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Empty gestures in the Arctic



Welcome to Moral Money. Today we have:

  • A collaboration with Energy Source on Arctic drilling

  • C-suite executives give boards a passing grade (barely)

  • French and Dutch regulators call for ESG oversight

  • Pakistan promises to cut coal

Energy source: Kabuki theatre in the Arctic

After losing to Joe Biden, US president Donald Trump has certainly not gone quietly into the night. But while his attempts to overthrow the election results have (rightly) dominated the headlines, his lame-duck administration has made some other controversial under-the-radar moves that should not be ignored — such as moving to auction off oil leases in the Arctic National Wildlife Refuge.

To tackle this very important topic, this week we’re doing something new. We’re hashing things out with our Energy Source colleagues Derek Brower and Myles McCormick to give you a full picture of what this means for often intersecting worlds of energy and sustainability. Read more from Derek and Myles by subscribing to their newsletter here. And let us know what you think of this new format at

Derek Brower (ES): The Trump administration spent almost four years trashing rules designed to protect the environment, from loosening controls on oil and gas companies’ methane pollution, to allowing mercury emissions from power plants, to opening up national forests to drillers. It eased Obama-era fuel economy and emissions standards for passenger cars. The day after President Trump lost the election, the US formally left the Paris agreement.

But let’s be clear about Mr Trump’s hopes to open the Arctic National Wildlife Refuge to drillers. Yes, he plans to sell leases just days before President-elect Biden enters the White House. But this is pure symbolism. Exploring North America’s Arctic is expensive and risky. Shell, the last big major to launch a big Arctic campaign, blew more than $7bn before abandoning the idea in 2015. Forget climate activists, the market would punish any company willing to plough billions into such costly adventurism. Plus, there’s enough oil in Texas — available without much controversy, producible quickly and at relatively low cost — to keep producers occupied. The world is not clamouring for Arctic oil.

Moral Money colleagues, what do you think? Is Mr Trump just toying the Arctic stuff to own the libs one last time? 

Billy Nauman (MM): You nailed a couple of important themes here, Derek. “Owning the libs” often appears to be Republicans’ sole aim these days. But Trump is not alone in creating Arctic policies that amount to little more than symbolism. Companies that claim to care about global warming are getting in on the action as well. 

After years of activists and investors ratcheting up pressure on banks that lend to fossil fuel companies, we’ve started to see a wave of new climate policies rolling in from the finance sector. One of the most common pillars of these policies is — you guessed it — a pledge to stop funding fossil fuel projects in the Arctic. Goldman Sachs, JPMorgan Chase, Wells Fargo, Citi, Bank of America and Morgan Stanley have all jumped on this bandwagon.

The zeitgeist is certainly changing in finance. Banks are finally waking up to the risk that fossil fuel companies will be forced to leave significant portions of their assets in the ground. The massive PR accompanying these announcements also indicates that they are still desperate to rehab their images after the last financial crisis, and see “climate-consciousness” as a good way to do that.

But since no one wants to touch the Arctic anyway, as you point out, it is difficult to get too excited about these commitments. If Arctic oil somehow became an attractive investment, it would be meaningful if banks actually stuck to their guns. (I’m sceptical that they all would). Doing it now is pure symbolism. 

At the end of the day, a banker’s job is to assess risk — and investing in Arctic oil exploration is just not a smart bet. They don’t deserve a pat on the back and a green star just for doing their jobs. 

Myles McCormick (ES): That is exactly the crux of it Billy: it’s easy to take a stand against something that isn’t going to happen. 

As Derek points out, the newfound ability to exploit America’s abundant shale resources has largely put paid to the days where plucky wildcatters would set out on high risk, high reward missions to unearth big oil reserves. But there is another reason why drilling in ANWR is not a realistic prospect: a septuagenarian from Scranton named Joe Biden. 

