On 2 December the first vaccine to prevent Covid-19 is formally approved. The UK Medicines and Healthcare Products Regulatory Agency approved the Pfizer and BioNTech mRNA Covid-19 vaccine for temporary emergency use. The vaccine was found to be over 90 percent effective in the first independent analysis of any Covid-19 vaccine in phase 3 trials (final stage before commercial licensing). Global equity markets rallied after Pfizer’s announcement of the new vaccine on 9 November, led by travel and leisure companies that have been hit hard by the Covid crisis. The German BioNTech, founded in 2008 by a Turkish husband and wife team of scientists, initially focussed on cancer treatments in developing their messenger RNA technology. While BioNTech scaled back its IPO in 2019 amid weak investor interest, its success in the Covid vaccine race saw its shares increase by 46 percent in November.
On 25 November, the International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB) announce their intention to merge and launch the Value Reporting Foundation in 2021. The Foundation will merge the SASB and IIRC into a credible, international organization that maintains the Integrated Reporting <IR> Framework, advocates integrated thinking, and sets sustainability disclosure standards for enterprise value creation. Both SASB and the IIRC focus on investors as target audience. Their guidance is described as complementary and pursuing a common philosophy. This includes integrated value creation and sector-specific indicators for companies to report against. The Chair of the SASB Foundation Board of Directors says “the merger is an important step towards businesses and investors communicating with clarity and ease about the issues that matter most to financial performance.”
On 15 October nineteen Accounting Professors, including editors of leading accounting journals, publish an open letter to the Chair of the IFRS Foundation Trustees. It concerns a new IFRS Consultation Paper on Sustainability Reporting (Sept 2020), which foresees the IFRS creating a global Sustainability Standards Board (SSB). They express serious concern that the paper includes proposals inconsistent with research findings from the field of sustainability accounting. The paper states that an SSB would not employ a double materiality approach, but rather focus on the information needs of investors. Based on academic research, the Accounting Professors argue that a “profit and financial materiality focus leads sustainability reporting to make a negative impact on, or reduced contribution to, sustainable development”. They believe the approach will exacerbate the “lack of corporate and investor responsiveness to sustainable development issues”.
On 11 September the GRI, IIRC, SASB, CDP and CDSB publish a Statement of Intent to work together towards comprehensive corporate reporting. They commit to engage with key actors such as the IOSCO, IFRS, European Commission and WEF International Business Council. Their vision statement presents different types of “nested sustainability information”, recognizing the ideas of double materiality and dynamic materiality. The visual presentation sets out an outer ring of information on significant impacts (on the economy, environment and people), a middle ring of information on sustainability topics material for enterprise value creation, and an inner ring of material information already reflected in financial reporting. These building blocks are described as showing the ecosystem in which the different standards are nested. Further alignment between them will facilitate the flow of information across the three building blocks.
In August the European Electric Car Report signals that during the first seven months of 2020 the West European electric passenger car market outpaced that of China. Europe bought half a million electric (EV) and plug-in hybrid (PHEV) cars in the first half of 2020 and is on track to sell a million plug-in cars this year for the first time in history. Electric cars have been boosted by government and OEM backed purchase subsidies, as well as fiscal subsidies in major markets in a response to the COVID-19 pandemic and assisting OEMs in meeting tougher EU-wide fleet average CO2 emissions legislation. Citroën launched its 100% electric car ë-C4 on 30 June, having launched its two-seater Ami earlier in 2020. Other popular electric cars in Europe include the Tesla Model 3, Renault Zoe, Nissan Leaf, Porsche Taycan and Hyundai Ioniq Electric.
On 14 July BlackRock reports that it has taken action against investee companies for climate inaction. It has put 244 companies “on watch” for insufficient progress on climate issues and taken voting action at the AGMs of 53 companies over climate issues, largely through voting against the re-election of directors. This comes after a coalition of shareholders – including public pension funds – have scrutinized BlackRock, Vanguard, JPMorgan and T Rowe Price, four of the world’s biggest fund houses, over their record on environmental action and climate change voting. Earlier the year it among others failed to support a climate resolution at JPMorgan bank. In January BlackRock announced that it is integrating more climate analysis into all its investment processes, and its support for combined use of the SASB and TCFD frameworks in climate risk reporting.
On 19 June Markus Braun, CEO of Wirecard, announces his resignation as details of large-scale fraud unfolds at what was one of Europe`s most valued fintech companies. The group for the first time acknowledges the scale of a multiyear accounting fraud, warning that €1.9bn of cash on its balance sheet probably does “not exist”. Its shares collapse by more than 80%. The German financial watchdog BaFin calls the scandal a “complete disaster”. Tracing the case since 2019, the FT reports at the centre of the affair is Wirecard’s “third-party acquiring” business. It handles credit card payments for businesses and was supposedly outsourcing some payment processing to third parties. Whistleblower allegations led to discovery that clients listed in documents prepared for auditor EY did not exist. Deposits Wirecard said it held in escrow accounts at two Asian banks could not be confirmed by the banks.
On 12 May the World Business Council for Sustainable Development reports that its members who demonstrate taking ESG factors into account have been beating major stock exchange benchmarks by 4.3 – 9.4% in 2020 up to the end of April. Its listed members in Europe beat the STOXX Europe 600 benchmark by a margin of 4.3%. Member companies from China and India outperformed their benchmarks (Hang Seng & BSE Sensex) by 7.5% and 9.4%. Various studies confirm past research indication that responsible investments outperform in crisis times. Data provider Morningstar reports from its examination of 745 Europe-based ESG funds that they outpaced traditional funds during the market sell-off sparked by COVID-19 in the 1st quarter 2020, delivering average excess returns of up to 1.83%. Morningstar found that most ESG funds outperformed the wider market over the last decade.
