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Green books sprout tall: 10 top ESG reads

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Welcome to Moral Money’s first 2021 edition, where we too are locked down and feeling gloomy. So to start, we have compiled a list of Moral Money-themed books to perk you up and escape to a future that hopefully will not be as dreary as this week. Also, we have:

  • Chris Hohn’s say-on-climate advances globally

  • ESG in the courtroom

  • Japan, South Korea help finance coal in Vietnam

ESG boom yields growing green reads

You know that an asset class is getting hot when publishers jump in. Sustainable finance is no exception. In recent months we have received a flood of new books championing ESG, which we worked our way through during the new year holiday.

The verdict? If you want to explain sustainability to Gen-Z, a good option is Who Cares Wins: Reasons For Optimism In Our Changing World, by Lily Cole (the former supermodel). If you need a retail investment guide, try Investing To Save The Planet by Alice Ross (a fellow FT journalist). Or if you know a student or young professional who is interested in finance but wants to improve the world, give them Seeking Virtue in Finance: Contributing To Society In A Conflicted Industry by JC de Swaan, an economics lecturer at Princeton University.

For more sophisticated analysis, read Sustainable Investing: A Path To A New Horizon, a collection of essays edited by Herman Bril, Georg Kell and Andreas Rasche (with a rousing introduction by Mark Carney); or another essay collection called Standing Up For A Sustainable World: Voices Of Change, edited by Claude Henry, Johan Rockström and Nicholas Stern.

On the topic of stakeholder ideals, take a look at Accountable: The Rise of Citizen Capitalism, by Michael O’Leary and Warren Valdmanis, or The Six New Rules Of Business: Creating Value In A Changing World by Judy Samuelson. Or to ponder green finance, read The Green Swan: Central Banking and Financial Stability In the Age Of Climate Change from the Banque de France. Irrespective of the provenance, this is an unusually punchy read.

However, one of our favourites — since it is admirably short and clear — is Impact: Reshaping Capitalism To Drive Real Change by Ronald Cohen. And we would be remiss if we did not salute another title that will be published next month and (happily) shares our name: Making Money Moral: How A New Wave of Visionaries Is Linking Purpose And Profit by Judith Rodin and Saadia Madsbjerg, formerly of the Rockefeller Foundation. Happy Reading. (Gillian Tett)

‘There will be fights’: investors demand say on climate shareholder votes

© AP

Billionaire hedge fund manager Chris Hohn ended 2020 with a win when Moody’s became the first US company to embrace his “say on climate” proposal and hold a vote on environmental efforts at its 2021 annual general meeting at the end of December.

Also last month, Unilever said it would give investors an annual vote to approve or disapprove of the company’s progress on climate-related issues. The proposal, to be voted on in May, stemmed from Sir Christopher’s initiative. And As You Sow, a San Francisco non-profit that files shareholder petitions with investors, launched a “say on climate” proposal at US railroad Union Pacific too.

Such shareholder proposals pose increasing risk for companies in 2021. Not all companies will support the say on climate proposal, Mr Hohn said. “There will be fights. But we can win the votes.”

And the days of quiet engagement are over. While BlackRock has traditionally tried to engage with companies behind closed doors to prod changes in behaviour, it has said that this year it is considering supporting more shareholder proposals.

“Given the need for urgent action on many business relevant sustainability issues, we will be more likely to support a shareholder proposal without waiting to assess the effectiveness of engagement,” BlackRock said. “We see voting on shareholder proposals playing an increasingly important role in our stewardship efforts around sustainability.”

In 2020, investors had strong success with environmental shareholder proposals concerning the Sustainability Accounting Standards Board and Task Force on Climate-related Financial Disclosures as well as climate-change lobbying concerns.

This year, a “what have you done for me lately” attitude prevails. Companies will need to proceed with caution in trying to fend off shareholder proposals in this environment. (Patrick Temple-West)

Banks slam Trump administration’s Arctic lending freeze

US banks are pressuring the outgoing Trump administration to withdraw a proposal unveiled in November to stop banks from denying lending services to Arctic drilling projects and other controversial activities.

