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What we got right — and wrong — in 2020

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Welcome to Moral Money. 2020 was a crazy, wild, shocking — tragic — year. Covid-19 upended numerous forecasts, including some that the Moral Money team had cheerfully made back in the calm days of January 2020, when the global economy was booming (remember that?) 

So what happened with the biggest storylines we set out to cover at the beginning of the year? What do we expect in 2021 when the coronavirus scourge finally dies down? (Here is hoping.) 

We will address the second question in a few days’ time in a separate note, and — as ever — would welcome any forecasts of your own. But before looking to the future, let’s take a glance back at 10 major themes we laid out for 2020. After all, transparency is the bedrock of environmental, social and governance . . . no matter how embarrassing it might seem. 

1. The ESG boom

We got this point half wrong. The focus on ESG in finance and business has exploded in the past year. But we did not quite predict how Covid-19 would have an impact on this growth. In March, when the economy collapsed, we briefly feared that the pandemic might derail the rise of ESG.

After all, history shows that sustainability movements tend to wilt in recessions, and the pandemic was such a dramatic shock that it seemed logical to think (fret) that companies and investors would regard sustainability as a luxury they could no longer afford.

Not so. Unlike earlier recessions, the Covid-19 shock has accelerated the sustainability momentum. This is remarkable, particularly since it seems likely to continue in 2021, for reasons we will set out next week. We are thrilled our initial reaction in March was wrong.

Chart of ESG ETF assets under management by region ($bn)

2. The accounting alphabet soup

The first question we posed last year was “Can anybody create unified ESG standards?” and the answer was, unfortunately, no.

But we did see some good progress.

Early in the year, the World Economic Forum and the Big Four accounting firms announced that they were developing a new disclosure framework linked to the UN’s sustainable development goals. It is still a work in progress — and has elicited some criticism for not being stringent enough — but the fact that the Big Four are working together at all shows just how important this topic is.

We also saw some important developments from the biggest players in the ESG data world (the aforementioned alphabet soup). In September, the Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), CDP, International Integrated Reporting Council (IIRC) and Climate Disclosure Standards Board (CDSB) joined up to work on a unified ESG framework. Just last week we saw the fruits of their labour begin to take shape. Check it out for yourself here. Simply put, this is a big deal.

It is too early to tell if it will be the silver bullet that markets have been waiting for, but the International Organization of Securities Commissions (IOSCO) has already given the group a vote of confidence. All eyes turn now to the International Financial Reporting Standards Foundation (IFRS), which is set to weigh in on the matter soon.

3. The US election

© Getty Images

Joe Biden started 2020 trailing in his party’s primary. In the waning days of the year, Mr Biden is packing for the White House with an opportunity to shape ESG rules in the US. Mandatory climate risk and other ESG disclosures are likely to be a top agenda item for the US Securities and Exchange Commission in 2021.

But the Democrats’ failure to win the Senate, combined with Republican gains in the House, will limit Mr Biden’s ambitions. Even if liberals win both Georgia Senate seats in the runoff on January 5, the Democrats will have the slimmest majority possible to advance climate and ESG laws through Congress. The political picture facing Mr Biden ensures the US will lag Europe on sustainability policies for years to come.

4. Republicans going green (ish?)

We noted in January that “one intriguing question for 2020 is whether [Donald] Trump might soften his stance” towards green issues and the Paris climate accord, since there were signs that some centrist Republicans were embracing climate change issues. He didn’t. On the contrary, in the closing days of his administration, the White House intends to auction off leases to drill in the Arctic wildlife reserve and the Office of the Comptroller of the Currency is taking measures to prevent banks from withholding finance for this on ESG grounds.

However, some Republicans have been quietly positioning themselves to be more open to climate change debates, mindful of how their own base is shifting. Moral Money might have been a little too optimistic about how swiftly Republicans would make this shift; but the momentum is there.