In an interview with BCG and an opinion on Forbes published 19 April, Oxford Professor Bob Eccles discusses the meaning of dynamic materiality in COVID times. He describes COVID in terms of boosting the salience of certain topics (e.g. employee health & safety) and illustrating event-driven materiality. While he supports the SASB approach of determining materiality on an industry sector basis, the global pandemic has demonstrated the impact of a shock event with implications across all sectors. “When something universally cataclysmic happens in a very concentrated period of time, an issue can become material to every company in every industry, for better or worse. In the case of COVID-19 it is largely for the worst. With COVID-19 there is no debate about its materiality. The question is in what ways its impact is being felt and what can be done about it,” writes Eccles.
On 19 March the WEF with Boston Consulting Group publishes a white paper on “The New Age of Materiality: Harnessing the Pace of Change in ESG”. It notes a new trend for investors to build their capacity to more accurately assess which environmental and social issues will become material over time, and integrate these forward‐looking perspectives into investment decisions. It argues that in an era of hyper‐transparency, the rate at which currently immaterial issues become material is accelerating. It presents a framework with four key drivers of the growing dynamism in ESG materiality. The drivers are growth in evidence and transparency, escalating stakeholder activism, growing responsiveness of key decision-makers, and greater emphasis on ESG by investors. It notes that there are signs of convergence on how ESG performance is measured (among investors and rating agencies).
On 20 February the IIRC launches a revision of its Integrated Reporting <IR> Framework. A key question remains target audience. The current Framework determines “the providers of financial capital” as the primary users of <IR>. Some feel this should be expanded to stakeholders broadly (providers of all types of capital). Implied is whether materiality is ultimately determined with reference to significant financial consequences. The IIRC revision topic paper underlines that <IR> is about meeting the needs and interests of key stakeholders, and that value creation requires an understanding of diverse resources and relationships. It states: “Connecting this logic to investment decisions does not undermine this process, nor does it negate the importance of other stakeholders… integrated reports infuse the collection of stakeholder views as integral to the value equation and as a proxy for the organization`s quality of leadership.”
On 5 January the WHO publishes its first Disease Outbreak News on a new coronavirus identified following a reported cluster of cases in Wuhan, China. On 12 January China publicly shares the genetic sequence of COVID-19. Evidence of human-to-human transmission mounts. A WHO delegation visits China and its Emergency Committee convenes. On 30 January WHO reports 7818 total confirmed cases worldwide, the majority in China and 82 cases in 18 other countries. It declares the novel coronavirus outbreak a public health emergency of international concern (PHEIC – highest alarm level). By 11 March WHO declares the outbreak a global pandemic. Economies start to lock down, causing the most severe global economic contraction since the 1930s. The OECD expects the global economy to contract by 12% in the first half of 2020. COVID cases worldwide increase to reach over 25 million by August 2020.
In a world biggest IPO, Saudi Aramco sets off to raise a record US$25.6bn with its IPO on 5 December. The company sold shares for 32 Saudi riyals (US$8.53) each, which gave it a market valuation of US$1.7tn when shares started trading on 11 December. Shares increased 10% when they started trading. The valuation fell short of the US$2tn desired by Crown Prince Mohammed bin Salman. The giant state-owned oil monopoly did succeed in achieving the biggest IPO in history, raising the US$25.6 billion by selling 1.5% of the company. The Saudi Arabia government initially considered floating 5% of the company in 2018, but the project was shelved following concerns about legal complications in the USA, doubts about the valuation and international outrage after the murder of journalist Jamal Khashoggi in a Saudi consulate in Turkey.
On 6 November Westpac, Australia’s 2nd biggest bank by market capitalisation, announces that cash profit fell 15% to A$6.85bn in 2019. Its worst financial results in a decade follow costs linked to a public inquiry into misconduct, a faltering economy and low interest rates. The bank intends to raise A$2.5bn capital through an equity raising, to ensure it complies new regulations on bank balance sheets. Australia’s prudential regulator expects the country’s big four banks — Commonwealth Bank of Australia, Westpac, National Australia Bank (NAB) and ANZ Bank — to have a common equity tier one ratio of at least 10.5%. The same week NAB reports a 10.6% drop in full-year cash profits to A$5.09bn. The Big Four face regulatory headwinds based on findings by Australia’s Royal Commission inquiry into misconduct across the financial sector.
On 22 October SoftBank takes control of WeWork. It’s biggest investor took the decision after WeWork has been in turmoil since filing in August at the SEC for its IPO. At the time Google from its assessment of Internet data found highly negative sentiment trends related to a company that since nine years operated under the mission “to elevate the world’s consciousness”. The coworking company cut its valuation down to US$10 billion from US$47 billion, removed its CEO and delayed its IPO indefinitely. Softbank gave co-founder Neumann US$1.7 billion to step down, and gave WeWork a US$5 billion valuation. By September the company had 834 locations open or soon to open in 126 cities around the world, building on its model of turning cheap real estate into co-working spaces. Its revenue 2018 was US$1.9bn and it had some 12,000 employees.
In September a Financial Times commodities report signals that Latin American ranchers are benefiting from surging Chinese beef demand. Chinese beef imports from Latin America have soared after swine fever swept across rural China. Benefitting most, Argentina had exports up 129% year-on-year to 186,000 tonnes. Brazil was second-biggest exporter to China at 180,000 tonnes in the year to August, up by 15%. Demand for beef around the world continues to grow, as developing nations look for foodstuffs besides chicken and pork for their growing populations. The Brazilian company JBS, largest meat processing company worldwide and biggest exporter to China, is confident that demand from their main export market will remain strong. In 2015 Trucost (S&P) found that beef production in Brazil accounted for costly environmental impacts at US$596m, largely as a result of deforestation to clear land for pasture.
On 19 August The Business Roundtable, a group of chief executive officers from major US corporations, issues a new position on the “purpose of a corporation.” Over 180 chief executives, including Walmart and JPMorgan Chase, overturned three decades of orthodoxy on shareholder primacy. The statement acknowledged that the duty of management and directors is not foremost to maximise shareholder value. They need to exercise accountability towards all stakeholders. The statement highlights five stakeholder groups, listing shareholders last and describing them as “providers of capital”. The new doctrine appears to be that of Capital Providers, Employees, Customers, Suppliers and Community or CPECSC primacy. The American Council of Institutional Investors responded critically that the decision to drop the doctrine of shareholder primacy would lead to “accountability to no one“.
