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Half of financial institutions fail to conduct climate analysis, CDP says



Greetings from New York, where I have just done something remarkable: I stepped out outside without wearing a face mask. This is now officially permitted by the Centers for Disease Control for double-vaccinated adults, at least in non-crowded spaces. A light is glimmering in the tunnel.

And when the Moral Money team held a European summit this week, one message was clear: changes in corporate behaviour due to Covid-19 will outlast the pandemic. Among the examples:

  • Audrey Choi, head of sustainability at Morgan Stanley, stressed that during the pandemic it became widely understood that ESG investing could deliver high returns.

  • Jonathan Woetzel, director of the McKinsey Global Institute, stressed that the vaccine saga convinced us all that governments needed to work with the corporate world — and companies collaborate, not compete, around public goods.

Social expectations, in other words, have changed — and if this week’s news is any indication they will keep changing as expectations about companies’ role in climate change rise. Read on. (Gillian Tett)

Banks are disclosing little about their climate risks

In recent months, global financial companies have trumpeted their unprecedented net-zero carbon emission pledges — complete with slick publicity campaigns.

Many of these companies continue to underwrite more green bonds or sustainability-linked loans, which is all good news for the planet.

But these greening attributes belie an uncomfortable truth: financial companies are failing to disclose information about their climate risks.

Half of financial institutions indicated they did not conduct any analysis of how their portfolios impact climate change, according to a report released today from CDP (formerly known as the Carbon Disclosure Project).

Only about half of insurance companies disclosed a low-carbon transition plan and only half of those companies were taking action with their underwriting portfolios, CDP said.

Plus, only a quarter of the companies reported their financed emissions, according to CDP. These paltry disclosures suggest financial institutions are underestimating their climate risks. 

“While most financial institutions are focused on providing sustainable finance, they are less focused on ensuring the entirety of their business is aligned with net zero,” CDP said. “Huge sums of capital are still being committed to financing fossil fuels without a focus on transition.”

There were some standouts. Allianz, BNP Paribas, BNY Mellon won applause for their disclosures. And CDP praised Dutch lender ABN Amro for disclosing the emissions associated with more than 70 per cent of its portfolio exposure.

But those companies are exceptions to the rule.

“The sector must act now,” CDP warned. “Financial institutions that do not align their portfolios face enormous risks, including from stranded assets.” (Patrick Temple-West)

Recycled (hot) air?

© Bloomberg

Covid-19 has changed many elements of the “safety” debate for companies: issues such as workplace sanitation, sick pay and mental health are all being bundled into the “S” factor in ESG (or, as Leo Strine, the former chief justice of Delaware is fond of pointing out, into an additional “E” in EESG, meaning “employee” issues.)

But if manufacturing giant Carrier is correct, there is another aspect of safety that companies will soon also need to think about: air quality.

This week it launched a new system to monitor whether the quality of air circulation inside buildings is high enough to prevent dangerous germs from collecting. David Gitlin, chief executive of Carrier, argues that while air quality issues did not provoke much angst in the past, this has changed during the pandemic and become a matter of employee and customer care.

Of course, Carrier has a vested interest in pushing that point, given that it is seeking to sell these digital air conditioners. Some ESG enthusiasts might argue that the most important issue that companies such as Carrier need to address is whether the devices are creating environmental damage. (Gitlin has said the company is addressing this, but it is an area of heated debate.)

What is perhaps most interesting about Carrier’s sales pitch is that it raises a bigger question: will workers flex their muscles after Covid-19 and demand higher workplace safety standards? Moral Money suspects they will, particularly given rising concern over issues such as air quality. Any executive who is trying to extol their “S” credentials should brace for this. (Gillian Tett)

Moody’s warns of credit risk to capital for carbon-intensive activities


One of the big announcements coming out of Biden’s climate summit last week was the establishment of the so-called Glasgow Financial Alliance for Net Zero (Gfanz). Led by Mark Carney (pictured), it is designed to set some standards for finance companies setting net-zero emissions goals.

As noted above, financial companies have a long way to go on disclosure. And the entire concept of net zero has come under increasing fire from critics in recent months. But these net-zero commitments can have a big impact on companies, especially if Gfanz succeeds in its goal of putting more rigour behind them.

According to rating agency Moody’s “the recent proliferation of net-zero targets . . . is expected to raise credit risk and reduce the availability, and increase the cost, of capital for carbon intensive activities”.

If companies follow through on their pledges, Moody’s anticipates it will have a greater impact on heavy emitting companies than any divestment campaign or disclosure requirements. 

It’s true there are still a lot of “ifs” that need to be worked out.

“The full implications for this decade of such initiatives will only become clear with the detail, breadth and speed of implementation steps taken under the net-zero initiatives,” Moody’s notes.

