Thursday 18th January 2018
January 17th 2018: The Pure Gold Company says it has seen a 42% increase in first time investors purchasing gold so far this month compared to the same period in 2017, as renewed concerns over a possible crypto currency crash, geopolitical tensions and uncertainty over Brexit prompt safe-haven sales. Josh Saul, CEO of the investment firm says, “In addition to these underlying worries, the collapse of Carillion this week has impelled financial services professionals to buy gold in greater numbers too. We’ve seen a 69% rise in sales to people in finance citing fresh concerns over systemic risks caused by the collapse of the UK construction giant. More specifically, sales to investment bankers have risen 32% this week amid fears that businesses connected to Carillion, especially the banks, could be affected by the large amount of debt that is unlikely to be repaid. The expectation of another interest rate rise this year, against the backdrop of record debt and millions of people who, until November, had never experienced a rate rise before, is fuelling worries that people may have to sell property to pay unaffordable mortgages and debt. Our clients aren’t purchasing physical gold with a short-term view to making an immediate profit. It’s more about protection and wealth preservation during uncertain times. Many of our clients see it as a financial insurance policy that tends to increase as political, economic and monetary risks escalate. Looking ahead, these risks aren’t likely to abate substantially, prompting more people to look for a safe haven for their assets.” - “Republican leaders are struggling to avert a possible government shutdown in the US,” says Miles Eakers, chief market analyst at Centtrip, today. “As the government funding is due to expire this Friday, Republicans are looking for another short-term measure to agree on spending priorities while trying to keep immigration issues separate. The stopgap bill would ease pressure on President Donald Trump and the dollar in the short term. However, with mid-term elections for both the House of Representatives and the Senate due in November and Trump holding only a slim majority in both houses, the fact that the budget has not been formally agreed may be seen as potentially damaging to the president and the greenback.” - Ahead of the Bank of Japan’s (BoJ) monetary policy meeting on 22/23 January, Katsunori Ogawa, chief portfolio manager at SuMi TRUST, says the BoJ needs to provide more reassurance to the market given uncertainty around the next central bank governor and rumours surrounding policy changes: “We expect the central bank to hold its monetary stance. There has been recent anticipation around the BoJ’s move towards tapering but the likelihood of an immediate shift towards normalisation is low. However, market rumours have historically been a trigger for interest rate rises, and recent actions by the BoJ and the prospect of a new governor, are causing nervousness. Governor Kuroda, or his successor, will have to work to combat this uneasiness in the market surrounding policy changes. Governor Kuroda has indicated that he will persist with monetary easing until the 2% inflation target is reached but we feel that the BoJ has put too much emphasis on reaching this target. The central bank should be prepared to adapt policies according to the actual situation in the economic and financial markets without sticking too closely to the 2% target, as this was set as an emergency measure during a time of crisis. Looking at the global markets, stock and bond prices are high, while credit spreads and volatility are low, meaning that almost all financial assets are in a high price range. This is likely due to a large amount of liquidity supplied by central banks across the world, allowing returns to be made even in an environment of low interest rates. As there is no specific concentration in a single asset, extreme overheating - as was the case in past bubbles - is unlikely to occur this time round, but the BoJ must remain cautious in case there is a sudden change of tide in the market. Financial markets are also expecting the pace of US tapering to remain gradual and stock markets to maintain current stability. However, an adjustment of monetary policy in the US has often triggered a global financial crisis, so the BoJ cannot afford excessive optimism.” - Burberry shares are off 7% at the time of writing following disappoint Q3 trading figures suggesting retail sales fell by 2% over the reporting period, though business increased 1% on an underlying basis. Overall, sales of £719m fell below expectations. The rate of growth of Burberry exports to China and the Asia Pacific and the US also looks to be slowing. Mike van Dulken, Head of Research at Accendo Markets, notes: “today’s breakdown may have triggered a bearish flag towards last year’s lows of 1545p (-7%). Of note is UK retail sales growth down by high single digits, although it did face a tough comparable. EMEIA growth fell by low single digits. Growth in the US - its biggest market - was flat. A 1% negative impact from new space is also a blot, along with persistently negative key tourist spending and only a very marginal reduction in tax rate from 2018 thanks to US tax reform.” Meanwhile, Helal Miah, investment research analyst at The Share Centre, adds: “The key disappointment comes from the UK which left its EMEIA region to experience a sales decline, the reason being the difficult comparative to the prior year when tourists flocked to the UK to take advantage of the weak pound. However, the management’s view is that this should have been expected. The new management’s restructuring programmes and strategies are being implemented well as the group continues with creative collaborations with celebrities and social media engagement, areas where it has traditionally been strong. The focus remains on enhancing its digital capabilities while mobile transactions already represents roughly 40% of revenues and it has commenced initial discussions with wholesale partners. Despite the disappointing results, management have maintained cost savings target of £60m and expect to meet the full year profit target. We accept that it will be difficult to meet the previous year’s growth where a weak sterling boosted sales growth up to 40%, but these overall results were a little lacklustre when expectations on the group were beginning to pick up again. Given the high single digit sales decline in the UK, questions will also be asked on whether the high-end UK consumer is also feeling the pinch and being more cautious with its spending. However, for the medium to long term, China, the Asia Pacific region and digital sales remain all important and investors should be pleased that these areas have continued to do relatively well. We believe that the new management’s strategies will take time to bed in and with economic growth we will see better results in due course, but we remain cautious of management’s ambitions on taking the brand further upmarket, a strategy which didn’t payoff for other companies.”

