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What you may have missed in Joe Biden’s climate executive orders

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A (very) happy Friday, readers. We have a question for you: What is the best way to fix climate change? Gazillions of ideas are circulating in Washington right now, amid Biden mania. More will circulate next week when the World Economic Forum holds a virtual, not-in-Davos summit. But our top tip is to keep a very close eye on carbon pricing, and accounting systems. Read on:

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Click here if you’d like to receive Moral Money every Wednesday and Friday. And we want to hear from you. Send any thoughts to moralmoneyreply@ft.com or email me at gillian.tett@ft.com

Biden executive order boosts carbon pricing prospects

The biggest news out of Washington this week for Moral Money readers was Joe Biden’s move to rejoin the Paris climate agreement. But there were a number of other very important climate-related actions included in his executive orders that did not get as many headlines.

One noteworthy development is Mr Biden’s plan to re-establish a working group that determines the “social cost of carbon” and other greenhouse gas emissions. This is pretty geeky stuff, but it is worth paying attention because it could soon have a big impact on government policy and the world of sustainable finance.

Put simply, this group, which was disbanded under the Trump administration, is responsible for pricing the damage created by carbon and other greenhouse gas emissions. The numbers the working group comes up with are then used in cost benefit analyses done by government agencies considering new regulation or making new investments.

The reason this is so important is because the government’s internal carbon price is about to rise. Dramatically.

In 2017, the Trump administration unleashed a “surgical strike” on the way these metrics are calculated, said Richard Newell, president of Resources for the Future, an environmental economics think-tank. By using a higher “discount rate” (we’ll explain more in a second) in their calculations and measuring damage only to the US, rather than the world, Trump officials slashed the social cost of carbon from about $42 per tonne to below $6 per tonne.

If the reformed task force goes back to using the same methods it did under President Obama, Mr Newell said that the price would jump up to about $53 per tonne. However, he suspects it may go much higher, thanks to another executive order that calls for the government to modernise its regulatory review process.

As we mentioned above, one of the factors used in these calculations is a “discount rate”, which basically represents the cost of us taking action now to save future generations from inheriting this mess (go deeper with the London School of Economics’ explanation here.)

Mr Newell predicts that the Biden administration could adjust the discount rate to a level that would put the social cost of carbon somewhere around $100 per tonne.

This figure is noteworthy because it would mirror the UN Global Compact’s recommended carbon price for companies. And while corporations typically measure carbon prices differently to the government (by focusing on what it would cost to cut emissions, rather than the monetary value of the damage they create), the numbers being in sync would indicate that they were approaching the right level.

So why does this matter?

This metric is used in setting energy policy such as fuel economy guidelines for automobiles and power plant regulations. It will assuredly lead to much stricter standards.

And given the growing recognition of how “physical climate risks” such as flooding and wildfires affect investors and companies, it could also be factored into financial regulation, according to Mr Newell.

Even though prioritising the social cost of carbon is not meant to establish a baseline for a carbon tax scheme, there are positive knock-on effects for nationwide carbon pricing advocates.

“This is a positive indication for carbon prices,” said Greg Bertelsen, chief executive of the Climate Leadership Council, a bipartisan group advocating for a carbon fee that would fund dividend payments to US households. “We need all sectors of the economy to be working together to find the most readily available emission reductions. And that’s what that price signal provides you.”

The CLC (and others calling for carbon pricing) also received a boost from the influential conservative business group, the US Chamber of Commerce, which officially changed its stance on climate this week and indicated that it would not fight to block a carbon tax.

The fact that Janet Yellen, Mr Biden’s pick for Treasury secretary, is a founding member of the CLC, probably helps its prospects.

Mr Biden’s executive order calls for the working group to provide its final numbers on the social costs of greenhouse gases by January 2022, but has also mandated that they establish an interim number within 30 days, so we will soon see where this is headed. Watch this space for more. (Billy Nauman)

The end is nigh: Investors push Johnson for steps to eliminate petrol cars 

© Bloomberg

You know the co-worker who gets the attention of the bosses with a big idea pitch — without concrete plans on how to get there? That’s where Prime Minister Boris Johnson is at right now with his November announcement to ban the sales of petrol cars by 2030.

