Green Finance Blossoms

The perfect storm is right now

The world is facing the perfect storm for environmental change. We are at the most exciting time to fight climate disaster in the last four years. The US is set to rejoin the Paris Agreement, China announced it will be carbon neutral in 40 years, and the mid-November Green Horizon Summit hosted by the City of London saw a handful of key regulatory and financial advances.

Despite weather-related catastrophes like wildfires in California and massive flooding in parts of Asia during his term, outgoing President Trump stuck to his early decision to withdraw from the Paris climate accord. Incoming President Biden, instead, affirms his intention to lead a diplomatic initiative to go beyond its current goals of keeping the temperature rise well below 2 degrees Celsius this century. Sustainability is central to the President-elect’s agenda. 

Biden has not simply jumped on the latest bandwagon: he was responsible for one of the first climate change bills ever introduced to the Senate. His goal is for the US to be net zero emissions by 2050, and he has promised to create an enforcement mechanism by the end of his first term. That is a crucial element in a democracy where those who deny climate change represent a substantial force and could back in power in four years.

Meanwhile, China may be the world’s largest emitter of greenhouse gases, but its leadership has now taken a stand on the issue.  A couple of months ago, President Xi Jinping announced at the UN General Assembly that his country will achieve carbon neutrality by 2060, only ten years after the US, not a simple achievement for a fast-growing economy that relies on coal.

In part, this plays into China’s narrative of being a responsible member of the international community, ably contrasting with US withdrawal under President Trump.  However, with a Democratic Party administration in place from 2021, one that will continue to stand up to China’s military and economic might, cooperation on climate change looks likely to be the one area where the two superpowers can work together and achieve major progress on tackling the environmental disaster.

The third part of the equation is not as headline-grabbing as the first two but is arguably as important for its private sector consequences. Last week the Financial Conduct Authority (FCA) announced that from January 1st all London-listed companies will have to disclose how climate change affects their business under Taskforce on Climate-related Financial Disclosures (TCFD) standards; the Bank of England announced the launch of its climate stress test for financial institutions in June 2021; Chancellor Rishi Sunak announced the launch of the first green gilts (UK green treasury bonds), in essence government borrowing for low-carbon projects.

London hosts the world’s most global stock exchange, while the City of London is, still, the centre of international finance. Thus although these UK rules may have arrived after those of the European Union, a leader in this sector, they will have global consequences.

In fact, it is indicative of the City’s aim to lead on green finance that China Yangtze Power plans to list on the London Stock Exchange (LSE). It will be the first Chinese company to receive the LSE’s ‘Green Economy Mark’ for companies that derive at least half their revenues from the green economy. Yangtze Power is the world’s biggest hydropower plant operator in terms of capacity.

Meanwhile, the carbon credit market – where regulatory allowances for emissions can be bought and sold – looks like becoming mainstream. This summer, the KFA Global Carbon ETF listed in New York. The exchange-traded fund tracks the performance of the world’s three most liquid markets for carbon credits.

Critics argue there is a plethora of standards on the environment, making it almost impossible to compare like with like and allowing ‘greenwashing’ of projects and companies. These are but growing pains that will sort themselves out. And the reality is that helping companies transition from high carbon-producing energy via ‘brown bonds’ is just as important for the world economy and jobs as the ‘green bonds’ that finance more fashionable endeavours.

A more meaningful criticism is of the asset managers who are slow to take action while their CEOs publicly take companies to task.

BlackRock, the world’s largest investor, is a case in point. A report released last year by Friends of the Earth and other activist groups concluded that the company’s investment in sectors like palm oil and rubber which generally encourage deforestation had increased by over half a billion dollars in the past five years, while its CEO Larry Fink sends out self-reverential missives.

Admittedly it is far from easy to steer a different course quickly when captain of a behemoth with over $6.5 trillion in assets. What will help move the dial is the FCA’s aim to introduce TCFD obligations for the largest asset managers, life insurers and pension providers by 2022. In the US, even with a divided Congress, the new President could use government procurement as a lever, while the Securities and Exchange Commission (SEC) can write mandatory rules for listed companies.

