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Climate action is an equity issue

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Climate action is an equity issue

By Sarah Butler Sloss, Founder Director of the Ashden Awards

Last month, a report was published by Positive Money, which called on the Bank of England to place climate change front and centre of its mandate in order to encourage investment for low-carbon transition.

It was a strong message, reminding the central bank that it has a duty to support the push to raise private and public finance to close the green investment gap and that climate change has a direct impact on the stability of the financial system.

We should go a step further. The point needs to be made that unless finance for genuinely sustainable energy, not just in the UK, but in developing regions too, is significantly increased with immediate effect, the vital goals of the 2015 Paris Agreement and the UN’s 2030 Sustainable Development Goals will never be met.

This sounds extreme, but it is not an exaggeration to say that we face catastrophic change if we don’t take climate action seriously now. The Bank of England has the power to disincentivise continued investments in fossil fuels and encourage the re-investment of funds into sustainable energy sectors.

Sarah Butler Sloss

Sarah Butler Sloss

Globally there is a $25.6bn annual shortfall, according to a report by SE4all, in reaching the target of universal access to sustainable energy (SDG7) by 2030. Unfortunately, UK banks contribute to this by continuing to fund fossil fuel companies with billions of pounds every year, when there is growing evidence that sustainable investments are reaping rewards. The FTSE has shown, for example, that excluding fossil fuels from its index has been beneficial. Compound annual returns over the last 5 years have been 10.1% for FTSE All-World ex Fossil Fuels vs 9.5% for FTSE All-world with volatility of 10.1 vs 10.2.

A recent report in the Financial Times tells of the success of Generation, a London-based investment group for sustainable investing, that was founded by former US Vice-President Al Gore and David Blood. Generation has gathered almost $20bn in assets and notched up annualised returns in the low teens net of fees, the report says. It is being touted as one of the top performers among 400-odd long-only global equity funds of this vintage. This is exactly the kind of performance that needs to be shouted from the rooftops. Sustainable investing is about much more than reassuring corporate moral consciences.

It is not surprising that Al Gore is involved. Both he and David Blood are supporters of our own Ashden Awards, which promote and celebrate green energy initiatives. Looking back on his keynote speech at last year’s awards ceremony, he made one very apposite comment when he quoted the economist Rudi Dombusch: ‘Things take longer to happen than you think they will and then they happen much faster than you thought they could.’

I hope he’s right. Because against the backdrop of continued investments in fossil fuels, we now have to work out how we can scale up and accelerate finance for energy access, and the energy transition more generally.

The challenge, of course, is global. Where funding is available, nearly two thirds of it is going to a handful of countries. In 2014, for example, only a third of energy commitments went to 13 sub-Saharan countries, and this accounts for over half of the global population living without reliable access to electricity.

For smaller organisations the biggest obstacle to providing energy access solutions at scale is finance. It has never been easy to raise it, and it’s no easier now. Whether it’s a cookstove company in India or a PAYG company in Tanzania, the need for more patient capital, concessionary finance, as well as straightforward finance at the right size, is crucial but very hard to find.  A contributory factor for this is that the energy access sector is at a fairly early development stage and lacks the distribution infrastructures that we all take for granted. It lacks end-user finance and trained human resources, so most companies in the sector have to do all of this themselves, which is tough for the bottom line.

And of course, this type of company is generally at an early growth stage, often described as the valley of death, when large amounts of growth capital are needed, and there are few organisations providing it. The sector is too nascent for the local banks to understand, so a local loan is very unlikely. The large investors and big players such as the development agencies and development banks don’t know how to deal with the smaller ticket size. It’s easier to raise over $100m+ than to raise under $2m.

To grow and scale these young innovative companies need soft, patient or concessionary capital at the right size and plenty of it.

