By Rupert Thompson, Chief Investment Officer at Kingswood
Global equities took a tumble last week, losing 5.0% in local currency terms. This left markets down some 7% from their early September high but still leaves them up some 40% from their March low.a
The reason for the sell-off is not hard to fathom, namely the surge in infections in the UK and Europe and the new lockdowns announced both here and in countries such as France and Germany.
Lockdown 2.0 is not as severe as its predecessor but will still deal a significant blow to economic activity. The Eurozone and the US last week may both have announced record growth in the third quarter, but GDP remained a sizeable 4.3% and 3.5% respectively down on the end of last year. The latest lockdowns now threaten a renewed decline in Europe in the fourth quarter.
The UK hasn’t released Q3 numbers as yet, but as of August, GDP was as much as 9.0% below its end-2019 level. It has been one of the economies worst hit by Covid and remains one of the most vulnerable. Even though Rishi Sunak has now reinstated the more generous furlough scheme, the lockdown risks reducing GDP by a hefty 5% or so in the fourth quarter.
The US also looks likely to see growth suffer over coming months with infections climbing sharply and the government response chaotic. Only in China is Covid already beginning to seem like a distant nightmare with GDP up 4.1% this year. This divergence has been reflected in the marked outperformance of the Chinese stock market year-to-date, which continued last week with it down only a modest 0.5%.
While the next couple of months could well see further market weakness, we do not expect anything like a re-run of the sell-off earlier in the year. The lockdowns are less severe, the hit to GDP should be much smaller and we are rather closer to seeing light at the end of the tunnel. Much more extensive testing, better treatments and vaccine roll-outs should all lead to the picture steadily improving through next year and in time provide the rationale for further gains in equities.
In the meantime, one source of support is coming from earnings. We are now over half-way through the Q3 reporting season in the US and earnings are coming in considerably better than expected. The tech giants reported last week and generally beat expectations (not that it did their share prices much good) as did the banks earlier in the month. S&P 500 earnings now look likely to fall some 10% rather than 20% as was the expectation at the start of reporting.
Still, markets near term have not only to contend with Covid but also the US elections. We will keep our comments brief today. So much has already been written on the subject and, with the result still uncertain, it makes sense to wait until the dust has settled before pontificating any further at any length. It should also not be forgotten at times such as these that the importance of the US election in driving markets is often exaggerated. More important generally than which party wins the election is the state of the business cycle, Fed policy and also this time, of course, Covid.
What can be said with any confidence is limited. Biden remains the front runner but his victory is far from assured. The worst outcome for markets would be a close and contested vote which might not see the victor announced for weeks. As for the best outcome, other than a clear victory by either candidate, it is far from clear. Biden’s policies are a very mixed bag and the ability of Trump or Biden to implement their policies will depend on winning control of Congress.
We will be sending out a post-election update on Wednesday by which time we may, or may not, be able to shed some further light on these matters.
EasyJet to raise up to 1.2 billion euros from bond issue
By Yoruk Bahceli and Abhinav Ramnarayan
AMSTERDAM (Reuters) – EasyJet will raise 1-1.2 billion euros from a seven-year bond sale later on Wednesday, according to memo from a bank arranging the deal seen by Reuters, days after Britain laid out a timeline for a return to international travel.
The deal has received initial investor demand of 4.8 billion euros, according to the lead manager, helping the company cut the yield guidance to around 2.125%, from around 2.375% when the sale started earlier on Wednesday. [L8N2KU2QS]
The positive response from bond investors comes after UK Prime Minister Boris Johnson set out a phased plan on Monday to end England’s COVID-19 lockdown.
Under the plan, Britain — EasyJet’s most important market — could see curbs on international travel removed as early as May 17.
A day after the announcement, it emerged EasyJet had hired BNP Paribas, Morgan Stanley and Santander for a potential bond sale, following a steep rise in bookings.
The airline’s share price has risen 16.55% to 973 pence this week, while the yield on its outstanding June 2025 notes has dropped a hefty 47 basis points to 1.439%. Bond yields move inversely to prices.
Proceeds from the bond sale will be used for general corporate purposes and for refinancing debt, according to an investor announcement. EasyJet has a 500 million euro bond maturing in February 2023.
(Reporting by Yoruk Bahceli, Editing by Abhinav Ramnarayan, Kirsten Donovan)
Is the idea of win-win really a fallacy when it comes to ESG investing?
By Shaw Mabuto, Partner, SPEAR Capital
Over the past few years, environmental, social, and governance (ESG)-led investing has grown exponentially. In fact, the value of ESG-driven assets almost doubled over four years, and more than tripled over eight years, to hit US$40.5 trillion in 2020.
Driving that growth has been the belief among investors that ESG investments provide a win-win scenario where they can help save the planet while netting positive returns. And, to a large extent, that’s held true. A 2020 study found that 60% of sustainable funds outperformed the market over 10 years.
Despite such results, there are some who believe that the win-win scenario offered by ESG is a fallacy. Financial Times’ US Editor Robert Armstrong, for instance, argues that “win-win arguments promoting both bigger profits and better social returns are illogical”.