Even if some enterprising upstart buys up leases in ANWR, despite the odds stacked against it, the man who takes up residence at 1600 Pennsylvania Avenue next month will do all he can to impede the project. While Mr Biden cannot easily cancel the lease sales, he can slow the process to a snail’s pace, driving up costs to make the project even less palatable. 

More tools Mr Biden has at his disposal: an executive order to stop further development of ANWR pending a lengthy review; reallocating permitting staff away from Alaska; or he could go the whole hog and declare parts of the Alaska coastline a national monument, rendering it off limits to drilling. 

Rushing through lease sales may be a symbolic gesture by Donald Trump. Stopping the project in its tracks, by hook or crook, would be an even greater symbolic gesture for his successor.

US executives give the G in ESG a B-

It is a fair bet that most directors whose companies have come through 2020 intact will be congratulating themselves right now on surviving a year of unparalleled governance challenges. But a new survey should give them pause. 

PwC and the Conference Board asked more than 500 C-suite executives of US public companies how they thought their directors had performed this year. Only 30 per cent thought their board was capable of responding well to a crisis, and 35 per cent said it had “struggled to provide effective oversight” when Covid-19 hit. 

The reason, it seems, is who is sitting around the boardroom table. Eighty-two per cent of executives think that at least one member of their company’s board needs to be replaced (while just 49 per cent of board directors say the same about their peers). Advanced age and “overboarding” — directors juggling too many jobs — are the biggest complaints. 

Bar chart of How many directors on your board should be replaced? (%) showing The C-suite wants new blood in the boardroom

Much of this year’s governance discussion has focused — rightly — on the need for improved boardroom diversity, and the survey shows that the vast majority of executives agree that less conformist boards are more effective. But the extent of concern in the C-suite suggests that board chairs and ESG-conscious investors may need to pay as much attention to directors’ effectiveness as they are belatedly paying to board composition. (Andrew Edgecliffe-Johnson)

European regulators put ESG data providers on notice

© Bloomberg

M&A activity in the ESG data space has been enriching investment bankers handsomely over the past 12 months. Late last month, S&P scored a big acquisition with its $44bn purchase of IHS Markit, which will help the credit rating company incorporate emissions data into ESG scores (S&P acquired RobecoSAM’s ESG ratings arm in 2019).

The wave of consolidation has inevitably caught regulators’ attention. On Tuesday, the financial market regulators in France and the Netherlands pushed for the European Securities and Markets Authority (Esma) to take a targeted look at regulating ESG data and credit ratings. Sustainability service providers remain largely unregulated, the duo said, and that could lead to conflicts of interest as well as unfair barriers to entry for competitors. Esma should oversee sustainability service providers and shed light on their methodologies, said the Autorité des Marchés Financiers and the Autoriteit Financiële Markten.

Esma is already developing ESG disclosure standards for financial products that are likely to start in March 2021.

The ESG regulatory action remains firmly in Europe for now. On Monday, Michael Bloomberg called on the Biden administration to quickly mandate climate-related financial disclosures. But Joe Biden’s pick to lead the Securities and Exchange Commission is unlikely to start work on mandatory ESG disclosure regulations until the second half of 2021 at the earliest. 

Until then, ESG stands for “Europe scores globally”? (Patrick Temple-West)

Tips from Tamami

Nikkei’s Tamami Shimizuishi helps you stay up to date on stories you may have missed from the eastern hemisphere.

China’s pledge last week at the UN virtual Climate Ambition Summit to triple wind and solar capacity during the next decade eclipsed another important climate announcement from one of its neighbours in south Asia.

Pakistan’s Prime Minister Imran Khan announced that the country would have no new coal-fired power plants, and committed to sourcing 60 per cent of the country’s energy from renewables by 2030. He also said that 30 per cent of all vehicles will be electric in the next 10 years.

Pakistan’s contribution to global emissions is less than 1 per cent, but “sadly, we are the fifth-most vulnerable country to climate change”, said Mr Khan.

