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One thing to start: the US Securities and Exchange Commission yesterday identified environmental, social and governance (ESG) investing as an issue for examination in the coming year. This comes after the SEC made inquiries about ESG matters at some funds last year, underscoring that greenwashing is increasingly on the regulator’s radar.
Welcome to Moral Money. This week we have:
Financial fallout from the Australian bushfires
Renewable power growth stalls in the UK
ESG fund growth — legit or marketing spin?
A Japanese 7/11 operator has done the unthinkable — asked for a day off
Also, keep an eye out early next week for another special edition featuring an exclusive interview with Klaus Schwab, head of the World Economic Forum. With Davos just days away, you won’t want to miss what he has to say about sustainable business, stakeholder capitalism — and what the WEF is planning.
If you want more Moral Money content throughout the week, check our hub page regularly at ft.com/moral-money for breaking news, analysis and curated commentary on this bubbling revolution. Follow us on Twitter @ftmoralmoney, forward this newsletter to colleagues who you think would find it valuable, and sign up here if you haven’t already.
Will Australia’s fires singe investors?
Australia, which has enjoyed a record run of 28 years without a recession, has become the latest source of climate change credit risk to hit investors. Australia’s fires, which dwarf the recent infernos in the Amazon and California, underscore how important environmental considerations are becoming as investors evaluate credit risks, Fitch said in its January 6 report.
The rating agency noted that Australian utilities tightened regulations following the fatal “Black Saturday” fires in 2009 so the country’s power providers could be spared the culpability that PG&E faced in California. But the extent of the fire damage is far from certain. Bank of America estimated that the fires could subtract at least 0.2 to 0.4 per cent from Australia’s gross domestic product growth in the fourth quarter of 2019 and first quarter of 2020.
The Reserve Bank of Australia, which in 2019 cut interest rates to a record low of 0.75 per cent, had previously cited the country’s drought as a reason for slower growth last year. “Odds were already high that the RBA will cut interest rates at its next meeting in February, to bring the cash rate to 0.5 per cent. The fires increase those odds,” said Katrina Ell, an economist at Moody’s Analytics.
As of January 7, Australian insurers have received 8,985 fire-related claims since September from New South Wales, Victoria, Queensland and South Australia, according to the Insurance Council of Australia, which puts insurance losses so far at A$700m. That may sound low, but more claims are expected and BofA noted that data from the Australian Prudential Regulation Authority shows that the five years to 2018 saw an average of just 1,480 insurance claims as a result of fires.
The crisis has also highlighted Prime Minister Scott Morrison’s controversial climate change position, raising questions about whether voters around the world will turn against fossil-fuel friendly politicians. (Patrick Temple-West)
ESG investments — buyer beware!
Asset managers are certainly talking a big game about environmental, social and governance investing. But new research from consultancy LCP shows the challenge of telling which companies are taking the matter seriously and which are simply slapping a label on their funds to try to lure in sustainably minded clients.
“These days, it’s hard to find an investment manager that doesn’t say they are committed to responsible investment and many of them tell a good story. However, our survey results show that their claims shouldn’t be taken at face value,” said Sapna Patel, investment consultant at LCP.
According to LCP’s research, fund managers are “worryingly weak” in their approach to climate risk, for example. Despite warnings from groups such as the Bank of England, few managers consider the issue at a systemic level across asset classes. Fourteen per cent of the sector does not consider climate risk at all.
“Engagement” is the most commonly cited method for addressing climate issues, LCP found. However, only 52 per cent of the industry could give a “reasonably detailed description of their approach” and only 54 per cent gave a good example of an engagement action they had taken.
“Despite the proliferation of specialist ESG funds coming to market, we see relatively few that are well-suited to the needs of our clients,” said LCP’s head of manager research Matt Gibson.
This should worry investors. The EU recently passed a long-awaited taxonomy that will set standards for what sorts of investments can be labelled “green”. But that has not yet taken effect and even when it does it will not be a magic bullet. Bottom line: investors must do their homework. (Billy Nauman)
UK sees windpower grow but nuclear fall
The recent increases in renewable electricity generated in the UK might seem like good news. However, here is a sobering revelation: this improvement has been offset by falling nuclear supplies, because of ongoing outages at two of the UK’s biggest nuclear plants, Hunterston and Dungeness.
The result? Total low-carbon electricity — generated from hydro, wind, solar, biomass and nuclear — has stalled, according to analysis by climate research non-profit Carbon Brief. And this makes the goal of reaching net-zero emissions by 2050 “a huge challenge”.
The figures are striking. Overall electricity generation in the UK fell for the third consecutive year in 2019, taking it to 15 per cent below 2010’s level, according to the analysis. Fossil fuel output declined 6 per cent, led by a 60 per cent reduction in coal-generated electricity. (There were a record 83 days in 2019 when no coal was used to generate electricity.)
Simon Evans, Carbon Brief’s policy editor, said: “The [UK] government’s target for 40GW of offshore wind by 2030 is not certain to be sufficient to reach [net zero targets] without increases from other low-carbon sources such as onshore wind, solar or additional new nuclear.”
