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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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Wall Street stocks follow European and Asian bourses lower




Equities updates

Wall Street stocks followed European and Asian bourses lower on Friday after markets were buffeted this week by jitters over slowing global growth and Beijing’s regulatory crackdown on tech businesses.

The S&P 500 closed down 0.5 per cent, although the blue-chip index still notched its sixth consecutive month of gains, boosted by strong corporate earnings and record-low interest rates.

The tech-focused Nasdaq Composite slid 0.7 per cent, after the quarterly results of online bellwether Amazon missed analysts’ forecasts. The tech conglomerate’s stock finished the day 7.6 per cent lower, its biggest one-day drop since May 2020.

According to Scott Ruesterholz, portfolio manager at Insight Investment, companies which saw significant growth during the pandemic may see shifts in revenue as consumers move away from online to in-person services.

“[Consumers are] going to start spending more on services, and so those businesses and industries which have benefited in the last year, companies like Amazon, will be talking about decelerating sales growth for several quarters,” Ruesterholz said.

The sell-off on Wall Street comes after the continent-wide Stoxx Europe 600 index ended the session 0.5 per cent lower, having hit a high a day earlier, lifted by a bumper crop of upbeat earnings results.

For the second quarter, companies on the Stoxx 600 have reported earnings per share growth of 159 per cent year on year, according to Citigroup. Those on the S&P 500 have increased profits by 97 per cent.

But “this is likely the top”, said Arun Sai, senior multi-asset strategist at Pictet, referring to the pace of earnings increases after economic activity rebounded from the pandemic-triggered contractions last year. Financial markets, he said, “have formed a narrative of peak economic growth and peak momentum”.

Column chart of S&P 500 index, monthly % change showing Wall Street stocks rise for six consecutive months

Data released on Thursday showed the US economy grew at a weaker than expected annualised rate of 6.5 per cent in the three months to June, as labour shortages and supply chain disruptions caused by coronavirus persisted.

Meanwhile, China’s regulatory assault on large tech businesses has sparked fears of a broader crackdown on privately owned companies.

“It underlines the leadership’s ambivalence towards markets,” said Julian Evans-Pritchard of Capital Economics. “We think this will take a toll on economic growth over the medium term.”

Hong Kong’s Hang Seng index closed 1.4 per cent down on Friday, while mainland China’s CSI 300 dropped 0.8 per cent, after precipitous slides earlier in the week moderated.

Japan’s Topix closed 1.4 per cent lower, after the daily tally of Covid cases in Tokyo surpassed 3,000 for three consecutive days. South Korea’s Kospi 200 dropped 1.2 per cent.

The more cautious investor mood on Friday spurred a modest rally in safe haven assets such as US government debt, which took the yield on the 10-year Treasury, which moves inversely to its price, down 0.04 percentage points to 1.23 per cent.

The Federal Reserve, which has bought about $120bn of bonds each month throughout the pandemic to pin down borrowing costs for households and businesses, said this week that the economy was making “progress” but it remained too early to tighten monetary policy.

“Tapering [of the bond purchases] could be delayed, which in many ways is not bad news for the market,” said Anthony Collard, head of investments for the UK and Ireland at JPMorgan Private Bank.

The dollar, also considered a haven in times of stress, climbed 0.3 per cent against a basket of leading currencies.

Brent crude, the global oil benchmark, rose 0.4 per cent to $76.33 a barrel.

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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US regulators launch crackdown on Chinese listings




US financial regulation updates

China-based companies will have to disclose more about their structure and contacts with the Chinese government before listing in the US, the Securities and Exchange Commission said on Friday.

Gary Gensler, the chair of the US corporate and markets regulator, has asked staff to ensure greater transparency from Chinese companies following the controversy surrounding the public offering by the Chinese ride-hailing group Didi Chuxing.

“I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” Gensler said in a statement.

He added: “I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies.”

The SEC’s new rules were triggered by Beijing’s announcement earlier this month that it would tighten restrictions on overseas listings, including stricter rules on what happens to the data held by those companies.

The Chinese internet regulator specifically accused Didi, which had raised $4bn with a New York flotation just days earlier, of violating personal data laws, and ordered for its app to be removed from the Chinese app store.

