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IMF chief Georgieva on a mission to make green accounting mainstream



Good morning from New York. If you are anything like me, it has been hard to tear your eyes away from the “meme stonks” story all week.

Markets editor Katie Martin had a really smart take on the issue. She makes an especially good point here:

“In theory this should be the sort of thing that the wholesale financial industry applauds. Many a World Economic Forum session in Davos has agonised over how to enhance financial inclusion, to help those less fortunate through the gifts of the financial markets.” 

As Katie notes, it would be misguided to laugh this story off or assume it is a weird anomaly. Nor should we assume this has nothing to do with ESG.

The saga is not (just) about GameStop, equity bubbles or short squeezes; the real story is that this should be a wake-up call for elites about people who are really angry about inequality (and rightfully so).

Think about it. For huge portions of the American population, especially young people with mountains of student debt and dismal career prospects, the wounds of 2008 never healed. The unwillingness of their elders to take climate change seriously has not helped matters, and few trust Wall Street (no matter what financiers say about ESG). Go watch the Joker video linked in Katie’s column to see what I mean.

So the best way to make sense of Redditors pumping GameStop is to recall the online supporters who backed Donald Trump “for the lulz” in the early days of his campaign. People left behind by capitalism are lashing out because they feel they have been screwed over by a rigged system.

As they see it: If this ends up being their big break and they get rich, great. If they stick it to some of the elites (and maybe even burn down the whole system in the process), even better. The fact that trading platforms such as Robinhood cut them off for doing what they see Wall Street traders do all the time, while big investors still reap the gains, will only add fuel to this fire.

We won’t pretend to know how this ends. But the issue for anyone thinking about “S” in ESG is this: how do we address the undercurrent of rage on display? It isn’t going away. (Billy Nauman)

Moral Money

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One on one with the IMF’s Kristalina Georgieva

The mighty IMF is not renowned for brainstorming (much) with company auditors; it mostly deals with economists. But as the battle to find innovative ways to fight climate change heats up — and puts pressure on company auditors — these worlds are colliding in some unusual ways. Kristalina Georgieva, IMF managing director, sat down with Moral Money to explain how and why, pitching some of the questions that MM readers submitted in advance (thank you).

Moral Money: What exactly is the IMF doing about the issue of how to measure climate change? Are you getting involved with the audit profession? 

Georgieva: The most important role the IMF plays, as an institution, is making sure that data is accurate and measurements are compatible [around the world]. We believe the best way to advance green accounting is to make it an integral part of mainstream measurement. So we are working on taxonomies, standardised reporting, and integrating this reporting into our financial sector assessments process (FSAP, the IMF’s regular review of financial stability). We are also building a new data initiative, so that you can overlay growth and climate emissions and then see how policies are impacted.

We think it is hugely important to integrate climate-related risks in our FSAP and we will provide these systems to auditing authorities among our members, so that rather than creating a parallel universe of auditing, this is actually integrated into the work of auditing institutions. We will be moving our engagement with auditing institutions as we build up that. There has been a lot of progress in creating compatible [global] standards, but they are still all over the place — we don’t yet have a global system of [green] accounts that is entirely credible. This is why a mainstream institution like the IMF is so important.

MM: Will you work with audit companies to do that?

Yes. We already have interactions with the auditing community because they are an important foundation in securing financial stability, macroeconomic stability, and [expanding] engagements is a logical step and a very significant step — and one we are [now] undertaking. We want to put this work on a very sound foundation of data standards, disclosure, compatibility and then verification.

MM: Will you be pushing for carbon price to be embedded in national accounts and company audits? And if so, what kind of carbon price will you be looking at? 

Yes. When [our last] report was written it basically said at that time [in 2018] that the carbon price is at $2 a tonne, but it has to get to $75 if we are to have a chance to meet our Paris agreement aspirations. We are now expanding this work to 150 countries, so going from a global overview down to country level. Fortunately, we are seeing a pick-up on the issue of carbon price. The World Bank has this database that shows that we now have over 22 per cent of CO2 emissions being covered [with carbon] prices. And if you’re an optimist, it’s a good thing because it has gone up quite significantly over a short period of time. But we still have another 78 per cent [to go] and without carbon pricing we cannot reach zero-carbon emissions by 2050. It just cannot happen. We need this signal. We intend to update [this research] next month. 