Investors are now circling back with the Johnson government for details about the steps that need to be taken to reach the goal. The UN Principles for Responsible Investment, as well as the Brunel Pension Partnership and BT Pension Scheme Management among others, on Thursday published two letters to Mr Johnson and the Department for Transport, calling for more information. 

The City’s financial prowess has a big role to play in achieving the 2030 goal, the letters said. With public budgets under stress, “now is the time to utilise the City of London and private finance to help deliver the ambitious decarbonisation needed”. These avenues include dedicated investment funds, the Charging Infrastructure Investment Fund and the new National Infrastructure Bank.

Additionally, consumers need incentives to buy zero-emission vehicles today, although price parity with petrol cars is not expected until the middle of the decade.

Tax incentives, subsidies and grants are needed “to ensure consumers are not penalised for making sustainable choices”, the investors said.

The Johnson administration should also consider gradually raising the mandate for sales of zero-emission vehicles. This approach should ease the car industry’s transition to total clean car sales.

Global government zeal for clean transport has helped inflate a burgeoning bubble in electric vehicles. Remember to keep track of the frothiness with Alphaville’s EV bubble watcher. (Patrick Temple-West)

‘It was worse than I thought’: Boards lack ESG experience

As we at Moral Money know all too well, environmental, social and governance buzzwords are all the rage these days. On earnings calls from September to December 2020, FactSet found the highest number of ESG mentions on earnings calls going back at least eight years.

But new research has found the vast majority of corporate ESG enthusiasm is pure lip service. Just 6 per cent of 1,188 board directors at Fortune 100 companies have environmental or governance experience, according to research published this month by New York University professor Tensie Whelan. Very few directors had experience with ethics, transparency, corruption and other material good governance issues, she said. Board directors’ environmental experience tended to stem from previous work in energy or conservation — experience that can be a stretch to link to environmentalism.

There were, however, a handful of Fortune 100 companies with particularly strong ESG board experience. Dow Chemical has three board members with environmental credentials. Amazon recently strengthened its board by adding Indra Nooyi (pictured), former chief executive of PepsiCo. During her tenure, the company focused extensively on ESG risks, Ms Whelan said.

© Bloomberg

But other companies have some catching up to do. Among them, Insurance provider Liberty Mutual has no board members with climate credentials and drugs distributor McKesson — which has been sued for alleged involvement in the opioids crisis — has no board members with ESG credentials on its board.

“I was particularly surprised about the lack of environmental and governance credentials” for the companies’ board members, Ms Whelan told Moral Money. “It was worse than I thought it was going to be.”

One solution could be to tie executive compensation to ESG goals. Companies have started doing this in piecemeal approaches that do not actually change corporate behaviour.

“It tends to focus people when their pay is tied to delivering,” she said. “And if it isn’t, then it sends a signal from the top of the organisation that this is actually not important.” (Patrick Temple-West)

Can emerging markets leapfrog the west?

With the inauguration of US President Joe Biden, much of the world is looking to the US for ambitious climate action.

But observers would be smart to look further east. In a conversation with Moral Money’s Gillian Tett, Nadeem Babar, Pakistan’s special assistant to the prime minister on petroleum and chairman of the task force on energy reforms, said that by 2025 more than 50 per cent of electricity in the country would come from renewable resources.

“We are very comfortable that we can meet these targets,” Mr Babar said. “The targets are ambitious, but we can do it . . . [despite] Pakistan being a developing country.”

Forty per cent of Pakistan’s imports are energy-related, namely fossil fuels from Saudi Arabia. These are more expensive than energy from domestic hydroelectric power or solar, which could give Pakistan more incentive to “leapfrog” western countries, he said. (Kristen Talman)

Chart of the day

Line chart of Electricity generation by source, % showing Coal fell, renewables rose and natural gas reigned

Despite intense favouritism for the coal industry, former president Donald Trump’s efforts failed to deliver. The coal revival never arrived. Ultra-cheap natural gas and surging renewables dominated the electricity sector. Check out the analysis of the US energy landscape for the new Biden administration from our colleagues on Energy Source.