Beijing’s crackdown spooked US investors, sending the company’s shares tumbling almost 50 per cent in recent weeks. They have rallied slightly in the past week, however, jumping 15 per cent in the past two days based on reports that the company is considering going private again just weeks after listing.

The controversy has prompted questions over whether Didi had told investors enough either about the regulatory risks it faced in China, and specifically about its frequent contacts with Chinese regulators in the run-up to the New York offering.

Several US law firms have now filed class action lawsuits against the company on behalf of shareholders, while two members of the Senate banking committee have called for the SEC to investigate the company.

The SEC has not said whether it is undertaking an investigation or intends to do so. However, its new rules unveiled on Friday would require companies to be clearer about the way in which their offerings are structured. Many China-based companies, including Didi, avoid Chinese restrictions on foreign listings by selling their shares via an offshore shell company.

Gensler said on Friday such companies should clearly distinguish what the shell company does from what the China-based operating company does, as well as the exact financial relationship between the two.

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” he said.

He added that companies should say whether they had received or were denied permission from Chinese authorities to list in the US, including whether any initial approval had then be rescinded.

And they will also have to spell out that they could be delisted if they do not allow the US Public Companies Accounting Oversight Board to inspect their accountants three years after listing.

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Wall Street stocks climb as traders look past weak growth data




Equities updates

Stocks on Wall Street rose on Thursday despite weaker than expected US growth data that cemented expectations that the Federal Reserve would maintain its pandemic-era stimulus that has supported financial markets for a year and a half.

The moves followed data showing US gross domestic product grew at an annualised rate of 6.5 per cent in the second quarter, missing the 8.5 per cent rise expected by economists polled by Reuters.

The S&P 500, the blue-chip US share index, closed 0.4 per cent higher after hitting a high on Monday. The tech-heavy Nasdaq Composite index climbed 0.1 per cent, rebounding slightly after notching its worst day in two and a half months earlier in the week.

The dollar index, which measures the US currency against those of peers, fell 0.4 per cent to its weakest level since late June after the GDP numbers.

“Sentiment about the economy has become less optimistic, but that is good for equities, strangely enough,” said Nadège Dufossé, head of cross-asset strategy at fund manager Candriam. “It makes central banks less likely to withdraw support.”

Jay Powell, the Fed chair, said on Wednesday that despite “progress” towards the bank’s goals of full employment and 2 per cent average inflation, there was more “ground to cover” ahead of any tapering of its vast bond-buying programme.

“Last night’s [announcement] was pretty unambiguously hawkish,” said Blake Gwinn, rates strategist at RBC, adding that Powell’s upbeat tone on labour market figures signalled that the Fed could begin tapering its $120bn a month of debt purchases as early as the end of this year.

The yield on the 10-year US Treasury bond, which moves inversely to its price, traded flat at 1.26 per cent.

Line chart of Stoxx Europe 600 index showing European stocks close at another record high

Looking beyond the headline GDP number, some analysts said the health of the US economy was stronger than it first appeared.

Growth numbers below the surface showed that consumer spending had surged, “while the negatives in the report were from inventory drawdown, presumably from supply shortages”, said Matt Peron, director of research and portfolio manager at Janus Henderson Investors.

“This implies that the economy, and hence earnings which have also been very strong so far for Q2, will continue for some time,” he added. “The economy is back above pre-pandemic levels, and earnings are sure to follow, which should continue to support equity prices.”

Those upbeat earnings helped propel European stocks to another high on Thursday, with results from Switzerland-based chipmaker STMicroelectronics and the French manufacturer Société Bic helping lift bourses.

The region-wide Stoxx Europe 600 benchmark closed up 0.5 per cent to a new record, while London’s FTSE 100 gained 0.9 per cent and Frankfurt’s Xetra Dax ended the session 0.5 per cent higher.

In Asia, market sentiment was also boosted by a move from Chinese officials to soothe nerves over regulatory clampdowns on the nation’s tech and education sectors.

Beijing officials held a call with global investors, Wall Street banks and Chinese financial groups on Wednesday night in an attempt to calm nerves, as fears spread of a more far-reaching clampdown. Hong Kong’s Hang Seng rose 3.3 per cent on Thursday, although it was still down more than 8 per cent so far this month. The CSI 300 index of mainland Chinese stocks rose 1.9 per cent.

Brent crude, the global oil benchmark, gained 1.4 per cent to $76.09 a barrel.

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