There is also the issue of implicit harmful energy subsidies. Our team did an assessment [of those subsidies] and for 2017 it is a staggering number of $5.2tn, of which only $300bn is the direct subsidy. Buying fuel from source and selling it cheaper is [just] $300bn! I was shocked when I saw this. Shocked. So if we want to eliminate harmful subsidies, through carbon price, we need to see [and address] the implicit problem.

MM: When do you expect financial markets to start properly pricing in the issues of transition? 

MM: It is clearly not priced in yet. The fact that we are only pricing for 22 per cent shows that. But we cannot [have] the massive shock of a jump in the global price of carbon suddenly, because then we might create a very significant problem for the economy that suppresses growth to a point that [undermines] the chance of transition. Providing forward guidance on carbon price over the next decade is critically important, and by the end of this decade, we should have a carbon price coming to the level [we need]. Many climate economists say we don’t have this time, we have to move much faster. But we believe that we should never think of carbon prices as one single instrument, but instead think of the carbon price combined with green investment [as the policy]. We need just transition as a win-win-win for people and jobs and the planet.

MM: Do you support what the Biden administration is doing?

We support it wholeheartedly. It is very impressive that among the very first actions of the new administration was to return to the Paris agreement. We are seeing a very clear policy direction, in terms of greening the recovery, shifting gear towards low carbon, and the return of the concept of the forward guidance on the carbon price. That is very welcome, [particularly] with Janet Yellen [the new Treasury secretary] having co-authored a paper on carbon prices.

MM: Should SEC join forces with the European Commission on a green taxonomy?

It would be highly desirable. The commission’s taxonomy is very sophisticated [and] it may be difficult for less sophisticated policy to catch up, so we have to think about ways in which we build bridges. We aim for a high standard, but we recognise that there are different paths towards this high standard in different countries. The commission may be a little too green for some. But I personally believe it is great to have a high standard — for some countries this is the direction to travel, but not the end destination.

Boards put more money where their CEO’s mouth is

We told you in 2019 that a Conference Board study had found that just 71 US companies in the Russell 3000 tied any part of their executives’ 2019 pay to whether they hit various environmental, social or governance targets. 

That raised obvious questions about whether business leaders were as focused on ESG as most claim to be, but an update of the study suggests that boards are increasingly factoring ESG into compensation. 

When the Conference Board and its data-mining partner ESGAUGE looked at the 2020 figures, they found 604 companies using such metrics. Some of that jump can be attributed to improved disclosure, ESGAUGE’s Paul Hodgson said, but he estimated that the underlying increase was still about 675 per cent.

There is still huge variation in what counts as an ESG metric, with targets cropping up for everything from disclosing political donations to reducing workforce injury rates. In most cases, too, just a fraction of executives’ total pay is at risk if they miss those goals. 

But there is reason to expect more companies to make ESG part of their bonus schemes: governance software group Diligent Institute this week reported that 40 per cent of directors said their board was either already tying pay to diversity, equity and inclusion targets or planned to do so. 

Just 25 per cent said the same about environmental metrics, though. That’s worth remembering as more CEOs tout their net-zero plans. (Andrew Edgecliffe-Johnson)

Why gender diversity is good for corporate climate accountability

Companies are increasingly being pushed by regulators and asset managers to disclose more information about their global warming contributions. Now, new research suggests that companies dominated by old, white men have more catching up to do than their peers.

Arabesque S-Ray, a sustainable research and financial metrics firm, found that companies with higher gender parity were substantially more likely to disclose greenhouse gas emissions data. Of the world’s top 2,800 global public corporations, 22 per cent of those in the least-diverse category did not release their emissions data to the public, compared with just 15 per cent for the most diverse firms.

The research provides further evidence supporting the need for gender diversity at companies.

