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What will Biden’s SEC pick mean for ESG?

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Welcome to Moral Money and the start of Joe Biden’s presidency later today. For the past three years, Gary Gensler — Mr Biden’s pick to lead the US stock market regulator — has been studying and teaching about cryptocurrencies, an issue he will need to address as the Securities and Exchange Commission chairman.

But his familiarity with environmental, social and governance investing and climate change is less clear. He has not expressed a clear position on mandatory ESG or climate change corporate disclosures.

However, two things are known. First, the SEC’s two Democratic commissioners have supported ESG disclosures and will be helpful guides for the new chairman.

Secondly, we know Mr Gensler can drive regulations into existence. Handed the thankless task of adopting derivatives regulations during the Obama administration, Mr Gensler charged ahead with surprising speed and success. He barrelled over the corporate lobbyists who stood in his way — a trait he might rely on again to advocate for ESG disclosures.

The initial clues about Mr Gensler’s ESG position will come when he testifies before Congress for his new job. Moral Money will keep you updated. — Patrick Temple-West

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ESG activists target companies supporting ‘insurrectionist caucus’

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Since the riot at the US Capitol on January 6, businesses have been scrambling to put distance between themselves and the people who supported Donald Trump’s attempt to undermine US democracy.

But ESG activists are highly sceptical of corporate pledges to cut off political donations to the members of Congress who voted to overturn the election. And groups like Majority Action are looking to ensure that companies and their executives don’t go straight back to business as usual once things calm down.

Over the weekend we had a scoop on Dan DiMicco, a former Trump adviser, exiting the board of Duke Energy after Majority Action launched a campaign calling for his departure, citing posts he made on Twitter and Parler questioning the legitimacy of Joe Biden’s victory.

And Mr DiMicco is only their first target.

In addition to putting pressure on individual board members and companies, Majority Action plans to turn up the heat on asset managers by calling for them to put political spending front and centre in their ESG programmes.

“Given their concentrated shareholder voting power, [investment managers] should be setting standards for comprehensive disclosure of corporate money, including corporate dark money in politics, and holding boards accountable for the alignment of that money with their corporate purpose and objectives,” said Eli Kasargod-Staub, executive director of Majority Action.

But stopping all political donations isn’t the answer, according to Mr Kasargod-Staub. Instead, he’d like to see companies take a more principled stand.

“[Pausing] political donations to all parties [implies] everybody in the ecosystem was working to undermine election integrity, instead of a minority of one party,” he said. “We are very concerned about this kind of ‘both-sides-ism.’”

Large investors like the New York City pension funds are making a similar call.

New York City comptroller Scott Stringer last week called on companies to permanently stop donating to members of Congress who objected to the certification of the Electoral College vote, saying that their actions “ultimately resulted in a violent insurrection orchestrated in part by white supremacists, domestic terrorists and neo-Nazis”.

Will this work? It is far too early to tell. The Washington Post found that 20 of the 30 largest corporate political donors had suspended some or all contributions since January 6.

But comments yesterday from Doug McMillon, Walmart chief executive and head of the influential Business Roundtable lobbying group, indicate that companies have no desire to loosen their grip on American politics: “Looking back, the business community has made contributions to strengthen the country,” he said on a conference call. “Not participating in the process as it’s laid out could create other issues . . . I think we’ve got to find a way to participate in the right way.”

As research from professor Shiva Rajgopal at Columbia University shows, political spending is one of the most profitable investments a company can make.

This will almost certainly mean Majority Action and other ESG advocates face an uphill climb, especially once the spotlight fades. But Mr Kasargod-Staub is optimistic about their chances.

“The question is do you countenance elected officials working in concert to overturn a free and fair democratic election, or not? That’s a really clear, bright line question.” (Billy Nauman)

BoA vice-chairman sees big ESG growth ahead under Biden

Anne Finucane, vice-chairman of Bank of America sees a bright future for climate activity on the horizon as Joe Biden takes office in Washington.

Ms Finucane said Europe had done the rest of the world a favour by leading on climate legislation. But while “the US may have been slow to the dance” it would soon take charge, Ms Finucane told Gillian Tett in a recent interview.

After a recent conversation with John Kerry, Mr Biden’s incoming climate envoy, Ms Finucane is confident that the government will accelerate climate action not just through regulation, but also through market-based “motivation”.

“The US, certainly more than Europe . . . its economy is built on capitalism. And it’s unapologetic about capitalism. So as a result when you create a market we move quickly.”

The business community was ready, she said. The sheer growth of ESG investing is evidence of this: “From the $110tn assets that are being professionally managed, we are seeing 40 per cent of global financial assets with an ESG consideration. And that will only increase.”

