Carbon conscious commodities and Denmark’s green bond innovation

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Welcome to Moral Money. After a wild week at Davos, we are back to our regularly scheduled programming (well . . . almost). If we’ve learned anything over these first seven months it is that there is more to cover in the world of ESG and responsible capitalism than we ever expected.

So we have some good news. Starting this week, we will be publishing two newsletters a week — one on Wednesday and one on Friday. We have exciting plans to expand our series of in-depth interviews with sustainability leaders, and to provide even more of the news and analysis you can’t find anywhere else. Watch this space . . . we are only just getting started.

Today we have:

  • An innovative plan by Denmark to sidestep some of the problems that can come with issuing green bonds — and protect its coveted AAA status

  • A key metal market is making moves to push miners to monitor their carbon output

  • Carbon costs can be a shadowy affair — but regulators want to shed light on companies’ internal pricing

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All that glitters is not gold . . . or environmentally friendly

Last week in Davos, it was clear that businesses of all stripes face rising pressure to raise their sustainability game in 2020. The mighty London Metal Exchange is no exception. 

Last year the exchange announced plans to introduce new rules in 2022 to clamp down on metals that are produced using child slavery, environmentally damaging practices and other socially negative actions. 

Now the exchange is considering introducing measures to disclose the carbon footprint for commodities on its platform. “We have noticed how momentum is building [behind ESG], and we are now being challenged to move to true environmental and carbon [reporting],” Matthew Chamberlain, chief executive of the LME, told Moral Money. “This will force the LME to force producers to disclose their carbon content and other environmental metrics, and create vehicles to facilitate the trading of low carbon and specific metals.”

Mr Chamberlain said it would not be easy to implement this shift. For most of its 143-year history, the LME only tracked the quality of metallurgy, and it has taken time for officials to widen their lens. “At the outset, I was not 100 per cent sure that this is the right way to go,” he said. “But having been through this [ESG] journey, I now think this is the right thing to do — and the industry has been on the same journey.”

The practicalities may still be challenging. “On child labour there is global consensus about standards but on carbon there is no consensus,” Mr Chamberlain said, and transparency differs between different commodity sectors. “The easiest one is a sector like lead where the environmental issue has been known for some time — most lead is already recycled. The hardest is cobalt,” he said. “And the biggest focus is aluminium, since that has a big environmental footprint.” 

Despite the hurdles, Mr Chamberlain said that the LME needed to press ahead with its adoption of ESG principles, working alongside groups such as the OECD. “The OECD has done good work on supply chains — but it is almost impossible for them or any government to fully monitor global supply chains,” he said. “So we came under a lot of pressure to say that the LME should step up and . . . embed those requirements.” Commodity traders, miners and other metal users stand warned. (Gillian Tett)

Denmark pushes for sovereign green bond innovation

The Danish government is pursuing an innovative, and potentially less risky, approach to issuing “green” government debt. In essence, it involves splitting the financial commitment from the green commitment to create a “twin bond” for two separate markets.

Like many AAA-rated sovereigns, Denmark has been wary about issuing a conventional green bond, concerned that it could affect the size and liquidity of the nation’s debt market.

“One of the natural ways you minimise cost is you try and ensure all your bonds are as liquid as possible,” Robert Stheeman, head of the UK’s Debt Management Office, told the FT last week, as he explained his aversion to issuing green government debt. “In our case that usually means building up benchmarks to £20bn-£30bn size. Smaller one-off bonds tend to fragment that process and the market is not necessarily willing to pay a liquidity premium for those smaller bonds.”

Instead of issuing a single bond earmarked for climate-friendly national expenditure, the Danish government will split “green bonds” into a conventional bond and a “green certificate”, which will be sold together at “green auctions” but can then be traded separately.

“If you’re a Danish investor, if the current degree of demand for green debt continues to rise, that green certificate will increase in value over time,” said Dennis Shen, Associate Director in Public Finance at Scope Ratings. “It’s about issuing green debt without hurting yourself.” (Anna Gross)

Few banks using ‘shadow’ internal price for carbon

Moral Money has covered transatlantic divisions over taxing carbon, but there is another challenge: few financial companies have their own internal price for carbon with which to assess projects’ profitability or reputational risk, according to a survey published by the Institute of International Finance on Tuesday.

Carbon prices aim to measure the cost of greenhouse gas pollution and can be tied to markets such as the EU’s emissions trading systems or to a carbon tax. 