On 7 July Deutsche Bank (DB) announces its “most fundamental transformation in decades”. Its supervisory board meets to discuss a major restructuring that may result in 20,000 job cuts. DB has been plagued by ratings downgrades, fines and management upheavals. Its investment banking was often the culprit, while generating half DB’s revenue. DB sets out to shrink its ailing investment bank by a third, rolling back a 20-year attempt to make the top ranks of Wall Street. The plan is expected to drive Germany’s biggest lender to a net loss in 2019 and cost of €5bn. Its CEO aims to cut annual costs by €4bn by 2022, without raising more capital to finance restructuring. Not raising capital will see DB’s common equity tier one ratio fall below its current minimum target of 13% of its risk-weighted assets. A 1% point reduction of the ratio unlocks €3.5bn in capital.
On 30 June Alibaba reports impressive quarterly results, especially boosted by its ecommerce and cloud computing businesses. It reported revenue of 114.92 billion yuan (US$16.74 billion), an increase of 42% year-over-year (compared to 61% year-on-year revenue growth for the same period 2018). It reported non-GAAP diluted earnings per share (EPS) of 12.55 yuan versus 10.25 yuan expected. Its cloud computing revenue grew 66% in the last year, including 85% in China compared with an annual growth rate of 16% for the broader industry. Alibaba Cloud is the 4th biggest cloud company globally with over 40% of the market in China. Following a US$25bn IPO in New York (2014), Alibaba is expected to raise up to US$20bn in a planned secondary listing in Hong Kong. With 86% of ecommerce revenue and over half of total sales derived from China, it is largely unaffected by trade disputes with the US.
10 May is Uber’s IPO on Wall Street. Its highly anticipated stock market debut was expected to define the era of the unicorns (tech start-ups valued at US$1bn or more). Getting its business model for the ride-hailing market to scale requires long-term subsidies to both drivers and riders. To do this Uber had to raise US$25bn in equity and debt over the past decade, including US$8.1bn in new capital from its IPO. Shares slide to close 7.6% down on their first day of trading, as investors appear sceptical. By the end of the session shares are at US$41.51 below the company’s listing price of US$45. On 9 May Uber sold 180 million shares at US$45 each, raising US$8.1bn of cash and valuing it at US$82bn. 10 May sees a 7.4% fall in the shares of its rival Lyft, which went public two months earlier and reached US$22.4bn in value.
At a difficult Bayer Annual General Meeting on 26 April, 55.5% of its shareholders vote against absolving CEO Werner Baumann and other managers of responsibility for their actions in the takeover of Monsanto in 2018. The vote was followed by an emergency session of the company’s supervisory board. The no confidence vote has no precedent in German postwar corporate history. Investors were angered by a 38% fall in Bayer’s share price since its acquisition of rival Monsanto. By now Bayer was now worth just the US$63bn it paid for the US seed giant. Bayer faces mounting legal problems over glyphosate, a herbicide marketed by Monsanto in the past and linked with cancer. Bayer is facing 13,400 glyphosate-related legal claims. Baumann has insisted that “management acted conscientiously” in assessing the liability risk around Monsanto.
On 20 March the European Commission fines Alphabet Inc.’s Google 1.5 billion euros for antitrust violations in the online advertising market. In what it describes as “abusive practices” in online advertising, the Commission found Google broke the EU’s antitrust rules and abused its market dominance by preventing or limiting its rivals from working with companies that had deals with Google. The case revolves around search boxes that are embedded on websites and that display ads brokered by Google. It brings the total Google has been ordered to pay to 8.2 billion euros in EU antitrust probes that have run for nearly a decade. These target the company’s software for Android phones and shopping searches. The advertising revenues that fuel profits for Google and Facebook have come under growing antitrust scrutiny, triggered by complaints from media companies as advertising spend shifts to the web.
Shares of packaged food giant Kraft Heinz fall nearly 25% in February after the company wrote down US$15.4 billion on two of its most iconic brands, Kraft and Mayer. It also cut its dividend by 36% to 40 cents and announced it had received a subpoena from the SEC on its accounting policies and internal mechanics in 2018. Brazilian private equity giant 3G Capital Partners is the company’s second largest shareholder. 3G Capital has a reputation on Wall Street for scaling back costs through strict budgeting, layoffs and other changes at the companies it invests in or acquires. It bought Heinz in 2013 and merged it with Kraft in 2015. Its normal strategy has suffered as the large consumer products company Kraft is seeing a real competitive threat from the trend for fresher and healthier foods.
On 29 January the Pacific Gas & Electric (PG&E) Corp in California files for bankruptcy protection following hundreds of lawsuits from victims of wildfires in 2017 – 2018 and tens of billions of dollars in potential liabilities. The company has been linked to a series of wildfires in California, including Camp Fire, which caused 86 deaths and destroyed 14,000 homes, along with more than 500 businesses and 4,300 other buildings. Equipment owned and maintained by the utility sparked major wildfires. Experts agree that the climate crisis is making the conditions for wildfires worse, and extending the season. Camp Fire broke out in Northern California in November 2018 and became the deadliest and most destructive fire on record in the state. The Insurance Information Institute estimates that insured losses from the Camp Fire totalled between US$8.5 billion and US$10.5 billion.
On 1 December the CFO of Huawei is arrested in Vancouver, Canada, based on an extradition request from the US Government. Huawei is a world leader in developing new generation 5G mobile telecoms networks. US authorities are seeking the CFO’s extradition for alleged fraud, claiming that Meng Wanzhou lied to American banks about the relationship between Huawei and a company called Skycom in order to circumvent sanctions on Iran. US authorities claim that Skycom was an “unofficial subsidiary” of Huawei, run from 2009 to 2014 to violate sanctions. The Chinese telecoms equipment supplier is also under pressure in other Western countries as governments fear its technology can be used for spying. The CFO’s father Ren Zhengfei, founder and president of Huawei, denies that China’s new national security law obliges Huawei to build routes to gather electronic intelligence into its telecoms equipment.