“As soon as you make it a capital market opportunity, it takes off, especially in the US.” (Kristen Talman)

Europe’s green gems

© Bloomberg

In the early 2010s, the Faang stocks — a collection of high growth technology companies from Facebook to Google — captivated the stock market and became an acronym darling. Subsequently, China’s Bat companies (Baidu, Alibaba and Tencent) took the baton. 

Now, we have Gems — green energy majors — a group of European utilities poised for success thanks to the EU’s green deal, according to a report this month from Goldman Sachs. The companies include Iberdrola, Orsted, Enel, Solaria, SSE and others.

Historically, European utilities have provided consistent dividends but were not growing businesses. But now these companies “should enjoy unprecedented growth,” Goldman Sachs said. “The green energy majors are likely to deliver solid growth until 2030.”

The three biggest Gems (Iberdrola, Orsted and Enel) have outperformed Europe’s big three oil majors (Total, BP and Shell) by 300 per cent since 2010, Goldman Sachs said. And there is increasing evidence that the oil majors are scrambling to catch up.

Total on Monday said it acquired a $2.5bn stake in Adani Green Energy, an Indian energy provider with a 2.35-gigawatt solar portfolio. 

The success of the European utilities should be viewed enviously by the rest of the world. China, Japan and South Korea have all promised net-zero targets. With a serious capital expenditure programme such as the EU’s green deal, these countries could ignite an acronym darling of their own. (Patrick Temple-West)

Tips from Tamami

When life gives you lemons, make beer. That’s the takeaway for one Japanese brewer, anyway, after it discovered a typo printed on one of its products. 

Sapporo’s new, limited-edition beer will hit the shelves early next month in Japan, despite its misspelt “lagar” packaging. The company first announced that it would halt the launching of the product due to the mistake, but four business days later Sapporo reversed the decision because of an outpouring of requests for the company to not waste the product by throwing it away. The misspelt beer also saw support on social media.

Sapporo said that it had received many inquiries about what to do with the cancelled product and offers to buy the beer after the initial announcement. Sapporo added: “We accepted our customer’s voices sincerely. After a series of thorough discussions within the company, we decided to cancel the decision of halting.”

The incident demonstrates how consumers’ awareness of social issues, such as food waste, can change corporate behaviour. When the misspelling was first reported, the company called the misprint “embarrassing”. But, which is more embarrassing — a misspelling or wasting drinkable beer? The answer from the Japanese public was loud and clear.

Smart reads

  • Before investors take any ESG claims seriously, the accounting has to become a lot more serious, Karthik Ramanna, a professor at Oxford, writes in the FT. Currently, high-quality rules are virtually unheard of in ESG accounting standards. As the accounting authorities and the auditing firms push for more environmental and social reporting, this situation has to change.

  • Our colleague Jamie Powell at Alphaville has unveiled a real time electric vehicle bubble watch — a scorecard detailing the financial health of green car and battery makers as well as other companies in the EV ecosystem.

  • The US Chamber of Commerce, the largest pro-business lobby group, updated its stance on climate change on Tuesday. “The chamber supports a market-based approach to accelerate GHG [greenhouse gas] emissions reductions across the US economy,” the group said. Read its full statement here.

Further Reading

  • EU rules promise to reshape opaque world of sustainable investment (FTfm)

  • Outdated carbon credits from old wind and solar farms are threatening climate change efforts (The Conversation)

  • Central banks and climate change: all hot air (FT)

  • Occidental claims green push ‘does more than Tesla’ (FT)

  • Sustainable ETF assets jump but most funds fall short on UN goals (FT ETF Hub)

  • Yellen says she would appoint a senior climate official at Treasury (Reuters)



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Copper hits record high with demand expected to rise sharply

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Copper prices hit a record high on Friday in the latest leg of a broad rally across commodity markets sparked by the reopening of major economies and booming demand for minerals needed for the green energy transition.

Copper, used in everything from electric vehicles to washing machines, rose as much as 1.2 per cent to $10,232 a tonne, surpassing its previous peak set in 2011 at the height of a previous commodities boom.

The price has more than doubled from its pandemic lows in March last year due to voracious demand from China, the biggest consumer of the metal, and also investors looking to bet on a big uptick in the global economy and protect their portfolios against potential for rising inflation.

Government stimulus packages and the shift towards electrification to meet the goals of the Paris agreement on climate change are expected to fuel further demand for the metal, which analysts and industry executives believe could hit $15,000 a tonne by 2025.

“Capacity utilisation rates of our customers are the highest in a decade and that’s before stimulus money both in Europe and the US has started to flow,” said Kostas Bintas, head of copper trading at Trafigura, one of the world’s biggest independent commodity traders. “That will be significant.”

The US and Europe were becoming significant factors in the consumption of copper for the first time in decades, he added. “Before, it’s effectively been a China-only story. That is changing fast.”