Mr Khan’s pledge is significant as it shows Pakistan’s awareness of the carbon lock-in effect and the risk of stranded assets, said Dimitri De Boer, chief representative of the China office for ClientEarth, an environmental law group. With falling costs of renewables, rising financing costs for coal, and the possibility of carbon pricing, coal doesn’t make economic sense any longer — even for developing countries.

The decision’s implication for “greening” China’s Belt and Road Initiative is also important. Mr De Boer added: “If some key host countries are saying no more coal, and instead want renewables, it becomes an easier decision for China to stop making such investments altogether.”

Other BRI recipient countries in Asia and Africa might follow Pakistan’s decision. Green technology is no longer a luxury reserved for developed counties.

Smart reads

The US Federal Reserve has finally joined the Network for Greening the Financial System the central bank said on Tuesday. This is a major step forward for the central bank, but as a new survey points out, the members of the NGFS are still grappling with how far they should go to fight climate change.

Further Reading

  • How to talk to your CFO about sustainability (HBR)

  • China and Japan ‘risk missing’ $205bn Asean renewables opportunity (Nikkei Asia)

  • Unilever to put its plans to fight climate change to shareholder votes (FT)

  • Dealmakers warn of chilling effect on buyouts from US court ruling (FT)

  • Finance chiefs face pressure to get to grips with sustainability (FT)

  • US solar industry surges despite pandemic fallout, study finds (Reuters)

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US banks could cut 200,000 jobs over next decade, top analyst says




US banks stand to shed 200,000 jobs, or 10 per cent of employees, over the next decade as they manoeuvre to increase profitability in the face of changing customer behaviour, according to a banking analyst. 

“This will be the biggest reduction in US bank headcount in history,” Wells Fargo analyst Mike Mayo told the Financial Times. If his forecast bears out, this year would mark an inflection point for the US banking sector, where the number of jobs has remained roughly flat at 2m for the past decade.

The jobs most at risk are those in branches and call centres as banks prune their sprawling networks to match the new realities of post-pandemic banking, Mayo’s report found. That is consistent with Department of Labor statistics that predict a 15 per cent decline in bank teller jobs over the next decade.

Historically, lay-offs, particularly for lower-paying jobs, have been a contentious issue for the banking industry, which is often held up by progressive politicians as an example of a wealthy industry prioritising profits over people.

But the threat of technology companies and non-bank lenders chipping away at the business of payments and lending, which have traditionally been dominated by banks, has intensified over the past year, making job cuts necessary, Mayo said.

“Banks must become more productive to remain relevant. And that means more computers and less people,” he said.

Most of the reductions can be achieved through attrition over the next 10 years rather than cuts, reducing the risk of a backlash, Mayo said.

The new research, reported first by the FT, comes on the heels of disappointing jobs data that showed the US economy added just 266,000 jobs last month, sharply missing estimates of 1m. Structural elements of unemployment like accelerated automation that took place during the pandemic could pose stronger than anticipated headwinds to a recovery in the labour, economic officials said following the report. 

Pandemic activity pushed headcount up roughly 2 per cent last year as banks hired staff to meet the sudden demand for labour-intensive mortgages and government-backed small-business loans. But that trend is likely to be reversed in the near-term as lenders refocus on efficiency to compete more effectively with technology companies that increased their share of business during the health crisis. 

Increased competition from unregulated companies such as PayPal and Amazon entering financial services was one of the principal concerns JPMorgan Chase chief executive Jamie Dimon outlined in his annual letter to shareholders last month. 

Mayo estimates that banks currently represent just a third of the overall financing market.

“Digitisation accelerated and that played to the strength of some fintech and other tech providers,” Mayo said. 

Many of the bank branches that were closed during the pandemic will probably stay that way, and even those that remain open are likely to be more lightly staffed as branches become more focused on providing advice than facilitating transactions. A large amount of back-office roles also stand to be automated but those numbers are harder to quantify, the report said. 

Mayo said his team 20 years ago was twice as large and responsible for half as much. Doing more with less was the new norm across the industry.