On 19 November 2018 Carlos Ghosn, head of the Renault-Nissan-Mitsubishi Motors auto alliance, is arrested by Japanese authorities on suspicion of underreporting his income by half over the last five years. Nissan and Mitsubishi announce they will remove him as chair of their boards. An interim CEO is appointed by Renault, in which the French government owns 15% as shareholder. In December additional charges are announced, that of aggravated breach of trust as Ghosn is accused of transferring personal investment losses of €14.5 million to Nissan amidst global financial crisis in 2008. It highlights ongoing corporate governance challenges among corporations in Japan, including lack of independent oversight for executive pay. It also highlights tension between Nissan and the French Government since the latter in 2015 increased its stake in Renault, in order to secure double voting rights as shareholder.
On 16 October the Standards Board of the American SASB signs off on the world’s first set of industry-specific sustainability accounting standards covering financially material issues. The final, codified standards cover 77 industries and address sustainability factors most likely to have financially material impacts on the typical company in an industry. It follows six years of research and consultations. Said SASB Chair Jeffrey Hales: “What makes SASB standards unique is their focus on industry specificity and financial materiality”. The standards were developed for use by companies listed on US-based exchanges in their SEC filings. Industry leaders using the standards include GM, Merck, Nike, Kellogg’s, Diageo, PSA and Schneider Electric. The SASB Investor Advisory Group and Alliance include 56 members from North America, Europe and Australia with collective assets under management valued at $29 trillion.
On 19 September the share price of Swiss recruitment specialist Adecco falls to a two-year low. It follows an unexpectedly weak trading statement by the company, signaling the risks of significant economic slowdown in Europe. Adecco shares fell over 6% to SFr54.08 after the group reported revenues grew by just 2% in July and August. A year earlier its share price was 27% higher. The slowdown in European growth compared with the 2nd quarter was consistent with softer market and economic data. Sector worries also hit Dutch rival staffing services provider Randstad. Eurozone economic growth is affected by signs that manufacturers are suffering from a USA-China trade war. The European Central Bank has downgraded its projections for economic growth. Adecco is pursuing a two-pronged strategy to boost profit margins and revenue growth, increasing efficiency of its core business and investing in new markets.
On 14 August a highway bridge collapses in Genoa, Italy, during heavy traffic and rain. Fourty three people die. Amidst furious public reaction, Ministers point fingers to the bridge operator Autostrade per l’Italia. It also implies the family empire Benetton, a controlling shareholder in infrastructure holding company Atlantia that owns Autostrade. Edizione, a €12 billion Benetton family holding company, has a 30.25% stake in Atlantia. The populist Italian government launches a formal procedure aimed at revoking concessions held by Autostrade to operate toll highways. Experts estimate that if it revokes the concession, Government will have to pay Autostrade up to €20 billion in compensation for investments the firm has made. Shares in Atlantia falls more than 30% after the accident. Government intends to require concession holders in all infrastructures to invest more of their profits in maintenance and safety.
On 16 July a report on crypto-assets by the FSB reveals that the Basel Committee is “conducting an initial stock take on the materiality of banks’ direct and indirect exposures to crypto-assets”. Currently cryptocurrencies such as Bitcoin are covered by Basel rules on minimum capital requirements and liquidity for “other assets”. FSB has published a framework, developed with the BIS Committee on Payments and Market Infrastructures, for monitoring the risks to financial stability from crypto-assets. The International Organisation of Securities Commissions is also examining regulatory issues around “crypto-asset platforms” such as crypto exchanges. The threat of heavy regulation or total ban on exchange trading hangs over Bitcoin since early 2018. The price of major digital currencies such as Bitcoin, Ethereum, Ripple and Litecoin, has seen significant volatility in the face of regulatory initiatives and hacks on exchanges.
In the last week of June 2018, US manufacturer Tesla produces 7,000 cars. These include 5,000 Model 3 electric sedans, beating its goal of producing 5,000 Model 3s per week before the close of the second quarter to demonstrate it could mass produce the battery-powered sedan. The company has promised to eventually sell the Model 3 at US$ 35,000, seeking to go mass market. Short sellers lost over US$ 2 billion in June due to Tesla’s rising share price. On Friday 29 June its shares closed at $342.95, up 40% since a year low in April. In May Tesla shares fell 5.6% after its CEO Elon Musk in an earnings call rejected analysts’ questions on another quarter in which the company burned more than US$ 1 billion in cash and pushed back production of its Model Y. Musk dismissed their obsession with short-term financials and described their queries as “so dry”, adding “boring, bonehead questions are not cool”.
On 29 May Starbucks closes over 8,000 of its US stores to provide racial-bias education for its employees. This follows controversy around the arrest of two black men at one of its Philadelphia stores. The training is provided to over 174,000 employees with the aim to prevent discrimination in Starbucks stores. This comes two years after Starbucks was one of the first corporations to issue a sustainability bond, at USD 495.6 million. Starbucks is the world`s 4th largest coffee roaster by volume, responsible for 3% of global coffee sourcing. With initiatives such as its Coffee and Farmer Equity (C.A.F.E) standards, it aims to protect coffee suppliers against child labor, wage and health and safety violations, and work with farmers on environmental standards. Sustainability bonds allow issuers to use the proceeds for both environmental and social projects — a hybrid of a green bond and a social bond.
In April 2018 the Investment Association of asset managers whose members own a-third of the FTSE, and the governmental Hampton-Alexander Review send letters to 35 of the UK’s largest listed companies with low female representation at leadership level, calling for action on gender diversity. The recipient companies with low representation of women in top management and among their direct reports include BP, British American Tobacco and Tui. Various studies point to higher performance by more diverse companies. Credit Suisse has found that companies where women made up at least 15% of senior managers had 18% higher profitability than those where female representation was less than 10%. MSCI found that companies enjoyed premium returns and higher average valuations if they had three or more women on the board. Companies with stronger female leadership had superior average annual ROE of 10.1%.