Just how valid is this counter-argument? And should it impact the decision-making of anyone wanting to take an ESG-led approach to investing?
The case against win-win
According to Armstrong, the illogic of the win-win argument can be explained by the fact that the argument rests on two fallacies. The first is that the time horizon which individual investors operate over doesn’t match that at which social good and financial interests must converge. Nor, he argues, is this convergence within the scope of any corporation’s planning horizon.
The second is that “a wicked or ‘anti-ESG’ portfolio perfectly well might offer the best available return”. Even as ESG portfolios become more de rigueur, Armstrong suggests, an ‘anti-ESG’ portfolio might provide better value because the assets in it can be bought cheaper.
Others have pointed out that there may be an ESG bubble forming. That’s because many ESG companies, particularly those in the environmental space, are loss-making and yet their share prices keep rising.
The problem with the logic behind the first fallacy is that it presumes that the point at which social good and financial interests must converge is some point in the future. It’s not. Despite considerable reductions in local and international travel thanks to COVID-19, 2020 was still the hottest year in history. A 2020 report by Greenpeace Southeast Asia and the Centre for Research on Energy and Clean Air, meanwhile, found that globally, air pollution has a $2.9 trillion economic cost, equating to 3.3% of the world’s GDP. How much more money should be left on the table before social good and financial interests converge?
The trouble with the second argument is that it ignores the societal pressure and consumer shifts could force companies that are “anti-ESG” now to change their policies or even pressure them out of existence. Of course, certain “anti-ESG” companies could thrive and outperform in this scenario, but as a whole, the risk could warrant the discount.
The arguments for a bubble can be similarly disproven. Those suggesting that we’re in the midst of an ESG bubble ignore the fact that ESG-focused companies are likely to lead the post-COVID recovery. In the wake of the pandemic (and the clean skies that accompanied cities locking down), people have realised that business cannot carry on as usual.
As people, corporations, and countries look to improve their environmental and sustainability credentials, they will flock to the companies that allow them to do so. The last of these entities is particularly important. Can it really be a bubble if governments are pushing companies to become more ESG-compliant because doing so is the best hope for the planet?
The right companies under the right guidance
None of that, of course, is to say that every ESG-focused company is guaranteed to succeed. Even with all the right policies in place, a company can still make products that don’t resonate with changing consumer wants and needs.
It’s therefore imperative that investors choose funds with experience and a strong record when it comes to backing fundamentally strong ESG companies. Additionally, they should steer clear of only relying on ESG funds that invest in listed companies.
Private Equity (PE) funds, for example, are often capable of identifying companies which have a potentially strong proposition and are more focused on taking a hands-on approach to their success. Without the vagaries of the stock market to deal with, they can take a long-term approach which benefits both the companies in its portfolio and its investors.
Embracing ESG’s reality
The growth of ESG over the past few years, therefore, isn’t a sign of misguided investors taken in by a fallacy. Nor is it, as some have suggested, the early signs of a bubble. The most investor-friendly companies going forward will be the ones that lead the way when it comes to ESG.
And that’s not because they’re simply giving the investors what they want. It’s because, fundamentally, ESG principles are what makes a good company. By serving the environment, looking after the social good, and exercising good governance, they’re setting themselves up for long-term success (so long as they’re producing products that consumers genuinely want).
Sceptics who think that the ESG win-win scenario is a fallacy would do well to remember that.
Show us the plan: Investors push companies to come clean on climate
By Simon Jessop, Matthew Green and Ross Kerber
LONDON/BOSTON (Reuters) – In the past, shareholder votes on the environment were rare and easily brushed aside. Things could look different in the annual meeting season starting next month, when companies are set to face the most investor resolutions tied to climate change in years.
Those votes are likely to win more support than in previous years from large asset managers seeking clarity on how executives plan to adapt and prosper in a low-carbon world, according to Reuters interviews with more than a dozen activist investors and fund managers.
In the United States, shareholders have filed 79 climate-related resolutions so far, compared with 72 for all of last year and 67 in 2019, according to data compiled by the Sustainable Investments Institute and shared with Reuters. The institute estimated the count could reach 90 this year.
Topics to be put to a vote at annual general meetings (AGMs) include calls for emissions limits, pollution reports and “climate audits” that show the financial impact of climate change on their businesses.
A broad theme is to press corporations across sectors, from oil and transport to food and drink, to detail how they plan to reduce their carbon footprints in coming years, in line with government pledges to cut emissions to net zero by 2050.
“Net-zero targets for 2050 without a credible plan including short-term targets is greenwashing, and shareholders must hold them to account,” said billionaire British hedge fund manager Chris Hohn, who is pushing companies worldwide to hold a recurring shareholder vote on their climate plans.
Many companies say they already provide plenty of information about climate issues. Yet some activists say they see signs more executives are in a dealmaking mood this year.
Royal Dutch Shell said on Feb. 11 it would become the first oil and gas major to offer such a vote, following similar announcements from Spanish airports operator Aena, UK consumer goods company Unilever and U.S. rating agency Moody’s.
While most resolutions are non-binding, they often spur changes with even 30% or more support as executives look to satisfy as many investors as possible.
