© Bloomberg

One thing to start: we are cursed, it seems, to live in interesting times (as the old cliché goes). It may feel a bit frivolous to talk about sustainable investing when a rightwing mob is storming the US Capitol. But the issues that environmental, social and governance investors are trying to address are not going away. While climate change and economic inequality were not at the forefront of the rioting, one can easily see how those problems will create more civil unrest in the long run. The police response on Wednesday compared with last summer’s Black Lives Matter protests certainly seems to highlight why racial injustice must be fixed.

If nothing else, the events have forced once apolitical business executives to ponder afresh their values — and condemn Donald Trump and his supporters. Staying neutral and passive is no longer an easy option for the C-suite.

Today we have:

  • One-on-one with Hank Paulson

  • Democratic victory boosts green investments and bubble fears

  • Pressure mounts on clothing industry over water use

Climate opportunity is ‘akin to the digital revolution’ of 40 years ago

On Wednesday afternoon Moral Money sat down to chat with former Goldman Sachs chief and US Treasury secretary Hank Paulson, pictured above, about his new role with private equity company TPG. It was a peculiarly dramatic moment: Twitter was abuzz with news that Trump supporters in Washington were not just staging a protest but an insurrection.

However, the timing of Mr Paulson’s move to TPG is no accident. Assuming that Joe Biden peacefully takes power as planned, his administration is expected to focus on climate policy. This echoes a wider global shift in policy focus that has prompted Mr Paulson to move to TPG in the hope of showing that it is possible to turn a profit while helping the business world go green.

The announcement on Wednesday of his move — he is joining TPG as an executive chairman for its new climate fund, the latest addition to its line of “Rise”-branded impact products — comes after a months-long effort to woo Mr Paulson back to the private sector.

When TPG co-chief executive and founding partner Jim Coulter, fellow co-chief Jon Winkelried and pop singer Bono first started trying to convince him to join the fund, he had no interest, he told Moral Money. What persuaded him to change his mind, however, was that Mr Coulter promised to shift his own focus at TPG to work primarily on the climate fund. That raised Mr Paulson’s hopes that TPG can use its firepower to show that green investing is not just for do-gooders or philanthropists — but can build a market that attracts enough money (and big hitters such as Mr Coulter) to actually solve the problem:

“I see climate change as an existential challenge to our society, economy and to our way of life. And it’s going to take a lot of capital. Governments don’t have that capital. I’m all for philanthropy, and for subsidised or concessionary social impact funding, but in my judgment that won’t bring the amount of capital we’re going to need,” he said.

“What it’s going to take is full returns. And I look at this as being the right time to demonstrate that you can have a big impact in terms of emissions reduction, while demonstrating commercial viability, and creating the kinds of returns that it’s going to take to attract large amounts of capital.”

Joe Biden’s victory and a Democratic majority in Congress should provide a strong tailwind for climate-focused investments. But Mr Paulson stresses that he is not making an opportunistic play based just on the election results:

“I’m not looking at any major change coming from Congress right away. What I’m saying is [there is] more leadership from the top and direction. The fact that the United States of America is now saying loudly, to the whole world, climate is important. A lot that’s being done, even today, is being done at the subnational level. And when I look at what’s happening in the financial sector and the business sector, I think this will also send a strong signal to the rest of the world.

“So this isn’t just: ‘We have president Biden, so now this fund makes sense.’ All of our efforts are going to be easier with his leadership, but I see a lot of other things that are happening right now in the world. People are waking up and understanding to a much greater extent what we’re dealing with. They are recognising that good, voluntary targets coming out of the UN are necessary and important, but they’re far from sufficient. And there’s a lot that needs to be done. And it’s going to take a lot of capital.”

Inside TPG, the new fund is being referred to as an “omni-climate” strategy, Mr Coulter told Moral Money. That means it aims to not focus solely on any individual sector — like infrastructure or renewable energy — but to invest across the board and try to capitalise on synergies between different industries. Mid-market investments will be a particular focus: while there is a lot of money going into small venture capital investments and big-ticket green bonds, the ground between this is less crowded, he added.

“We’re looking at investing across the whole spectrum . . . And this is what appealed to me. It wasn’t just theory, I took a look at what they’ve done within the Rise fund,” Mr Paulson said.