On 23 March South Africa`s Naspers announces it would sell US$ 10bn of its shares in Chinese media giant Tencent. It foresees the sale to raise money for funding investments across a portfolio of ecommerce and tech assets in emerging markets, incl shares in the holding company of Mail.ru (Russia) and Flipkart (India). Traditionally known as a print media company in South Africa, Naspers also owns pay-TV operations in 48 African countries. Some shareholders have been outspoken about the group’s executive pay policy, saying it unfairly rewards executives for the performance of Tencent, in which Naspers holds a 31.2% stake but no management control. JSE-listed companies have to engage with shareholders when a vote against remuneration policy is over 25%. Naspers is accused of not revealing the level of opposition to its remuneration policy by lumping its two classes of shares together when disclosing voting details.
On 14 February Credit Suisse CEO Tidjane Thiam has a hard time explaining to media the closure of its product VelocitySharesDaily Inverse VIX Short-Term Exchange-Traded Note (ETN). The bank announced it would terminate the second-largest publicly traded product betting on future swings in the S&P 500 after its value plunged. Explaining the initial intention of providing a trading tool for sophisticated investors, he stated: “The contribution of this product to our revenue is only SFr10m per annum… I made SFr5.7bn of revenue (last year). Any notion that this is material to us is (wrong), it is not material at all. It is something we do because clients want it to hedge.” Experts question the logic behind such complex securities. The bank found itself defending a controversial financial product that played a role in big market losses that week. Earlier the Credit Suisse XIV prospectus cautioned: “The long term expected value of your ETNs is zero.”
On 31 January Tencent Music Entertainment, part of China`s gaming and social mediagiant Tencent Holdings, joins Sony Music Entertainment in announcing that they are forming a new music label. The new label Liquid State will be dedicated to promoting electronic and dance music by showcasing Asian DJs. Digital music subscription income in China is expected to more than double from 2 billion yuan ($318 million) in 2016 to 4.7 billion yuan in 2018. Tencent and its tech rival Alibaba emerge as Asia`s biggest investment dealmakers. This raises a challenge for private equity groups and more conventional investment groups who raise money from pension funds, sovereign wealth funds and wealthy family businesses. While tech groups in the USA account for less than 5% of all venture capital flows in their home market, Alibaba and Tencent account for 40-50% of venture capital flows in mainland China.
US investment firm Manning & Napier ($31.7bn AuM) files a claim against UK retailer Tesco over its 2014 accounting scandal. The follows an earlier lawsuit filed against Tesco in October by Allianz Global Investors, Russell Investments and 110 other investors. In 2014 Tesco disclosed that it had misstated its profits during the first half of that year. The discrepancy eventually grew to £326m and Tesco reported a £6.3bn loss in 2015. Tesco argues that the profit misstatement was not large enough in any given year to exceed the materiality threshold set by its auditors, in 2014 at £15m (5% of pre-tax profit). Three former Tesco executives are standing trial for fraud. They were charged in 2017 after Tesco was found to have inflated its profits in 2014. A £129m fine on the company was imposed by the UK Serious Fraud Office and Tesco opened a £85m investor compensation scheme for shareholders who lost money due to the scandal.
Part of a series of reports published by The Inquiry into a Sustainable Global Financial System in mid-November 2017, the Singapore-based DBS digital bank reports that annual ASEAN green investment needs to grow 400% to guard against climate and environmental risks. The Green Finance Opportunities in Asian report by DBS and the UN Environment Inquiry signaled that USD 3 trillion in green investment is needed up to 2030, a new ASEAN green investment market 37 times the size of the global 2016 green bond market. Current annual ASEAN flows of green finance are estimated at USD 40 billion, against an average annual need of roughly USD 200 billion up to 2030. This investment is spread across infrastructure (USD 1,800 billion), renewable energy (USD 400 billion), energy efficiency (USD 400 billion) and food, agriculture and land use (USD 400 billion). Indonesia will require the largest volume of green finance.
Walmart`s share price increases significantly on 10 October after optimistic earnings guidance and a $20bn share buyback programme was announced by the company before its annual investor day meeting. It`s stock rose 4.5% to $84.13, taking its year-to-date gain to almost 22%. Walmart expected earnings to climb 5% in the next fiscal year as its investment in ecommerce continued to pay off. End of September Walmart announced an update to its sustainable chemistry policy on consumables, which had resulted in a 96% reduction in the weight of high-priority chemicals. Its new commitments set a goal of reducing Walmart’s chemicals footprint by 10% by 2022, affecting over 55 million pounds of priority chemicals. The company has been working with the Environmental Defense Fund on defining science-based targets and a framework for corporate leadership to protect consumer health.
On 29 September US regulators decide that AIG insurance will no longer be considered a threat to financial stability, removing its classification as “systemically important financial institution” (SIFI). The majority decision was taken by the Financial Stability Oversight Council, which decides whether non-bank financial companies are SIFIs. The decision frees the insurer from the threat of more stringent capital rules. In 2008 AIG needed a $185bn taxpayer bailout due to the impact of its derivatives portfolio. It has since disposed of half its $1tn in assets. After the announcement shares in AIG rose a percent in after-hours trading, giving it a market capitalisation of $55bn. Rival insurer Prudential Financial remains the only non-bank SIFI in the USA. In 2016 regulators withdrew the classification from General Electric’s financial services business, and MetLife successfully challenged its too big to fail status in court.