The Office of the Comptroller of the Currency, which issued the proposed rule, “does not have the statutory authority to pursue such a rulemaking,” the American Bankers Association said on Tuesday, adding that “the OCC seriously underestimated the cost burden the rule would impose upon covered banks”.

Such opposition from companies makes the path difficult for the OCC to finalise this rule. But with President Donald Trump and his allies, anything is possible. (Patrick Temple-West)

Litigation risk: the latest ESG threat facing companies

We write a lot in this newsletter about the risks of ignoring ESG, but one big issue has largely flown under the radar.

While it is important to understand financial risks, such as stranded assets or the threat of divestment campaigns, companies are also facing a growing likelihood that ESG failures can result in them being dragged into court.

A lot of ESG litigation is climate-centric, but there are an increasing number of cases being brought over social and governance issues — such as modern slavery in the supply chain or corporate reporting failures, writes law firm Latham and Watkins.

One such lawsuit, a child labour case brought against Nestlé and Cargill, was recently heard by the US Supreme Court — and depending on how it rules, there could be others to follow.

So what can companies do to protect themselves? The first thing they should do is educate themselves on the specific risks they face and dedicate the resources they need to monitor ESG issues at the board level, Latham and Watkins said.

It is also important that companies examine their supply chains and take extra care to ensure the ESG data they report is accurate.

This is particularly important for large multinationals, which are the “primary target of NGOs, activists, and similar organisations that are agitating for ESG-related claims,” Latham and Watkins said.

As more regulators and investors start requiring companies to disclose ESG data, it seems inevitable that these cases will increase. “Treat public disclosures in relation to ESG matters as seriously as those deployed in respect of financial disclosures, and adapt similar processes,” Latham and Watkins said.

Even if companies prevail in these lawsuits, simply being caught up in court can damage their reputation — and cost a lot of money. So the most important thing is to not open the door to potential litigation in the first place. But that may be easier said than done. (Billy Nauman)

Chart of the day

We would take a rather firm guess that the first thing you did this morning after rolling out of bed was brew a cup of coffee (pod system or Moka pot?). Mark Maslin, Professor of Earth System Science at University College London alongside PhD Candidate Carmen Nab, found that “changing how coffee is grown, transported and consumed can slash the crop’s carbon emissions by up to 77 per cent”.

Decarbonising your espresso could decrease its carbon footprint from 0.28kg per espresso shot to as little as 0.6kg, they said in a piece on The Conversation website. Better still, there is no effect on the pep in your step after consumption.

Tips from Tamami

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

As Japan and South Korea push forward with a controversial coal project in Vietnam, the two countries have decided to provide roughly $1.77bn in loans for the project despite strong opposition from international investors and environmental NGOs.

The Japan Bank for International Cooperation, a public export credit agency, announced it would join the financing framework and offer up to $636m for the Vung Ang 2 project. Other lenders include the Export-Import Bank of Korea and private financial institutions. The closely monitored decision was released at the end of 2020, when most investors and journalists had already left for the new year’s break — the most important annual holiday in Japanese society.

Japan and South Korea pledged to be carbon neutral by 2050 and decided to phase out overseas coal project financing last year, but they excluded existing or pending projects such as Vung Ang 2.

“This is a serious double standard that should be criticised,” said Ayumi Fukakusa, campaigner at Friends of the Earth Japan.

While JBIC’s press release didn’t list the names of co-financiers (it’s unusual for such an announcement, according to Ms Fukakusa), Japan’s top three banks also reportedly participated. Ms Fukakusa added: “They should disclose the details of loans, as a signatory of Task Force on Climate-related Financial Disclosures.”

