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Political spat over climate risks in investments gets hotter

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The “E” for environment component of ESG often gets the most attention because of the debate over whether to invest in fossil-fuel companies. In the wide-ranging social, or S, bucket, investors look at how companies treat their workforces, reckoning a happier group with less turnover can be more productive. For the G, or governance aspect, investors make sure companies’ boards keep executives accountable and pay CEOs in a way that incentivizes the best performance for all stakeholders.

The ESG industry has scorekeepers that give companies ratings on their environmental, social and governance performance. Poor scores can steer investors away from companies or governments seen as bigger risks, which can in turn raise their borrowing costs and hurt them financially.

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Florida has become one of the hottest battlegrounds for ESG. Gov. Ron DeSantis in August prohibited state fund managers from using ESG considerations as they decide how to invest state pension plan money. And even as his state cleans up from the environmental destruction caused by Hurricane Ian, DeSantis plans to ask the Florida Legislature in 2023 to go even further by prohibiting “discriminatory practices by large financial institutions based on ESG social credit score metrics.”

Pension funds are often caught in the middle of the battles. Questions are flowing into the Florida Education Association from teachers about what DeSantis’ moves will mean for their retirements.

“I usually tell them it’s still unclear what this exactly means,” said Andrew Spar, president of the union, which represents 150,000 teachers and educators across the state. Much is still to be determined, including exactly which funds the pension investments will steer toward.

In contrast, the Minnesota State Board of Investment is considering a proposal to adopt a goal of making its $130 billion in pension and other funds carbon-neutral. The board already uses shareholder votes to advance climate issues. It seeks out climate-friendly investment opportunities and eschews investments in thermal coal. While the new proposal goes farther, it does not call for total divestment from fossil fuel companies, as many climate change activists advocate.

The ESG debate has spilled into the race for Minnesota’s state auditor. Democratic incumbent Julie Blaha — who has singled out DeSantis as one of the leaders she believes are politicizing the discussion about ESG — has cited the investment board’s high returns in recent years as evidence the approach works.

“To be a good fiduciary, you have to consider all the risks, and the evidence is clear that climate risk is investment risk,” Blaha said.

But Blaha’s Republican challenger, Ryan Wilson, says investment returns must come first, and that all risks must be considered. He says the board shouldn’t “disproportionately dictate” that climate risk should matter more than other risks.

Proponents say considering a company’s performance on ESG issues can boost returns and limit losses over the long term while being socially responsible at the same time. By using such a lens, they say investors can avoid companies that are riskier than they appear on the surface, with stock prices that are too high. An ESG approach could also unearth opportunities that may be underappreciated by Wall Street, the thinking goes.

As for returns, there is no consensus on whether an ESG approach means lower or higher returns.

Morningstar, a company that tracks mutual funds and ETFs, says slightly more than half of all sustainable funds ranked in the top half of their category for returns last year. Over five years, the showing is better with nearly three-quarters ranking in the top half of performers in the category.

Rejecting ESG can be costly in ways besides investment performance.

A Texas law that took effect in September 2021 banned municipalities from doing business with financial institutions that have ESG polices against investments in fossil fuel and firearms companies, industries that are important to the Texas economy. It turned out to be an expensive decision.

Barred from underwriting local jurisdictions’ municipal bonds, five big underwriters — JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America and Fidelity — exited those markets. A Wharton School study estimated that the loss of those big players would cost Texas communities an extra $303 million to $532 million in higher interest payments on their bonds. Fidelity says it has since restored its good standing with Texas by certifying to the state that it does not boycott energy companies or discriminate against the firearms industry.

Several big Wall Street banks and investment management companies have become favorite targets of the anti-ESG politicians because they’ve been outspoken in their embrace of ESG. Republican state treasurers have pulled or plan to pull over $1.5 billion this year out of BlackRock, the world’s largest investment company, which has a goal of net zero greenhouse gas emissions by 2050 or sooner. Missouri last month became the latest. Treasurer Scott Fitzpatrick accused BlackRock of putting the advancement of “a woke political agenda above the financial interests of their customers.”

Coal-producing West Virginia passed a law in June that allows for the disqualification of banks and other financial institutions from doing business with the state if they “boycott” energy companies. Treasurer Riley Moore soon banned BlackRock, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo, blaming them for contributing to high energy prices by driving capital away from the industry.

“We’re not going to pay for our own destruction,” Moore said.

