Speedy climate action could boost inflation, warns BlackRock’s Fink

Good morning from New York, where we are all closely watching the upcoming mayoral election. As a centre of international finance, what happens in local politics here can have an effect far beyond the five boroughs.

Gothamist has put together a great primer for anyone interested in the top candidates’ climate plans. And if you don’t care about New York, well, just keep reading! Today’s Moral Money newsletter is jam packed with coverage from across the globe. — Billy Nauman

Heating up: Fink warns fast climate action could boost inflation

Larry Fink, BlackRock’s chief executive, has been vocal in pushing companies to agree to a net-zero carbon target by 2050. But there is good reason not to move too quickly, the head of the world’s largest asset manager said.

Accelerating the race to green the economy would raise the prospect of higher inflation and pose a major policy challenge for many countries, Fink said in remarks at the Deutsche Bank global financial services conference.

Citing the example of airlines (biofuels are 50 to 60 per cent more expensive than current carbon based sources), Fink said a mandate to go green quickly would result in higher ticket prices. This would ultimately prove too disruptive for the economy and would not fly politically given the likelihood of “displaced jobs and deepening regional inequalities”.

“The transition has to be fair and just,” said Fink. “We do not have the technology yet” for a smooth transition. “This is a big policy issue” in terms of whether regulators and governments “accept more inflation to go green”.

Regarding the macro outlook, Fink said the main question being asked by financial markets was whether the economy was at risk of overheating. After three decades of low inflation readings, Fink said inflation rising above 3.5 per cent would be “a big shock” for markets.

Also participating in the discussion, Christian Sewing, chief executive at Deutsche said there was a need for greater global co-operation in nurturing a green transition and warned that divestiture of carbon assets into private hands “doesn’t help the next generation” and it is “not the right thing to do”. Sewing also reiterated that Europe required a capital market union in order to help finance the green transition. (Michael Mackenzie)

PS catch up on our latest series on inflation here.

Ruffling feathers at the green swan conference

The Bank of International Settlement’s Green Swan conference kicked off this week bringing together central bankers from around the world to address climate risk.

In the run-up to the conference, people like Banque de France governor François Villeroy de Galhau expressed optimism that financial regulators would step up their actions on climate. But some conference participants are not so sure.

Despite the Biden administration’s affinity for climate protections, the US still might be reluctant to embrace tough government action to combat global warming, said former US Treasury and Federal Reserve official Sarah Bloom Raskin.

Speaking at the event on Wednesday, Bloom Raskin said it made little sense to take a “wait-and-see” approach to a risk that “[introduces] unplanned-for and exceedingly high costs to the economy and society”.

But nevertheless, in the US, “the assumption is markets will fix the climate,” she said. “The use of financial regulation might come later.”

This will be disappointing to advocates of stricter green finance rules, to be sure. But, they should not lose all hope. There are also signs that some central bankers who previously argued against taking climate action are backtracking.

On Wednesday, Bundesbank’s president Jens Weidmann “opened the door” to limiting the European Central Bank’s bond purchases from polluting companies, Reuters reported.

Writing in the FT last year, Weidmann took quite a different position. He said the ECB and central banks should not “penalise or promote certain industries.”

“Our primary objective is to maintain price stability,” he said then. But his comments on Wednesday suggest he has relaxed his concerns with central banks taking a proactive role in the global warming fight.

The conference continues today with the highly-anticipated panel that includes Yi Gang (pictured), the People’s Bank of China governor, the Federal Reserve’s Jay Powell and ECB’s Christine Lagarde (our own Gillian Tett is moderating). We will keep you up to speed as the conference concludes. (Patrick Temple-West)

BofA says ESG bubble fears overblown

Earlier this year, we wrote about how investors were starting to worry about a bubble brewing among ESG stocks. But new research from Bank of America should deflate some of those fears.

There is still “frothiness” among clean energy companies, but BofA found that premiums for companies with high ESG scores were dropping rapidly.