Smart read

Coal’s liability as a stranded asset gets clearer every day. On Thursday, the mining company Vale said it had struck a deal to buy minority stakes in the Moatize coal complex and a related port and rail project from Japanese trading house Mitsui for an eyebrow-raising sum: $1. Please read the FT’s Neil Hume’s article here.

Further reading

  • UK risks longer dependency on fossil fuels without nuclear (FT)

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

  • VW hit with fines for missing strict EU emissions targets (FT)

  • Grey areas in the green revolution (FT)

  • Biden Energy Nominee Holds Energy Investments, Including Interest In Electric Vehicle Company Set To Go Public This Year (Forbes)

  • I Grew Up Witnessing Forced Labor. US. Companies Must Step Up (NY Times)





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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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This thread is closed to comments due to a history of posts on this subject that breach FT user guidelines



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US stocks make gains on Fed message of patience over monetary policy

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Stocks on Wall Street reversed earlier losses after Jay Powell, the Federal Reserve chairman, reiterated the central bank’s desire to stick with accommodative policies during his second day of testimony to Congress.

The tech-heavy Nasdaq Composite ended the day up 1 per cent, having fallen almost 1 per cent at the opening bell. The S&P 500 climbed 1.1 per cent, marking the blue-chip benchmark’s second consecutive rise after five sessions of back-to-back losses.

A morning sell-off in US Treasuries also faded, with the yield on the 10-year note having climbed as much as 0.07 percentage points to slightly less than 1.43 per cent, its highest level since February last year, before settling back to 1.37 per cent.

Treasuries have been hit by expectations that US president Joe Biden’s $1.9tn stimulus plan will stoke inflation, which erodes the cash value of the debt instruments’ interest payments. However, the more recent rise in yields has also been accompanied by a rise in real rates, which are more indicative of the return investors make after inflation and signal an improving growth outlook for the economy.

Higher yields, which move inversely to the price of the security, also knock-on to equity valuations by affecting the price-to-earnings multiples investors are willing to pay for companies’ shares. A higher yield, analysts say, makes fast-growth companies whose earnings represent a slim proportion of their stock market value less attractive in comparison.

Shares in the 100 largest companies on the Nasdaq are valued at a multiple of 37 times current earnings, against 17 times for the global FTSE All-World index of developed market equities.

“When bonds yield close to zero, you are not losing out by investing in those companies whose cash flows could be years into the future,” said Nick Nelson, head of European equity strategy at UBS. “[But] as bond yields start to rise, that cost of waiting [for companies’ earnings growth] increases.”

Earlier on Wednesday, investors’ retreat from growth stocks rippled into Asia. Hong Kong’s Hang Seng index sank 3 per cent, its worst daily performance in nine months. Chinese investors using market link-ups with bourses in Shanghai and Shenzhen dumped Hong Kong-listed shares at a record pace, selling a net HK$20bn ($2.6bn) on Wednesday. China’s CSI 300 index fell 2.6 per cent. Japan’s Topix slipped 1.8 per cent, dragged down by tech stocks.

Column chart of Hang Seng index, daily % change showing worst day for Hong Kong stocks in 9 months

European equity markets closed higher, with the Stoxx 600 regional index rising 0.5 per cent and London’s FTSE 100 index up 0.5 per cent. UBS’s Nelson said European equities were less vulnerable to rising yields because European stocks generally traded at lower valuations than in Asia and the US. “We have fewer big technology companies here.”

While the bond market ructions have unsettled many equity investors, some believe this should not affect stock markets because the inflation expectations that have driven the Treasury sell-off are linked to bets of a global recovery.

“Rising bond yields and rising inflation from low levels provide a historically attractive environment for equities,” said Patrik Lang, head of equity strategy and research at Julius Baer. Traditional businesses whose fortunes are linked to economic growth, such as “industrials, materials and especially financials”, should do better in a reflationary environment than tech stocks, added Lang.