State officials have also been critical of ESG scores from ratings agencies and other outfits. For instance, S&P Global offended North Dakota State Treasurer Thomas Beadle because it rated the state as “neutral” for social and governance metrics but “moderately negative” for environmental factors because its economy and budget rely heavily on the energy sector.

His state’s lawmakers last year prohibited their investment board from considering “socially responsible criteria” for anything but maximizing returns. Beadle told senators considering potential next steps that ESG has created “significant headwinds” for energy companies trying to raise capital, and that it could affect his state’s tax revenues.

Besides state capitols, other big battlegrounds are federal agencies, where leaders of the backlash include the State Financial Officers Foundation, a group of Republican state treasurers, auditors and other officials. They’re trying to block rules being drafted at the Securities and Exchange Commission and Department of Labor to require standardized climate disclosures by companies and to make it easier for pension plan fiduciaries to consider climate change and other ESG factors.

The industry has heard the pushback and has even been surprised by how quickly it’s accelerated. But it’s pledging to plow ahead.

US SIF is an industry group advocating sustainable investing whose members control $5 trillion in assets under management or advisement. Its CEO, Lisa Woll, believes that most of the national and state politicians railing against ESG investing probably don’t understand it.

“If they did, it’s very difficult to make these kinds of allegations,” Woll said.”`It feels more like a talking point than an informed critique.”

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Government of Canada announces investment in three Waterloo Region tech businesses – ITBusiness.ca

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Today, the Federal Economic Development Agency for Southern Ontario (FedDev Ontario) announced an investment of more than $10 million in three Kitchener-Waterloo tech companies.

Miovision Technologies is a Kitchener-based company that lets cities and towns reduce traffic congestion and vehicle emissions while improving public safety through intelligent transportation solutions. With the $7.4-million repayable investment through the Jobs and Growth Fund, Miovision will develop TrafficLink and Scout, its traffic monitoring hardware and software. It also plans to increase its network by up to 100,000 intersections in North America over the next four years, and will further its transition into “Smart City” technologies, expanding its presence globally and adding 58 jobs,

Advanced Electrophoresis Solutions Ltd. is a Cambridge medical technology manufacturer specializing in the development of testing instruments for pharmaceutical companies to analyze protein structures and interactions. The repayable investment of over $1.7 million, through the Business Scale-up and Productivity stream, will allow the company to increase the production of ready-to-use customized testing instruments, and grow its sales and marketing team. Advanced Electrophoresis Solutions is looking to expand its presence in Asia and Europe while also creating 11 additional jobs within Waterloo.

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Huron Digital Pathology is a St. Jacobs-based medical equipment company that develops digital imaging solutions in the pathology field for the clinical, research and education markets. With the $1-million repayable investment through the Business Scale-up and Productivity stream, the company can increase the production of its digital pathology scanners. It hopes to revolutionize disease diagnosis by being the first company to bring to market an Artificial Intelligence (AI) enabled image search engine for use in the pathology field. Huron Digital Pathology is looking to increase its productivity. with the goal of producing over 100 scanners every year and creating 11 skilled jobs.

“Tech companies, like the three highlighted today, are what builds Waterloo region’s growing resumé of research and innovation. Canadian tech companies work tirelessly to bring new products and processes to markets that will benefit our regional economy and Canadians,” said The Honourable Filomena Tassi, Minister responsible for the Federal Economic Development Agency for Southern Ontario. “The Government of Canada is committed to supporting businesses as they adopt new digital solutions, enhance global competitiveness and create local jobs that will contribute to a growing economy that works for everyone.”

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After FTX, is crypto as an investment dead?

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But following a series of failures in the industry, including the collapse of Bahamas-based FTX Trading Ltd. in November, bitcoin and ether prices are now down by about 75% from their all-time highs a year earlier — and financial advisors and crypto experts are divided as to the industry’s fate.

Many crypto skeptics see the collapse of FTX as confirming their worst suspicions.

“[Cryptocurrency] is highly speculative, highly volatile and it’s something you steer away from until we see signs of maturity in that sector,” said Andrew Pyle, investment advisor with CIBC Wood Gundy in Peterborough, Ont.

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While the blockchain technology that underpins cryptocurrency is likely to offer investment opportunities in the future, the sector has no place today in the portfolios of the “vast majority” of clients, said Pyle, who has never recommended crypto investments.