“The demands for increased disclosure and target-setting are much more pointed than they were in 2020,” said Daniele Vitale, the London-based head of governance for Georgeson, which advises corporations on shareholder views.
COMPANIES WARM THE WORLD
While more and more companies are issuing net-zero targets fesor 2050, in line with goals set out in the 2015 Paris climate accord, few have published interim targets. A study https://www.southpole.com/news/survey-just-1-in-10-business-have-backed-up-net-zero-ambitions-with-science-based-targets from sustainability consultancy South Pole showed just 10% of 120 firms it polled, from varied sectors, had done so.
“There’s too much ambiguity and lack of clarity on the exact journey and route that companies are going to take, and how quickly we can actually expect movement,” said Mirza Baig, head of investment stewardship at Aviva Investors.
Data analysis from Swiss bank J Safra Sarasin, shared with Reuters, shows the scale of the collective challenge.
Sarasin studied the emissions of the roughly 1,500 firms in the MSCI World Index, a broad proxy for the world’s listed companies. It calculated that if companies globally did not curb their emissions rate, they would raise global temperatures by more than 3 degrees Celsius by 2050.
That is well short of the Paris accord goal of limiting warming to “well below” 2C, preferably 1.5C.
At an industry level, there are large differences, the study found: If every company emitted at the same level as the energy sector, for example, the temperature rise would be 5.8C, with the materials sector – including metals and mining – on course for 5.5C and consumer staples – including food and drink – 4.7C.
The calculations are mostly based on companies’ reported emissions levels in 2019, the latest full year analysed, and cover Scope 1 and 2 emissions – those caused directly by a company, plus the production of the electricity it buys and uses.
‘TAILWIND ON CLIMATE’
Sectors with high carbon emissions are likely to face the most investor pressure for clarity.
In January, for example, ExxonMobil – long an energy industry laggard in setting climate goals – disclosed its Scope 3 emissions, those connected to use of its products.
This prompted the California Public Employees’ Retirement System (Calpers) to withdraw a shareholder resolution seeking the information.
Calpers’ Simiso Nzima, head of corporate governance for the $444 billion pension fund, said he saw 2021 as a promising year for climate concerns, with a higher likelihood of other companies also reaching agreements with activist investors.
“You’re seeing a tailwind in terms of climate change.”
However, Exxon has asked the U.S. Securities and Exchange Commission for permission to skip votes on four other shareholder proposals, three related to climate matters, according to filings to the SEC. They cite reasons such as the company having already “substantially implemented” reforms.
An Exxon spokesman said it had ongoing discussions with its stakeholders, which led to the emissions disclosure. He declined to comment on the requests to skip votes, as did the SEC, which had not yet ruled on Exxon’s requests as of late Tuesday.
‘A CRUMB BUT A SIGN’
Given the influence of large shareholders, activists are hoping for more from BlackRock, the world’s biggest investor with $8.7 trillion under management, which has promised a tougher approach to climate issues.
Last week, BlackRock called for boards to come up with a climate plan, release emissions data and make robust short-term reduction targets, or risk seeing directors voted down at the AGM.
It backed a resolution at Procter & Gamble’s AGM, unusually held in October, which asked the company to report on efforts to eliminate deforestation in its supply chains, helping it pass with 68% support.
“It’s a crumb but we hope it’s a sign of things to come” from BlackRock, said Kyle Kempf, spokesman for resolution sponsor Green Century Capital Management in Boston.
Asked for more details about its 2021 plans, such as if it might support Hohn’s resolutions, a BlackRock spokesman referred to prior guidance that it would “follow a case-by-case approach in assessing each proposal on its merits”.
Europe’s biggest asset manager, Amundi, said last week it, too, would back more resolutions.
Vanguard, the world’s second-biggest investor with $7.1 trillion under management, seemed less certain, though.
Lisa Harlow, Vanguard’s stewardship leader for Europe, the Middle East and Africa, called it “really difficult to say” whether its support for climate resolutions this year would be higher than its traditional rate of backing one in ten.
‘THERE WILL BE FIGHTS’
Britain’s Hohn, founder of $30 billion hedge fund TCI, aims to establish a regular mechanism to judge climate progress via annual shareholder votes.
In a “Say on Climate” resolution, investors ask a company to provide a detailed net zero plan, including short-term targets, and put it to an annual non-binding vote. If investors aren’t satisfied, they will then be in a stronger position to justify voting down directors, the plan holds.
Early signs suggest the drive is gaining momentum.
Hohn has already filed at least seven resolutions through TCI. The Children’s Investment Fund Foundation, which Hohn founded, is working with campaign groups and asset managers to file more than 100 resolutions over the next two AGM seasons in the United States, Europe, Canada, Japan and Australia.
“Of course, not all companies will support the Say on Climate,” Hohn told pension funds and insurance companies in November. “There will be fights, but we can win the votes.”
(Additional reporting by Sonali Paul in Sydney, Francesca Landini in Milan, Clara-Laeila Laudette in Madrid and Shadia Nasralla in London; Editing by Katy Daigle and Pravin Char)
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