Big Four audit firms face heavy penalties for audit failures. On 15 August KPMG is fined over $6.2m by the US Securities and Exchanges Commission for its 2011 audit of oil and gas company Miller Energy. Charged for accounting fraud, Miller had overvalued certain assets by more than 100 times. On 16 August PwC is fined £5.1m by the UK Financial Reporting Council for “extensive misconduct” relating to the 2011 audit of the consultancy firm RSM Tenon. In South Africa, KPMG announces on 11 August that it has suspended its lead audit engagement partner pending the outcome of a review of work done for Gupta-linked companies. KPMG International announces a month later that the head of KPMG SA and seven senior executives will quit after an internal investigation found that work done for the politically connected Gupta family fell “considerably short” of the auditing firm’s standards.
On 6 July Environment Minister Nicolas Hulot announces that France will ban the sale of any car that uses petrol or diesel fuel by 2040. Three weeks later his example is followed by the UK Government, announcing that new diesel and petrol cars and vans will be banned in the UK as of 2040. At the same time BMW announces that an electric version of the Mini will be built in the UK from 2019. On 5 July Chinese-owned Volvo announces that all its new models will be electric or hybrid from 2019. Also in July, Tesla delivers its 1st Model 3 electrical car, a smaller version at USD $35,000 that will target the mainstream market. While electrical cars make up only about 1% of global car production, experts expect a major switch-over to electric cars by the mid-2020s. After 2040 petrol or diesel cars will be in the minority, with 70-80% of new vehicles expected to be electric in France and the UK by 2040.
On 29 June the FSB Taskforce on Climate-related Financial Disclosures publishes its Recommendations. Focused on climate-related “Financial” disclosures, they expect the disclosures to be included in annual financial reporting. The disclosures involved should reflect correct pricing of climate-related risks. The Recommendations provide guidance (e.g on KPIs) related to certain financial categories – core Elements of financial statements. The Recommendations related to Strategy and Metrics & Targets are subject to materiality assessment. Those on Governance and Risk Management are not subject to a materiality assessment, as the climate theme by definition is felt to be material for disclosure in these areas. It is assumed that listed companies of all sectors need to have Board oversight and defined management roles as well as processes for integrated risk management in place addressing climate change.
In its Financial Stability Review of 2 May, the South African Reserve Bank sights the probability of further downgrades to South Africa’s credit ratings. This may weaken the currency and lead to higher borrowing costs. In April the sovereign credit rating was cut to junk (debt “non-investment grade” or “speculative”) by both S&P Global Ratings and Fitch Ratings Ltd. Having South Africa at the 2nd lowest investment grade level, Moody’s prepares to visit the country for review. The catalyst for the downgrades was President Zuma firing Finance Minister Pravin Gordhan at the end of March in a cabinet reshuffle. Since then South Africa’s six-member banks index (incl Standard Bank Group and Barclays Africa Group) has plummeted more than 8%, making it the country’s worst performing stocks of the year. It is feared local banks will increasingly have to battle declining returns and rising bad debts in the year ahead.
On 26 April Switzerland’s second biggest bank Credit Suisse reports a first quarter net income of CHF 596bn, reversing a CHF 302m loss a year earlier. This appears to be part of a trend of European banks getting back on a road of recovery. Credit Suisse CEO Tidjane Thiam among others announced that he intends to raise CHF 14bn through a rights issue – granting shareholders a chance to buy new shares at a discount to the current trading price. This could lift the banks’ ratio of common equity to risk-weighted assets from 11,7% to 13,4%. The CEO is also driving an increasing focus on Asia where Credit Suisse seeks to serve both business and newly rich families through its corporate, investment banking and wealth management services. In the past year its Asian wealth management business has had profits rising by two thirds.
It is reported that capital flows to emerging markets have turned positive for the first time since the 2nd quarter of 2014, having attracted a net US$ 28,6bn in the 1st quarter of 2017. This comes after the Washington DC-based Institute of International Finance (IIF) reported that cross-border portfolio flows in March were at their highest monthly level since January 2015 and broad capital flows to China turned positive in February for the first time in almost three years. The trends appear despite the fact that the US Federal Reserve raised interest rates on 15 March, suggesting that investors were not bothered by what would normally be a negative signal for emerging market assets. The Financial Times signals that, starved of yield in developed markets, investors have rediscovered an appetite for emerging market risk.
On 17 February Kraft Heinz announces a US$ 143bn take-over bid for Unilever, only to be withdrawn two days later after strong pushback from the Unilever chief executive and Board. The potential benefits were questioned by Unilever shareholders, 70% of whom are long-term investors who have held their shares for over 7 years. The failed bid did raise concerns about the group’s structure and profitability. On 22 February Unilever announced it would conduct “a comprehensive review of options available to accelerate delivery of value for the benefit of our shareholders”, after which its share price recovered. Unilever’s profit margins are half those of Kraft Heinz, suggesting that the business could be run more efficiently. It may sell off businesses such as Lipton tea to fund a large acquisition in home and personal care, a domain that currently accounts for 57% of sales.
The World Economic Forum (WEF) publishes its Global Risks Report on 11 January. Based on its Global Risks Perception Survey (GRPS) with feedback from 750 experts, it concludes that rising income and wealth disparity and increasing polarization of societies are 1st and 3d respectively among underlying trends that will determine global developments in the next decade. Among top environmental issues ranking both high-risk and high-likelihood, climate change ranks as 2nd most important underlying trend. Of 12 emerging technologies examined, experts found artificial intelligence and robotics as having the greatest potential benefits, but also the greatest potential negative effects and greatest need for better governance. The findings signal a world undergoing multiple complex transitions towards a lower-carbon future, technological change of unprecedented depth and speed, and new economic and geopolitical balances.
From 26-29 December Japanese conglomerate Toshiba loses almost half its share price value as investors respond to its multibillion dollar writedown warning. The Financial Times reports a loss of trust among investors in a company that since 2015 has shown “slack corporate governance and repeated disclosure failures”. Japanese R&I downgraded Toshiba’s credit rating from BBB minus to BB. The warning signaled impairment losses on part of its Westinghouse nuclear business in the US that could result in a writedown of $2,3 billion. Investors continue to question if Toshiba has adequately addressed standards of oversight and decision-making. Accounting irregularities exposed in 2015 suggested Toshiba falsely inflated its profits by $1.3bn over seven years. Japan’s $1.3tn Government Pension Investment Fund — largest investor in the world — announced it was suing Toshiba for damages over the scandal.