5. Banks step up to fight global warming

Banks sharpened their long, long-term vision this year in line with shareholder sentiment — as we suspected they would — with an increasing list of firms pledging to be net-zero by 2050. Barclays, HSBC, TD Bank and others committed to align all customer financing activity to the 2015 Paris climate accord. Morgan Stanley this year became the first big US bank to say it will measure, disclose and set a target to achieve net-zero financed emissions by 2050.

Elsewhere on the sustainability spectrum, Australian banks pulled the plug on coal. Deutsche Bank promised to double its green financing activities to €200bn by 2025.

While these pledges were applauded, environmental campaigners will be agitating for more in 2021. Earlier this month, San Francisco pressure group As You Sow filed 2021 petitions at JPMorgan, Wells Fargo, Bank of America, Goldman Sachs and Citigroup calling for immediate, tangible steps to disclose and cut fossil fuel financing.

6. Big Tech takes centre stage in sustainability

We said in January that artificial intelligence and smart home technology could take a leading role in the increased use of renewable energy in 2020. We forecast this because of the difficulty of consistently generating renewable energy and the challenges of storing it. Not to mention the issue that energy consumption is used, and priced, with no connection to supply.

Like many good ideas, this got kicked to the kerb in 2020 by the Covid-19 shock: progress in harnessing smart technology to distribute green power more effectively is still slow. So, sadly, is the development of effective battery technology.

7. The year the world turns olive

Chart of issuance by instrument type ($bn) showing that green bonds dominate the sustainable debt market

We forecast that this year would be the year of “olive” with financiers increasingly looking at not just “green” and “brown” bonds and loans. Instead, they would see a transition in progress as businesses moved along a spectrum from brown to green.

We were correct: olive products, approaches and strategies became all the rage in 2020 as financiers hunted for ways to apply ESG standards to dirty industries such as fossil fuel companies.

Critics complained this smacked of greenwashing. Financiers retorted it was the only way to tackle the key sources of pollution and emissions (aka those fossil fuel groups) and to create the right products that could be sold to investors. Either way, the momentum has been striking — notwithstanding the fact that the “green” taxonomy that the European Commission released this year is fairly rigid (i.e. not very olive friendly at all.)

8. The decade of delivery?

We pointed out in January that 2020 was the start of the UN’s self-styled “decade of delivery”, when the world was supposed to hit its sustainable development goals. Back then, progress was patchy, but the conversation was shifting.

On the zeitgeist point, Moral Money was correct: there has been plenty of chatter about SDGs. On the “progress” point, however, 2020 has not just been “patchy” — but disastrous. The economic impact of the pandemic has undone years’ worth of progress in meeting many of the UN’s targets for health, literacy and gender equality and economic development in poor countries. That makes the SDGs doubly important; but this cruel twist also makes them even harder to achieve, not least because there has been relatively little debate about these issues recently with rich countries consumed with their own woes.

9. Boris goes green?

© AP

In an effort to find something — anything — else to talk about that was not linked to Brexit, 2020 was a contender to be the year that Boris Johnson’s government would go green. The need for more green initiatives and sustainable business was perhaps the only thing on which almost all of the UK’s political parties could get behind.

We were correct, albeit rather late in the day. For most of the summer, Mr Johnson was so Covid-19 obsessed (rightly so as the UK suffered from more total excess deaths than any country in Europe) that sustainability slipped off the agenda, particularly after the Glasgow climate summit was delayed to 2021.

But now Mr Johnson is making up for lost time (not least because he wants to show that the UK can still be a global leader amid the woes of . . . er . . . Brexit). We have seen a blitz of public-private initiatives and bold talk about making London the green financial capital of the world. That may be over ambitious. But, happily, this is still one aim (if not the only one) that the UK’s various political factions can agree on, without mentioning that dreaded “B” word.

10. China leading Asia

© REUTERS

Chinese president Xi Jinping’s pledge in September to make his country carbon neutral by 2060 surprised the world — even reporters at Moral Money, who forecast that the world’s largest polluter might prevail as an ESG leader in 2020 a year ago. Mr Xi earlier this month followed up his pledge with more concrete, near-term reduction plans, easing concerns over Beijing’s dedication to cutting emissions.

