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How companies can find 'best fit' ESG investment – IR Magazine

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‘This is the biggest capital reallocation since the Industrial Revolution,’ said Nicholas Stern to the Financial Times recently. Stern, an influential academic on the economics of climate change, is not alone in his thinking. 

Few would argue. We see this shift of capital already happening. Investors are divesting, pledging new strategies of investment and reallocating capital to less risky, more forward-thinking ESG options. For example, more than 1,480 institutions have publicly committed to at least some form of fossil fuel divestment, representing an enormous $39.2 tn of assets under management. The People’s Pension is divesting £226 mn ($304 mn) from companies that fail to meet ESG standards. And a recent PwC survey revealed that half of investors are prepared to divest if companies fail to address ESG.

The creators of the European Commission’s action plan on sustainable finance can certainly take some credit for initiating this transition. Simply by requiring the calculation and disclosure of risk, as is required by the Sustainable Finance Disclosure Regulation (SFDR), investors are being made aware of the financial impact ESG issues can have on their share prices and returns.

Some companies – those that are leaders in ESG, in a green sector or part of the green revolution – will likely have no shortage of investment. But what about the companies that are not in such a position? How much risk do they face? Will they see major shareholders divesting and share prices falling?

How to determine the level of investor risk
Part of the job of the investor relations team in this new era of ESG is understanding the risk of shareholders divesting. Ninety-one percent of European investors have a company-wide policy on responsible investing or ESG issues. And recent changes to these policies, spurred on by the SFDR’s requirement for light/dark green classifications and principle adverse impact disclosures, could impact decisions on their current investments. It is not just ESG funds that are currently evaluating ESG criteria.

Even if you are speaking to fund managers annually and feel confident you understand their plans, their strategy may change in this quickly evolving environment, particularly as the pledges institutional investors are making trickle down. Moreover, you need data – data you can give to the board and C-suite that indicates the level of risk in hard, cold numbers, not a conversation.

A risk analysis is the most comprehensive approach, which you can do yourself or outsource. To analyze the risk, you will need to look at what your investors, on a fund-by-fund basis, are actually doing – not saying – as that is the only true indicator of their future behavior.

The metrics used to analyze such behavior could include things like carbon risk across their portfolio compared with yours, controversy levels across their portfolio compared with yours, governance scores across their portfolio compared with yours, and the pledges they have made as a signatory to a global agreement such as the Net Zero Asset Managers Initiative or Climate 100+ that may be at odds, or in alignment, with your own commitments. Additional financial metrics that compare your performance against the fund’s portfolio would help provide an even more complete picture as to who is potentially likely to divest.

By doing this on a fund-by-fund basis across your entire shareholder base, you will then be able to group together funds by level of risk, and relay to management what percentage of shares in issue (or free float) could potentially sell in the near term due to a discrepancy on ESG and/or performance.

How to find best-fit investment
Being proactive in finding investors that align with your company across a wide variety of metrics, including ESG (what we call best fit), would not only help to protect against the risk of current investors selling, but also help create demand for your stock and fuel fair market valuation.

This can be done by taking a set of metrics similar to those used to calculate the risk across your shareholder base and flipping them around to evaluate those funds that are not yet invested in you but could be. To create the initial list of those that are not invested in you but could be, a good starting point is to find those that are invested in your peers, sector, region or market cap. Crucially, you will then need to remove the funds that are already invested and those that you are ineligible for due to location, size, and so on. Having an accurate fund-level shareholder identification report is required at this stage, otherwise you may end up targeting current investors as if they were not invested.

After this process is complete, you can apply your ESG metrics to determine which are your best-fit investors. Comparing yourself with the funds across each of these data points will give a very clear indication of which funds you are aligned with and which you aren’t. Balancing these metrics is critical, however, as you may match on some, but not others. As such, a qualitative assessment across the entire spectrum of comparison points is an important last step in determining your final best-fit target list.

Conclusion
It probably goes without saying that there is no perfect process for identifying potential investors. But with an accurate shareholder identification report, good ESG data and an experienced eye, you will be able to create a best-fit target list. In an era deemed the ‘biggest capital reallocation since the Industrial Revolution’, that might be a good list to have.

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This content is provided by CMi2i and did not involve IR Magazine journalists.