“If I was giving advice to my kids, I’d say you probably don’t want to go into the financial industry,” Mayo said, adding that technology and customer or client-facing roles are probably the only areas that will see growth. “It’s likely to be a shrinking industry.”

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Inflation wild card unsettles markets




Regime changes usually take a while to fully register among investors. The big talking point in markets at the moment surrounds the potential return of a more troublesome level of consumer price inflation and what protective action investors should take.

The underlying trend of inflation matters a great deal for financial markets and investor returns. The rise in both equity and bond prices in recent decades has occurred during a long period of subsiding inflation pressure and from recent efforts by central banks to arrest disinflationary shocks since the financial crisis. 

A year after the global economy abruptly shut down, activity is duly picking up speed. The logical outcome has been a surge in readings of inflation and this week, a measure of US core prices recorded its largest annual gain since 1996, running at a pace of 3 per cent*.

Core readings exclude food and energy prices and are deemed a smoother gauge of underlying inflation pressure, a point that many people outside finance find baffling when budgeting the cost of groceries and petrol.

So the significant jump in the core measure, and even accounting for the base effect of the pandemic’s brief deflationary shock a year ago, has understandably generated plenty of noise.

This will remain loud in the months ahead as activity recovers from lockdowns with a hefty tailwind of fiscal stimulus working its way through the broad economy.

But muddying the waters for investors is that the outlook for inflation is still difficult to judge at this stage.

“There is so much dislocation in the economy from the reopening and base effects from a year ago that it will take at least six to 12 months before we get a clear view of the underlying inflation trend,” said Jason Bloom, head of fixed income and alternatives ETF strategies at Invesco.

Investors who are now worried about an inflation shock face a dilemma. Some assets seen as traditional hedges against such a risk, like inflation-protected bonds and commodities, have already risen appreciably. Effectively a period of inflation running hot has been priced in to some degree.

And history does provide a cautionary note for those moving late to buy expensive inflation protection.

Past inflationary alarms, as economies recovered in the wake of the dotcom bust in the early 2000s and the financial crisis of 2008, proved false dawns. After a mercifully brief pandemic recession, the powerful and well entrenched disinflationary trends of ageing populations and falling costs associated with technological innovation are by no means in retreat.

For such reasons, a number of investors and the US Federal Reserve expect inflationary pressure this year will prove “transitory”. But stacked against deflationary forces is the immense scale of the monetary and fiscal stimulus of the past year.

The effects of monetary and fiscal stimulus means “inflation may settle into a pace of 2.5 per cent (annualised) and that would be different from the average of 1.5 per cent before the pandemic”, said Jason Pride, chief investment officer of private wealth at Glenmede Investment Management. “Inflation will be higher. At a dangerous level? No.”

In an environment of firmer growth and moderate inflation pressure, equities will benefit, led by companies that have earnings more influenced by the economic cycle. Investors also will seek companies that have the ability to pass on higher prices to customers in the near term and offset a squeeze on profit margins.

Still, a troublesome period of elevated inflation cannot be easily dismissed. The “transitory” argument could be challenged if economic growth continues to run hot into next year, accompanied by a trend of higher wages from companies finding it hard to attract workers.

Before reaching that point, expected inflation priced into the bond market may well push past the peaks of the past two decades and enter uncharted territory in the US and also for other developed markets in the UK and Europe.

Bond market forecasts of future inflation pressure over the next five to 10 years have already risen sharply in recent months. But the rebound is from a low level and for now, expected inflation is not far beyond the Fed’s long-term target of 2 per cent.

“It is the change in inflation expectations that drives asset returns,” said Nicholas Johnson, portfolio manager of commodities at Pimco. Assessing almost 50 years of data, a portfolio holding equities and bonds underperforms during bouts of elevated inflation, while real assets including inflation-linked bonds and commodities prosper, according to the asset manager.