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Fed needs to ignore ‘taper tantrums’ and let longer rates rise

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The writer is chief executive officer and chief investment officer of Richard Bernstein Advisors 

The Ferber Method, a sleep training technique, teaches babies to self-soothe and fall asleep on their own. It’s as much a training technique for new parents to ignore their baby’s crying as it is for the child to learn to cope by themself. 

The US Federal Reserve should consider Ferberising bond investors and ignore future “taper tantrums” like the market disruption that occurred when the central bank signalled tighter monetary policy in 2013. The long-term health and competitiveness of the US economy may depend on bond investors’ self-soothing ability to cope with reality.

The slope of the yield curve is a simple model of the profitability of lending. Banks pay short-term rates on deposits and other sources of funds and receive longer-term rates by issuing mortgages, corporate loans, and other lending agreements.

A steeper curve, therefore, is a simple measure of better bank profit margins, and has in past cycles spurred greater willingness to lend. Historically, the Fed’s Survey of Senior Bank Lending Officers shows banks have been more willing to make loans to the real economy when the yield curve has been steeper.

A chart showing how banks have been more willing to lend with a steep yield curve. As the slope on the US treasuries  10-year-less-2-year yield curve has steepened, so the net percentage of banks reporting tighter lending standards has fallen

With that simple model of bank profits in mind, textbooks highlight the Fed’s control of short-term interest rates as a tool to control lending. The Fed reduces banks’ cost of funding and stimulates lending when it lowers interest rates. But it increases funding rates and curtails lending when it raises short-term rates. Coupling lower short-term rates with a steeper yield curve can be a powerful fillip to bank lending. 

However, policies in this cycle have been unique. As US short-term interest rates are near zero, the Fed has attempted to further stimulate the economy by buying longer-dated bonds and lowering long-term interest rates. Those actions have indeed lowered long-term borrowing costs in the economy, but banks’ willingness to lend has been constrained because lending margins have been narrow and risk premiums small.

Banks in past cycles might have been willing to lend despite a relatively flat yield curve because they could enhance narrow lending margins by using leverage. However, regulations after the financial crisis now limit their ability to use leverage.

This policy and regulatory mix has fuelled some of the growth in private lending. Private lenders are not subject to regulated leverage constraints and can accordingly lend profitably despite a flat curve. The growth in private lending effectively reflects an unintended disintermediation of the traditional banking system. This has meant liquidity destined for the real economy has largely been trapped in the financial economy.

The yield curve has started to steepen, and the Fed should freely allow long-term interest rates to increase for monetary policies to benefit the real economy more fully. Allowing long-term rates to increase would not only begin to restrain financial speculation as risk-free rates rise, but could simultaneously foster bank lending to the real economy. 

Thus, the need for the Fed to Ferberise bond investors. Banks’ willingness to lend is starting to improve as the curve begins to steepen, but some economists are suggesting the central bank should continue its current strategy of lower long-term interest rates because of the potential for a disruptive “taper tantrum” by bond investors. The Fed needs to ignore investors’ tantrums and allow them to self-soothe.

The investment implications of the Fed allowing longer-term interest rates to rise seem clear. Much of the speculation within the US markets is in assets such as venture capital, special purpose acquisition vehicles, technology stocks and cryptocurrencies. These are “long-duration” investments that have longer-time horizons factored into their valuations. They underperform when longer-term rates rise because investors demand higher returns over time. Capital would be likely to be redistributed to more tangible productive assets.

Investors and policymakers should be concerned that monetary policy is fuelling speculation rather than supporting the lending facilities needed to rebuild the US’s capital stock and keep the country’s economy competitive.

Like a new parent to a baby, the Fed should not rush to coddle bond investors’ tantrums and should let the financial markets soothe themselves. Short-term financial market volatility might cause some sleepless nights, but the Fed could unleash the lending capacity of the traditional banking system by letting the yield curve steepen further.



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