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VCs eye investment in Polygon – Yahoo Movies Canada

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A number of investors including Sequoia Capital India and Steadview Capital are in talks to back Polygon, which operates a framework for building and connecting Ethereum-compatible blockchain networks, by way of tokens purchase, three sources familiar with the matter told me.

The investors are looking to purchase tokens worth $50 million to $150 million, sources said, requesting anonymity as the talks are private. As is common with these token transactions, investors will be able to buy the coins at a slight discount. (20% discount on the average price of MATIC in the past one month, from what I have heard.)

Deliberations are ongoing, so the terms may change. Nobody had a comment early last week.

Polygon, formerly known as Matic, has established itself as one of the most popular layer two solutions. The firm, whose market cap has exceeded $14 billion, processes over 7.5 million transactions a day and allows thousands of decentralized apps to continue to use Ethereum as the settling layer but avoid the increasingly pricey gas fee.

Aave, Sushi Swap, and Curve Finance are among some of the largest bluechip projects that have deployed on Polygon, which has amassed one of the largest developer ecosystems (even when compared to some layer 1 blockchains).

Image credits: Polygon

An investment will mark a shift in the investors’ perception of India-based Polygon, which until recent years struggled to receive backing from most prominent venture firms in the South Asian market. (Most VCs in India, it’s worth noting, were also not actively tracking the web3 space until a few quarters ago.) Furthermore, Polygon has had to confront at least one episode where some of its early investors requested their money back during a bear cycle, according to two people familiar with the matter.

The firm returned money to some of those investors and survived. “It’s one of the themes with the Polygon team. Their perseverance is next level,” said a former employee.

Polygon, which received backing from entrepreneur and investor Mark Cuban this year, is among dozens of side-chains and roll-up networks that is hopeful that Ethereum will continue its dominance even as a handful of other layer one projects such as Polkadot, and Solana, which is backed by Multicoin Capital and A16z, are attempting to court the nascent but fast-growing developer ecosystem.

On Bankless podcast earlier this year, Polygon co-founder Sandeep Nailwal (pictured above) said the web3 developer ecosystem today is centred around Ethereum and he is hopeful that the network effect won’t dissipate. On the same podcast, Nailwal and Mihailo Bjelic, another co-founder of Polygon, said Polygon is increasingly expanding its offerings to build a blockchain infrastructure.

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Britain needs a 'booster for growth' as tax hikes threaten investment – CNN

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London (CNN Business)Britain’s economy needs much more investment. Business says it’s unlikely to get it any time soon.

The Confederation of British Industry said in its latest forecast that a “short-lived recovery” in capital spending would end in 2023 because of tax hikes on companies.
Investment in the United Kingdom has lagged that of other advanced economies for decades, and the business lobby group’s forecast will deal a blow to Prime Minister Boris Johnson’s aspirations for building a high-wage and high-productivity economy.
Business investment would briefly rise above pre-pandemic levels by the end of next year, before slumping as companies are hit by a corporate tax hike and the end to a tax break on some investments in plant and machinery, the CBI said.
The corporate tax rate will rise from 19% to 25% in April 2023. UK finance minister Rishi Sunak announced the hike in March this year to help pay for the costs of the pandemic and reduce government borrowing. The tax break on plant and machinery, introduced earlier this year, will also expire in April 2023.
Investment stagnated following the Brexit referendum in 2016 as companies were deterred by the uncertainty over Britain’s future trading relationship with the European Union. It has dropped further since the start of the Covid-19 pandemic.
Capital spending by UK companies fell by 11.6% between the third quarters of 2019 and 2020, the CBI said.
By the government’s own admission, business investment was already low by the standards of other advanced economies. A UK Treasury factsheet published in April said: “Much of the UK’s productivity gap with competitors is attributable to our historically low levels of business investment compared to our peers. Weak business investment has played a significant role in the slowdown of productivity growth since 2008.”
Investment in technology, skilled workers and innovation are key to raising productivity, and boosting growth and incomes without pushing prices higher. The CBI’s warning comes as inflation continues to rise. It hit a 10-year high of 4.2% in October, and the Bank of England’s chief economist has warned it could exceed 5% in early 2022.
“I know from speaking with firms of all sizes that they have an ambitious investment mindset, and are anxious to implement growth plans. But while intentions have thawed, we’re coming up to a cliff edge in 2023,” CBI director-general Tony Danker said in a statement.
He said the tax break had been successful but industry needed targeted measures to encourage “the scale of investment we need, particularly in green technologies. A booster for growth is needed to protect and build on our recovery.”
Britain’s economy should grow by 6.5% in 2021 according to the UK government’s own Office for Budget Responsibility’s projections. But the economy won’t recover its pre-pandemic size until the first quarter of next year, the Bank of England forecasts.
The recovery has been hobbled by Brexit, which the OBR believes will cause more long-term damage to the economy than the pandemic.