China’s move forced the hands of economic powerhouses in the region. Both Japan and South Korea declared within almost a month that they would be carbon neutral by 2050. Recipients of China’s economic support — such as Pakistan — also started shifting from coal to renewables. China, Japan and South Korea are the main financiers of overseas coal projects, so their green commitments will have a global impact.

Asia started the year as an ESG laggard, but it has transformed itself into one of the most active participants of the movement after Europe. This is partly thanks to China’s involvement and the current US administration’s disengagement. But, while the “E” factor of ESG made a great stride, “S” and “G” remained relatively unnoticed. With the Covid-19 recovery unfolding, we hope that sustainability will get more attention next year in Asia, where the number of people living in poverty is expected to increase for the first time in 20 years.

Here’s one more thing we did not expect in January . . . in 2020 Moral Money was also named Newsletter of the Year by the Society for Advancing Business Editing and Writing. We were surprised and thrilled, given that this SABEW award is not just for ESG but all forms of business journalism, and it is another sign of how ESG is moving into the mainstream.

We know we could not have done this without the support of all our Moral Money audience. So thank you!! We hope you have a festive (and safe) holiday season. We’re off on Friday but stay tuned for our 2021 predictions next week.

   



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Earnings beats: lukewarm reaction shows prices are stretched

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Investors are picking over first-quarter results for signs of economic recovery and proof that record market highs can continue. Stock markets have only been this richly valued twice before — in 1929 and 2000. Bulls hope strong corporate earnings and rising inflation can pull prices higher still. But pricing for perfection means even good results can be met with indifference.

L’Oreal illustrated this trend on Friday. The French cosmetics group stated that sales in the first quarter of the year rose 10.2 per cent. This was a better performance than expected. Yet the announcement sent shares down by around 2 per cent. Weak cosmetics sales were seen as a veiled warning that consumers emerging from lockdowns might not spend as freely as hoped.

Online white goods retailer AO World, a big winner from pandemic home upgrades, also offered a positive update this week. In the quarter that marked the end of its financial year, sales were £30m ahead of forecasts. But even upbeat commentary from boss John Roberts could not stop shares slipping 3 per cent.

Banks are not immune. Their stocks have outperformed the market by 7 per cent in Europe and 12 per cent in the US this year. But stellar Wall Street results were not enough to satisfy investors this week.

JPMorgan Chase, the biggest US bank, smashed expectations for the first quarter. Even adjusting for the release of large loan loss reserves, earnings per share beat expectations by 12 per cent because of higher investment banking revenues. Bank of America earnings also rose thanks to the release of loan loss reserves. Yet shares in both banks ended the week down. Goldman Sachs had to pull out its best quarterly performance since 2006 to hold investor interest.

On multiple metrics, stock valuations look steep. On price to book, banks are now back to the pre-crisis levels recorded at the start of 2020. Living up to the expectation implicit in such valuations is becoming increasingly hard.

Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up.



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Barclays criticised for underwriting US private prison deal

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Barclays has attracted criticism for underwriting a bond offering by the US company CoreCivic to fund the building of two new private prisons, in a new dispute over Wall Street’s relationship with the controversial sector.

The UK-based bank said two years ago that it would stop financing private prison companies, but the commitment did not extend to helping them obtain financing from public and private markets.

About 30 activists and investors, among them managers at AllianceBernstein and Pax World Funds, have signed a letter opposing the $840m fundraising for two new prisons in Alabama, which was due to be priced on Thursday.

The signatories said the bond sale brings financial and reputational risk to those involved and urged “banks and investors to refuse to purchase securities . . . whose purpose is to perpetuate mass incarceration”.

Activists and investors who pay attention to environmental, social and governance issues have sought to cut off companies that profit from a US criminal justice system that disproportionately incarcerates people of colour. As well as raising ethical issues, many also say such financing may be a bad investment because legislators are increasingly calling for an end to the use of private players in the prison system.

