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Federal Reserve zeroes in on climate risk

ESG investing

Federal Reserve zeroes in on climate risk

Plus: A big week for sustainability-linked loans, a campaign to ‘whistleblow for the planet’ and cryptos’ ESG issues

Lael Brainard, Federal Reserve governor, indicated that the US should consider making climate disclosures mandatory for companies © AFP via Getty Images

Good morning from New York. It has been a relatively quiet week around the (virtual) office because many of our colleagues have been on holiday with local schools closed for winter break. But the world of sustainable finance stops for no one. And we are here on duty bringing you the latest, including an important update from the Federal Reserve on climate change, a look at what’s next for the UK activists at Extinction Rebellion, an examination of cryptocurrencies’ ESG failings and some news on a couple of huge, new sustainability-linked loans.

Moral Money

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Fed’s Brainard backs mandatory climate disclosure

A lot has changed in the month since Donald Trump left office and Joe Biden took over as US president. This is perhaps most evident in the Federal Reserve’s approach to climate change.

After years of silence on the topic, the Fed has started to put climate issues centre stage. Shortly after Biden won the election, the central bank highlighted climate change as a threat to financial stability and moved to join the Network for Greening the Financial System, a consortium of central banks dedicated to supporting the goals of the Paris climate accord.

Now with Trump out of office and the Biden administration pushing hard to make up lost ground in the climate fight, Fed officials are speaking out more explicitly about climate risk and how they intend to take action.

“Financial institutions that do not put in place frameworks to measure, monitor, and manage climate-related risks could face outsized losses on climate-sensitive assets caused by environmental shifts, by a disorderly transition to a low-carbon economy, or by a combination of both,” said Federal Reserve governor Lael Brainard, at the Institute of International Finance’s inaugural climate finance summit yesterday.

This might sound underwhelming to our European readers, but for the central bank of a country that has been led for the past four years by a man who claimed climate change was a Chinese hoax, it represents major progress.

The change in tone is not just coming from the Fed, either. John Coates, the newly appointed acting director of corporation finance at the Securities and Exchange Commission, also spoke at the IIF event and made it clear that climate denialism is not on the agency’s agenda.

“Personally I’m going to do my part to help the SEC policy keep pace with developments that are affecting investors and public companies and capital markets . . . And in case anybody had any doubts [that] means respecting science and evidence and reality,” he said.

And Rostin Behnam, acting chairman of the US Commodity Futures Trading Commission (CFTC), said he was looking to “narrow the focus on what the CFTC can do” to support carbon markets and the transition to a low-carbon economy.

The financial sector is also signalling it is on board. The IIF, which represents more than 450 global financial services institutions, joined up with 10 other financial industry trade groups to publish a framework for how it believes the US transition to a low-carbon economy should take shape.

A significant issue highlighted by all of these parties is the lack of consistent data, and the Fed’s Brainard indicated that the US should consider making climate disclosures mandatory for companies.

“Current voluntary disclosure practices are an important first step, but they are prone to variable quality, incompleteness, and a lack of actionable data,” she added. “Ultimately, moving towards standardised, reliable and mandatory disclosures could provide better access to the data required to appropriately manage risks.”

There will be a lot of political hurdles to clear if US policymakers are to try to implement something like the EU’s green taxonomy, or New Zealand’s mandatory Task Force on Climate-related Financial Disclosures (TCFD) reporting requirements.

But Brainard’s comments are a strong indicator of the way the wind is blowing, and that should catch the attention of every executive in the country.

Even without mandatory disclosure requirements, there are still ways regulators can help fix the data problem.

With a growing number of institutional investors demanding ESG information from companies, these disclosures are becoming mandatory by default, the SEC’s Coates said. And when companies “volunteer” this information, they are legally obliged to tell the truth, which gives regulators an opening to get involved.

“If companies are making voluntary disclosures, for example in sustainability reports . . . they can’t be misleading the market in a material way, even in those non SEC-filed documents,” Coates said. “And I worry sometimes that the people involved in the production and consumption of those documents don’t remember that.”

We’re willing to bet it will be easier for companies to remember that obligation after being hit with their first climate disclosure-related lawsuit. And we will be anxiously watching to see how the US regulators take action. (Billy Nauman)

Sustainability-linked loan market soars with AB InBev, Carlyle deals

© Bloomberg

All the talk out of Washington and the IIF is just one sign of the growing prominence of sustainable finance — there were also some pretty substantial deals struck this week.

Anheuser-Busch InBev, the maker of Budweiser and Stella Artois, yesterday inked the largest-ever sustainability-linked loan — a $10.1bn revolving line of credit that will be more expensive if the brewer fails to meet a set of ESG goals linked to water use, plastic recycling, clean energy and emissions reductions.

