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Can business step up as trust in government crumbles?

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One thing to start: another day, another round of nail-biting drama in Washington. as Moral Money went to press, speculation was sky-high about whether Congress would press ahead with the impeachment of Donald Trump.

But while the world waits to see what would happen next, on Tuesday night the US Chamber of Commerce joined other business groups in warning that it would yank donations from politicians linked with Trump. Is this too little, too late? Or is business finally using its muscle to take a stand? Opinions are mixed, The one thing that is crystal clear is that political tumult has put a new spotlight on the “S” in ESG. Read on.

Chiefs find a licence to lead as trust in other institutions crumbles

For more than two decades, the Edelman Trust Barometer has helped set the agenda for business leaders gathering in Davos each January. This year’s World Economic Forum annual meeting is a virtual one, but there’s as much food for thought as ever in the 28-country study. 

Much of the study covers how governments squandered the shortlived surge in public trust they enjoyed early in the pandemic. But the flipside of this, is that business has now emerged as by far the most trusted institution in most countries — more than governments, NGOs or, dare we say it, media. 

According to Richard Edelman, the PR company chief executive who Moral Money’s Gillian Tett will be interviewing today, this gives business a licence to lead on social issues. 

With people expressing more trust in their bosses than their elected leaders, he says, “CEOs have to be willing to act and not wait for government when there’s a lack of clarity”, whether that be about reopening plans or vaccinations. 

And with an “infodemic” raging in which there is little trust in the information coming from governments or media sources, he adds, “I think business has to take on the responsibility for being a quality source of information”. 

The survey suggests large majorities support chiefs stepping in when governments do not fix societal problems. However, readers may also want to note that there was far less support for business leaders holding governments to account or speaking out on civil unrest. (Andrew Edgecliffe-Johnson)

Picks and shovels for the ESG gold rush

© Getty Images

Yesterday, Switzerland joined the growing list of countries throwing support behind the Taskforce on Climate-Related Financial Disclosures (TCFD), the reporting framework designed to provide a clear look at whether companies are on track to meet the Paris climate accord’s goals.

This will be welcome news for investors, who are increasingly demanding environmental, social and governance information. Some companies, on the other hand, might not be so excited.

The Swiss did not go as far as the UK or New Zealand, which made these disclosures mandatory, but their TCFD endorsement is a strong signal that companies everywhere are going to need to start preparing these disclosures.

The problem, however, is that such reporting takes up a lot of time and resources. And the market is still fragmented, meaning a TCFD report is just one of many they may be expected to produce.

There may be help on the way. There are strong indications that the world of ESG standard setters is coalescing. Even if things stay as they are, technology companies are stepping into the picture.

US-based Persefoni made a splash at the beginning of the year hiring Tim Mohin, the former chief executive of the Global Reporting Initiative, which is one of the heaviest hitters in the ESG data market. Persefoni is also working with private equity company TPG to help ascertain the carbon impact of its portfolio companies.

By integrating with a company’s existing enterprise software, such as SAP or Oracle, Persefoni extracts sustainability data from the information they are already tracking to create new reports. It also provides suggestions on how companies can cut their emissions.

This is no small undertaking. The necessary data often comes from disparate sources — and tracking them all is something smaller companies struggle with. But the key to making it work is the Greenhouse Gas Protocol, which Persefoni chief executive Kentaro Kawamori compares to the Generally Accepted Accounting Principles (GAAP) used by financial accountants.

“It gives us all the formulas: ‘this is how you calculate an air travel footprint versus a stationary combustion footprint’.” he said. “We take all that and normalise it . . . and then that gives us the basis to be able to create a SASB report and TCFD report, a GRI report and so and so forth.”

Persefoni is not the only company of its kind, but so far the market is wide open. Madelyn Antoncic, the former chief executive of SASB, made a similar move to Mr Mohin. She joined a company called Global AI in 2019, which uses big data and artificial intelligence to provide information on how companies are aligned with the UN’s Sustainable Development Goals. And big software companies such as Salesforce are rolling out their own carbon accounting platforms.

The opportunity appears to be huge for whoever gets it right. And as the old cliché goes, the best way to get rich in a gold rush is to sell picks and shovels. (Billy Nauman)

‘Could someone please call Brussels?’ A plea for biodiversity 

French president Emmanuel Macron and European Commission president Ursula von der Leyen at a video conference meeting during the One Planet Summit © AP

The “mute menace” stalking all of us working remotely struck again on Monday, as European Commission president Ursula von der Leyen launched into prepared remarks at a virtual conference with her microphone off. She was speaking to this year’s One Planet summit, which was established by French president Emmanuel Macron, the UN and World Bank to energise work on the Paris climate accords.

