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Grey areas in the green revolution

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The big investment trend last year was sustainability, which many confuse with virtue.

A growing number of us want to use our savings more positively. We want to make money and at the same time make the world a better place. Last year, many funds with this aspiration did relatively well because the oil price plunged, taking down a big component of global indices. Tech companies, which tend to employ relatively few people and do not have the challenges of pollution that manufacturers face, prospered.

But as money has piled into this part of the market, stocks considered virtuous have shot up in value. Results ahead may leave investors disappointed. 

For me, investing sustainably means at least not making the world a worse place. This is harder still if at the same time you want consistently to outperform the global index. 

The funds my team run have always had a strong focus on environmental, social and governance (ESG) issues — it is good risk management, for a start. We do not buy gambling, tobacco, munitions or carbon fuel stocks. And we avoid places such as Russia, where the government has a history of appropriating assets.

Moral Money

The destination for news and analysis about the fast-expanding world of socially responsible business, sustainable finance, impact investing, environmental, social and governance (ESG) trends. FT.com/moral-money

Though we are sceptical about the efficacy of ESG ratings and do not obsess over trying to tick the myriad boxes required, our funds achieve reasonably high scores. But a couple of recent investments may act as a drag on any claim to sainthood. They highlight some of the challenges of sustainable investing.

The inconvenient and complex truth is that many so-called “positive” investments have a dark side that is too easily overlooked – and, in turn, some “dirty” stocks merit closer consideration. 

For instance, our rationale for investing in Freeport-McMoRan, the leading US copper mining company, is that the world appears to be entering a period of government-sponsored economic expansion.

The huge investment in infrastructure — much of it to help us transition to a low-carbon world — will lead to growing demand for copper. Copper has the greatest thermal and electrical conductivity of any non-precious metal, so is a critical component in solar and wind power, for instance. Mining is dirty, but it cannot be avoided if we are to meet targets. We need companies that do it well and responsibly. So in our view the world needs companies like Freeport-McMoRan. 

Electric cars are another good example. Pure electric vehicles come in two varieties: battery electric (BEV) and hydrogen fuel cell (HEV). Many governments are announcing dates not far into the future where no petrol-powered vehicles can be sold (including hybrids), thus requiring drivers to buy BEVs, the only electric vehicle currently in mass production.

There are a few problems here, starting with the overall pollution of making BEVs. The battery stack in a BEV needs changing completely every few years as the cells degrade. What do you do with the dead batteries? The carbon footprint of a BEV is also dependent on how the electricity to power it is produced. In a country like Germany, which still burns a lot of coal, the carbon footprint of a BEV fleet could be high.

In Japan there are doubts that the grid has sufficient capacity to deal with the whole petrol vehicle fleet switching to BEVs on the timescales desired by politicians — and that must be the same in many countries. Indeed, recent low wind speeds in the UK have led electricity prices to rocket and the nuclear plants to run flat out to make up supply. Cheerleaders for renewables prefer to ignore the nuclear waste implications. And let’s not discuss how broken wind farm blades go into landfill.

By contrast, hydrogen fuel cell vehicles do not require batteries and their emission is steam. Most hydrogen is currently made from fossil fuels. When the carbon dioxide emissions are captured this is called “blue hydrogen”. However, in recent years wind farms and other producers of renewables have started producing hydrogen directly — so-called “green hydrogen”. This also helps renewable systems become more efficient, as hydrogen production can be reduced when electricity demand is high.

The hydrogen can then be shipped wherever it is most needed through liquidised gas supply chains, similar to those built for liquified natural gas. It can also be stored and used to supplement periods of low wind and solar generation — though doing this at scale may require vast storage capacity.

Hydrogen needs to be stored under high pressure. It contains much more energy per unit of mass than petrol – 120MJ/kg vs 44MJ/kg — but much less per unit of volume (8MJ/L vs 32 MJ/L).

This has led many to believe it is best suited as a fuel source for trucks and trains. However, Toyota recently launched the world’s first hydrogen sedan car, the Mirai, which has three fuel tanks that take less than five minutes to fill, giving a range of over 300 miles.