Private equity company Carlyle this week also announced a $4.1bn loan with terms tied to diversity and inclusion. It will receive a discount on borrowing costs if it hits its goal of having women and minorities make up at least 30 per cent of the board members of the companies it controls.

These deals represent a major surge in sustainable lending. As of January 31, only $8.6bn worth of sustainability-linked loans had hit the market this year, according to Bloomberg New Energy Finance.

It is noteworthy that both of these loans are replacing existing lines of credit, and both are tied to ESG goals already set by the companies. In theory, this shows how banks (most of which have set ESG goals of their own) can promote wider responsible business practices through their lending operations, and how companies can use sustainable finance to make sure they stay on track with their sustainability goals.

Proponents of sustainability-linked bonds and loans also point out that these instruments have an advantage over green bonds and loans (which companies use to fund specific environmentally oriented projects) because they incentivise company-wide ESG improvements.

But for any of this to work, the goals being set need to be ambitious, and the carrots and sticks that come with these loans need to be substantial. Otherwise, the potential for greenwashing (or ESG-washing) is a problem.

Neither AB InBev nor Carlyle would provide specifics on just how much of a penalty they would face if they did not hit their goals. Both companies assured Moral Money that the incentives were meaningful, but without more information, it is impossible to judge from the outside.

As more of these deals roll in, it is clear why data and transparency are top priorities in the ESG world. (Billy Nauman)

These climate activists want you to dish dirt on your company

This month, some FT Weekend readers in the London area received an unauthorised insert in their February 6-7 edition of How To Spend It. In it, was a call to “whistleblow for the planet”.

Behind the insert was Extinction Rebellion, or XR for short — an activist group pushing for climate action from governing bodies and companies. The group solicited FT readers to out corporate climate misdeeds on its new platform, TruthTeller.Life.

The move is part of XR’s plan to get back on its feet this year after its Covid-19 “hibernation”, which made it difficult to organise and raise funds. The environmentalist group struggled to gain traction amid 2020’s competing crises of climate change, the pandemic and wider racial injustice — all while it battled leadership conflicts within its ranks.

Now the group is targeting potential whistleblowers as a core part of its new strategy as it works to redefine activism in the Covid-19 era. In addition to targeting FT readers, XR is also using LinkedIn ads calling on workers at companies such as Shell, Exxon, HSBC and HS2 to share “what they know”.

But in an age of high unemployment, leaning on employees to be the curtain-revealing stakeholders might be a bold move.

If you received a copy of “How to Save It” or have been targeted with XR’s LinkedIn ads, we would love to hear your thoughts. As always, email us at moralmoneyreply@ft.com. (Kristen Talman)

Cryptos’ ESG problems go far beyond climate

© Reuters

Last week we wrote about Tesla’s big bitcoin purchase and asked whether or not it had diminished the electric car company’s green credentials. Cryptocurrency mining, of course, consumes a lot of energy and scientists have estimated the emissions tied to the industry rival those of nations such as Sri Lanka.

But greenhouse gas emissions are only one of cryptos’ ESG issues. As Martin CW Walker, director of banking and finance at the Center for Evidence-Based Management, wrote in a piece published by the London School of Economics, cryptocurrency also has big problems with “S” and “G”.

On the social side, Walker concedes that crypto may have some privacy benefits, but he claims those are far outweighed by the fact that cryptocurrencies “facilitate criminal activity including tax evasion and evasion of exchange controls”.

He also dismisses arguments that crypto promotes financial inclusion and highlights the consumer protection problems created by those who manipulate crypto prices by publishing “demonstrably false” information that would be “illegal if provided by those offering other classes of assets for investments”.

As fund managers promoting ESG start dipping their toes into the crypto market, it will be interesting to see how their clients and sustainability advocates react. As Walker sees it, the issue is cut and dried: “Any mainstream fund manager or pension fund seeking to place a portion of their portfolio in crypto risks severely undermining their ESG credentials.” (Billy Nauman)

Chart of the day

The push to increase renewable energy in the US is not just about switching away from fossil fuels. There is also a need to upgrade the infrastructure to make sure that the green power that is being generated can get where it needs to go. And that is sparking a fight as people object to “stringing the land with ugly wires” and “hefty corporate rivals” aim to prevent green power companies from seizing market share.

Further reading

  • Harassment, pay and glass ceiling highlight consultancy gender gap (FT)

  • Surge in ESG Questions Prompts Managers to Adopt More Tech (FundFire)

  • Saving the planet is a software challenge too (FT)

  • Inside the London lab making climate-action clothes (HTSI)

  • Renewable energy: green bubble trouble (FT)

  • Daimler rules out ‘premature’ end to combustion engine sales (FT)

  • Pressure to Disclose Director Race, Gender Ramps Up (Agenda)

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