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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)

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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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How traders might exploit quantum computing




If you had a sports almanac from the future as did Biff Tannen, the brutish bully of the time-travelling Back to the Future movie trilogy, how might you be inclined to take advantage of the foresight buried within it?

The obvious temptation would be to place sure bets in the market that make you rich. In Biff’s case, the wealth is then used to change the world into a dystopian reality in which he himself exists as “America’s greatest living hero”.

That sort of thing used to be considered fiction. But the dawn of so-called “supremacy” of quantum computing over conventional technology raises the possibility that one day soon someone might be able to effectively see into the future.

This is because quantum computers, when they become fully capable, are likely to be uniquely good at crunching probability scenarios. They are based on the mysterious world of quantum physics. Quantum bits or qubits are the basic units of information in quantum computers. Unlike the binary bits of traditional computing, which must be either zero or one, qubits can be both at the same time.

This gives quantum computers super powers that will allow them to solve probability-based tasks that would previously have been impossibly hard for conventional counterparts in realistic timeframes. If the problem at hand was a game of football, adding quantum computers to the mix is like allowing footballers to use their hands to get the ball into the net, say quantum experts.

It’s a prospect that poses an entire new set of challenges for market regulators and participants. If super quantum computers really can help institutions see into the future, the information advantage will be unprecedented.

It might also represent an entirely new type of front-running and market manipulation risk, one that regulators can’t necessarily even identify unless they too have a quantum computer at hand.

In Back to the Future, the almanac gave Biff a 60-year insight advantage over everyone else in his home 1955 timeline. With quantum computers, the edge might only be nanoseconds. But in the fast and furious world of high-frequency trading, that could be enough to sweep up.

The reassuring news — at least for now — is that we’re still at least five years away from quantum computers being powerful enough to compete with existing supercomputers on much simpler problems. Prediction might not even be their initial forte.

Goldman Sachs research recently noted, as and when quantum computers are rolled out, they are far more likely to be deployed on crunching options pricing conundrums or running Monte Carlo simulations that value existing portfolios than they are on predicting future movements of asset classes.

According to Tristan Fletcher, of artificial intelligence-forecasting start-up ChAI, that’s because prediction is ultimately about solving a very specific, deep problem by understanding the nuances of the data that matters.

“We are already at the limits of what any system that isn’t actually listening to Opec meetings and five-year plans is capable of,” he said. It’s not the complexity of the calculation that is the issue as much as the breadth of the data sample at hand. That means prediction wouldn’t necessarily get more accurate with quantum power.

The appeal to focus on “brute-force” problems such as optimising portfolio analysis or cracking cryptographic problems such as those that underpin bitcoin, the cryptocurrency, is far greater.

But this poses its own problems. If cryptographic systems can be broken, exceptionally sensitive data held across the financial system could be exposed and taken advantage of in unfair and market manipulative ways.

Rather than being able to better predict the market, the true pay off in the arms race might lie in achieving quantum-level encryption-breaking capability and using it subtly to seize the information that can get a trader ahead. Experts say the chances someone is already up to this, however, are low. If quantum supremacy had been achieved, the news of it would leak pretty quickly.

“We don’t know what we don’t know,” said Jan Goetz, chief executive of IQM, a quantum computing builder. “But generally the community is very small so everyone knows what’s going on. The status quo is clear.”

Nonetheless, the financial sector seems to be waking up to this quantum computing issue. Many banks and institutions are introducing teams to think exclusively about how quantum computing will affect their business. How far ahead they are on making their systems quantum secure is harder to say. It’s a secretive issue. For now, most agree, the threat level is low, not least because — as the hacking of the Colonial pipeline shows — system security is low enough to ensure far cheaper and simpler ways to hijack digital systems.

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Martin Gilbert returns to dealmaking fray with Saracen acquisition




Martin Gilbert, the acquisitive founder of Aberdeen Asset Management, has returned to the dealmaking fray and scooped up Edinburgh-based boutique Saracen Fund Managers through his new venture. 

AssetCo, the Aim-listed company of which Gilbert became chair in April, said on Friday it had agreed to buy Saracen for £2.75m. The deal marks the first step in its strategy to use its platform to make acquisitions in the asset and wealth management industries.

“We need to acquire a regulated entity,” said Gilbert, who established Aberdeen four decades ago and helped orchestrate the £11bn all-share merger between Standard Life Investments and Aberdeen Asset Management in 2017. “Saracen was typical of a good asset manager that had struggled to grow. That’s where we think we can help.” 