Toyota says governments have been foolish in announcing dates to phase out petrol cars when the full array of new technologies is not yet developed. Staying with hybrids while hydrogen vehicle development matures would allow a broader range of transport solutions more suitable for a variety of vehicles and requirements.

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Much has been made of how Tesla has captured the electric vehicle market. With an MSCI ESG rating of A, Tesla is valued at about $795bn. Last year it sold around 500,000 cars and made £31bn of sales – about $72,000 a car (which is beyond most people’s budgets).

If the company can make a massive 15 per cent net margin, this means the present valuation represents about 135 years of current cash profits. Of course, Tesla plans to sell many more cars than this in future, but the market is growing more competitive, with even Apple now plotting its entry.

Toyota is a company few “ESG” funds would own because it makes petrol cars, thereby bringing its MSCI ESG rating down to BBB. Yet it may prove to be the world leader in the environmentally preferable solution. Toyota has a valuation of $250bn and makes 10m cars a year. At its normal net margin of about 7 per cent, the valuation represents around 20 years of cash profits. 

Equity investing is a hazardous business — morally and financially. The recent focus on ESG products and ratings may hurt some important companies and inspire a level of confidence in some stocks that is unjustified given current uncertainties. It’s worth remembering the words of Paul Valéry: “The trouble with our times is that the future is not what it used to be.”

Simon Edelsten is co-manager of the Mid Wynd International Investment Trust and Artemis Global Select 



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Chancellor spots break in clouds after Brexit, Covid and battered finances

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Rishi Sunak will next week deliver a Budget in the shadow of a pandemic, in the aftermath of Britain’s painful divorce from its biggest trading partner and with its public finances, on his own account, under “enormous strains”.

But the chancellor, in an interview with the Financial Times, insisted he can see a brighter future and that his second Budget since being appointed last February will help to build a “future economy” characterised by nimble vaccine and fintech entrepreneurs.

Sunak supported Brexit and now has to show it can work. He knows he cannot expect much help from the EU, which has shown no appetite for opening its markets to the City of London, but still insisted Brexit is an opportunity.

He said post-Brexit Britain would be an open country. “It’s a place driven by innovation, entrepreneurship, taking the agility we have after leaving the EU and putting that to good ends, whether in vaccines or fintech,” he said.

Sunak’s Budget on Wednesday will attempt to flesh out the government’s “build back better” slogan; Britain’s successful vaccine scientists and scrappy tech start-up twenty-somethings will be the poster children of this new approach.

While big and profitable companies are expected to face a hefty increase in their corporation tax bills — part of Sunak’s drive to restore fiscal discipline — the chancellor will focus on companies for whom a profit is a distant dream.

On Friday he told the FT he would launch a new fast-track visa scheme to help Britain’s fastest-growing companies recruit highly skilled workers, as part of a drive to build an “agile” post-Brexit economy.

He said he wanted to help “scale up” sectors such as fintech to compete for the best global talent. The new visa system, he added, would be “a calling card for what we are about”.

Next week Sunak will publish a report by Lord Jonathan Hill, Britain’s former EU commissioner, on the City of London’s listings regime, to make it more attractive for fast-growing tech companies.

“We want to make sure this is an attractive place for people to raise capital — we’ve always been good at that,” Sunak said. “We want to remain at the cutting edge of that.”

The chancellor confirmed Hill will look at whether London can be a rival to New York as a location for so-called Spacs, the modish blank-cheque vehicles that hunt for companies to buy and take public.

He declined to speculate on what Hill will recommend, but gave a broad hint he supports radical reform. “Do we want to remain a dynamic and competitive place for people to raise capital? Yes we do,” he said.

The loss of some City business, including EU share trading, to Amsterdam has reinforced criticism of the government over its negotiation of a trade deal that focused heavily on fish, but hardly at all on financial services.