The fallout from FTX’s collapse means “you’re looking at a number of years before you get broader public trust in cryptocurrencies,” said Mark Noble, executive vice-president of ETF strategy with Horizons ETFs Management (Canada) Inc.

“That said, I don’t think the crypto ecosystem goes away,” Noble said, suggesting that blockchain innovations will continue during what could be a long “crypto winter” of little investor interest. Horizons ETFs offers both long and short bitcoin funds.

Institutional investors who believe in the transformative potential of blockchain technology are likely to “double down” on investments, said Michael Zagari, an investment advisor in Montreal with Burlington, Ont.-based Mandeville Private Client Inc.

“Just because one investment [FTX] didn’t work doesn’t mean they’re going to stop there,” said Zagari, who suggests there will be “a lot of deals to be had” but believes the industry will remain volatile for the next 12–18 months.

He recommends allocating no more than 10% of a portfolio to cryptocurrency or crypto-related investments for risk-tolerant clients with at least a 10-year horizon, as part of their equity exposure.

FTX’s bankruptcy has caused other crypto exchanges to suspend withdrawals, with some struggling to continue operating.

And “there are going to be more shoes to drop. We just don’t how many or how big,” said Alex Tapscott, managing director of the digital asset group with Ninepoint Partners LP, during a Nov. 24 webinar.

Characterizing himself as “short-term bearish, long-term bullish” on cryptocurrency, Tapscott suggested that the Ontario Teachers’ Pension Plan Board and the Caisse de dépôt et placement du Québec exposed themselves to “huge concentration risk” by each investing in a single crypto firm rather taking positions in established cryptocurrencies. (See “Highs and lows,” below.)

Brian Mosoff, CEO of Toronto-based Ether Capital Corp., also said bitcoin and ether will endure through this crash, even if some exchanges don’t. “Nothing has changed [in terms of the technology],” Mosoff said. Bitcoin and ether “still do exactly what they set out to do: the fundamentals are the same; the value proposition is the same.”

Retail investors seem to agree. While crypto ETF assets under management dropped by $4.1 billion between Jan. 1 and Nov. 30, only $66 million of the decline was due to outflows, according to data from National Bank Financial Markets (NBFM).

“It seems like the crypto ETF users in Canada are sticking to their allocations,” said Daniel Straus, director of ETF research and financial products research with NBFM, in an email to Investment Executive. “Bitcoin and ether are both extremely risky and speculative, but the anemic outflows from Canadian crypto ETFs suggest their investors may be treating them like ‘moonshot’ long-term bets.”

Mike Tropeano, senior director of wealth consulting with Broadridge Financial Solutions Inc. in Boston, said he expects global regulators to “be much harsher” on the crypto industry after the collapse of FTX. What will follow over the next few years is “a thinning of the herd,” a flight to safety to the most established names, and more innovation.

“The information is still flowing daily, [not only] with regard to FTX but [also] with the overall market,” Tropeano said. “Anyone who is looking to play a role in the market — the [financial] advisor especially — requires a lot of diligence to stay on top of what is happening.”

Mosoff suggested some “advisors are probably relaxing a little bit,” knowing that clients are less likely to be asking about investing in cryptocurrency “until the next cycle starts.” But he said that cycle will come, and advisors should use the crypto winter to educate themselves.

While the fall of FTX and BlockFi Lending LLC have shaken the market, the depth of the crypto winter may depend on how the industry’s established behemoths weather the storm, said Daniel Gonzalez, research analyst and consultant in Toronto with California-based Javelin Strategy & Research: “If a Coinbase, crypto.com or Binance were to go down the drain, I think that would end crypto adoption for retail investors for a while.”

In many ways, the advisor’s role now isn’t different from what it was when cryptocurrencies were trading at their peaks.

“There’s absolutely a role for advisors to play here, and it’s to be the voice of reason [in terms of allocation to cryptocurrency],” Mosoff said. “But I don’t think that’s saying, ‘I’m going to rule out an asset class entirely.’”

That said, cryptocurrency has not proven to be an inflation hedge or a diversifier, said Jason Heath, managing director of Objective Financial Partners Inc. in Markham, Ont. Furthermore, “higher interest rates and a likely recession are sure to hinder speculative investments like cryptocurrency in 2023.”

Pyle said expecting retail investors to understand is unreasonable “if institutional investors, traders, analysts, portfolio managers, hedge fund managers and even regulators can’t understand this space.”