Looking at the positives, “blended finance”, which combines donor orphilanthropic funding together with private capital, could provide liquidity for the sector. Increasingly, development finance institutions and government-backed agencies alongside family foundations, are investing their money for use in lowering the risk for commercial capital. The beauty of blended finance is that it can guarantee early losses, which makes the investment more attractive, ease the concerns of the private sector and hence leverages in significantly more capital for those businesses that need it.

Because our awards for sustainability initiatives are international and not just UK-based, we see the impact of different funding approaches at a local level. Local capital can be secured through co-signed loans between SME businesses and investors, and by doing this, local losses are also reduced. Again, the risk of first loss is guaranteed, and all parties get a seat at the table. Every year we see an increasing number of courageous energy enterprises and financial institutions trying new strategies to get finance to the energy access sector including blended capital, co-signed loans, bridge financing, corporate partnerships, loan guarantees and local currency deals.

These approaches are reaping rewards. We have calculated that, thanks to their own initiatives, the funding that enables them to operate and their sheer determination, the winners of our awards have collectively saved 13 million tonnes of CO2 a year and improved over 88 million lives over the last seventeen years.

It helps, of course, that the production costs of renewables have dropped exponentially which makes them infinitely more competitive and combined with digital technology which is enabling the user to pay for their energy in affordable instalments, decentralised energy is building momentum, placing less onus on the need for large and polluting power plants.

But what really makes a difference is that energy is being democratised so it can be accessed by those that need it most. The poorest of the poor, who have always lived without reliable power, are seeing their lives transformed because they can enter into the economy with appliances and services. Solar energy, in particular, is enabling education and economic opportunities, better health facilities, and clean, reliable and safe light for the first time, as well as the ability to charge a mobile phone without having to walk miles.

This is a crucial part of the big picture. But, to achieve global sustainable energy targets, a more supportive ecosystem of finance is needed. There is an exciting amount of talk and some very interesting work happening in this relatively new area of blended finance and other financial instruments but it needs to go further and much faster than it currently is. A change in approach and commitment is necessary from those that hold the big purse-strings. Not words, but actions. Not in the future, but now. We can’t continue to work-around or experiment, we are racing against time, and only a vast increase in finance to support energy access across all parts of the world, will stop an impending catastrophy from happening.

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IMF lifts global growth forecast for 2021, still sees ‘exceptional uncertainty’

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IMF lifts global growth forecast for 2021, still sees 'exceptional uncertainty' 1

By Andrea Shalal

WASHINGTON (Reuters) – The International Monetary Fund on Tuesday raised its forecast for global economic growth in 2021 and said the coronavirus-triggered downturn in 2020 would be nearly a full percentage point less severe than expected.

It said multiple vaccine approvals and the launch of vaccinations in some countries in December had boosted hopes of an eventual end to the pandemic that has now infected nearly 100 million people and claimed the lives of over 2.1 million globally.

But it warned that the world economy continued to face “exceptional uncertainty” and new waves of COVID-19 infections and variants posed risks, and global activity would remain well below pre-COVID projections made one year ago.

Close to 90 million people are likely to fall below the extreme poverty threshold during 2020-2021, with the pandemic wiping out progress made in reducing poverty over the past two decades. Large numbers of people remained unemployed and underemployed in many countries, including the United States.

In its latest World Economic Outlook, the IMF forecast a 2020 global contraction of 3.5%, an improvement of 0.9 percentage points from the 4.4% slump predicted in October, reflecting stronger-than-expected momentum in the second half of 2020.

It predicted global growth of 5.5% in 2021, an increase of 0.3 percentage points from the October forecast, citing expectations of a vaccine-powered uptick later in the year and added policy support in the United States, Japan and a few other large economies.

It said the U.S. economy – the largest in the world – was expected to grow by 5.1% in 2021, an upward revision of 2 percentage points attributed to carryover from strong momentum in the second half of 2020 and the benefit accruing from $900 billion in additional fiscal support approved in December.

The forecast would likely rise further if the U.S. Congress passes a $1.9 trillion relief package proposed by newly inaugurated President Joe Biden, economists say.