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Investing in the good earth

Monday, 04 August 2014
Investing in the good earth After years of being in the margins, climate change is finally having its day on the page thanks mainly to President Barack Obama’s vocal support for the Environmental Protection Agency’s (EPA’s) announcement that it would propose limits on carbon emissions from power plants. Climate change industry supporters have been waiting years for the US to take the lead in the climate change management debate and in June their wish was granted; particularly as other high carbon emitters, such as China are now firmly on the emissions capping bandwagon. Has the new found enthusiasm for the wellbeing of the Earth come just in time or too late to really make a difference? If climate change can be delayed or averted, which firms are in the front line to benefit from a more munificent approach to climate change management by G20 governments? Lynn Strongin Dodds reports on the hope and the glory.

After years of being in the margins, climate change is finally having its day on the page thanks mainly to President Barack Obama’s vocal support for the Environmental Protection Agency’s (EPA’s) announcement that it would propose limits on carbon emissions from power plants. Climate change industry supporters have been waiting years for the US to take the lead in the climate change management debate and in June their wish was granted; particularly as other high carbon emitters, such as China are now firmly on the emissions capping bandwagon. Has the new found enthusiasm for the wellbeing of the Earth come just in time or too late to really make a difference? If climate change can be delayed or averted, which firms are in the front line to benefit from a more munificent approach to climate change management by G20 governments? Lynn Strongin Dodds reports on the hope and the glory.


Speaking at the University of California, Irvine graduation ceremony, the US president noted, “The question is not whether we need to act. The overwhelming judgement of science, accumulated and reviewed over decades, has put that to rest. The question is whether we’re willing to act.”

The answer is still not straightforward. There have been reams of scientific research showing that the planet is definitely getting warmer. The latest is a report from the United Nations Intergovernmental Panel on Climate Change (IPCC) which blames human activity as the major contributing factor to an increase in global emissions of greenhouse gases (GHG). They have grown more quickly between 2000 and 2010 than in each of the three previous decades and it warns that if action is not taken temperatures will jump to dangerous levels. Avoiding this scenario means cutting GHG emissions by 40% to 70% from 2010 levels by mid-century and to virtually nothing by 2100 in order to keep temperature hikes to manageable levels of 2 degree Celsius. At current rates, temperatures are on track to increase by 3.7°C to 4.8°C by 2100.

New research from the federal agency National Oceanic and Atmospheric Administration (NOAA) in the United States adds credence to these findings. It shows that 2013 was the fourth warmest year on record. Last year was also the 37th year in a row in which global temperatures were higher than the 20th century median. In addition, most of the planet’s land and ocean areas were warmer than average, or broke heat records throughout the year. Evidence of these facts can be found in, for example, Australia which underwent the hottest year on record over 104 years and Botswana and Namibia which suffered their worst drought since the 1980s.

Translating this into a financial cost is difficult and studies vary but according to the NOAA, the US experienced seven severe weather and climate disasters costing at least $1bn or more in 2013 alone, while globally, there were 41 billion dollar disasters, second only to 2010. This includes the severe floods that hit parts of the United Kingdom earlier this year, which the country’s Federation of Small Businesses estimates the cost to affected businesses to be in the region of $1.3bn.

Looking at the bigger picture, the IPPC report cautions that world gross domestic product could shrink by as much as 2% annually if global temperatures rise by a widely predicted 2.5°C. The accumulated cost of crop losses, rising sea levels, higher temperatures and fresh water shortages could mount to between $70bn and $100bn a year, at the very least, in developing countries alone.