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China's Special Bonds Can't Halt Property-Led Investment Slump – BNN

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(Bloomberg) — China is betting that a pickup in infrastructure spending can spur investment and cushion a property-led slowdown which has dragged economic growth down to almost its lowest pace in more than three decades. 

But because the property curbs are hitting government revenue from selling land, Beijing will need to ease its tough campaign to crack down on “hidden” local government debt if it wants a long-lasting revival in infrastructure spending.

Premier Li Keqiang last month urged local governments to make better use of the proceeds from the sale of 3.65 trillion yuan ($573 billion) in “special” bonds to counteract “downward pressure” on the economy. The bonds are used to fund specific projects rather than general expenditures and regional authorities have almost completed the sale of this year’s quota.

The quota could be expanded to 4 trillion yuan next year, according to state media reports, but even that amount of funding would be small relative to China’s total infrastructure spending needs. Bloomberg Economics estimates infrastructure investment will reach about 23 trillion yuan in 2021, which implies special bonds can only around 16% of that expenditure.

The remainder is mainly paid for with money from land sales and local government financing vehicles, which are companies set up by local governments to raise debt from loans and bond sales and then keep that borrowing off of government balance sheets. Both those sources of financing are under strain from property sector curbs and a campaign against “financial risks.”

Those financing vehicles raised less money in 2021 as Beijing ordered local governments to cut their “hidden” off-balance sheet debt. LGFV’s net local bond issuance — the excess of newly sold bonds over repayments — in the first 11 months of the year was 1.95 trillion yuan, down from 2.19 trillion yuan in the same period last year, according to Bloomberg estimates. 

The platforms have found it harder than in the past to obtain loans from banks and from non-bank “shadow” financing because Beijing has been shrinking the shadow finance sector as part of its financial de-risking effort. They have also raised less from foreign investors: LGFV’s net issuance of dollar-denominated bonds through the end of last month more than halved to $5.7 billion.

The property crackdown is also reducing local government’s sales of land to property developers, a major source of funds for local government investment. Infrastructure spending growth has moved almost exactly in line with land sales revenue growth in recent years, according to analysis from Goldman Sachs Group Inc., while the correlation with special bond and LGFV bond issuance is less significant.

Beijing’s efforts to slow the real estate market began cutting into land sales volumes and prices this summer. Local government income from land sales shrank by more than 10% year-on-year in August, September and October, the largest and most sustained decline since 2015, according to Wei He, an analyst at Gavekal Dragonomics.

In the first 10 months of the year, infrastructure investment rose just 1% compared with the same period a year earlier, leaving local governments with unspent funds. 

“The positive factors such as money that hasn’t been spent this year will be countered by the negative impact from land sales,” He said. “Therefore I do not expect a significant acceleration in infrastructure spending to materialize next year.”

To be sure, “special” bond issuance has been concentrated at the end of this year, which could translate into a slight pick-up in infrastructure spending in the first half of 2022 if the funds are quickly put to use. But local governments have been struggling to find suitable projects to fund with special bonds whose conditions stipulate that investments must generate enough income to repay the bond principal and interest.

Local governments’ land sale revenue could fall 10% year-on-year in 2022, according to Gavekal’s He. That means if Beijing really wants infrastructure investment to increase, it will need to loosen the constraints on LGFVs, compromising on its goal to control debt-levels in the economy.

“If the economy softens in 2022 and the government needs to increase infrastructure spending to support economic growth, there would be easing in financing for LGFVs,” said Ivan Chung, associate managing director at Moody’s Investors Service in Hong Kong.

©2021 Bloomberg L.P.

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