But the mere fact that Moody’s is alerting companies that these programmes might impact their credit is a big deal. If the net-zero alliances successfully drive up the cost of capital for polluters it would represent a big win for the pressure groups that have been trying to hit them where it hurts (their wallets) for years. (Billy Nauman)

IDB’s plan to expand LatAm green bond market

Latin America has lagged in the green bond revolution. Issuers in the region have sold just 2 per cent of the world’s green paper to date, well below its weight in the global economy. One of the main problems is investor concern about disclosure: standard setting is in its infancy in Latin America and the risk of greenwashing is high.

The Inter-American Development Bank, the region’s biggest multilateral lender, hopes to change that. This week it is launching an innovative online platform to hold data about Latin American green bond issues in a harmonised, standardised format.

Juan Antonio Ketterer, head of connectivity, finance and markets at the IDB, told Moral Money that only 53 per cent of Latin American green bond issuers report what the proceeds will be spent on. Just 27 per cent are certified to the international standards of the Climate Bonds Initiative and only 1 per cent report the impact of the investment afterwards. “There’s a certain amount of greenwashing but we don’t know how much,” he said. “We don’t have the data.”

The Green Bond Transparency Platform will go live at the start of May with data on about 30 per cent of the region’s outstanding $24bn of green bonds. The hope is that new issuers will opt to use the platform’s secure blockchain technology to record data on their bonds and in the process boost the attractions of their issues for green investors globally.

The IDB’s free and public platform will be open to sovereigns, as well as corporates — so far, Chile, Mexico City and two Argentine provinces have issued green bonds and Colombia plans to follow suit later this year. (Michael Stott)

Tips from Tamami

Nikkei’s Tamami Shimizuishi helps you stay up to date on stories you may have missed from the eastern hemisphere.

Will the commitment from Japan’s Prime Minister Yoshihide Suga to reduce the country’s emissions by 46 per cent by 2030 kick-start Japan Inc’s shift to green energy?

Suga’s words have the power to “guide the ministries in setting policies and their pressure on private companies,” said Richard Katz, a senior fellow at the Carnegie Council for Ethics in International Affairs.

For example, Suga is in a position to tell the influential Ministry of Economy, Trade and Industry (Meti) to set targets to achieve the emissions goal and “can reject [Meti’s] plan if it’s a clear evasion”.

But Suga’s political capital is eroding due to poor poll ratings. His Liberal Democratic party lost all three by-elections last weekend. “What ends up happening depends on the power of the prime minister,” Katz said.

Pushback from business leaders is looming, too. While the Keidanren business federation praised Suga’s target, Katz observed that the country’s most powerful business lobbying group stopped short of updating “their views about what should and should not be done”.

“Policy that bans gasoline-powered or diesel cars from the very beginning would limit [ . . . ] options [to achieve carbon neutrality by 2050], and could also cause Japan to lose its strengths,” Akio Toyoda, chief executive of Toyota and chair of the Japan Automobile Manufacturers Association, said.

“We’re genuinely concerned that Mr Toyoda does not seem to realise what is at stake here”, Jens Munch Holst, chief executive of Danish pension fund AkademikerPension, one of four investors pressuring the world largest automaker to change its international policy engagements — alongside with Church of England Pensions Board.

If there is no improvement, AkademikerPension said it would consider preparing a shareholders resolution to submit next year or even ultimately consider selling its stake in the company.

Chart of the week

Physical risks from climate change coming to investors’ attention; Number of companies mentioning climate change in earnings calls, by year (%)

Over the past three years, the number of companies mentioning “climate change” in earnings calls has steadily increased.

This makes sense, given the heightened focus from regulators, investors and consumers on the topic. However, it is interesting to see how far sectors such as oil and gas still have to go. Somehow, despite the increased recognition of climate risk, fewer than half the companies in the sector have breached the topic in an earnings call. (Kristen Talman)

Smart read

The effort to overhaul Exxon’s board is among the most-watched US shareholder proxy battles in years and highlights a broader test for corporations as climate change risks rise up investors’ agendas, wrote the FT’s Derek Brower and Justin Jacobs.

For more essential energy news, forward-thinking analysis and insider intelligence sign up to our Energy Source newsletter.

Further Reading

  • Why Covid should have a lasting effect on executive pay (FT)

  • Carbon price is missing from Biden’s overhaul of climate policy (FT)

  • Sustainability is at risk when asset managers are the judge, jury and executors of the ESG agenda (Impact Alpha)

  • Blackstone makes sustainability push with slew of new hires (Reuters)

  • Wealthy Families Look to Help Family Businesses in the Pandemic (NYTimes)

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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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