“While stocks with top quintile ESG scores based on MSCI data traded at a 20-30 per cent premium to bottom quintile stocks several years ago and as high as a 50 per cent premium at the onset of Covid-19, that premium has shrunk to merely 5 per cent today. Sustainalytics and Refinitiv data sets yield similar results,” BofA analysts write.

A likely reason for this is that investors are becoming more sophisticated with how they use ESG data, said Marisa Sullivan, equity and quant strategist at BofA.

Instead of throwing money at companies with a good top-line ESG score, “investors are digging deeper”, she said. “They have more granular data at their fingertips. They’re starting to adopt a more nuanced view of what is, for example, green.”

The shrinking premiums have done nothing to cool ESG demand, either. As of April 30, inflows into global ESG equity funds were up nearly 200 per cent from last year.

And just because there is no premium for “good” ESG scores, alpha can still be found in ESG investing, Sullivan said.

“It’s an area where you, as an active investor, can really dig in place some bets and make some differentiated calls because things are changing so quickly within the sustainability space,” she said.

(Billy Nauman)

Originator of ‘womenomics’ starts ESG venture capital fund

Since the end of 2020, the financial community in Tokyo has been wondering what might be the next move for Kathy Matsui (pictured), the longtime chief Japan strategist at Goldman Sachs, perhaps best known as the originator of the term “womenomics”.

When she stepped down from Goldman last year, there was no shortage of possibilities for her career: dozens of activist funds, corporate board seats and private equity all beckoned with powerful allure. But, as she revealed earlier this week, Matsui had other plans: to set up her own venture fund, initially targeting $150m, that would help guide entrepreneurs through an emerging business environment defined by ESG goals.

Pitching the project as Japan’s first ESG-focused global venture capital fund, Matsui has co-founded the MPower Partners Fund with three other women — Yumiko Murakami, Miwa Seki and Eriko Suzuki — each with extensive backgrounds in finance. The fund will mainly target growth to late-stage domestic Japanese start-ups, while reserving about a third of its capital for earlier-stage overseas investments.

In addition to capturing the rapidly growing Japanese investment interest in ESG themes, the fund’s strategy is based on the idea that Japanese start-ups in particular need to build ESG thinking into their business approach as a precursor to any global ambitions they might have.

The fund is in part a retort to the longstanding myth that Japan is not a natural incubator of entrepreneurship, while addressing the reality that the VC market in Japan remains small and immature. Early investors in the fund include two of Japan’s largest insurers, Dai-ichi Life and Sompo Holdings, along with the banking giant Sumitomo Mitsui Trust. 

Matsui’s persistent emphasis on the need for corporate Japan to address its lack of gender equality and diversity hit its stride from 2015 with the passing of Japan’s first governance code, the global rise of ESG investing and with the declaration of the then-prime minister, Shinzo Abe, that his government would help women “shine”. The impact of those three factors on corporate Japan, and on its progress in areas such as diversity, remain patchy at best. (Leo Lewis)

Chart of the day

Why should financial regulators care about climate risk? Because, as this Bank for International Settlements chart shows, it threatens the bottom line of a lot of companies. In a recent report, the BIS examined the syndicated loan market to see how borrowers would be affected if (or when) carbon prices are introduced.

For this exercise, they modelled what would happen if a global carbon price were instituted at $100 per tonne (a price many experts believe would be necessary to achieve the Paris climate goals) and found that 30 per cent of borrowers in the syndicated loan market would face a potentially material loss of revenue that could affect their credit rating.

Smart read

Charlie Penner might not be a well-known name in the sustainability community, but as head of active engagement at the activist hedge fund Engine No 1, he slayed the oil company ExxonMobil in the boardroom*. “Penner was lured to Engine No 1 by the idea of a new firm focused directly on impact investing,” our FT colleagues wrote in an excellent profile of Engine No 1.

Further reading

• The EU’s new sustainability rules spell trouble for many businesses (FT)

• Why executives should always listen to unreasonable activists (FT)

• Only government can make fashion sustainable (BoF)

• Bank of England aims for net-zero emissions before 2050 (Reuters)

*= This article has been amended since initial publication to correct Charlie Penner’s position at Engine No 1.