Last summer the Treasury filled in hundreds of pages of questionnaires from Brussels about its regulatory plans for the City but Britain is still waiting for a series of “equivalence” rulings that would allow UK firms to trade with the single market. It could be a long wait.

When Emmanuel Macron, French president, was asked this month by the FT if he was in favour of Brussels granting “equivalence” to UK financial services rules, he replied simply: “Not at all. I am completely against.”

Sunak insisted he has not given up and that the Treasury remained “constructive and open” in talks with Brussels. But he added: “We live in a competitive world. It’s not surprising other people are looking after their interests.”

Sitting in his sparse Treasury office, stripped of any clutter, wearing his trademark bright white shirt, Sunak said: “We just need to focus on what we’re in control of. I’m enormously confident about both the future for the City of London and, more broadly, financial services.”

At the age of 40, Sunak is only just a year into the job. “When I got the job I had three weeks to prepare a Budget,” he recalled. “I genuinely thought at the time it would be the hardest thing professionally I would have to do in my life.” But that was before the full-blown pandemic hit the UK.

“That Budget turned out, probably, to be the easiest thing I did in my first year in the job. It has been a tough year, dealing with something that nobody has had to deal with before. There was no playbook. We had to move at speed and scale.”

His critics argue that handing out £280bn of borrowed money to support the economy may not have been that difficult either — Sunak’s approval ratings remain very high — and that the really difficult bit is yet to come: trying to rebuild the economy and the tattered public finances.

Conservative MPs are anxious that Sunak’s innate fiscal conservatism might lead him to make unwelcome raids on the finances of core Tory voters and businesses, just as the economy starts to reopen.

The chancellor is expected to freeze income tax thresholds, pushing people into higher tax bands as their pay rises. Another “stealth” move — freezing the lifetime pensions allowance at just over £1m for the rest of the parliament — was reported in the Times on Friday and not denied by the Treasury.

And all the while Sunak will carry on running up debts into the summer to protect the economy from what he hopes will be the last Covid-19 lockdown. He said he is “proud” of what the support measures have achieved so far.

“I’m going to keep at it,” he said. “Some 750,000 people have lost their jobs and I want to make sure we provide those people with hope and opportunity. Next week’s Budget will do that.”



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‘Digital big bang’ needed if UK fintech to compete, says review

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Sweeping policy changes and reform of London’s company listing regime will spark a “digital big bang” for the City and turbocharge the UK’s fintech industry, according to a government-commissioned review.

The report, to be published on Friday, warns that the UK’s leading position in fintech is at risk from growing global competition and regulatory uncertainty caused by Brexit

The review, carried out by former Worldpay chief Ron Kalifa, is one of a series commissioned by the government to help strengthen the UK’s position in finance and technology.

Both sectors are under greater threat from rivals since the UK left the EU in January amid growing global competition to attract and retain the fastest growing tech start-ups. 

Changes to the UK’s listing regime are recommended, such as allowing dual-class share structures to let founders maintain greater control of their companies after IPO. The review also proposes a lower free-float threshold to allow companies to list less of their stock.

Kalifa said the rapid evolution of financial services, from online banking and investment to digital identity and cryptocurrencies, meant that the UK needed to move quickly.

“This is a critical moment. We have to make sure we stay at the forefront of a global industry. We should be setting the standards and the protocols for these emerging solutions.”

John Glen, economic secretary to the Treasury, said more than 70 per cent of digitally active adults in the UK use a fintech service “but we must not rest on our laurels . . . all it takes is a bit of complacency to slip from being a leader of the pack to an also ran”.

He said the government would consider the report’s recommendations in detail. 

The review was welcomed by executives at many of the UK’s largest fintechs and leading financial institutions such as Barclays. Mark Mullen, chief executive of Atom Bank, said the review was “essential to maintain momentum in this key part of our economy and to continue to drive better — and cheaper outcomes for all of us”.

The review also recommended the government create a new visa to allow access to global talent for tech businesses, a move likely to be endorsed by ministers as early as next week’s Budget, according to people familiar with the matter.

