Welcome from New York where we have some exciting breaking news: Moral Money has been named newsletter of the year by the Society of American Business Editors and Writers. We are thrilled since, as the judges said, “the Moral Money newsletter is less than two years old, and it’s already won two SABEW awards”. (It’s very unusual to win twice in one category, and this was a general class, not green one.) The judges noted that we make “the reader feel like part of the conversation around pressing topics such as ESG investing, boardroom diversity, Big Tech and climate change” — so thank you to all our readers for joining this conversation.
Meanwhile, the Biden administration is keeping Moral Money (and everyone else) on our toes with constant snippets of news to cover. The latest? Sleuthing by NPR revealed this week that Biden’s proposed jobs package has earmarked $10bn for a “Civilian Climate Corps”, that would mobilise young(ish) volunteer citizens to combat climate change. Who knows if it will fly.
While we await the CCC, we explain below that universities are already scrambling to create their own climate corps initiatives, by educating financiers and executives on environmental issues — and we have a sobering explanation about why this is urgent given the rising housing risks. And on the other side of the Atlantic, European politicians are releasing more green standards too. Read on. (Gillian Tett)
Before Donald Trump’s election defeat, US financial regulators were reluctant to talk about climate change risks, lest they trigger the-then president’s Twitter vitriol.
But in recent months, the Federal Reserve, the SEC and other agencies have scrambled to address climate risks in the financial system. On Trump’s last day in office, the US housing regulator asked for help in identifying credit risks in the government’s trillion-dollar mortgage portfolio.
Several companies responded, but one of the most alarming submissions came from DeltaTerra Capital, an investment research company founded by David Burt, one of the protagonists in Michael Lewis’s The Big Short.
With help from a geospatial analysis, Burt detailed the mortgage loss expectations in two scenarios for the trillion-dollar portfolios at Fannie Mae and Freddie Mac, the twin government-backed housing agencies that were taken over by the government in September 2008.
In a worst-case climate scenario, Fannie and Freddie face portfolio losses that are about two-thirds the size of the blow they took in the 2008-2009 crisis, Burt said. While these losses could be absorbed by current capital cushions at the agencies, they would present big challenges for the mortgage finance industry and leave little room for other credit problems.
For Fannie and Freddie’s climate risk awareness, “I would say they are behind the curve,” Burt told Moral Money.
The biggest and most immediate problem is that many home values include natural disaster risks that assume the odds of crippling weather will stay constant. But studies increasingly show that global warming has intensified hurricanes and other weather disasters. Complacency has set in, Burt said.
Complicating matters, the agencies have a mandate to facilitate home ownership for worthy borrowers. This poses a problem if Fannie and Freddie need to tighten lending standards in certain areas, such as New Orleans, or impose mortgage insurance costs that could stifle borrowing. Introducing new lending constraints to address climate concerns “works against their primary objective”, Burt said.
The climate threat to housing has been building for years. Now, with Trump’s recalcitrant climate views no longer dominating, regulators have an opportunity to study climate risks seriously and prepare.
As Burt’s report points out, however, so far “we have seen very little in the way of risk measurement tools that apply directly to housing finance risk measurement and monitoring”. (Patrick Temple-West)
European authorities are likely to adopt a new green finance metric that could cause banks to rethink lending policies for businesses with high greenhouse gas emissions, rating agency Fitch has warned.
The so-called green asset ratio (GAR), proposed earlier this year by the European Banking Authority, would require banks to report on how much of their portfolio is dedicated to climate-friendly businesses.
The details are being hammered out and the first disclosures are likely more than a year away, but Fitch believes the consequences could be significant.
If and when EU banks are required to publish their GAR, it may “[force] lending shifts as [banks] seek ‘greener’ assets and reduce funding for ‘brown’ assets,” Fitch writes. “Banks may also face funding pressures if more sustainable investors shun banks that report lower ratios.”
The GAR will also provide a means of public accountability for all of the banks that have made net-zero pledges in recent months.
This will be welcome news to climate activists that have been putting pressure on banks to cut off the money “pipeline” for fossil fuel companies.
But it remains to be seen how the final rule is shaped, and how strong of an effect it may have.
The rule is up for comment and will undoubtedly face pushback from fossil fuel producers and other heavy emitting industries.
Another potential problem is that the GAR is set to be linked to the EU’s long-awaited green taxonomy, which has come under pressure from a broad spectrum of critics.
On one side, environmentalists have blasted the taxonomy for being too broad after reports came out that it might classify natural gas as a “green” fuel. And at the same time people such as former Bank of England governor Mark Carney (pictured) have warned the taxonomy may be too strict.
The GAR will also only cover a portion of banks’ financing activity, and there will surely be ways to game the system.