The campaign to stop funding the Vung Ang 2 project is gaining momentum. Greta Thunberg, the world’s most famous teenage climate warrior, showed her “full support” for the effort, retweeting a video message produced by the group leading the charge.

A group of NGOs, including FoE Japan, has demanded big shareholders of Mitsubishi Corp, Japan’s leading trading house and an investor in the project, to engage and divest if necessary. Japan and South Korea’s “green” declaration in 2020 will face a real test in 2021.

Smart read

Unilever is about to begin consumer trials of a patented compound derived from seaweed that it says can create self-cleaning surfaces with applications from banknotes to odour-proof shoes, the FT’s Judith Evans writes. The technology prevents micro-organisms from forming so-called biofilms on surfaces by disrupting their communications systems.

Further Reading

  • Analysts expect as much as $500bn of green bonds in bumper 2021 (FT)

  • UK banks to launch wave of green products (FT)

  • Christine Lagarde expected to make ECB a climate change pioneer (FT)

  • ‘A Slap in the Face’: The Pandemic Disrupts Young Oil Careers (NYT)

  • Tesla director Hiro Mizuno picked as UN sustainable investment envoy (Nikkei)

  • There’s a simple way to green the economy — and it involves cash prizes for all (Guardian)





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Wall Street stocks trail European equities ahead of Fed meeting

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Stocks on Wall Street lagged behind European peers ahead of a two-day US central bank meeting that will be closely watched for clues on the future path of monetary policy.

Wall Street’s S&P 500 index was down 0.2 per cent at lunchtime in New York, retreating from an all-time high that the benchmark hit on Friday, while the technology-focused Nasdaq Composite index climbed 0.4 per cent.

Core US government debt sold off on Monday, taking the yield on the benchmark 10-year US Treasury note up 0.03 percentage points to 1.5 per cent. This followed a rally last week in which investors banked on the Federal Reserve looking past high US inflation to maintain its pandemic-era support for financial markets.

The Fed is widely expected to maintain its $120bn of monthly bond purchases when it meets on Tuesday and Wednesday. These asset purchases, which have been followed by rate-setters in Europe and the UK, have lowered the yields on government bonds, reducing corporate borrowing costs and boosting the appeal of riskier assets such as equities.

But after a rapid recovery of the US economy fuelled by coronavirus vaccines and President Joe Biden’s massive stimulus programmes, some analysts see the Fed’s policymakers bringing forward their predictions of the first post-pandemic interest rate rise.

“We expect the Fed to upgrade its outlook for growth and materially revise up the inflation forecast,” Tiffany Wilding, US economist at the bond investment house Pimco, said in a research note. “We think the majority of Fed officials will also pull forward their projections for the first rate hike to 2023 [from 2024].”

Headline US consumer price inflation hit 5 per cent in the 12 months to May. Jay Powell, Fed chair, has maintained that the rises are a temporary effect of the US economy reopening after coronavirus shutdowns. “But others are concerned inflation is more structural,” said Marco Pirondini, head of US equities at Amundi. “I’d say it is 50-50 on either side.”

A rise in used car and truck prices, after a global semiconductor shortage lowered production of new vehicles, accounted for about a third of the increase in May’s CPI, according to the Bureau of Labor Statistics.

US wages could also “go up in a more sustained way”, Pirondini said, after Biden signed an executive order in late April to increase government pay, pressuring private industry to also raise salaries.

Across the Atlantic, the pan-regional Stoxx Europe 600 gained 0.2 per cent to another record high with energy the top-performing sector following a further lift in oil prices.

Brent crude climbed as much as 1.3 per cent on Monday to $73.64 a barrel, a two-year high for the international oil benchmark.

Line chart of Indices rebased showing UK’s travel and leisure stocks trail wider market

Elsewhere in the region, the UK’s travel and leisure companies lagged behind the wider market on reports that the planned lifting of Covid-19 curbs in England on June 21 would be delayed by the UK government.