An advisor’s “paramount responsibility is to protect your clients’ wealth,” Pyle added. “Protect it from inflation, protect it from running out and protect it de facto from things that most people don’t understand.”

Highs and lows in the crypto space

2021

Feb. 18: Toronto-based Purpose Investments Inc. launches world’s first bitcoin ETF.

October: Ontario Teachers’ Pension Plan Board (OTPP) invests US$75 million in FTX Trading Ltd. through its Teachers’ Venture Growth platform.

Oct. 12: Caisse de dépôt et placement du Québec invests US$150 million in New Jersey-based Celsius Network LLC, a crypto lender.

Nov. 10: Bitcoin hits its all-time intraday high of US$68,789.63.

Nov. 16: Ether hits its all-time intraday high of US$4,891.70.

2022

January: The OTPP invests another US$20 million in FTX.

Jan. 10: Fidelity Investments Canada ULC announces it will add 1%–3% exposure to bitcoin in its asset-allocation ETFs. (The target allocations remain the same as of press time.)

Feb. 14: New Jersey-based BlockFi Lending LLC agrees to pay the U.S. Securities and Exchange Commission US$100 million in penalties and pursue registration of its crypto lending product.

March 31: Canadian cryptocurrency ETFs amass $6.1 billion in assets under management, according to data from National Bank Financial.

May: TerraUSD stablecoin and Luna, a linked token, crash.

June 18: Bitcoin plunges below US$25,000. It was trading above US$50,000 in early May.

July 6: Voyager Digital Ltd., a New York-based crypto broker, files for Chapter 11 bankruptcy.

July 13: Celsius Network files for Chapter 11 bankruptcy.

Aug. 17: Caisse de dépôt et placement du Québec announces it is writing down its entire investment in Celsius Network.

Nov. 11: FTX files for Chapter 11 bankruptcy.

Nov. 17: OTPP announces it will write down its entire investment in FTX.

Nov. 21: U.S. senators Elizabeth Warren, Dick Durbin and Tina Smith send a letter to FMR LLC (Fidelity Investments) asking the firm to reconsider a decision to allow 401(k) plans to offer access to bitcoin.

Nov. 27: Bitfront, a U.S. crypto exchange, announces it will cease operations in March 2023. The platform stated the decision “is unrelated to recent issues related to certain exchanges that have been accused of misconduct.”

Nov. 28: BlockFi files for Chapter 11 bankruptcy, citing exposure to FTX.

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Credit Suisse’s investment bank draws interest from Saudi crown prince, WSJ reports

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Dec 4 (Reuters) – Investors including Saudi Arabia’s crown prince and a U.S. private-equity firm run by a former Barclays CEO have shown interest in investing $1 billion or more in Credit Suisse’s (CSGN.S) new investment banking unit, the Wall Street Journal reported on Sunday.

Crown Prince Mohammed bin Salman is considering an investment of around $500 million to back the new unit CS First Boston (CSFB) and its CEO-designate Michael Klein, the report said, adding that bank has not yet received a formal proposal from any Saudi entity.

Additional financial backing could come from U.S. investors including former Barclays chief Bob Diamond’s Atlas Merchant Capital, the report said, citing people familiar with the matter.

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Credit Suisse did not immediately respond to a request for comment.

Seeking to restore vigor to a business that has been languishing, Credit Suisse in October said that it will reshape its investment bank by resurrecting the First Boston brand. The bank tapped board member Klein to lead CSFB.

Saudi National Bank (SNB), controlled by the government of Saudi Arabia, had earlier pledged to invest up to 1.5 billion Swiss francs ($1.60 billion) in Credit Suisse itself for a stake of up to 9.9%, and said it may back the standalone CSFB which will operate as an independent capital markets and advisory bank headquartered in New York.

Credit Suisse’s history with the First Boston brand dates to 1978 when the pair linked up to operate in the London bond market. They later merged to create CS First Boston, but a tough period followed after famed bankers departed and the firm ran into regulatory troubles.

Some bankers and investors have expressed scepticism over its ability to regain its past glory in a shrinking market.

($1 = 0.9373 Swiss francs)

Reporting by Kanjyik Ghosh and Akriti Sharma in Bengaluru; Editing by Cynthia Osterman

 

Our Standards: The Thomson Reuters Trust Principles.

 

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