“Most investors have not experienced a period where inflation surprised to the upside,” added Johnson. Clients are asking more questions about insulating their portfolios, but their present exposure to commodities and other assets show that in broad terms investors are “not paying much of an inflation premium”.

That can change and the prospect of inflation regime change remains a wild card for investors.

*The value of core inflation has been changed since first publication.

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How traders might exploit quantum computing




If you had a sports almanac from the future as did Biff Tannen, the brutish bully of the time-travelling Back to the Future movie trilogy, how might you be inclined to take advantage of the foresight buried within it?

The obvious temptation would be to place sure bets in the market that make you rich. In Biff’s case, the wealth is then used to change the world into a dystopian reality in which he himself exists as “America’s greatest living hero”.

That sort of thing used to be considered fiction. But the dawn of so-called “supremacy” of quantum computing over conventional technology raises the possibility that one day soon someone might be able to effectively see into the future.

This is because quantum computers, when they become fully capable, are likely to be uniquely good at crunching probability scenarios. They are based on the mysterious world of quantum physics. Quantum bits or qubits are the basic units of information in quantum computers. Unlike the binary bits of traditional computing, which must be either zero or one, qubits can be both at the same time.

This gives quantum computers super powers that will allow them to solve probability-based tasks that would previously have been impossibly hard for conventional counterparts in realistic timeframes. If the problem at hand was a game of football, adding quantum computers to the mix is like allowing footballers to use their hands to get the ball into the net, say quantum experts.

It’s a prospect that poses an entire new set of challenges for market regulators and participants. If super quantum computers really can help institutions see into the future, the information advantage will be unprecedented.

It might also represent an entirely new type of front-running and market manipulation risk, one that regulators can’t necessarily even identify unless they too have a quantum computer at hand.

In Back to the Future, the almanac gave Biff a 60-year insight advantage over everyone else in his home 1955 timeline. With quantum computers, the edge might only be nanoseconds. But in the fast and furious world of high-frequency trading, that could be enough to sweep up.

The reassuring news — at least for now — is that we’re still at least five years away from quantum computers being powerful enough to compete with existing supercomputers on much simpler problems. Prediction might not even be their initial forte.

Goldman Sachs research recently noted, as and when quantum computers are rolled out, they are far more likely to be deployed on crunching options pricing conundrums or running Monte Carlo simulations that value existing portfolios than they are on predicting future movements of asset classes.

According to Tristan Fletcher, of artificial intelligence-forecasting start-up ChAI, that’s because prediction is ultimately about solving a very specific, deep problem by understanding the nuances of the data that matters.

“We are already at the limits of what any system that isn’t actually listening to Opec meetings and five-year plans is capable of,” he said. It’s not the complexity of the calculation that is the issue as much as the breadth of the data sample at hand. That means prediction wouldn’t necessarily get more accurate with quantum power.

The appeal to focus on “brute-force” problems such as optimising portfolio analysis or cracking cryptographic problems such as those that underpin bitcoin, the cryptocurrency, is far greater.

But this poses its own problems. If cryptographic systems can be broken, exceptionally sensitive data held across the financial system could be exposed and taken advantage of in unfair and market manipulative ways.

Rather than being able to better predict the market, the true pay off in the arms race might lie in achieving quantum-level encryption-breaking capability and using it subtly to seize the information that can get a trader ahead. Experts say the chances someone is already up to this, however, are low. If quantum supremacy had been achieved, the news of it would leak pretty quickly.

“We don’t know what we don’t know,” said Jan Goetz, chief executive of IQM, a quantum computing builder. “But generally the community is very small so everyone knows what’s going on. The status quo is clear.”

Nonetheless, the financial sector seems to be waking up to this quantum computing issue. Many banks and institutions are introducing teams to think exclusively about how quantum computing will affect their business. How far ahead they are on making their systems quantum secure is harder to say. It’s a secretive issue. For now, most agree, the threat level is low, not least because — as the hacking of the Colonial pipeline shows — system security is low enough to ensure far cheaper and simpler ways to hijack digital systems.

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