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How to stay ahead of the ESG curve in 2021



If you are feeling like us, you will be heartily glad to see the end of 2020. But what will 2021 bring? We are not going to place bets on when the pandemic might end or economic recovery start. But here, in the last edition of Moral Money for 2020, are our thoughts and forecasts for what the new year is likely to deliver for environmental, social and governance issues in these peculiar times. Please tell us if you agree — or not.

The ESG boom lives on

There are not many silver linings to the dark cloud of Covid-19. However, here is one: to the surprise of many (including us), the pandemic accelerated interest in environment, social and governance issues in 2020, and Moral Money predicts this will intensify in 2021. There are at least five reasons:

  1. The ESG boom is now being driven as much by risk management as activism: Covid-19 has shown company executives and financiers around the world the perils of ignoring so-called “externalities”.

  2. The “externalities” around climate change will be increasingly on the agenda in 2021 due to the COP26 meeting, more instances of extreme weather and polls that show society broadly cares about global warming. Covid-19 proved the perils of ignoring science; it also showed that behaviour can change in surprising ways when the public understands the nature of the emergency.

  3. Big money increasingly has a stake in promoting the ESG agenda, for its own benefit, and will lobby for this in 2021. Larry Fink, chief executive of BlackRock, recently told Moral Money that he viewed climate finance as the second big structural shift of his investing career (the first was the rise of securitisation — which he spotted early on, and used to launched his career). And while longtime ESG enthusiasts scoff that Mr Fink is late to the game compared with earlier activists, the key point is this: since Mr Fink (and others) have spotted a momentum trade in ESG, they are determined to maintain this momentum.

  4. Transparency is rising in a manner that will make company boards and investment committees nervous about falling foul of ESG norms in 2021, particularly in the face of millennials who have used transparency to demand change (be that employees, customers or anyone else). The shock of the #MeToo movement in 2019 and Black Lives Matter in 2020 has shaken executive attitudes. Even if you hate the idea of “stakeholderism”, ignoring ESG can be bad for shareholders.

  5. Politics will back ESG momentum in 2021 too. In the UK, Prime Minister Boris Johnson has thrown his weight behind green reforms. The European Commission is pressing ahead with its green taxonomy and green stimulus plans. The incoming administration of Joe Biden has put climate policy at the centre of its staffing decisions, and is likely to push for rapid ESG investing reforms. China pledged to go carbon neutral and Japan has followed with its own promises. Indeed, these days it is tough to find any government — except Brazil — that is not trying to get a green halo in some form.

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

To be clear: we are not predicting that the growth of ESG will have a smooth trajectory in 2021. There are big problems dogging the sector such as a lack of accounting consistency, different transatlantic policy approaches, too much money chasing too few viable investment products and the difficulty of deciding how the “E” of ESG should be balanced against the “S”. This will probably produce some scandals and greenwashing complaints in 2021. But the direction of travel is clear: ESG is moving from the margins to the main stage.

So what should investors watch for in particular? Here are a few thoughts . . . 

Will COP26 succeed?

© Getty Images

COP26, the UN summit in Glasgow, is seen as a make-or-break moment for the fight against climate change. The meeting, which was postponed from last month until November 2021, will bring world leaders together to discuss how they plan to achieve the goals of the 2015 Paris climate accord. Key issues on the table are set to include global carbon pricing and a chance to make up for the failure of 2019’s COP25 in Madrid.

The meeting is likely to demonstrate a rising chorus of support for green policies. At the beginning of 2020, “nobody thought there will be any chance of delivering at COP26”, said Daniel Klier, global head of sustainable finance at HSBC. “Now, we have almost entered an arms race of who can be better.”

What will be really interesting to watch, though, is not just what the public sector does, but how companies and businesses respond. Mr Klier, for example, forecasts that private sector action during the COP26 meetings may have a much more lasting impact than some of the things governments agree to in conference rooms. This private sector emphasis represents a shift toward a bottom-up, business-first approach that the UK prefers rather than a continental European top-down government approach.

What will Biden do next on climate?

Joe Biden was elected US president on a green(ish) platform — at least when compared with Donald Trump. But what shade of green will his administration actually embrace? The appointments made thus far suggest that his team is aiming to put “green” at the centre of economic policymaking — but rolled out in a pragmatic manner that tries to win broad-based establishment support.


His Treasury secretary nominee, Janet Yellen, just co-authored a vast G30 paper calling for practical climate change policies (such as carbon taxes). Brian Deese the man who has been running ESG policy for BlackRock, is now the chief economic adviser to the White House. John Kerry, the seasoned wily diplomat, was named special global envoy on climate change. Mr Biden has selected environmentalists to helm the Environmental Protection Agency and other key agencies.