However, despite a large and growing body of evidence for climate change, there are still many sceptics who believe that climate change is cyclical rather than systemic. In consequence, they decry any action that they regard as having no overall effect on climate but which, they say, will hurt the pockets of individuals and corporations. For example, political opinion is divided in the US over the EPA’s plan to cut 30% of emissions from US power plans over the 2005 and 2030 period. It is the most ambitious programme to date and the agency is adopting a flexible approach with each state being allowed to set targets based on their individual circumstances. Some lawmakers have rejected the Obama administration’s approach as an outright threat to the economy and there is criticism over the cap and trade system whereby the government issues emissions permits which companies can buy and sell according to their needs.

The United States already has two schemes: the Regional Greenhouse Gas Initiative (RGGI), covering nine states in the northeast and a programme in California. They have though become a proxy for broader political fights over energy and the environment. For example, legislation to introduce a federal cap and trade programme failed in Congress in 2010, and Republican opponents have said such systems create a new tax on electricity, consumers and businesses. Chris Christie, the governor of New Jersey, pulled his state out of RGGI in 2011, claiming it had no discernible impact on the environment.

The US is not alone. The European Union, home to the world’s biggest cap and trade scheme, is also facing opposition. The EU just reported its greenhouse gases in 2012 were 19% below 1990 levels but carbon prices in the nine-year-old scheme have flagged since the eurozone crisis, denting its effectiveness. In addition, countries are arguing over a plan to strengthen the system.

Meanwhile, the jury is out as to whether China will deliver on its objectives. The country’s National Energy Administration has been applauded for its efforts to lower coal's share of energy use to below 65% this year from 2013’s 65.7%, three years ahead of schedule while twelve of the country’s 34 provinces are aiming to reduce consumption of the fuel by 655m metric tons by the end of the decade. This would cut carbon dioxide emissions by 1,300m by 2020, according to research from Greenpeace. The success of the initiative will hinge on whether China can develop renewable energy such as wind and solar to complement nuclear and natural gas to displace coal power. Although this capacity can be built, it is expensive, and provincial authorities as well as industry have little incentive to switch to costlier power sources.

“The politics of climate can be challenging,” says Vikram Widge, head of climate finance and policy at the International Finance Corporation (IFC). “There was a shift away from a sense of urgency in the wake of the financial crisis but it has come back on the agenda and governments are looking to shift to a low carbon environment due to the costs incurred if we don’t invest in new technologies and solutions today. I think we will also see more activity over the next 15 months in the run-up to the UN Climate Conference in Paris next year.”

Hans Mehn, Partner at Generation Investment Management, believes that significant progress is being made but there is still a lot more to do. “In the last six years, there has been a real discrepancy between the headlines and the trend lines regarding the transition to a low-carbon economy. Leading up to 2008, there was great enthusiasm that new technologies would be able to emerge quickly to solve the climate crisis. The emotional euphoria turned to despair with the financial crisis and created a perception that green businesses could not be successful businesses. The reality has been that, in aggregate, there has been a steady drumbeat of adoption for renewable energy, energy efficiency and other solutions.

The business case has been demonstrated through a very challenging period and solutions businesses have achieved success and scale in incumbent industries such as energy, buildings & lighting, transportation, etc. However, penetration of these vast, global markets is still in the early days, and there is a long runway of adoption to be realised in order to have a significant impact on the carbon intensity of these sectors.”

The investors’ view

James Cameron, non-executive chairman of asset management and advisory firm Climate Change Capital agrees, adding, “One of the biggest challenges is that we have been pretending that climate change is an issue for the future when the evidence over the last 30 years has shown that it is a problem now. There have been many reasons for this science works by disagreement and there is political and economic power vested in the status quo. However, I think now there is a strong resolution to act on the evidence.”

Some of the world’s largest corporations have taken matters into their own hands, launching sustainability programmes to cut their own carbon footprint as well as develop new technologies. “Sustainability has become mainstream and many companies are looking at how they can create business solutions and turn it into a competitive advantage.” says Charles Perry, a director at sustainability group Anthesis-SecondNature. “In each sector, there are leading companies ranging from consumer group Unilever to retail giant Walmart as well as General Electric, M&S, Waitrose and Nike.”

General Electric started down this path before it became fashionable and has reaped the benefits. For example, an investment of nearly $2bn in research and development for sustainability innovation two years ago translated into roughly $25bn in revenue as of mid-July 2013. Meanwhile, four years ago, Walmart, the US’ largest private consumer of electricity committed to cutting 20m metric tons of GHG— equal to taking 3.8m cars off the road for a year—from its global supply chain by 2015.

In the UK, supermarkets such as M&S and Waitrose as well as the Co-op and Tesco have taken the lead, introducing programmes that set carbon reduction targets, improve water and energy usage through efficiency measures in shops and across the supply chain, as well as investment in renewable energy to power their stores.

