Green – not just the colour of money, News Flash, Dynasty

The International Energy Agency has signalled that for the world to limit global warming and get to net zero emissions by 2050, all new fossil fuel investments – oil, coal and gas – must come to an end. This news might add even more momentum to the trend we’re seeing of financial institutions backing away from loans to or investment in fossil fuel projects and companies.

Multilateral institutions and publicly owned banks are leading the way. The Asia Development Bank, for instance, aims to end all financing for coal mining and power plants and ban support for oil and gas production, under its new draft energy policy. The European Investment Bank announced a while back it will not fund coal projects and it is also abandoning gas.

Over in the US, banks reduced their lending to the fossil fuel industry last year, according to one report, though sceptics say this is more about lower energy demand rather than a green commitment from institutions. The four largest US banks decreased their fossil fuel financing by a combined $44 billion in 2020 from the year before.

On a global scale, the picture is more mixed. The 60 biggest commercial and investment banks financed $3.8 trillion in fossil fuel companies since the Paris Agreement was signed in 2016, according to the report, Banking on Climate Chaos 2021. Some banks, particularly big banks in China, have been increasing business with fossil fuel companies while others have been doing less.

The green lending trend has also come to South Africa. The International Finance Corp (IFC) will lend up to $150 million to Absa Bank to finance renewable energy and climate change-related projects in what it claims is “Africa’s first certified green loan.”

A group of Standard Bank shareholders – along with shareholder activist organisation Just Share – earlier this year co-filed a shareholder resolution asking Standard Bank to publish a report detailing its strategies and targets to reduce its exposure to fossil-fuel assets for the year ending December 31, 2021.

From an investment management perspective, we at Dynasty have observed a significant shift in sentiment from our fund managers and have recently engaged with them to ensure that their strategies are aligned with global trends and our clients’ interests. While we prefer to avoid focussing on thematic investing and are thus not selecting specific funds dedicated to sustainability, renewable energy and similar premises, all of our managers are taking steps to ensure that the companies they invest in (as part of their existing investment processes), are making positive strides to a more sustainable future. Our strong quality bias naturally leads us to be underweight in resources and commodity producers, as they tend not to meet the selection criteria, but even the world’s largest passive asset manager, Blackrock, is now using its influence to support positive change.

“Investors need to better understand both climate and environmental risks, and we are already improving our own procedures to achieve this.”

– Jonathan Taylor, Vice-President, European Investment Bank (EIB)

Global News

Echoing a theme we have written about in recent weeks, Deutsche Bank is accelerating its efforts to strengthen its environmental, social and governance (ESG) credentials. It plans to facilitate €200 billion in sustainable finance and investments by the end of 2023.
US banking stocks soared this week as investors pumped money into the sector in anticipation of a strong economic recovery. After years of underperformance since the 2007-2008 financial crisis and a particularly difficult 2020, S&P500 banking stocks seem set for a strong year relative to other sectors. Analysts say the stocks are still cheap and some shareholders see them as a relatively safe investment that will grow with the economy.
More broadly speaking, US markets had another choppy week, slumping for three days running up to close of trade on Wednesday, before bouncing back off positive economic data and resurgent tech stocks. Dow Jones futures and S&P 500 futures fell slightly on Thursday, suggesting investors remain cautious about the direction of the markets. Analysts expect ongoing volatility as investors try to understand the tensions between economic recovery, rich stock valuations, and the prospect of the Fed acting to contain inflation.
With specific reference to inflation, core and consumer inflation in the US came in surprisingly high this week with core inflation at 3%. However, US Fed governors said they expect this bump in inflation to be short-lived, rather than a sign of a sustained inflation spike.
On the global front, Chinese authorities took action to contain soaring commodity prices, helping to pull down energy and commodities stocks in the US, UK and South Africa. This was compounded by concerns about the resilience of Chinese demand. Oil, copper, soybeans and almost every other futures contract linked to industrial and agricultural staples also dropped.
Bitcoin is on track for its worst month in more than three years, dropping from almost $65,000 to around $40,000 – after showing a recovery from the lows it plumbed of $30,000 early in the week. The slide was triggered by Tesla’s Elon Musk saying that his company will no longer accept Bitcoin as a form of payment for its vehicles due to environmental concerns. A statement from the People’s Bank of China stating that crypto will not be permitted for payments added to the pressure.
Concerns are brewing about the rejection of the World Health Organization’s (WHO’s) advice to register for Covax on the part of Burundi, Tanzania and Eritrea. Many observers fear that their reticence to inoculate their population could cause the virus to continue spreading and eventually mutate into variants that can evade current vaccines and reach other parts of the globe.

Local News

The City of Johannesburg aims to meet 35% of its energy needs from renewable sources by 2030 and will seek proposals for privately supplied power by August. This follows the government’s pronouncement last year that municipalities could buy electricity from companies other than Eskom.
As in the US, inflation is creeping back in South Africa. Stats SA reports that inflation spiked to 4.4% in April, up from 3.2% in March. The main contributors to the 4.4% annual inflation rate were food and non-alcoholic beverages; housing and utilities; transport; and miscellaneous goods and services.
With inflation rising, but within its target, it was no surprise to most economists that the South African Reserve Bank decided to leave the repo rate untouched. Some commentators believe we may well see an interest rate hike later in the year.
The rand has gained 1.3% on the week to trade below R14/$ (at the time of writing) – its strongest level since the end of 2019. While the rand remains strong relative to its Emerging Market peers, according to our currency models the latest move is more a function of dollar weakness, which can be evidenced by the fact that the rand is trading 1.4% weaker against the pound than the strongest levels seen in April.
Could the prospect of rising interest rates be a negative for JSE equities? Elize Kruger and Mike Schussler believe so. They argue that South Africa was in deep economic trouble before Covid-19 and that the prospects for an economic miracle beyond the pandemic remain slim. Their argument is that South Africa and its people are becoming poorer and that a low growth scenario is likely to prevail, barring a Damascene conversion to more market friendly policies on the part of the ruling party. Consequently, they expect JSE equities to underperform, especially as interest rates rise. This reinforces our view at Dynasty about why there are more compelling investment opportunities offshore than in South Africa.
On the subject of potentially business-unfriendly policy, the government is finalising laws that aim to narrow the earnings gap between company executives and the lowest-paid workers, according to Trade and Industry Minister Ebrahim Patel. The new bill will require disclosure of wage differentials in companies, stronger governance on excessive director pay and enhanced transparency on ownership and financial records.
Naspers is one of the companies that will be under the microscope when the Competition Commission holds its Online Intermediation Platforms Market Inquiry. The inquiry aims to better understand the online markets operating in South Africa and their impact on competition and the public interest. Naspers owns Takealot, Mr D Food, Property24, and Autotrader.
In political news, the arms deal corruption case against former South African President Jacob Zuma has been delayed yet again. Zuma’s defence lawyer said he would plead not guilty when the hearing finally starts. BizNews reported the delay was caused after Zuma’s new “defence team raised concerns over the lead prosecutor and said it might seek his recusal from the case”.
The government has softened its stance on its three-year salary freeze for public servants, offering a 1.5% once-off salary adjustment and a monthly cash bonus of R978. Government remains caught between the economic reality of lacking funds to increase public servants’ pay and the prospect of a crippling public sector strike during a year of pandemic and local government elections. Unsurprisingly, the major ratings agencies are sceptical about government’s ability to keep public sector wages in check for the next three years.