explanation (and graphic) of how the jet stream bent south, covering Texas in freezing arctic air.
Shares in Petrobras fell off a cliff yesterday as the market absorbed Brazilian president Jair Bolsonaro’s decision to oust the state oil group’s chief executive in favour of a general.
Bolsonaro had blamed Petrobras’s erstwhile boss Roberto Castello Branco for recent rises in petrol and diesel prices, which had provoked the ire of the country’s truck drivers.
Strikes over fuel costs in 2018 paralysed Brazil’s economy and sapped support for the government, helping secure Bolsonaro’s election to office.
The proxy battle at ExxonMobil rumbles on, with activist group Engine No.1 blasting the oil major’s assertion that its carbon-cutting plan was in line with the Paris accords.
Exxon has stuck to its guns as an oil producer even as rivals like BP and Shell lay out plans to shift into greener sources of energy and reduce fossil fuel output. But it has made concessions in the face of investor pressure, including pledges to cut emissions intensity by 2025.
This month the company said that its emissions targets were “projected to be consistent with the goals of the Paris agreement” and would position it to be “an industry leader in greenhouse gas performance by 2030”.
Engine No.1, which wants to install four new energy-transition-focused directors on Exxon’s board, was having none of it. In a letter to the board yesterday, it wrote:
“None of the company’s new claims change its long-term trajectory which would grow total emissions for decades to come. This is not consistent with, but rather runs directly counter to the goals of the Paris agreement.”
Exxon did not respond to a request for comment.
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