“Could someone please call Brussels?” Mr Macron pleaded as Ms von der Leyen talked on — unaware of the mic malfunction. It added a brief moment of levity to an otherwise dour topic for this year’s summit: declining biodiversity, or the menace humans pose to the world’s ecosystems.

The loss of biodiversity could drain nearly $10tn from the global economy by 2050. More than 85 per cent of wetlands that existed in 1700 were lost by 2000, and about one-third of the earth’s forests have been lost since the industrial revolution, HSBC said in a 2020 report.

In conjunction with Monday’s event, HSBC, Lombard Odier and Mirova pledged $10bn to biodiversity conservation, a move inspired by Prince Charles’s work on the topic. UK prime minister Boris Johnson has also freed up £3bn for marine and forest conservation.

For all the world leaders who participated on Monday, there was another menace lurking: Greta Thunberg. The environmental activist known for spoiling the fun of the international conference circuit trolled the summit on Twitter.

“Bla bla nature, Bla bla important, Bla bla ambitious,” she tweeted on Monday. 

It is a fair criticism, but one the EU is taking seriously. Last year, the EU launched a biodiversity strategy for 2030. The plan calls for a proposal for legally binding EU nature restoration targets in 2021, and on Monday the European Commission started a consultation on developing these binding restoration targets.

Maybe Mr Macron was on to something when he called to Brussels for help? (Patrick Temple-West)

Politically themed investments boosted after US Capitol riot

Since last week’s events, when a rightwing mob stormed the US Capitol, corporations have been falling over themselves to cut off political donations. Some have stopped giving to lawmakers who supported the president’s attempts to deny the outcome of the election. Some have stopped giving altogether.

How long they keep this up (and whether or not it has any effect) remains to be seen. But given that the companies in question include the largest US banks, it underscores the idea that business cannot be divorced from politics.

As we wrote this summer, an increasing number of investors are looking to drop companies that donate to politicians with whom they disagree.

In November, a company called Reflection Asset Management launched an ETF (with the ticker DEMZ) that only invests in companies that give “at least 75 per cent of their political contributions to Democratic candidates and political action committees”.

And over the past week data provider Floodlight, which works with investment managers to build customised portfolios tailored to people’s political leanings, has seen a surge in interest, said chief executive Nate Wyne.

“We’re really happy that more people are saying ‘this power is given to the people for a reason’ and we shouldn’t just keep doing this because we’ve always done it,” he said. (Billy Nauman)

Chart of the day

Line chart of Net greenhouse gas emissions  showing US emissions plunged in 2020

US greenhouse gas emissions rose less in 2020 than in any year since the second world war as the pandemic caused much of the US economy to grind to a halt. But they are expected to come roaring back when the economy recovers, providing a challenge to the incoming Biden administration.

Tips from Tamami

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

The movement to stop sourcing cotton from China’s Xinjiang region is gaining momentum, as clothing and textile companies face increasing pressure to take responsibility for their supply chains.

Retailer Marks and Spencer vowed to stop using cotton from the region last week, becoming one of the first official signatories of a call to action led by a coalition of human rights groups to stop abuses of Uyghur people. Labour groups, including Human Rights Watch, the AFL-CIO, and Worker Rights Consortium are supporting the campaign.

Fair Labor Association, a Washington DC-based non-profit, banned using cotton and textiles from the region at the end of last year. It was the first time the organisation, whose members include Nike, New Balance and Japan’s Fast Retailing, Uniqlo’s parent, had prohibited sourcing from a specific country or region in its 20-year history.

It’s no easy task to find an alternative source of cotton. The Xinjiang region accounts for 84 per cent of China’s cotton production and 20 per cent of the world’s. FLA, however, believes that its member companies can achieve the goal.

“There are a number of cotton-producing countries — in Asia, Africa, and the Americas — with the ability to increase supply over time, and possibly even in the short-term with the global forecast for cotton use down because of the Covid-19 pandemic,” said Sharon Waxman, president and chief executive of FLA.

Scott Nova, executive director at WRC, observed that the movement of companies disassociating from Xinjiang has been gaining traction in the past couple of months.

“This is a seismic shift from where most of these same corporations stood on the issue less than 12 months ago, when they were privately insisting that ending cotton sourcing from [the region] was either a logistical impossibility or would take many years to achieve,” said Mr Nova.

Further Reading

  • UK urged to introduce mandatory climate votes at AGMs (FT)

  • Germany seeks global corporate tax deal with Biden administration (FT)

  • Corporate America pulls political donations after Capitol assault (FT)

  • Investors start to pay attention to water risk (The Economist)

  • Kirin fails to dispel doubts on military-linked Myanmar partner (Nikkei)

  • Sustainability transformation: 6 tips you can steal from Ikea and Octopus (Sifted)

  • Shell case puts spotlight on energy groups’ role in climate change (FT)

  • Environment groups question UK’s carbon capture push (FT)



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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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