With Nasdaq’s latest diversity proposal, which calls on companies to have at least two diverse board members, up for approval by the US Securities and Exchange Commission, evidence like this will certainly help its chances of passing. (Kristen Talman)

Smart read

Further reading

  • UK pension schemes face new climate risk reporting rules (FT)

  • Carney task force confronts concerns over carbon credits market (FT)

  • An Iron Man goes Green: Robert Downey Jr. launches ESG-focused venture capital funds (Fortune)

  • Trump Rule Starts to Strip ESG From Plans (Ignites)

  • ESG Impact Is Hard to Measure — But It’s Not Impossible (HBR)

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




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




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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What we’ve learned from the Texas freeze




One thing to start: While the freeze in Texas caused havoc for most, some companies have reaped big rewards. Australia’s Macquarie Group said yesterday full-year profits could rise by up to 10 per cent as a result of a surge in demand for its natural gas shipping business.

Welcome to today’s newsletter, where Texas remains in focus. In our first item, Derek Brower asks if oil’s modest price rise in reaction to last week’s events signals that the rally will soon run out of steam.

Further rises, after all, will only tempt America’s shale producers to dive into growth mode. For our second item, Justin Jacobs speaks to Devon boss Rick Muncrief about when the taps will be turned back on.

Elsewhere we round up the key reading on the Texas fallout from the FT and beyond; ask how the appointment of a general to head up Brazil’s Petrobras has gone down in the markets (hint: not well) and bring you the latest on the proxy battle to green ExxonMobil.

Thanks for reading. Please get in touch at You can sign up for the newsletter here. — Myles

Is the oil rally nearing the end of the road?

Texas’s cold snap last week lifted oil prices — yet still brought a warning for the market’s bulls. The Permian Basin, the world’s most prolific oil-producing region, froze up. US production fell by 2m barrels a day, according to Wood Mackenzie. Kpler, a data provider, estimates the country’s total output in February will be down by 1m b/d.

By Tuesday morning, after it emerged that producers would take weeks to fully restore flows, US oil futures were trading for around $62.50 per barrel, just $2.50 or so more than its price on the eve of the snowstorm. Hardly an Abqaiq-style oil-price leap.

One explanation is that huge volumes of refining capacity are offline too, removing a big source of demand and neutralising some of the supply disruption. But the market’s relative calm also begs questions about how resilient oil’s rally is — especially with an Opec meeting next week, when the cartel must decide how much, if any, of its 7m barrels a day or more of offline supply it will begin restoring.

Many analysts remain bullish. Goldman Sachs, Wall Street’s most influential oil-price forecaster, upped its expectations by $10 a barrel this week. It now expects Brent, which was above $66 on Tuesday morning, to hit $75 in the third quarter.

Line chart of US crude production showing The big Texan freeze

Yet the bull case increasingly depends on many things coming true at once, points out Neil Atkinson, an independent analyst who was formerly head of oil markets at the International Energy Agency. Sanctioned Iranian barrels must remain offline; US supply must remain constrained; and economies must rebound quickly. Above all, Opec must keep cutting.

Current prices are in a “sweet spot” for the cartel, said Atkinson. But any further price rises could prompt a response from shale (see below) and test Opec’s discipline, prompting a response from its biggest producer.

“Over the years, Saudi Arabia has shown its willingness to shift policy and maximise output if compliance falls and/or if the perceived costs of co-operation exceed the perceived benefits,” wrote Bassam Fattouh, head of the Oxford Institute for Energy Studies and a Saudi oil-policy expert, in an article explaining the kingdom’s recent decision unilaterally to deepen its owns cuts.

“Thus, Saudi Arabia can easily swing in the opposite direction in response to low compliance and given the relatively low level of Saudi production, the size of the upward swing could be quite substantial, as was the case in April 2020.”

(Derek Brower)

American oil market eyes production boost

After the oil-price surge of recent weeks, the big question hanging over the US shale patch, and broader oil market, is when American producers will start loosening the purse strings and opening up the taps.

That point might now be visible on the horizon. “If we do see commodity prices rapidly increase back to $70 or $80 a barrel, you’re going to be generating a lot of free cash and that gives you a lot of optionality on things you could think about,” Rick Muncrief, chief executive of Devon Energy, a major Permian producer, told ES last week.

For now, Muncrief’s company is keeping a 5 per cent cap on production growth and promising a windfall for shareholders if prices keep climbing. “First things first, we want to make sure we stay disciplined,” Muncrief said.

But his comments to ES point to when companies might ditch the capital discipline mantra and become more vocal about their ability to both accelerate output growth and keep cash flowing to shareholders.