The analysis comes a week after National Grid, which is responsible for balancing supply and demand in Britain’s electricity network, announced that more of the UK’s energy was generated from zero carbon sources than from fossil fuels in 2019 for the first time since the industrial revolution.
There were four complete months and 137 individual days in 2019 when renewables generated more electricity in the UK than fossil fuels, Carbon Brief found. But the non-profit argues that the UK has considerable work to do to shift energy production meaningfully towards non-polluting sources. To meet its 2030 goals, the country needs to increase its low-carbon electricity generation by three-fifths, according to Carbon Brief’s forecasts. (Anna Gross)
Chart of the Week
Green bonds are red hot. Issuance smashed through analysts’ projections in 2019 and is set to continue expanding this year as sustainability minded investors snap up almost every deal that hits the market.
The EU’s newly approved guidelines on what counts as a sustainable investment should push the market even higher in 2020 as they should help to stamp out greenwashing, Moody’s predicts. (Billy Nauman)
Grit in the oyster
Many companies and investors say they try to “do well by doing good”. As a reminder that many still fall short, here’s a little grit in the ESG oyster.
Portugal, home to western Europe’s largest lithium deposit, is quickly becoming a battleground for sustainability advocates. But instead of the typical fight between environmentalists and fossil fuel companies, a row is brewing between people who would typically be on the same team, highlighting one of the biggest problems facing the sustainability movement.
On one side there are people who support mining because lithium is critical to developing the batteries needed to meaningfully cut carbon dioxide emissions. On the other are locals who fear mining will poison the environment.
“Mining is too often a parasitic investment,” said Catarina Scarrott, a spokeswoman for a local movement opposing a mine in the northern village of Covas do Barroso. “They take away more than they give back.”
Bridging this gap will be critical if the world is going to be able to transition to clean energy in a just manner. (FT)
Can Mark Zuckerberg remake Facebook as a conscious company? Is Warren Buffett a sustainable investor or a pragmatic profiteer? You can tackle these questions and others in the FT series “The responsible capitalists”. (FT)
Leo Strine, the retired Delaware Supreme Court chief justice, sat down for an interview with Agenda reporter Jennifer Williams-Alvarez. Never afraid to speak his mind, Mr Strine criticised corporate boards for failing to take a hard line against excessive executive compensation. (Agenda — subscription required).
Tips from Tamami
Nikkei’s Tamami Shimizuishi keeps an eye on Asia to help you stay up to date on stories you may have missed from the eastern hemisphere.
New Year’s Day is a special holiday in Japan. People visit temples and shrines, enjoy traditional foods and drink sake. Just like Thanksgiving and Christmas in the west, many take a day off and spend time with their family. But that isn’t the case for convenience shop workers. In a country that considers convenience shops part of its infrastructure, people expect them to operate 24 hours, seven days a week — including New Year’s Day.
A shop owner in Osaka has tried to challenge that norm and ran into trouble. 7-Eleven franchisee Mitoshi Matsumoto says Seven & I Holdings, the chain’s parent company, terminated his contract after he decided to close his outlet on New Year’s Day. The company denied the claim and attributed the termination to customer complaints about Mr Matsumoto’s shop.
This isn’t the first time that Mr Matsumoto and the company have clashed. Earlier, the franchisee shortened his shop’s opening hours without Seven & I’s permission, prompting the company to warn that he had violated his contract and would lose his shop.
Mr Matsumoto said he cut the hours not because he wanted to, but because he had to. His wife, who used to share his workload, passed away in 2018, and he had trouble finding reliable staff. He worked more than 14 hours a day with few holidays, but still could not keep his shop open all day, every day. Japan’s shrinking workforce and rising wages mean that his agony is widely shared by other shop owners.
Corporate Japan is trying to change its workaholic culture and encourage workers to take more holidays. Convenience shops are no exception. This year, 7-Eleven and Lawson, another major convenience shop chain, closed some of their premises on New Year’s Day for the first time. In 7-Eleven’s case, only about 50 directly owned shops were allowed a day off. Unfortunately, franchisees such as Mr Matsumoto were not included in this experiment — but change is coming. It will be important for ESG investors to check whether companies treat all their employees fairly and equally — including franchisees.
Democracies are ill-suited to deal with climate change (FT)
Potential pay-off for Boeing boss shows limits of business pledges (FT)
Shipping fuel regulation to cut sulphur levels comes into force (The Guardian)
Firm sues California over law banning private prisons and immigration detention centers (LA Times)
Boards must be held accountable for sexual harassment scandals (FT)
Green finance grows in Middle East as Etihad signs loan (Global Capital)
The Navajo, circled by coal, see jobs vanish as CO2 falls (E & E News)
Japan’s GPIF is right — short selling is downright irresponsible (FTfm)
Australia, your country is burning — dangerous climate change is here with you now (The Guardian)
Private equity giants vow to show their ESG credentials in 2020 (FT)
Amazon threatens to fire critics who are outspoken on its environmental policies (Washington Post)