TPG has already made some investments and found success, Mr Paulson said, pointing to EVBox, a Dutch electric vehicle charging company. Not only did TPG invest in EVBox (which went public through a TPG special purpose acquisition company), it invested in the solar company that provides it with power, he explained. And while Mr Paulson is clear-eyed about the enormity of the task at hand, he and Mr Coulter think (or hope) that the opportunity in climate could echo the early days of the tech industry 40 years ago. No doubt, others will take note.

“We are really looking at this with a lot of humility. This is a huge problem. And the only way you can look at success here is in the rear-view mirror. Markets and economics don’t respond to what we say, it’s what we do. We won’t know how successful we are until we look back and say, did we have the big impact we thought we would? And did we have good returns? I want good returns, not just to get good returns for our investors, but to pave the way for others to see the commercial viability. I want there to be all sorts of other investors.”

(Billy Nauman)

Senate win ignites green boom (or bubble)

© REUTERS

After Joe Biden’s presidential poll win, Moral Money said the US would follow the EU in developing green stimulus programmes that would boost renewable energy producers. But these hopes were damped by the Democrats’ terrible congressional elections, and it was a big question over the holidays just how much Mr Biden could get done without control of Congress.

Now those concerns have eased since the Democrats have won a majority in the Senate (albeit by the slimmest margin). Thus, bankers are racing to find pockets of value in an already very frothy green market.

Credit Suisse on Thursday championed the biofuels market. Its analysts pointed out that Biden’s administration was likely to push states to establish trading schemes for low-carbon fuels. Only California and Oregon have launched these projects, but the initiatives have helped encourage biofuel projects nationwide and prompted oil majors to jump into the action. Darling Ingredients, which recycles animal and kitchen fats into fuel, is expected to outperform, the bank said. 

But beware of a green bubble, warned Bank of America on Thursday. US policy actions could turn out to be underwhelming. The thin control of the Senate suggests “only a moderate avenue for further climate action”, BofA said, adding valuations in clean energy appear “difficult to justify”.

Financiers with long memories might feel a twinge of déjà vu. The last time we saw euphoria for green development, this collapsed spectacularly. In 2008, as oil prices surged and the Obama administration was voted in, solar stocks soared (see below Invesco’s solar ETF). However, the bubble then burst and solar stagnated in a lost decade. Is it now a case of “this time is different?” Possibly. But investors should take note that some of the same ingredients that felled that last green hurrah are at play today. (Patrick Temple-West)

Water risk poses threat to clothing investors

© Reuters

The word “fashion” does not usually invoke a debate about water. But it probably should. Bleaching, dyeing and printing fabrics are all heavily dependent on freshwater, exposing clothing companies to potential problems in their supply chains.

And there are signs that some companies are becoming more nervous about the risks. Last year, Ralph Lauren pledged to reduce its water use by 2025. The designer, pictured, said it would adopt waterless dye applications and reduce the use of water-intensive chemicals in the production process as part of a larger effort to address water risk.

However, Planet Tracker, a London-based pressure group, said that more groups needed to follow suit. It has identified 740 public companies that require freshwater for clothes and are subject to significant “water risk” — and points out that a host of individual investors and asset managers are exposed to this rarely recognised risk. Vanguard is in this list.

“Because of the fragmentation of the supply chain supporting the multibillion-dollar fashion industry, these water-related risks are largely hidden from view from investors and lenders,” Planet Tracker said. These risks “are not fully priced in”.

Investors have a responsibility to call on companies to disclose more information, Planet Tracker said. Specifically, more information about suppliers in the production process should be available, it said, suggesting that suppliers should be encouraged to publish verified environmental data. (Patrick Temple-West)

On Wednesday, January 13 at 10am ET, Gillian Tett will be moderating Edelman’s global virtual unveiling of the 2021 Edelman Trust Barometer. The study looks at trust in societal institutions, government and business and from 33,000 respondents across 28 markets. Sign up here.

Further reading

  • Joe Biden must take a global lead on climate risk disclosure (FT)

  • Miners face up to climate challenge (FT)

  • Can Nike keep its cool? (FT)

  • Managers Address Systemic Racism, Lack of Staff Diversity (FundFire)

  • Albertsons is laying off employees and replacing them with gig workers, as app platforms rise (Washington Post)

  • Texas Fracking Billionaires Drew Covid-19 Aid While Investing in Rivals (WSJ)

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