The news left the FTSE 350 Travel & Leisure sector down 1.4 per cent compared with a rise of 0.2 per cent for the broader FTSE 350 index.

The dollar index, which measures the US currency against peers, dipped 0.1 per cent. The euro was up 0.2 per cent against the greenback, purchasing $1.212. Sterling was up 0.1 per cent at $1.411.

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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BNP under fire from Europe’s top wine exporter over lossmaking forex trades

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BNP Paribas is facing allegations that its traders mis-sold billions of euros of lossmaking foreign exchange products to Europe’s largest wine exporter, the latest accusations in a widening controversy that has also enveloped Goldman Sachs and Deutsche Bank.

J. García Carrión, founded in Jumilla in south-east Spain in 1890, is in dispute with the French lender over currency transactions with a cumulative notional amount of tens of billions of euros. It claims the lossmaking trades were inappropriately made with one of its former senior managers between 2015 and 2020, according to people familiar with the matter.

BNP is one of several banks facing complaints from corporate clients in Spain over the alleged mis-selling of foreign exchange derivatives, which pushed some companies into financial difficulties.

Deutsche Bank has launched an internal investigation of the alleged mis-selling that this week led to the departure of two senior executives, Louise Kitchen and Jonathan Tinker.

An internal investigation at JGC found that BNP conducted more than 8,400 foreign exchange transactions with the company over the five-year period, equivalent to about six each working day.

That level of activity was far higher than what the company would have needed for normal hedging of exchange-rate risk on international wine exports, the people said, adding that the Spanish company had shared the results of its internal probe with BNP.

While the vast majority of the lossmaking trades related to euro-dollar swaps that moved against the bank, some were in currency pairs where JGC has little or no operations, such as the euro-Swedish krona.

As a direct result, the €850m-revenue company made about €75m of cash losses in those five years, while BNP could have made more than €100m of revenue from transactions, the people added. Many of the deals were made through trading desks in London.

Executives have demanded compensation for at least some of the losses, arguing that BNP’s traders or compliance department should have spotted and reported the disproportionately high level of transactions and profits from a single client, according to multiple people with knowledge of events.

JGC says the deals were designed as bets on currency markets, rather than for hedging, and is considering a lawsuit to try to recover some of the money, one of the people said.

“BNP Paribas complies very strictly with all regulatory obligations relating to the sale of derivatives and foreign exchange instruments,” the bank said in a statement. “We do not comment on client relationships.”

JGC declined to comment.

Separately, the Spanish wine producer is suing Goldman Sachs in London’s High Court for a partial refund of $6.2m of losses caused by exotic currency derivatives. Goldman has maintained the products were not overly complex for a multinational company with hedging needs and were entered into with full disclosure of the risks.

In Madrid, the wine company has also brought a case against a former senior executive who was responsible for signing off the lossmaking deals. JGC alleges this person conducted the deals in secret and covered them up internally by falsifying documents and misleading auditors.

In the London lawsuit, JGC alleges its executive was acting “with the encouragement and/or pursuant to the recommendations” of Goldman staff “for the purposes of speculation rather than investment or hedging”.

Deutsche Bank has been investigating for months whether its traders in London and Madrid sidestepped EU rules and convinced hundreds of Spanish companies to buy sophisticated foreign exchange derivatives they did not need or understand.

The Financial Times has reported that the German bank has settled many complaints brought against it in private and avoided going to court.

People familiar with the matter told the FT that the departures of Kitchen and Tinker were linked to the probe into the alleged mis-selling, which appears to have occurred in units that at the time were overseen by the two.

The bank declined to comment. Kitchen and Tinker did not respond to requests for comment.



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Will the Fed dare to mention tapering?

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Will the Fed dare to mention tapering?

When Federal Reserve officials convene on Tuesday for their latest two-day monetary policy meeting, questions over whether the central bank should start talking about tapering its $120bn monthly bond-buying programme will lead the agenda.