This means that in 2021 we will not just see the US rejoin the Paris climate accord, but also move ahead with substantial policy discussions. Expect some form of a carbon tax, a clamp down on carbon emissions and noise about shale gas. And watch for changes to the Department of Labor and to Securities and Exchange Commission rules that would make it easier for asset managers to invest in ESG products. If these transpire, the impact will be significant.

The battle around supply chains

Three or four years ago, when companies said that they wanted to “be sustainable” they usually had their own operations in mind. No longer.

Companies today are facing growing demands from investors, employees and clients to not just raise standards in their own businesses, but those of their supply chains too. Walmart is one American pioneer in this respect: it is urging its suppliers to cut carbon emissions, improve their biodiversity footprint and will soon move to social issues too.

Others will undoubtedly join the conversation in 2021, not least because it seems that investors seem minded to reward companies that are raising ESG supply chain standards. This is partly because investors have realised that if a company is able to monitor ESG standards among suppliers, it is probably fairly well run in general.

The accounting alphabet soup will keep swirling

2020 was the year that Moral Money got utterly fed up with the confusing mess of acronyms linked to ESG accounting standards (TCFD, SASB, GRI, to name but a few). So did many investors.

Happily, 2021 is likely to deliver (slow) movement towards creating a more rational world. Moral Money expects that eventually some form of a system based around TCFD and SASB will shape how most companies report on ESG issues, possibly within the frame being championed by the World Economic Forum (even thought many continental Europeans still love GRI).

© Getty Images

We rather hope that the easy-to-understand label “impact accounting” that has been launched by Harvard Business School professors and Ronald Cohen becomes the more popular tag since it is so much easier to pronounce and explain.

The olive yield curve

The European Commission will press ahead with efforts to introduce its green taxonomy in 2021. It deserves kudos in this respect for being a pioneer (and, by default, the global standard setter since the Trump administration withdrew from Paris).

But 2021 will also be a year when investment bankers and companies push for a more nuanced definition of “green” to ensure that brown companies, such as fossil fuel giants, are rewarded in the markets and court of public opinion as they travel in the general direction of green.

Call this, if you like, the rise of olive finance. Some activists deride this as greenwashing; others argue that it is the only way to encourage (or force) more companies to transition to a cleaner world. Either way, expect to see more “transition” or “sustainability linked” bonds that offer cheaper finance if green(er) goals are met. That, in turn, will encourage the creation of more platforms to monitor how companies and their projects are moving along this “olive” scale.

The 2020 Tokyo Olympics in 2021

© AFP via Getty Images

The Olympic Games in Tokyo were a hard sell to begin with. Tokyo is not a desirable place for the summer games due to the extreme summer heat in recent years. The International Olympic Committee even decided to move the marathon to the cooler northern city of Sapporo. Not all Japanese were convinced by the “hosting the Olympics will kickstart the economy” logic.

Then came the Covid-19 pandemic. The games are delayed about a year, causing an extra cost of ¥294bn ($2.8bn) on top of the existing ¥1.35tn budget. Shinzo Abe, a proponent of the Tokyo games, is no longer the country’s prime minister. A recent poll showed that a majority of the public opposes holding the games next year, favouring a further delay or outright cancellation.

Japan needs to establish a new model of success for the Olympic Games. Pre-pandemic-style success, a packed stadium full of local people and overseas tourists, is unlikely to happen and may not even be desirable — inside or outside of Japan. But a clear blueprint of the post-pandemic games has not yet been provided by the new administration of Yoshihide Suga — or the IOC.

The local mood is sour, but Kenji Fuma, chief executive of Tokyo-based ESG advisory company Neural, sees a bright spot: global co-operation. As multilateral meetings are on the decline under the pandemic — even virtually — Mr Fuma thinks that the games can act as a reminder of global collaboration. “I hope that [the] Tokyo Olympics in 2021 will be remembered as a turning point that fortifies bonds among countries and creates a mood to fight for the sustainable society together”, said Mr Fuma.

Investors raise the stakes in proxy season 2021

Companies’ annual general meetings used to be torpid affairs, brightened only by the free snacks. But, now, the gatherings have become battlegrounds for ESG activists — punctuated in 2020 by a record year of support for environmental and social shareholder proposals.

Climate change will remain a top concern for shareholders in proxy voting season 2021. UK hedge fund billionaire Chris Hohn’s “Say on Climate” initiative will be coming before US shareholders. Investors will continue to fight coal. Amundi plans to broaden its coal engagement beyond European banks to insurance companies and other financial services businesses on other continents.

And social issues focusing on paid leave and diversity disclosures will gather steam. First up: BlackRock. Mr Fink’s all-important letter to companies in the weeks ahead could be a bellwether for social concerns just as his 2020 letter was for climate change causes.