Fintechs have been lobbying for a visa scheme since shortly after the 2016 Brexit vote, but the success of remote working since the onset of the coronavirus crisis has reduced its importance for some firms.

Revolut, for example, has ramped up its hiring of fully remote workers in Europe and Asia to reduce costs and widen its potential talent pool, according to chief executive Nik Storonsky.

Charles Delingpole, chief executive of ComplyAdvantage, a regulatory specialist, agreed that fintech was becoming more decentralised. He added that the shift in tone from the government could have as big an impact as specific policy changes. “Whilst none of the policies is in itself a silver bullet . . . the fact that the government recognises the threat to the fintech sector and is publicly acting should definitely help.”

The review also proposed a £1bn privately financed “fintech growth fund” that could be co-ordinated by the government. It identified a £2bn fintech funding gap in the UK, which has meant that many entrepreneurs have in the past preferred to sell rather than continue to build promising companies. It wants to make it easier for UK private pension schemes to invest in fintech firms. 

The report also recommended the establishment of a Centre for Innovation, Finance and Technology, run by the private sector and sponsored by government, to oversee implementation of its recommendations, alongside a digital economy task force to align government efforts.

The review has identified 10 fintech “clusters” in cities around the UK that it says needs to be further developed, with a three-year strategy to support growth and foster specialist capabilities.

Dom Hallas, executive director at the Coalition for a Digital Economy (Coadec), said it was now important that people “follow through and actually implement” the ideas in the review. The sector’s direct contribution to the economy, it is estimated, will reach £13.7bn by 2030.

However, the review also raised questions over the role of the Competition and Markets Authority, saying that the CMA should better balance competition and growth. 

“There is a case for more flexibility in the assessment of mergers and investments for nascent and fast-growing markets such as fintech,” it said. 

“Success brings scale but as some businesses thrive, others inevitably will fail. Some consolidation will therefore be critical in facilitating the growth that UK fintechs need in order to become global champions.”

Charlotte Crosswell, chief executive of Innovate Finance, which helped produce the report, said: “It’s crucial we act on the recommendations in the review to deliver this ambitious strategy that will accelerate the growth of the sector.

“The UK is well positioned to lead this charge but we must act swiftly, decisively and with urgency.”



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Coinbase: digital marketing | Financial Times

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Coinbase will be a stock riding a runaway train. The US cryptocurrency platform wants investors to think long term about the prospects for a global “open financial system”. Most will be unable to tear their eyes away from wild, short-term price swings in bitcoin, the world’s largest digital asset. 

This has its benefits. Coinbase, which has filed for a US direct listing, makes most of its money from commissions on crypto trades. Sales more than doubled to $1.3bn last year. The company has swung from a loss to net income of $322m as crypto prices jumped.

But the company has given no detail on the financial impact of the 2018 bitcoin price crash. Will Coinbase’s 2.8m active retail users and 7,000 institutions hang on if there is another protracted price fall? 

Coinbase was valued at $8bn in a 2018 private funding round and $100bn in a recent private share sale, according to Axois. That rise looks remarkably similar to the increase in bitcoin’s price from less than $5,000 to more than $50,000 this year.

The rally is hard to justify. Bitcoin has not become a widely used currency — nor is the US ever likely to countenance that. It offers investors no yield. Volatility remains high. Elon Musk’s tweet this weekend that bitcoin prices “seem high lol” propelled a sharp fall that hit shares in crypto-related companies. Shares in bitcoin miner Riot Blockchain have lost a quarter of their value this week. 

Prospective investors in Coinbase should keep this in mind. Its listing will take cryptocurrencies further towards the financial mainstream. But risk factors are unusually numerous, including the volatility of crypto assets and regulatory enforcement. 

Both threats are widely known. Another risk factor in the listing document deserves more attention. Vaccination campaigns and the reopening of shuttered sectors of the economy is raising yields in safe assets such as Treasuries. Risky trades may become less attractive. Coinbase might be about to go public just as the incentive to trade cryptocurrencies is undermined. 

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