But, even with all those caveats, Fitch believes the rule will succeed in pushing banks to be more green.
“There’s going to be a lot of internal pressure [at banks] because no senior management will like to come out looking badly on the ratio,” Janine Dow, senior director, sustainable finance at Fitch Ratings. “A number of the banks that we’ve spoken to have explained that they think once the ratios are published that they will have to be doing a very crafted and careful marketing exercise . . . in the event that their ratios are not very good, they will have to explain why.” (Billy Nauman)
Finance professionals across the globe are hitting the books to learn the ins and outs of climate change.
In the hope of equipping portfolio managers and analysts with greater insight into climate risks and their implications on portfolios, asset manager AllianceBernstein sent 250 investors back to school in 2019.
Now they have struck an exclusive corporate partnership with Columbia University’s Climate School to collaborate over the next three years on “long-term, in-depth research” into the intersection of climate change and financial services.
Across the Atlantic, the European Investment Bank followed a similar path by seeking out the IMD business school in Switzerland for a customised course called “Building a Climate Bank” specifically for senior executives.
Led by Francisco Szekely, professor of leadership and sustainability, the course was designed to advance the EIB’s goal of aligning existing green bonds to the EU’s evolving sustainable finance legislation, including the EU Taxonomy Regulation, the bank told Moral Money.
We would not be surprised to see more moves like this. As climate change gets worse and governments crack down on carbon emissions, investors will need to know everything they can about environmental risks.
And, if there are any university students reading this, please let us know if you spot any portfolio managers or central bankers around campus doing keg stands. (Kristen Talman)
US sustainable funds accumulated a record $21bn in net inflows in the first three months of 2021, according to a new report from Morningstar. The sum surpassed the $20.5bn of net inflows secured in the fourth quarter of 2020, the previous record high.
But the US action was dwarfed by Europe. Sustainable funds in Europe attracted an all-time high for inflows at $146.7bn, compared with $124.4bn the previous quarter. European sustainable funds garnered more money than their conventional peers, capturing 51 per cent of net inflows into the overall European fund universe.
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.
A majority of AstraZeneca shareholders on Tuesday voted against a bonus for chief executive Pascal Soriot, marking the latest investor revolt over pay in what is shaping up to be a record year for dissent.
The AstraZeneca vote came the same day that the Institute for Policy Studies, a liberal-leaning Washington think-tank, published a report identifying 51 large US companies that rewrote executive pay plans during the pandemic to make bonuses easier to earn.
Speaking on a panel coinciding with the report’s release, Abigail Disney, Walt’s great-niece, said corporate bonus schemes have established a “caste” system dividing executives from their front line workers. The bosses, she said, “have been rewarded obscenely”.
Do Moral Money readers think this a one-off response to the pandemic or a turning point in the executive pay debate? We are eager to hear your thoughts about this year’s shareholder revolts and the perennial question of how much is too much? Please email us at
Nikkei’s Tamami Shimizuishi helps you stay up to date on stories you may have missed from the eastern hemisphere.
The Asian Development Bank (ADB) will no longer finance new coal power projects, according to the policy draft it released late last week. The draft also said the ADB will support member countries in achieving “a planned and rapid phase-out of coal in the Asia and Pacific region”.
The statement echoed another multinational development bank’s attitude towards coal. The Asian Infrastructure Investment Bank “will not finance any projects that are functionally related to coal,” Jin Liqun, the AIIB’s president, said last autumn.
The ADB’s new coal policy is “a positive step,” said Simon Nicholas, energy finance analyst at the Institute for Energy Economics and Financial Analysis (IEEFA). But he also pointed out that “it will make official what was already happening in practice”. As the ADB noted, it has not financed a coal power plant since 2013.
While the wave of official divestment from coal among multilateral development banks is gathering pace, individual countries’ development-related banks and institutions are lagging behind.
“Japan and China constitute the last strongholds of public international coal financing,” said David Ryfisch, team leader of international climate policy at the NGO Germanwatch. While South Korea committed to ending overseas coal financing during the US climate summit in April, neither Japan or China did so.
For example, the Japan International Cooperation Agency (JICA) is under scrutiny for its involvement in coal plants in Bangladesh.
The environmental warriors also want the ADB to take its green efforts further. “For a truly ambitious energy policy, the ADB would also need to exclude gas financing except for very rare circumstances. Otherwise, we risk locking in just another fossil fuel for decades”, Ryfisch said.
Please check out the FT’s new special report on sustainable investing in Brazil. The series includes an article from our colleague Michael Stott about the ESG reputational crisis facing Brazil, with concerns ranging from deforestation of the Amazon to eroded protections for indigenous peoples.