China’s economy is expected to expand by 8.1% in 2021 and 5.6% in 2022, compared with its October forecasts of 8.2% and 5.8%, respectively, while India’s economy is seen growing 11.5% in 2021, up 2.7 percentage points from the October forecast after a stronger-than-expected recovering in 2020.

The Fund said countries should continue to support their economies until activity normalized to limit persistent damage from the deep recession of the past year.

Low-income countries would need continued support through grants, low-interest loans and debt relief, and some countries may require debt restructuring, the IMF said.

(Reporting by Andrea Shalal; Editing by Shri Navaratnam)

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Leon Black step downs as Apollo CEO after review of Epstein ties

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Leon Black step downs as Apollo CEO after review of Epstein ties 2

By Mike Spector and Chibuike Oguh

NEW YORK (Reuters) – Leon Black said on Monday he would step down as chief executive at Apollo Global Management Inc, following an independent review of his ties to the late financier and convicted sex offender Jeffrey Epstein.

While Black, whose net worth is pegged by Forbes at $8.2 billion, will remain Apollo’s chairman, his decision to step down illustrates how doing business with Epstein weighed on the reputation of one of Wall Street’s most prominent investment firms. Black co-founded Apollo 31 years ago.

Apollo said it plans to change its corporate governance structure, doing away with shares with special voting rights that currently give Black and other co-founders effective control of the firm.

The independent review, conducted by law firm Dechert LLP, found Black was not involved in any way with Epstein’s criminal activities. Black paid Epstein $158 million for advice on tax and estate planning and related services between 2012 and 2017, according to the review.

Black, 69, said that although the review confirmed he did not engage in any wrongdoing, he “deeply” regretted his involvement with Epstein.

“I hope that the results of the review, and related enhancements … will reaffirm to you that Apollo is dedicated to the highest levels of transparency and governance,” Black wrote in a note to Apollo fund investors. He will step down as CEO no later than July 31.

Apollo co-founder Marc Rowan, 58, will take over as CEO.

Rowan has often kept a low-key profile compared with Apollo’s other co-founder, Joshua Harris, 56, and spearheaded many initiatives that turned Apollo into a credit investment giant, including the permanent capital base the firm enjoys through its ties to reinsurer Athene Holding Ltd.

The revelations of Black’s ties to Epstein took a toll on Apollo, which Black turned into one of the world’s largest private equity groups. Apollo executives had warned in October that some investors had paused their commitments to the buyout firm’s funds as they awaited the review’s findings.

Apollo shares are down 1% since the New York Times reported on Oct. 12 that Black paid at least $50 million to Epstein for advice and services, when most of his clients had deserted him.

Over the same period, shares of peers Blackstone Group Inc, KKR & Co Inc and Carlyle Group Inc are up 19%, 10% and 23%, respectively.

“We think a large number of (Apollo fund investors) took a ‘pause’, and we believe the outcome (of the review) and changes today will cause most of them to return to allocating to future Apollo funds,” Credit Suisse analysts wrote in a research note.

Apollo shares jumped 4% to $47.65 in after-hours trading on Monday.

“We continue to follow these events closely and will evaluate how Apollo addresses its issues,” the California State Teachers’ Retirement System, one of the largest U.S. public pension funds and an Apollo investor, said in a statement.

Epstein was found dead at age 66 in August 2019 in a Manhattan jail, while awaiting trial on sex trafficking charges for allegedly abusing dozens of underage girls in Manhattan and Florida from 2002 to 2005. New York City’s chief medical examiner ruled that the cause of death was suicide by hanging.

FALLING OUT

Black previously said he had paid millions of dollars to Epstein, but the exact size of his payments was revealed for the first time on Monday. Beyond the $158 million in payments, Black made two loans to Epstein totaling $30.5 million in early 2017.

Dechert said in its report that Black’s social ties with Epstein, who built his fortune by endearing himself to powerful figures in high society, went back to the mid-1990s.