On 8 November Donald Trump surprisingly wins the US presidential election. He wins 306 electoral votes and Hillary Clinton 232, but gets only 46,2% of the popular vote versus Clinton’s 48,3%. Election polls and investors expected Clinton to win. In the initial market shock reaction Dow futures fall 800 points and the S&P 500 by 5%. European stocks fall and Japan’s Nikkei stock exchange closes 5.4% lower. But within a day markets digest the result and some sectors start to focus on possible opportunities. The Dow industrials move up to their best week since 2011. Based on his election promises, infrastructure and traditional energy sectors are optimistic. So is finance, expecting deregulation. Yet his positions on climate, trade and migration leave clean energy, manufacturing and ICT sectors nervous. Amidst market uncertainty, the value of the US dollar surges with post-election expectations of reflation in the US.
On 5 October the climate convention (UNFCCC) secretariat states that the threshold for entry into force of the Paris Agreement was achieved. This follows receipt of instruments of ratification of the EU and Canada. The Paris Agreement consequently enters into force a month later on 4 November. The speed at which countries ratified the agreement was unprecedented in international treaty-making history. To enter into force, at least 55 countries accounting for at least 55% of global GHG emissions were required. National action plans will now formally become Nationally Determined Contributions (NDCs). On 25 October the International Energy Agency (IEA) reports that renewables have overtaken coal as world’s largest source of power capacity. With falling costs of renewable supplies, the IEA revised its 5-year forecast to suggest renewables’ capacity will grow 13% more than estimated in 2015.
On 6 September the Financial Times reports that most banks today deliver a return on equity (RoE) of only 5% – 10%. This is far from the high point in bank returns during years before the financial crisis of 2008 onwards. A decade earlier for example HSBC made a RoE of 17% and Goldman Sachs 25% – 30%. Non-Nordic European banks’ profitability appears to be undermined by high provisions. Average non-performing loan ratios at 6% (21% in Italy) are about three times US and Japanese levels. Furthermore, fast-digitising, branch-closing Nordic banks operate at a cost-income ratio of 46%, some 10-15 percentage points below the rest of Europe. Europe’s banks trade at 10 times their forecast 2017 earnings and 0.8 times their book value, compared to US banks which trade at 11 times earnings and 1.0 times their book value.
From 5-21 August 2016 Rio de Janeiro hosts the Summer Olympic Games. The costs of hosting the Games include sports-related costs and broader infrastructure-related costs. The sports-related costs of Rio 2016 was estimated to be US$ 4.6 billion, some 51% over budget. With broader costs added, the overall cost was estimated at US$ 12 billion – of which the greater contribution came from the private sector. The costs compare with the previous summer games in London at US$ 15 billion and Sochi winter games at US$ 21.9 billion. The Olympics reportedly have the highest average cost overrun of any type of mega-project. Overall costs include operations costs (during the event including security), venue construction / renovation costs, and infrastructure costs. Estimated externalities, both costs and benefits, remain the subject of much debate.
In July 2016 global corporations assess the material consequences of Brexit. Analysis published by The Economist (9 July) highlights the likely implications for diverse industries. These include European multinationals with investments in an economy that holds some 7% of world FDI. Worries about different regulations applying in the UK versus EU affect especially industries such as ICT (transnational data transfer), airlines (open continental operations), manufacturing (cars, aircraft, etc), energy (cross-border electricity investment and trade), pharma (patents systems) and chemicals (EU REACH framework). These include industries using the UK as an export hub, whose investment planning for the next two years and after faces the additional complication of currency fluctuations (GBP versus Euro). Germany’s BASF for example runs 10 plants in the UK and about 80% of what it produces there is exported to Europe.
In a referendum on 23 June, 52% of the British voting population decides that the United Kingdom should leave the European Union. The historical vote sends shockwaves through financial markets world-wide. Broader economic consequences for the UK will unfold in coming years. The immediate impacts hit in particular British financial institutions as well as housing and travel companies as a weak Pound is expected to leave British consumers holding back on spending. EasyJet is one of the first to announce a profit warning, as it expects its revenue in the second half of the financial year to fall by a “mid single-digit percentage”. It starts a formal process to move its headquarters to continental Europe. Foreign investment banks take steps to move staff from London to other European financial centres. The Brexit vote also impacts current merges & acquisitions.
On 2 May federal prosecutors in Brazil announce that they will seek R$155bn (US$44bn) in damages from BHP Billiton and Vale, which operate the iron miner Samarco as 50/50 joint venture. This follows one of Brazil’s biggest environmental disasters ever in November 2015 when a Samarco wastewater tailings dam burst. It among others left 17 people dead and over 500 homeless. The local state and federal governments have already settled with the two companies for US$3bn-6bn. In response to the announcement, BHP’s shares fell 6% in London and 9% in Australia. Vale’s shares fell 5.5% in Brazil. The two groups lost US$7.6bn in value. Considering Vale’s smaller market capitalization, it lost US$1.5bn in value compared to BHP’s loss of US$6.1bn. Yet as FT Lex pointed out, formally each “owns” half of the liability for the disaster.
On 3 April 2016 news breaks on the Panama Papers, a leak of 11.5m files from the database of Mossack Fonseca (world 4th biggest offshore law firm). Leaked a year earlier to the Süddeutsche Zeitung, over 400 journalists world-wide analysed the documents for the International Consortium of Investigative Journalists. Its revelations about offshore accounts for tax evasion purposes imply hundreds of politicians, business and sports people. It also puts the spotlight on banks, such as France’s Societe Generale which was an active user of the law firm to set up offshore shell companies. In response the IMF head calls tax avoidance a global risk. The Obama Administration launches new measures (incl stricter “customer due diligence” rules for banks). Measures proposed by the EU Commission require companies with annual turnover over €750m to annually publish country-level data (incl profits, tax, employees, net turnovers).