Robert Kaplan, head of the Dallas Fed, also talked about the potential for oil producers to pivot away from capital discipline as prices rise. “I’ve learned sometimes if prices get high enough mindsets can change,” he told an International Energy Forum conference yesterday.

“To get back to 13m barrels a day, yes, you would need a change in mindset. Probably spurred by higher prices. Can I predict whether that will or won’t happen? No I can’t predict it, but I think we should be on watch for it,” Kaplan said.

We will get more of an idea of the mood in the shale patch later this week, after Pioneer Natural Resources, EOG Resources, Diamondback Energy, Occidental Petroleum and Apache have all reported earnings.

Expect a lot of talk about when producers might start getting back into the growth game. (Justin Jacobs)

What to read on the Texas freeze

A weeklong catastrophe left millions without power and heat amid some of the coldest weather the state has seen in a century.

The failure of the state’s electric grid caused immense human suffering, financial pain for consumers (and gain for some energy companies), and has spawned a wide-ranging conversation about where things went wrong and how to prevent it from happening again. Here are the key pieces to read:

  1. Start with Bloomberg’s in-depth account of the early hours of Monday morning, when the state’s grid operator, the Electric Reliability Council of Texas, was forced to plunge millions into darkness as power generation seized up.

  2. The International Energy Agency put the pieces together here in a broad overview of how the grid broke down — and points out that the lessons from Texas should be learned far and wide, especially as the world becomes increasingly electrified and vulnerable to disruptions.

  3. Gregory Meyer and I covered the financial fallout from the storm, including the story of one family in Burleson, Texas, which saw their electric bill suddenly spike to more than $8,000. We also explored who the winners and losers were in a $50bn bonanza of power trading.

  4. Some companies that cashed in on the crisis are being accused of profiteering. The gas producer Comstock Resources said surging natural gas prices were like “hitting the jackpot”.

  5. The crisis sparked an inevitable debate pitting renewables advocates against fossil fuel backers. This green versus brown debate generated much more heat than light. But the issue of intermittent renewables’ reliability is a critical one. The FT’s editorial board argued that frozen wind turbines were hardly the main cause of the grid’s collapse as the natural gas system, which has the largest share of the power market, also failed.

  6. A less sexy but probably more important issue is why so much of Texas’ energy system was so easily felled by temperatures that much of the rest of the country sees on a regular basis. This excellent Texas Tribune story looks at why “winterising” power plants, pipelines and wells might not be as easy or cheap as state officials hope.

  7. Finally, there is a fascinating debate over the role climate change did or did not play in the Arctic blast. My colleagues Leslie Hook and Steven Bernard have a nice explanation (and graphic) of how the jet stream bent south, covering Texas in freezing arctic air.

(Justin Jacobs)

Data Drill

Shares in Petrobras fell off a cliff yesterday as the market absorbed Brazilian president Jair Bolsonaro’s decision to oust the state oil group’s chief executive in favour of a general.

Bolsonaro had blamed Petrobras’s erstwhile boss Roberto Castello Branco for recent rises in petrol and diesel prices, which had provoked the ire of the country’s truck drivers.

Strikes over fuel costs in 2018 paralysed Brazil’s economy and sapped support for the government, helping secure Bolsonaro’s election to office.

Line chart of Share price (Brazilian reals) showing Petrobras shares plunge after Bolsonaro ousts CEO

Power Points


The proxy battle at ExxonMobil rumbles on, with activist group Engine No.1 blasting the oil major’s assertion that its carbon-cutting plan was in line with the Paris accords.

Exxon has stuck to its guns as an oil producer even as rivals like BP and Shell lay out plans to shift into greener sources of energy and reduce fossil fuel output. But it has made concessions in the face of investor pressure, including pledges to cut emissions intensity by 2025.

This month the company said that its emissions targets were “projected to be consistent with the goals of the Paris agreement” and would position it to be “an industry leader in greenhouse gas performance by 2030”.

Engine No.1, which wants to install four new energy-transition-focused directors on Exxon’s board, was having none of it. In a letter to the board yesterday, it wrote:

“None of the company’s new claims change its long-term trajectory which would grow total emissions for decades to come. This is not consistent with, but rather runs directly counter to the goals of the Paris agreement.”

Exxon did not respond to a request for comment.

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