Since the US central bank last met in late April, several senior Fed policymakers, including vice-chair Richard Clarida, have cracked the door more widely open for a discussion about eventually winding down the pace of those purchases, which include US Treasuries and agency mortgage-backed securities.

The recent comments align with those referenced in the latest Fed meeting minutes, which indicated that “a number of participants” believed it might be “appropriate at some point in upcoming meetings” to begin thinking about those plans if progress continued towards the central bank’s goals of a more inclusive recovery from the pandemic.

Recent economic data support this timeline. Consumer prices in the US are rising fast, with 5 per cent year-on-year gains in May revealed in last Thursday’s CPI report — the steepest increase in nearly 13 years. Additionally, last month’s jobs numbers, while weaker than expected, still showed signs of an improving labour market.

Most investors still expect the Fed to only begin tapering in early 2022, with guidance on the exact approach delivered in more detail around September this year at the latest. Goldman Sachs predicts a more formal announcement will come in December, with interest rate increases not pencilled in until early 2024.

“The Fed is signalling they are going to start talking about it,” said Alicia Levine, chief strategist at BNY Mellon Investment Management. “They are softening up the market to expect [something] this summer.” Colby Smith

Are inflation risks rising for the UK?

Consumer prices in the UK have risen at an annual rate of less than 1 per cent for most of the pandemic due to low demand for goods and services and weak wage pressure.

However, with the recent easing of Covid-19 restrictions releasing pent-up consumer demand, the nation’s headline inflation figure doubled in April from the previous month.

When core consumer price inflation data for May are released on Wednesday, some analysts expect an even bigger leap, predicting that annual CPI growth will jump to the Bank of England’s target of 2 per cent.

Robert Wood, chief UK economist at the Bank of America, said such an inflation surge would add to the BoE’s hawkishness. He also forecast further rises later this year as commodity price increases continued to elevate energy and food costs.

Additional price pressure would come from supply chain disruptions and higher transport costs that push up input costs.

“The upside risks to our inflation forecast are growing from all angles,” said Paul Dales, chief UK economist at Capital Economics, who expected consumer price levels to peak at 2.6 per cent in November.

“The reopening may result in prices in pubs and restaurants climbing quicker than we have assumed,” Dales added, while labour shortages in some sectors, such as construction and hospitality, were also starting to push up wages and prices.

However, both analysts expect the increased price strain to be temporary.

“Once higher commodity prices have fed through to consumer prices, inflation will fall back again,” said Wood, forecasting that UK inflation would drop back below the BoE’s target in late 2022. Valentina Romei

Line chart of Annual % change on consumer price index showing UK consumer price inflation is set to rise above target

Will the BoJ keep its rates policy on hold?

Japan’s economic recovery has diverged from Europe and the US this year as it struggles with its Covid vaccination campaign and big cities such as Tokyo continue to be partially locked down under states of emergency due to the pandemic.

Although the nation’s wholesale prices rose at their fastest annual pace in 13 years last Thursday on surging commodity costs, Japan has otherwise faced a lack of price pressures compared with the US.

That means that when the Bank of Japan concludes its two-day meeting on Friday, analysts believe it will not alter monetary policy.

“I don’t expect any change in policy,” said Harumi Taguchi, principal economist at IHS Markit in Tokyo. “They increased flexibility in March and I expect they will continue to watch that.”

After a policy review, Japan’s central bank in March scrapped its pledge to buy an average of ¥6tn ($54.8bn) a year in equities, and the pace of its exchange traded fund purchases dropped sharply in April and May. The moves signalled a shift away from aggressive monetary stimulus in favour of what the BoJ termed a more “sustainable” policy.

“Japan is one of the few countries whose property prices have not risen, and since rent is a major component of the consumer price index, it is not likely to see much inflation ahead,” said John Vail, chief global strategist at Nikko Asset Management in Tokyo.

“Interest rates can remain extremely low, which in turn keeps the yen on a weak trend,” Vail added. Robin Harding

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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