Non-profit groups such as CDP have been working with companies to develop carbon pricing metrics but only about 21 per cent of financial companies are using a “shadow” carbon price internally, and 14 per cent say they plan to do so, according to the IIF. Banks outside Europe and in emerging markets were more likely to have a shadow carbon price, it found.

That suggests many more will come under pressure as governments show increasing interest in requiring companies to report their use of internal carbon prices.

As Erik Thedéen, director-general of Sweden’s financial supervisory authority, put it: “Only a few companies use explicit internal pricing and disclose it, but mandatory disclosure will create peer pressure to ensure they use an effective carbon price. (Patrick Temple-West and Anna Gross)

Chart of the Week

A graphic with no description

The world’s increased focus on “responsible” capitalism is affecting companies far beyond their own operations. Investors are not just concerned about companies embracing ESG internally, but also throughout their supply chain — where issues such as modern slavery can be rampant.

This data shows how much of the MSCI ACWI index (by market cap) has been reported to have used forced labour, but Sudhir Roc-Sennett, Vontobel Quality Growth’s head of thought leadership & ESG, said this is only scratching the surface. The reports of forced labour in the chart, as collected by Sustainalytics, are only those that have been reported in the media. The different colours correspond to the severity of the incidents — with 10 being the highest. As investors begin to force companies to hold their suppliers accountable, more will surely come to light. (Billy Nauman)

Grit in the oyster

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.

Companies warn of huge black market in greenhouse gas

Hydrofluorocarbons (HFCs), which are used in air-conditioning units, have been illegally pouring into the EU in defiance of quotas that the bloc established to limit environmental damage, writes the FT’s Jude Webber.

The HFCs, which often originate in China, are being trafficked into the EU through Turkey, Russia and Ukraine and costing big manufacturing companies in lost profits. 

In the words of Mark Vergnano, chief executive of Chemours, the EU limits are “completely undermined by organised crime activities”. (FT)

Smart reads

  • The Sustainability Accounting Standards Board (SASB) scored another big win this week in the battle to become the go-to framework for companies to report non-financial information. After receiving a big boost from Larry Fink and BlackRock, the California-based group got another strong vote of confidence from State Street Global Advisors this week

  • SSGA, one of largest passive managers in the US, told the FT’s Robin Wigglesworth yesterday that it would be using its new “R-factor” ratings system, which is based on SASB’s framework, to push corporate boards to act on climate change and other ESG issues. There is still no “one standard to rule them all” but with investors with $30tn calling on companies to use its framework SASB is quickly emerging as a leader. 

Tips from Tamami

Nikkei’s Tamami Shimizuishi keeps an eye on Asia to help you stay up to date on stories you may have missed from the eastern hemisphere.

As the fear of the Chinese coronavirus has deepened, corporate Japan has tried to keep its employees as safe as possible. Honda, for example, has decided to evacuate approximately 30 Japanese expatriates, including their families, from Wuhan, the epicentre of the outbreak. While many companies are considering whether they should move their expats out of China entirely, another Japanese company has taken action at home and abroad.

GMO Internet, an internet conglomerate, ordered all expats and business travellers to return from China to Japan. It also asked its approximately 4,000 domestic employees — 90 per cent of its total workforce — to stay home and work remotely for two weeks. GMO’s offices are located in areas such as Shibuya (one of the busiest parts of Tokyo), Osaka and Fukuoka where many tourists from China visit during the Chinese new year holidays. The company explained that the decision would help it to provide a stable service “by eliminating the risk of infection and securing the safety of all of our partners”. 

GMO said it had learned its lesson from the 2011 earthquake, when more than 4m commuters in the Tokyo area couldn’t get home after work. Since then, the company has enforced a so-called “Business Continuity Plan” (BCP) and has trained all employees to work from home simultaneously.

It is a big cultural shift for Japan, where bosses tend to value showing up at work. As workers also have a strong sense of duty to show up, commuters have in the past formed long lines outside stations the day after a large earthquake or typhoon, hoping to catch the first train to work — despite how long or dangerous the wait. 

Further reading

  • Making the US justice system fairer is good business (FT

  • US threatens retaliation against EU over carbon tax (FT

  • Posterity will be a harsh judge of today’s corporate leaders (FT)

  • Lundin pledges to become carbon neutral by end of decade (FT

  • Top UK pension scheme threatens managers over climate risk (FTfm

  • China, not America, will decide the fate of the planet (FT)

  • Hundreds of Amazon employees publicly attack its climate record (FT)

  • Warren Buffett Is One of the World’s Richest Fossil-Fuel Billionaires (Bloomberg)

  • Decarbonisation to drive ‘dramatic’ rise in cement prices, says Redburn (FT)


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