While Barclays is not lending to CoreCivic, activists and investors attacked its decision to underwrite the deal, which is split between private placements and public issuance of taxable municipal bonds. The arrangement is “in direct conflict with statements made two years ago” when the bank announced it would no longer finance private prison operators, according to the letter.

Barclays said its commitment to not finance private prisons “remains in place”, adding it had worked alongside representatives from the state of Alabama to finance prisons “that will be leased and operated by the Alabama Department of Corrections for the entire term of the financing”.

CoreCivic said the Alabama facilities will be “managed and operated by the state — not CoreCivic. These are not private prisons. Frankly, we believe it is reckless and irresponsible that activists who claim to represent the interests of incarcerated people are in effect advocating for outdated facilities, less rehabilitation space, and potentially dangerous conditions for correctional staff and inmates alike.”

Barclays’ 2019 commitment to limit its work with private prison companies came as other banks, including Wells Fargo, JPMorgan Chase and Bank of America, also said they would stop financing the sector.

Critics said they were not sure why Barclays is differentiating between lending and underwriting.

“You’ve already taken the stance, the right stance, that private prisons and profiting from a legacy of slavery is bad,” said Renee Morgan, a social justice strategist with asset manager Adasina Social Capital, one of the signatories of the letter. “But then you’re finding this odd loophole in which to give a platform to a company to continue to do business.”



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Hedge funds post best start to year since before financial crisis

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Hedge funds have navigated the GameStop short squeeze and the collapse of family office Archegos Capital to post their best first quarter of performance since before the global financial crisis.

Funds generated returns of just under 1 per cent last month to take gains in the first three months of the year to 4.8 per cent, the best first quarter since 2006, according to data group Eurekahedge. Recent data from HFR, meanwhile, show funds made 6.1 per cent in the first three months of the year, the strongest first-quarter gain since 2000.

Hedge fund managers, who often bet on rising and falling prices of individual securities rather than following broader indices, have profited this year from a rebound in the cheap, beaten-down so-called “value” stocks and areas of the credit market that many of them favour. Some have also been able to profit from bouts of volatility, such as the surge in GameStop shares, which turbocharged some of their holdings and provided opportunities to bet against overpriced stocks.

“We’re going into a market environment that is going to be more fertile for most active trading strategies, whereas for most of the past decade buying and holding the index was the best thing to do,” said Aaron Smith, founder of hedge fund Pecora Capital, whose Liquid Equity Alpha strategy has gained around 10.8 per cent this year.

The gains are a marked contrast to the first three months of 2020, when funds slumped by around 11.6 per cent as the onset of the pandemic sent equity and other risky markets tumbling. However, funds later recovered strongly to post their best year of returns since 2009.

This year, managers have been helped by a tailwind in stocks and, despite high-profile losses at Melvin Capital and family office Archegos Capital, have largely survived short bursts of market volatility.

It’s a “good market for active management”, said Pictet Wealth Management chief investment officer César Perez Ruiz, pointing to a fall in correlations between stocks. When stocks move in tandem, it makes it more difficult for money managers to pick winners and losers.

Among some of the biggest winners is technology specialist Lee Ainslie’s Maverick Capital, which late last year switched into value stocks. Maverick has also profited from a longstanding holding in SoftBank-backed ecommerce firm Coupang, which floated last month, and a timely position in GameStop. It has gained around 36 per cent. New York-based Senvest, which began buying GameStop shares in September, has gained 67 per cent.

Also profiting is Crispin Odey’s Odey European fund, which rose nearly 60 per cent, having lost around 30 per cent last year, according to numbers sent to investors.

Odey’s James Hanbury has gained 7.3 per cent in his LF Brook Absolute Return fund, helped by positions in stocks such as pub group JD Wetherspoon and Wagamama owner The Restaurant Group. Such stocks have been helped by the UK’s progress on the rollout of the coronavirus vaccine, which has raised hopes of an economic rebound.

“We continue to believe that growth and inflation will come through higher than expectations,” wrote Hanbury, whose fund is betting on value and cyclical stocks, in a letter to investors seen by the Financial Times.

Additional reporting by Katie Martin

laurence.fletcher@ft.com



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