ESG funds already have $40 trillion under management, and growing apace.

A few other factors are critical. Generation Z and millennials form an ever-larger part of the workforce and are pressuring companies to make stronger commitments to change; living legend David Attenborough and environmental campaigner Extinction Rebellion and others are stepping up their activities; and the 2021 COP26 global climate talks in Glasgow will lead to more advances.

Last, zero interest rates allow governments to invest in a sustainable economy at a time when the pandemic-induced crisis demands job creation in new sectors. At the time of writing, UK Prime Minister Boris Johnson was due to announce a ten point plan to combat climate change, including new national parks, energy efficiency for homes and businesses and innovation funding to achieve net-zero.

Dealing with major global problems relies on collaboration between countries and between the private and the public sector, underpinned by dynamic and innovative financial systems. In a potentially more civil era ushered in by Joe Biden’s arrival in the White House, the next few years look like being ground-breaking in transforming how we produce energy – with outer space a distinct possibility for solar farms over the next decade.

In the words of Antonio Guterres, Secretary General of the United Nations,”Decarbonisation is the greatest commercial opportunity of all time.”

The world awaits you

My LSE graduation speech

This is an edited version of a graduation speech given at the London School of Economics in July 2019.

Good afternoon, Graduates of the London School of Economics and Political Science. It is your day, and your careers, and your new lives, which start today.

 “I was at the LSE. I graduated from the LSE. I’m an LSE Alumnus.” Those words are like saying “Open Sesame.” For the world lies open to you. You will end up working for the Government of China, for NGOs, for PWC or Goldman Sachs or Google. You will be entrepreneurs, social impact investors, data scientists, academics, prime ministers and presidents…we would be here all day if I kept on going. 

I have spent most of my life involved with the City of London. I am proud to say, we are awash with LSE graduates. I can’t quite get away with saying that is the only reason the City is a centre of global excellence! But it is certainly a big one.

Despite its small size, the LSE is the second best university in the world for the social sciences. And Social Scientists are those most crucial to solving deepening inequality, health crises, resurgent racism and global conflicts. All amid the collapse of the international rules-based order.

We have graduates from many departments present today, ranging from Accounting to Anthropology to Behavioural Science. But don’t be distracted by arbitrary distinctions. Cross-silo collaboration, a blending of your different skills and knowledge, is the way forward.

And for those of you going into the City, or into finance anywhere, remember that capital and innovation are crucial in all fields – from Green Finance to deal with climate change, to upgrading asset management so that it delivers value to all.

Shareholder primacy and the Washington Consensus on economic growth had their time in the sun. Today, a couple of years after the election of Donald Trump, we see an avalanche of books with titles like “Democracy and Prosperity – the Reinvention of Capitalism in a Turbulent Century” and articles in the mainstream press headlined “Populists have a point, the system has to change.”

At the end of last month Christine Lagarde, former Managing Director of the IMF, quoted Aristotle on the need for a personal sense of purpose to be linked to a social purpose. Speaking in the heart of the City at the annual World Traders’ Tacitus lecture she called for the financial sector to develop “broader social responsibility.”

She noted that Fintech is producing cheaper and more accessible products to drive an inclusion revolution; that a higher share of women on boards correlates to more financial stability and sustainable growth; that the younger generations prefer to invest in financial instruments with social impact.

[At this moment Boris Johnson was walking into number 10 Downing Street. I could not resist a partisan ad-lib.]  Taking power today is a new Prime Minister who is intent on saving the Conservative Party, rather than working for the good of of the greatest number in the UK. These are not LSE values.

Achieving social cohesion in our societies is key. The widening of the net of financial and societal gains of the last forty years is essential to support democracy and sensible government.

I shall finish with the most memorable sentence in American President John Kennedy’s inauguration speech, adapted for you, my audience, on this special day. Of course he attended the LSE – many global leaders have, and will.

“Ask not what the LSE can do for you, but what you can do for the LSE.”

Huge congratulations, graduates of 2019. The world awaits you.