One of the biggest challenges, according to Perry is “investors on the whole are currently not analysing sustainability. This is why the work being done by Carbon Tracker (a non-profit organisation) on stranded assets is so valuable.”

The concept is that listed oil, coal, mining and other fossil fuel companies that have embedded carbon reserves will become “unburnable” because of public policy restrictions on carbon. They account for over 10% of the worldwide equity market value. Putting this into an investment context, a study from the stranded assets programme of the University of Oxford’s Smith School of Enterprise and Environment estimates that equity divestment of oil and gas companies could range from $240bn to $600bn, and about half that figure for debt holdings out of the $12trn assets of combined US, UK and other regional public pension funds and university endowments.

To date, only a small but growing number of investors, including Rabobank, the Netherlands-based lender and Norwegian insurer and pension fund Storebrand, which has around $80bn assets under management, have divested these stocks. However, they are minnows compared with those that have stayed the course, such as CALstrs, the $176bn pension fund for Californian teachers. A turning point could be if Norway’s sovereign wealth fund, the world’s largest with over $840bn assets under management, decides to shed its fossil-fuel stocks, which comprise around 8% of its portfolio. It has recently established a working group to consider the matter.

“When assessing the risk of stranded assets, investors will be looking closely at each company’s marginal cost of production”, says Ian Simm, founder and chief executive at Impax Asset Management, which manages about £2.6bn, with about a quarter of that in the renewable energy sector across both listed equities and private equity infrastructure. “As the EPA and other agencies prepare to impose restrictions on carbon dioxide emissions, many institutional investors are rationally apportioning a higher risk premium to the ownership of some fossil fuel assets.”

Next generation companies

In the meantime, investors seem more interested in the new generation as well as more traditional companies that are mining new opportunities borne from the shift to a low carbon economy.

Simm believes there are good prospects in companies involved in renewable energy such as solar and wind, sustainable food and agriculture, and water infrastructure. It takes a global view with its top holdings ranging from US based water technology group Pall and waste management company Clean Harbour to Irish buildings energy efficient firm Kingspan Group and China Longyuam Power.

Generation, on the other hand, has a climate solutions fund that invests in small cap companies at the growth stage to high profile firms such as SolarCity, a leader in rooftop power systems and 20 year old Finnish group Vacon, a global manufacturer of variable-speed AC drives for adjustable control of electric motors, and inverters for producing energy from renewable sources. “Through this period not all businesses or solutions have succeeded, but the aggregate effort of innovation has led to increasing adoption of low-carbon solutions. Simply providing a green product is not sufficient. Successful innovators also need to deliver a compelling economic proposition to their customers with high quality products or services. It has largely been these leading business innovators who have catalysed the initial phases of the transition to a low-carbon economy since policy has been anything but consistent over the last years.”

“We are definitely seeing a growing number of opportunities and funds that invest in low carbon infrastructure and renewable energy, such as solar and wind,” says Kate Brett, a responsible investment consultant at Mercer, the consultancy. “There are also other ways investors can hedge climate risks, such as passive carbon-tilted indices, which strip out the most carbon-intensive stocks from the benchmark. In addition, there is a growing market for climate or green bonds, those issued to raise finance for environmental projects.”

These have included financing for renewable energy, energy efficiency (including efficient buildings), sustainable waste management and land use (including forestry and agriculture), biodiversity conservation and clean transportation and water. Until recently almost all climate bonds were issued by multilateral financial organisations such as the World Bank and the European Investment Bank, but there has been a recent spate of corporate activity. The most notable and the largest ever green bond, worth $3.4bn, was recently issued by GDF Suez, the French power company.

The Climate Bonds Initiative, a non-profit organisation that promotes investments to combat climate change predicts that total green bond issuance from all sectors will reach $40bn in 2014. Corporations could account for half of this figure based on issuance to date, according to ratings agency S&P.

Although supranational organisations welcome the company in the green bond market, they have also stepped up their efforts. For example, in 2013, the IFCC made $1.6bn in climate-related investments; more than ten percent of its overall commitments for the year. Projects included solar facilities in Morocco, South Africa and Latin America as well as advisory work with governments in emerging markets to develop insurance products that can safeguard farmers' assets as well as cover bank risks in order to promote increased lending to farmers. The most recent partnership was with the Centre for Agriculture and Rural Development Insurance Agency to support the development of typhoon index insurance for hundreds of thousands of its farmer clients in the Philippines.

“We are definitely seeing greater interest in climate change initiatives from emerging market countries as they become wealthier and there is a greater demand for energy, transport and houses,” says Widge. “We are also seeing examples of smart policies such as in Morocco and this is creating a shift in thinking.”



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