Saracen was founded in the late 1990s and has five full-time employees and three funds, which together manage about £120m in assets. In the financial year ended March 31, the group recorded turnover of £985,364 and a post-tax loss of £15,146.

David McCann, an analyst at Numis Securities, described Saracen as “a nice little business but obviously it’s very small”. He added: “It doesn’t move the needle for AssetCo, but it’s about what they do next. The expectation is that this is used as a building block for something much bigger.” 

Dealmaking is sweeping across the fragmented asset management industry. Gilbert, who stepped down from the board of Standard Life Aberdeen in December 2019 and is also chair of fintech Revolut, said AssetCo was “pretty ambitious, we’re looking at lots of opportunities”. 

“There are lots of opportunities for consolidation at all levels because of headwinds like the move to passive, fee compression, ESG and the move from public to private markets.

“We grew Aberdeen largely by organic growth and acquisitions,” he added. “That is our current strategy but at the boutique end of the market. I’ve told [Standard Life Aberdeen chief executive] Steve Bird ‘you’ve nothing to fear from us’.” 

AssetCo also owns a small stake in UK investment group River and Mercantile. Gilbert and Peter McKellar, who is also a director of AssetCo, will join the board of Saracen once the deal is completed.

Standard Life Aberdeen’s share price has tumbled about a third since the merger was struck.

The group last month cut its dividend by a third after full-year pre-tax profit fell almost 17 per cent and investors yanked money from its funds. It was also widely mocked online after announcing it would change its name to Abrdn.

Gilbert said: “The merger was obviously going to be difficult but the business is not alone in having to look at overheads because of the headwinds the industry is facing. It has the strongest balance sheet in the sector.” 

He added he was “supportive” of the rebrand: “That’s me being diplomatic.”

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Wall Street stocks bounce back after inflation scare




Wall Street stocks went into recovery mode on Thursday, after being pushed lower for three consecutive sessions by fears that central banks will withdraw crisis-era support following a surge in inflation.

The S&P 500 index was up 1 per cent at lunchtime in New York, after falling 2.1 per cent on Wednesday in its worst one-day performance since February. The technology-focused Nasdaq Composite rose 0.6 per cent, having neared correction territory on Wednesday when it closed almost 8 per cent below its record high in April.

US government debt rallied, with the yield on the benchmark 10-year Treasury sliding 0.03 percentage points to 1.67 per cent.

The S&P 500 hit an all-time high on Friday, fuelled by optimism about a global recovery supported by central banks keeping monetary policies loose. The blue-chip benchmark then lost 4 per cent over three sessions as worries about inflation rippled through markets.

Data released on Wednesday showed US inflation rose 4.2 per cent year on year in April, with prices rising at a faster pace than economists had forecast. This increased speculation about the Federal Reserve reducing its $120bn of monthly bond purchases has helped lower borrowing costs and prop up equity valuations.

Fed vice-chair Richard Clarida said this week, however, that “transitory” factors related to industry shutdowns last year had pushed price rises above the central bank’s 2 per cent target but the economy remained “a long way from our goals”.

Analysts warned that market volatility would continue as investors swung from believing the Fed to fretting that its policymakers would act too late to combat inflation and then tighten financial conditions rapidly.

Line chart of S&P 500 index showing Wall Street benchmark on track to snap three-session losing streak

“We are at such an inflection point that volatility in markets is likely to be quite persistent,” said Sonja Laud, chief investment officer at Legal & General Investment Management. “Any chance of a change from the story of constantly low interest rates is going to be unsettling.”

The Vix, an index of expected volatility on the S&P 500 known as Wall Street’s “fear gauge”, is running at around its highest level since early March.

“Markets are volatile because they’re not sure which sort of inflation we have at present, or what, if anything, the Federal Reserve may do to bring inflation down,” said Nicholas Colas of research house DataTrek.

Mark Haefele, chief investment officer at UBS wealth management, said the market jitters also presented an opening for traders.

“Given our view that the spike in inflation will prove transitory, and that the equity rally has further to run, investors can use elevated volatility to build long-term exposure,” he said.

In Europe, the Stoxx 600 index ended the session 0.1 per cent lower, paring a loss of 1.7 per cent earlier in the session.

International oil benchmark Brent crude dropped 3.8 per cent to $66.68 a barrel as the Colonial pipeline in the US resumed operations after being shut down last Friday by a cyber attack.

The dollar index, which measures the greenback against major currencies, rose 0.1 per cent.

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