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A blueprint for central bank digital currencies




Britain’s choice of world war two codebreaker Alan Turing to feature on its new plastic £50 note is ironically apt, and for several reasons. His work on cryptography speaks to the new front in monetary debates — how best to protect personal data in an age of digital payments. At the same time, the discrimination the war hero faced for his sexuality shows why privacy is important, including from the government.

In an interview with the Financial Times this week, European Central Bank executive Fabio Panetta said that a digital euro would protect consumer privacy — the public’s greatest concern over a central bank digital currency, according to a consultation by the ECB. Referring to Facebook’s attempt to launch the Libra stablecoin, Panetta warned that if central banks did not provide an alternative they would cede the ground to Big Tech. Companies could then use their dominant market position to set privacy standards.

Central bank digital currencies, however, raise questions about how to protect data from the state. If CBDCs became the dominant money then central banks could have vast data repositories of nearly every transaction in an economy. The need to clamp down on illegal money laundering would mean central banks, just like commercial banks today, would not allow individuals to hold their money anonymously — linking these transactions, however compromising, to individuals.

That might be acceptable in authoritarian regimes like China, where a digital currency project is moving ahead at pace. In democracies it is not. For this reason the Bank for International Settlements is right to call for the preservation of a two-tier financial system in its annual economic report. The so-called central bankers’ central bank advocates an account-based design with regulated private banks dealing with the public and the central bank maintaining digital currencies to make the payment system more efficient. It calls for digital identities tied to these accounts — fighting identity fraud as well as money laundering.

This arms-length structure would preserve privacy — since the state could access records only once a criminal investigation begins — and allow the private and public sector to do what they do best. The BIS argues the central bank coins could work as the plumbing of the system while banks and others could innovate and have responsibility for keeping data secure. Alternative token-based designs for a digital currency could preserve anonymity but facilitate crime.

One such token in the private sector, bitcoin, is the favoured means of payment for hackers’ ransom demands, as well as for some of those avoiding tax; this week the South Korean government seized millions of dollars’ worth of cryptocurrency from 12,000 people accused of tax evasion. Monero, a cryptocurrency that promises even more privacy than the pseudonymous bitcoin, has started to become the choice of many criminals. Cash has the same problem: at one point investigators concluded 90 per cent of £50 notes were in the hands of organised crime.

A two-tier financial system means banks could, as they do at present, have responsibility for checking identities and keeping up with “know your client” rules. While state-run identity schemes such as India’s Aadhar can be used to make sure digital currencies are going to the right place, there are valid ideological questions about government-run ID schemes. The BIS blueprint is a good start for central banks considering digital currencies, but more radical steps such as handing more personal data to the central banks need more widespread consultation and support.

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Pakistan’s Gwadar loses lustre as Saudis shift $10bn deal to Karachi




Saudi Arabia has decided to shift a proposed $10bn oil refinery to Karachi from Gwadar, the centre stage of the Belt and Road Initiative in Pakistan, further supporting the impression that the port city is losing its importance as a mega-investment hub.

On June 2, Tabish Gauhar, the special assistant to Pakistan’s prime minister on power and petroleum, said that Saudi Arabia would not build the refinery at Gwadar but would construct it along with a petrochemical complex somewhere near Karachi. He added that in the next five years another refinery with a capacity of more than 200,000 barrels a day could be built in Pakistan.

Saudi Arabia signed a memorandum of understanding to invest $10bn in an oil refinery and petrochemical complex at Gwadar in February 2019, during a visit by Crown Prince Mohammad Bin Salman to Pakistan. At the time, Islamabad was struggling with declining foreign exchange reserves.

The decision to shift the project to Karachi highlights the infrastructural deficiencies in Gwadar.

A Pakistani official in the petroleum sector told Nikkei Asia on condition of anonymity that a mega oil refinery in Gwadar was never feasible. “Gwadar can only be a feasible location of an oil refinery if a 600km oil pipeline is built connecting it with Karachi, the centre of oil supply of the country,” the official said. There is currently an oil pipeline from Karachi to the north of Pakistan, but not to the east.

This article is from Nikkei Asia, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.

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“Without a pipeline, the transport of refined oil from Gwadar [via road in oil tankers] to consumption centres in the country will be very expensive,” the official said. He added that at the current pace of development he did not see Gwadar’s infrastructure issues being resolved in the next 15 years.

The official also hinted that Pakistan’s negotiations with Russia for investment in the energy sector might have been a factor in the Saudi decision. In February 2019, a Russian delegation, headed by Gazprom deputy chair Vitaly A Markelov, agreed to invest $14bn in different energy projects including pipelines. So far these pledges have not materialised, but Moscow’s undertaking provided Pakistan with an alternative to the Saudis, which probably irritated Riyadh.

Arif Rafiq, president of Vizier Consulting, a New York-based political risk firm, told Nikkei that a Saudi-commissioned feasibility study on a refinery and petrochemicals complex in Gwadar advised against it. “Saudi interest has shifted closer to Karachi, which makes sense, given its proximity to areas of high demand and existing logistics networks,” he added.