On 10 March the ECB announces a cut in its deposit rate to minus 0.4%. Aimed at boosting the Eurozone economy, the move is highly material to the profitability and share value of banks. The ECB also decides against introducing a tiered deposit rate structure, a system of multiple rates used in Switzerland and Japan to encourage lending to companies while also punishing banks that hold too much cash. On complaints by banks that negative interest rates hurt profitability, a senior ECB official argue that banks should revisit their business models and invest more in efficiency through digital technologies. Some criticize the continuation of negative rates, arguing that negative indirect effects overshadow the initial impacts of seeking to tax excess deposits or in effect offering to pay banks to lend. Avoiding too much risk by lending more, banks may respond by charging more for lending (e.g. mortgages) and charging higher fees.
On 2 February Larry Fink, CEO of the world’s largest asset management firm BlackRock, sends a letter to the CEOs of the S&P 500 in which he attacks market short-termism. He asks every CEO to “lay out for shareholders each year a strategic framework for long-term value creation”, one reviewed by board members. It raises the time dimension of materiality. He challenges companies to educate their investors, explaining how with long-term plans they are adapting to technological disruption or geopolitical events, where they are investing and how they are developing talent. This follows meetings convened by Warren Buffett and JPMorgan Chase on the topic of longer-term investment priorities with BlackRock, Fidelity, Vanguard and Capital Group. In a supportive letter to the Financial Times, the CFA Institute agrees that the issue is not quarterly reporting as such but rather the type of information disclosed.
On 14 January the World Economic Forum (WEF) publishes its Global Risks Report. From survey feedback of 750 respondents, the two greatest global risks in terms of impact and likelihood are “Failure of climate change mitigation and adaptation” and “Large-scale involuntary migration”. Migration is a higher concern among short-term (18 months) risks, whereas the resource-related issues of climate, water and food dominate the top five risks with a long-term (next 10 years) perspective. Feedback from over 13000 business respondents to the WEF’s 2015 Executive Opinion Survey show a striking contrast: the relative absence of environmental risks and longer term issues among their top concerns for doing business. In developed economies, their top concerns are economic risks such as asset bubbles and fiscal crisis. In developing ones, it is unemployment, underemployment and energy price shocks.
On 12 December governments at COP 21 finalise a new agreement following the 1997 Kyoto Protocol. Fossil fuel producers play down its significance. Others describe it as historic. Richard Branson speaks of a “Paris effect” that will ensure the economy of the future is clean energy driven. The pact implies a science-based net zero emissions target for the 2nd half of this century. Bloomberg reports SolarCity CEO Lyndon Rive saying that “companies with business models threatened by a low-carbon world need to re-focus, fast“. The Stowe Global Coal Index (stock performance of 26 major producers) lost almost 60% of its value in 2015. The Paris agreement obliges every country to set out what it is going to do about its GHG emissions every five years, starting 2020. Every five years governments will experience intense public scrutiny of their climate plans. It also aims to keep global temperature rises to “well below” 2°C.
On 4 November the New York State Attorney-General sends a subpoena to ExxonMobil requesting financial records and other documentation for an investigation on whether the company misled investors and the public about climate change risks and how it could affect ExxonMobil. The Attorney-General’s office has broad powers to initiate financial fraud cases because of New York state’s Martin Act (1921). The Financial Times reports that it is inquiring into whether ExxonMobil made adequate disclosures to investors about the risks involved, its climate change impact disclosures to the SEC and possible consumer fraud considering its marketing, advertising and communications regarding climate change. The inquiry covers activities since the 1970s. CERES commented: “It’s not a crime to be a climate skeptic. But it is a crime to lie to investors, and to materially underestimate the risks.”
Thomson Reuters Launches an online, multimedia report entitled “Seven Reasons the World will be Sustainable”. It profiles the challenge for the Global 500 to take on carbon pricing. It also quotes the Global Sustainable Investment Review, highlighting that the global sustainable investment market has grown from $13.3 trillion in 2012 to $21.4 trillion in 2014, representing 30.2% of professionally managed assets in developed regions. In an interview Mercer’s Head of Responsible Investment (RI) says one of the main factors driving this growth is rising acknowledgement of the performance benefit associated with RI techniques. The evolution of ESG integration is showing the value that “nonfinancial” factors unlock. More research demonstrates that companies performing well on “material sustainability issues” outperform peers in terms of historical return measures, states Mercer’s Alex Bernhardt.
In September 2015 US regulators found Volkswagen guilty of intentionally falsifying emissions data. It catalyzed much debate on VW, the car manufacturing industry and test standards in Europe to limit air polluting NOx emissions. While consumer reaction worldwide did not immediately show a dramatic impact on sales revenues, investors made their displeasure clear. VW shares fell 70% over the following month. The company was removed from the Dow Jones Sustainability Indices (DJSI) by October and the FTSE4Good Index by December. In mid-November Union Investment, Germany’s third largest asset manager, called for the company to replace its new CEO and chairman. Volkswagen has budgeted $7.3 billion to mitigate fallout, including the prospect of vehicle buybacks. Commentators noted how an environmental or “extra-financial” issue became material overnight. (On broader industry fallout see FT.)
After the Black Monday China stock market crash of 24 August, Apple’s shares dropped 10% as investors were concerned about its exposure to the Chinese market. Later that day Apple CEO Tim Cook took the unprecedented step of replying to an email of the TV host of the CNBC show Mad Money. He indicated that Apple has continued to see strong sales growth for its business in China during July and August. After this feedback went public on the TV show, Apple recovered US$ 78 billion of its lost market value. Considering SEC rules on fair disclosure, a BBC correspondent commented: “as the email did not contain any numbers, I suppose Apple could argue that the information was not material, and that (TV host) Jim Cramer is not a stock analyst”. The incident illustrates the impact of different disclosure venues – for example a press release versus a statutory report – on investor decision-making.