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Breaking down BP’s bet on carbon credits

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One thing to start: president-elect Joe Biden named Gina McCarthy, currently a member of the board at the environmental advocacy group Ceres, to be domestic climate tsar. Renewables advocate Jennifer Granholm was named to head the energy department (check out the FT’s coverage of the duo here). Mr Biden has also named North Carolina regulator Michael Regan to lead the Environmental Protection Agency. Stand by for some green reforms.

Today we have:

  • BP bets on demand for carbon indulgences

  • Trump’s anti-ESG plan is a hit with private prisons

  • Stakeholder capitalism — does it actually work?

BP puts down roots in carbon credit market

Since taking the reins of BP in February, Bernard Looney has told anyone who will listen about how he sees sustainability and clean energy as keys to the company’s future success. Markets and environmentalists have been sceptical, to say the least. (Anyone who remembers “Beyond Petroleum” knows how quickly these efforts can fizzle out).

But in recent weeks, the company has started pouring money into some big projects that could help cut its carbon footprint and transition away from fossil fuels.

In November, BP teamed up with Orsted on a green hydrogen project in Germany. It is a big deal because the gas is seen as one of the only low-carbon energy choices for industries (such as steel or shipping) that do not have an easy way to operate without fossil fuels.

And this week, BP bought a majority stake in Finite Carbon, a US company that creates carbon credits by paying landowners to plant trees or refrain from cutting down trees. With BP’s backing, Finite Carbon plans to double in size by 2030.

The Finite Carbon deal caught our attention because it is not just about BP hitting its own net zero goals. The fact that the deal was made through BP’s “launchpad” incubator programme indicates that it sees companies looking to buy these credits to cancel out their emissions as a lucrative new planet-friendly income stream.

However, the timing could have been better. Just as BP went public with the acquisition, Bloomberg published a pair of damning articles questioning the legitimacy of carbon offsets. According to Bloomberg, many carbon offsets being sold today are meaningless — either because they take credit for planting trees that were going to be planted anyway or because they claim to protect forests that were never in danger.

While neither article mentioned Finite Carbon, it could be a significant blow — not to mention bad news for BP — if companies and investors lose faith in carbon credits and stop buying them altogether.

A more likely outcome, however, given the central role these credits play in so many corporate climate plans, is that companies buying offsets will face pressure to demand better verification. Regulators may also have to step in.

Either scenario could work to BP’s advantage.

If buyers get more serious about their due diligence, authentic offset providers should be able to charge a premium. And if regulators drop the hammer on sham offset companies, that would help the real ones seize market share. Assuming Finite Carbon’s offsets are the real deal, this would be music to BP’s ears.

Even if things remain status quo and companies (which were never actually that serious about climate change) keep their heads in the sand and just keep buying any and all offsets they can, it is hard to see how BP loses on this deal.

With BP’s stock jumping 1 per cent the day the deal was announced, it looks like markets may not think BP’s clean energy strategy is so, erm, “Looney” after all. (Billy Nauman)

Sin stocks cheer Trump’s bank lending gambit

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In 2019, JPMorgan Chase, PNC and other banks announced they would no longer do business with private prison operators — a sector dominated by two companies: GEO Group and CoreCivic. Both groups have been associated with President Donald Trump’s controversial immigration policies.

The move followed that of more liberal-leaning pension funds that had already jettisoned private prison holdings. MSCI ESG indices, for example, exclude for-profit prison companies in addition to tobacco, munitions, palm oil and other controversial businesses.

Shunned by financial institutions, these so-called sin stock companies can face challenges accessing capital. GEO Group and CoreCivic this year converted to corporations to shore up their balance sheets. 

In its waning days, the Trump administration is still pushing to thwart ESG momentum. In November, the Office of the Comptroller of the Currency proposed a rule that would require banks to offer financing services equitably based on impartial risk analysis — rather than pressure from liberal-leaning activists.

GEO Group applauded the new proposal in a letter to the OCC this month. Just as banks are prohibited from “redlining” — denying mortgages to minorities in certain neighbourhoods — financial institutions should not be allowed to discriminate against private prisons, the group wrote.