Concerns about the long-term supply of copper due to lack of investment by large miners has also pushed up prices. There are only a few large projects in a development, while most of the world’s easily produced copper has already been mined.

“The current pipeline of projects likely to start producing in the next few years represents only 2.3 per cent of forecast mine supply,” said Daniel Haynes, analyst at banking group ANZ. “This is well down on previous cycles, including 2010-13 when it reached 12 per cent.”

The upward march of other raw materials is showing no signs of abating. Steelmaking ingredient iron ore traded above $200 a tonne for the first time as China returned to work after the Labour Day holidays in early May. 

In spite of production cuts in Tangshan and Handan, two key steelmaking cities in China, analysts expect output to remain solid over the next couple of quarters. 

“Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise with steel supply being restricted,” said Erik Hedborg, a principal analyst at CRU Group.

“Iron ore producers are enjoying exceptionally high margins as around two-thirds of seaborne supply only require prices of $50 a tonne to break even.”

Elsewhere, tin on Thursday rose above $30,000 a tonne for the first time in a decade before easing. Tin is used to make solder — the substance that binds circuit boards and wiring — and is benefiting from strong demand from the electronics industry, which has been lifted by growing numbers of stay-at-home workers.

US wood prices continued to race higher ahead of the peak in the US homebuilding season in the summer with lumber futures rising to a record high above $1,600 per 1,000 board feet length, up from $330 this time last year.

Agricultural commodities also continued to rally as a result of a particularly dry season in Brazil, concerns about drought in the US and Chinese demand. Strong increases in food prices have started to affect global consumers. Corn rose to a more than eight-year high of $7.68 this week, while coffee has risen almost 10 per cent since the start of month, hitting a four-year high of $1.54 a pound this week.



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Wall Street stocks waver as investors await US jobs data

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Wall Street stock markets wavered, with tech losses dragging down some indices, but remained close to record highs ahead of US jobs data on Friday that could pile pressure on the Federal Reserve to rethink its ultra-supportive monetary policies.

The S&P 500 was up 0.2 per cent in the afternoon in New York, hovering slightly below its all-time high achieved late last month. The peak was reached following a long rally supported by the Fed and other central banks unleashing trillions of dollars into financial markets in pandemic emergency spending programmes.

The technology-heavy Nasdaq Composite, however, which is stacked with growth companies sensitive to changing interest rate expectations, was down 0.5 per cent by the afternoon in New York, the fifth straight losing session for the index.

The divergence of the two indices followed patterns from earlier this year, when investors sold out of growth companies over fears of rising rates and poured into more cyclical plays. That trade has been more muted recently but could be coming back, said Nick Frelinghuysen, a portfolio manager at Chilton Trust.

“It’s been a bit more ambiguous . . . in terms of what regime is leading this market higher, is it quality and growth or is it value and cyclicals?” Frelinghuysen said. “We’re in a little bit of a wait-and-see mode right now.”

The 10-year Treasury yield, which rose rapidly earlier this year amid inflation fears, declined 0.05 percentage points to 1.56 per cent on Thursday.

In Europe, the Stoxx 600 closed down 0.2 per cent, hovering just below its record high reached in mid-April.

With the US economy close to recovering losses incurred during coronavirus shutdowns, economists expect the US government to report on Friday that the nation’s employers created 1m new jobs in April. Investors will scrutinise the non-farm payrolls report for clues about possible next moves by the Fed, which has said it will continue with its $120bn a month of bond purchases until the labour market recovers.

Up to 1.5m jobs would “not be enough for the Fed to shift”, analysts at Standard Chartered said. “Between 1.5m and 2m, there is likely to be uncertainty on Fed perceptions.”

Central bankers worldwide had a strong “communications challenge” around the eventual withdrawal of emergency monetary support measures, said Roger Lee, head of UK equity strategy at Investec.

“If it is orderly, then you can expect a gentle continuation of this year’s stock market rotation” from lockdown beneficiaries such as technology shares into economically sensitive businesses such as oil producers and banks, Lee said. “If it is disorderly, it will be a case of ‘sell what you can’.”

On Thursday the Bank of England upgraded its growth forecasts for the UK economy but stopped short of following Canada in scaling back its asset purchases.

The BoE maintained the size of its quantitative easing programme at £895bn, while also keeping its main interest rate on hold at a record low of 0.1 per cent. The British central bank added that while its asset purchases “could now be slowed somewhat” after it became the dominant buyer of UK government debt last year, “this operational decision should not be interpreted as a change in the stance of monetary policy”.

Sterling slipped 0.1 per cent against the dollar to $1.389.

The dollar, as measured against a basket of trading partners’ currencies, weakened 0.4 per cent. The euro gained 0.4 per cent to $1.206.

Brent crude fell 1.1 per cent to $68.17 a barrel.



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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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