Epstein won Black’s trust by resolving an estate tax issue for him in 2012 potentially worth at least $500 million, the report said. He ended up advising Black on various aspects of his personal financial affairs, from his family office and airplane to his yacht and artwork.

Black believed that Epstein provided advice over the years that conferred between $1 billion and $2 billion in value to him, according to the Dechert report. Black said in his note to investors that he had paid Epstein a fee equivalent to 5% of the value he generated on an after-tax basis, and not tied to hourly rates.

Black and Epstein’s relationship deteriorated after Epstein failed to repay $20 million of the loans and Black refused to pay tens of millions of dollars in fees that Epstein demanded, according to the Dechert report.

They severed ties in October 2018, according to the report. Black knew Epstein had been convicted in Florida a decade earlier for soliciting prostitution from a minor, the Dechert report said, but there was no evidence suggesting Black had knowledge of the other alleged crimes before they were publicly reported in late 2018, culminating in Epstein’s July 2019 arrest.

On Monday, Black pledged $200 million toward “initiatives that seek to achieve gender equality and protect and empower women,” as well as helping survivors of domestic violence, sexual assault and human trafficking.

Apollo said it would pursue a “one share, one vote” corporate governance structure that would do away with shares with special voting rights. It said the move could qualify it for listing on the S&P Global indices.

Apollo also said it would seek to give its board more authority to oversee its business, eroding the power of its executive committee led by Black.

The board will be expanded to include four new independent directors, including Avid Partners founder Pamela Joyner and physician and scientist Siddhartha Mukherjee, Apollo said. Apollo co-Presidents Scott Kleinman and James Zelter will join the board and take on increased responsibility running day-to-day operations.

Apollo had about $433 billion in assets under management as of the end of September.

(Reporting by Mike Spector and Chibuike Oguh; Additional reporting by Lawrence Delevigne and Jessica DiNapoli in New York; Editing by Sonya Hepinstall, Leslie Adler and Kim Coghill)

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EU sees no cliff-edge ending for COVID fiscal stimulus

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EU sees no cliff-edge ending for COVID fiscal stimulus 3

BRUSSELS (Reuters) – European governments will not need to abruptly end fiscal support for their economies after the pandemic, top officials said on Monday, noting that any withdrawal of stimulus would be carried out gradually and only once the economy has recovered.

Euro zone public debt rose sharply during 2020 and is likely to exceed 100% of GDP this year as governments borrow to help individuals and businesses survive lockdowns.

The higher debt raises concern about how to deal with it down the road and when to start cutting it again, since the EU last year suspended its rules limiting budget deficits and debt, known as the Stability and Growth Pact (SGP).

EU finance ministers are to discuss when to reintroduce any borrowing limits in the second quarter of this year.

“I believe it important that finance ministers debate and reach a common understanding on the appropriate fiscal stance by the summer. This can then serve as guidance for the preparation of their draft budgetary plans for 2022,” the chairman of the euro zone’s group of finance ministers, Paschal Donohoe, said on Monday.

“To avoid any misunderstanding, let me stress that this is not about an imminent withdrawal of fiscal stimulus,” he told the economic committee of the European Parliament.

“We all agree that our immediate priority is to shield our citizens, in particular younger cohorts and those most exposed to the crisis. There must be no cliff-edges,” he said.

Joao Leao, the finance minister of Portugal which holds the rotating presidency of the EU and therefore sets the agenda for EU finance ministers’ work until June, was equally cautious.

“We should not withdraw stimulus too early. We need to make sure the suspension clause for the SGP remains in force at least until we return to pre-crisis economic figures,” he told the committee. “We need to make sure jobs are maintained as well as the production capacity of companies.”

He said first cash from the EU’s 750 billion euro post-COVID economic recovery programme should reach the economy in the first half of the year.

“Real funding should be getting to the economy before the summer or in early part of the summer,” he said.

(Reporting by Jan Strupczewski; Editing by Giles Elgood)

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