It is inconceivable that banks would reject GEO based on its credit quality, the group said, since the company has prison contracts with the federal government. Instead, “it is succumbing to ongoing political pressure, not a sudden lack of experience, that is leading banks to drop their longstanding relations”.

Even if the OCC can finalise the proposal before Mr Biden’s inauguration, bank lobbying groups might try to kill the rule. Regardless, banks are certain to be caught in the middle of a moral authority fight going well into 2021. (Patrick Temple-West)

Stakeholder capitalism . . . but how?

A few months ago Lucian Bebchuk, the James Barr Ames professor of law, economics, and finance at Harvard Law School — and a longstanding sceptic about ESG — produced research that should give sustainability evangelists pause for thought.

He and a colleague asked a few dozen of the big companies who had signed the Business Roundtable’s stakeholder letter in 2019 if their chief executives had bothered to consult board members before penning their names. The response? As he told a lively debate last week co-hosted by London Business School and Harvard Law School, a mere 2 per cent asked the board. Is that because companies were already backing stakeholder ideas? Or chief executives do not care about the board? Or they just regard stakeholderism as an empty PR gesture without strategic significance?

Mr Bebchuk presented strong arguments in favour of the latter, insisting that stakeholderism was misguided and reflected “ill-defined purpose”.

“I may be viewed as cynical to stakeholder capitalism, but I am more sceptical. I’m a big fan of stakeholders, I just don’t think stakeholderism is the way forward,” Mr Bebchuk told the audience of more than 800 virtual listeners last week. “The more effective way [to protect stakeholders] is to adopt laws, regulation and governmental policies.”

Alex Edmans, professor of finance and academic director at London Business School, took the other side, arguing that stakeholderism can both work for stakeholders and increase shareholder wealth. Ignoring ESG values is likely to damage a company, he insisted.

The debate clearly arouses strong feelings, judging from the frenzy of questions that the discussion unleashed. It could be a preview of what’s to come in 2021. (Kristen Talman)

Smart reads

UK Treasury: climate action presents opportunities, risks

The UK is pushing ahead with climate change mitigation plans as it prepares to preside over the G7 in 2021 and host the next UN climate change conference.

In an interim report on climate change action published on Thursday, the Treasury said the cost of the transition to net zero carbon emissions by 2050 will probably be small. Still, there are concerns about “carbon leakage” — where policy changes to lower emissions in one area inadvertently increase emissions elsewhere.

In its global leadership roles in 2021, “the UK is determined to use these opportunities to encourage ambitious international climate action and reduce global emissions”, the report said. “Collective action to reduce global emissions worldwide helps to reduce the risk of carbon leakage globally.”

ICE TO HOST UK CARBON TRADING FROM NEXT YEAR

As part of its interim report on achieving net zero emissions, the Treasury highlighted carbon trading and said the UK introduce a domestic emissions trading scheme after Brexit. On Thursday, Intercontinental Exchange confirmed it will be the venue for UK carbon allowances to start trading in 2021, the FT’s David Sheppard reported.

Grit in the oyster

Between April and September, one of the most tumultuous economic stretches in modern history, 45 of the 50 most valuable publicly traded US companies turned a profit, the Washington Post said in an article on Wednesday.

But despite their success, at least 27 of the 50 largest companies announced lay-offs this year, collectively cutting more than 100,000 workers, The Post found.

Chart of the day

Projections for global temperature in 2100 have declined as countries strengthen their climate commitments

Is the world turning the corner on climate change? Last weekend’s virtual climate summit shows cause for optimism. Global temperatures are still rising, but the “warming trajectory” is getting better, and scientists say the goals of the Paris climate accord may actually be in reach. (FT)

Further Reading

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

  • Trump’s grandstanding in the Arctic (FT Energy Source)

  • Valuing grandchildren (Investors Chronicle

  • Covid-19 has posed new challenges to the world’s waste-pickers (The Economist)

  • Why no one is impressed with Exxon’s emissions pledge (FT Energy Source)

  • Why Going Green Saves Bond Borrowers Money (WSJ)



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Gensler raises concern about market influence of Citadel Securities

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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European markets recover after tech stock fall

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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



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