The Tale of a Whale

The precariousness of JP Morgan Chase

The New York tourist sitting next to me with the map of London spread out on his lap asked where he could find the London Whale. Seriously. Unlike the London Eye, I told him, the London Whale was a human being, albeit a metaphorical landmark.

The London-based JP Morgan Chase trader’s nickname derived from his large positions in the credit market, which in the summer of 2012 resulted in the bank declaring a $5.8bn loss. It subsequently faced major fines from both the UK and US regulators for, among other things, its lax supervision and for not “adequately updating” its audit committee on the findings of an internal review, in the words of the Securities and Investment Board (SEC). The bank agreed to around $20 billion in legal settlements in 2013, almost equal to a typical year’s profit, for a range of misdemeanours.

Bereft of its gobbledygook, SEC’s phrase can be translated as “deceitful behaviour.” In other words, culture.

A recent survey highlighted that two thirds of global banks agree that a big part of the financial crisis was due to culture but only one third of banks thought there was anything wrong with their culture (my italics).

Transforming an institution’s culture is a lengthy journey, rather like chasing Moby Dick, the symbolism-laden whale in Nathaniel Hawthorne’s classic book of that name. As well as obvious factors like overhauling compensation, banks need to exercise integrity through sound judgement and rewarding decision-makers who have the guts to say no.

A very sensible suggestion on culture put forward in the Salz Review (an assessment of what went wrong at Barclays Bank pre and post the financial crisis ) was for bankers to spend two years on secondment to the financial regulator and vice versa. It appears to have sunk without a trace, despite the fact that there is a model for how to do it in the Takeover Panel, the UK’s M&A regulator, which regularly hosts top bankers and lawyers who then return to their firms.

Box-ticking is not the way forward. Unfortunately, though, the plethora of rules spewing forth from different regulators, like water from a whale’s blowhole, makes it overwhelmingly necessary. How else can universal banks active in a number of countries deal with the US’s Volcker Rule, the UK’s Vickers, the EU’s Liikanen, let alone Basel III, which appears to already be disintegrating? In fact, each country seems to be setting its own rules and banks are retreating home, capital in tow.

To add insult to injury, no sooner have banks complied with a rule that the regulator changes it. The Basel Committee admitted this autumn that perhaps securitisations per se were not “bad.” Without saying it in so many words, the implication was that forcing banks in 2009 to post higher capital requirements against them – as though all securitisations were similar to sub-prime mortgages – was wrong. The Committee is set to review the issue sometimes in 2014.

Meanwhile, the absurdity of zero or very low capital requirements on holding sovereign debt has steered banks to load up on it. This may be very useful for over-indebted governments, but as Jens Weidmann, President of the Bundesbank noted late last year, “the current regulation’s assumption that government bonds are risk-free has been dismissed by current experience.”

In truth, it doesn’t take familiarity with the last few years to realise that ‘risk-free government bonds’ has always been an oxymoron. In the best of cases their value has been damaged by inflation or currency devaluation; at the worst it has been destroyed by restructuring or default.

Moby Dick evaded his pursuers, but most of the crew of the Pequod, the whaling ship, met their death because they dared not stand up to Captain Ahab and his lack of judgment.

JP Morgan Chase’s Chairman cum President cum CEO Jamie Dimon – yes, truly three titles – admitted a few weeks ago that some investigations into the bank were just beginning, which does not bode well for 2014 results.

In May Mr Dimon fought off a shareholder revolt that would have seen him lose his position as chairman by letting it be known he would walk from the bank if this happened. The blackmail worked. He kept his triumvirate of titles and continues to lead the largest bank in the US.

This is a sell notice. It has the same whiff of omnipotence that marks the reigns of presidents who succeed in changing constitutions to allow them yet another, and another, and another term in office.

The Pequod had a problem of culture. We shall see how the tale unfolds for some of the banks, not least JP Morgan Chase. But the omens are not good: absolute power really does corrupt absolutely.*

*This column originally appeared in The Dialogue Review, an academic journal.