Rafiq, who is also a non-resident scholar at the Middle East Institute in Washington, considers this decision by the Saudis as a setback for Gwadar, the crown jewel of the China-Pakistan Economic Corridor, the $50bn Pakistan component of the Belt and Road.

The Saudi decision “is a setback for Pakistan’s plans for Gwadar to emerge as an energy and industrial hub. Pakistan has struggled to find a viable economic growth strategy for Gwadar,” he said. Any progress in Gwadar in the coming decade or two will be slow and incremental, he added.

Local politicians consider the shifting of the oil refinery a huge loss for economic development in Gwadar. Aslam Bhootani, the National Assembly of Pakistan member representing Gwadar, said the move is a loss not only for Gwadar but for all of the southwestern province of Balochistan. He said he would urge the Petroleum Ministry of Pakistan to ask the Saudis to reconsider their decision.

The decision has shattered the image of Gwadar as an up-and-coming major commercial hub. In February 2020, the Gwadar Smart Port City Masterplan was unveiled, forecasting that the city’s economy would surpass $30bn by 2050 and add 1.2m jobs. Local officials started calling Gwadar the future “Singapore of Pakistan”.

Rafiq said such dreams are unrealistic. “A more prudent strategy [for Pakistan] would be to use the city as a vehicle for sustained, equitable economic growth for Balochistan, especially its Makran coastal region,” he said.

Relocating the refinery from Gwadar to already developed Karachi also implies that CPEC, or BRI, has failed to promote Gwadar as a mega-investment hub. “Foreign direct investment in Gwadar will be limited and will remain exclusively Chinese,” an Islamabad-based development analyst said, “limiting the city’s scope for development”.

The refinery decision has once again exposed the infrastructural shortcomings of Gwadar, which Pakistan and China have failed to address in the past six years. Without highways and railways connecting it with northern Pakistan, the city will never develop as its proponents hope.

A version of this article was first published by Nikkei Asia on June 13, 2021. ©2021 Nikkei Inc. All rights reserved.

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Oil hits highest price since April 2019 before moderating




The price of crude oil briefly hit its highest level for more than two years on Monday, lifting shares in energy companies, as traders banked on strong demand from the rebounding manufacturing and travel industries.

Brent crude crossed $75 a barrel for the first time since April 2019 before falling back slightly, while energy shares were the top performers on an otherwise lacklustre Stoxx Europe 600 index, gaining 0.7 per cent.

The international oil benchmark has risen around 50 per cent this year, underscoring strong demand ahead of next week’s meeting of the Opec+ group of oil-producing nations.

US manufacturing activity expanded at a record rate in May, according to a purchasing managers’ index produced by IHS Markit. Air travel in the EU has reached almost 50 per cent of pre-pandemic levels, ahead of the July 1 introduction of passes that will allow vaccinated or Covid-negative people to move freely.

“This is a higher consuming part of the year,” said Pictet multi-asset investment manager Shaniel Ramjee, referring to the summer travel season. “And the oil market is pricing in strong near-term demand that is better than previous expectations.”

In stock markets, the Stoxx Europe 600 dipped 0.3 per cent while futures markets signalled Wall Street’s S&P 500 share index would add 0.1 per cent at the New York opening bell.

The yield on the 10-year US Treasury was steady at 1.494 per cent. Germany’s equivalent Bund yield gained 0.02 percentage points to minus 0.154 per cent.

Equity and bond markets have consolidated after an erratic few sessions since US central bank officials last week put out forecasts indicating the first post-pandemic interest rate rise might come in 2023, a year earlier than previously thought.

US shares tumbled last week, while government bonds rallied, on fears of tighter monetary policy derailing the global economic recovery.

Wall Street equities then bounced back on Monday, with a follow-on rally in some Asian markets on Tuesday, as sentiment got a boost from more dovish commentary from Fed officials.

Fed chair Jay Powell, in prepared remarks ahead of congressional testimony later on Tuesday said the central bank “will do everything we can to support the economy for as long as it takes to complete the recovery”.

John Williams, president of the Federal Reserve Bank of New York, also said that the US economy was not ready yet for the central bank to start pulling back its hefty monetary support.

Jean Boivin, head of the BlackRock Investment Institute, said that “the Fed’s new outlook will not translate into significantly higher policy rates any time soon”.

“We may see bouts of market volatility . . . but we advocate staying invested and looking through any turbulence,” Boivin added.

The dollar index, which measures the greenback against trading partners’ currencies and has been boosted by expectations of US interest rates moving higher before other major central banks take action, was steady at around a two-month high.

The euro dipped 0.1 per cent against the dollar to purchase $1.1901, around its lowest level since early April. Sterling also lost 0.1 per cent to $1.3909.

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