news & views of the week....

Here is a summary of some key topics that have been in the news this week that might be of interest to those in the funding & financing markets and beyond. The focus continues in the areas of financial stability, sustainable finance as well as the continuation of the intersection of finance and technological advancements. This week’s highlights include the Bank of England Financial Stability in Focus Report; a look at the BIS Regulating Big Tech event; how the OECD is Strengthening ESG approaches and market alignment to foster climate transition; an IMF blog on How Investment Funds Can Drive the Green Transition; and an insightful article from ISS ‘Caught Short: The Importance of Clear Reporting on the Use of Derivatives in Climate Strategies’….

Financial Stability in Focus - October 2021 Bank of England ?- The Bank of England launched the first in a series of publications that has a focus on issues related to financial stability. The paper examines the impact of the Covid-19 pandemic on corporate sector vulnerabilities. The pandemic has had a large but uneven effect on UK businesses and the report considers the implications for financial stability. Bank resilience - Banks are strong enough to continue to support households and businesses through the recovery from the pandemic; Financial markets - There is evidence of heightened risk-taking in some financial markets, and vulnerabilities remain in the non-bank sector. Financial markets play an important role in supporting the economy and provide a substantial amount of finance to businesses. If financial markets do not function properly, businesses may be unable to raise funds through those markets. There is evidence that investors are taking higher levels of risk in some global markets. For example, there are fewer protections in place when investors lend to companies with high levels of debt in so-called “leveraged loan” markets. And the prices of some financial assets appear high relative to historical norms. The BoE is monitoring these risks closely and is also working with UK and other international authorities to make market-based finance more resilient to shocks, so that financial markets can support the economy in bad times as well as good. Cryptoasset markets continue to grow rapidly, but currently pose limited risk to UK financial stability. Regulation needs to develop quickly enough, both domestically and at a global level, to address the risks they could pose in the future….

BIS - Regulating Big Tech: between financial regulation, anti-trust and data privacy Large technology firms are rapidly expanding their footprint in the payment system and in financial services. Big tech services can bring welcome innovation and competition to financial services, helping to enhance efficiency and financial inclusion. But they also raise thorny issues for regulators. For a start, their heavy use of customer data raises new challenges around financial stability, competition and data protection, which fall under the mandates of different public authorities. With user data from their existing business lines in e-commerce and social media, and by harnessing the inherent network effects in digital services, big techs can scale up rapidly in payment, credit, insurance and investment services. And proposals for global stablecoins combine these issues with the risk of fragmentation of the monetary system, with a reduced role for central bank money at the heart of the system. At the BIS Research Conference on Regulating Big Tech, central bank Governors, senior policymakers, researchers from central banks and academia, and other stakeholders discussed how best to regulate big tech in finance to promote the public interest. Agustín Carstens outlined how policymakers should respond to the rise of BigTech in finance in 3 ways: adapt existing regulations, improve current payment systems, and introduce CBDCs. Also of note, Jason Furman’s opening keynote about the challenges of BigTech in finance….

Strengthening ESG approaches and market alignment to foster climate transition - OECD - Amid public sector initiatives to achieve the objectives of the Paris Climate Agreement, there has been a sharp growth in investors’ use of ESG approaches to integrate climate risks and opportunities into investment decisions. Financial markets have a critical role to play to help assess the net benefits, channel capital to entities that are transitioning to renewables, embark on a low-carbon trajectory, and provide appropriate surveillance and verification to support an orderly transition to net zero. While noteworthy progress has been made, considerable challenges hinder the efficient mobilisation of capital. Greater comparability of climate transition metrics, as well as transparency and interoperability of climate finance and ESG approaches, are needed to support the orderly transition to low-carbon economies. The OECD hosted a panel discussion with public and private sector participants on progress, challenges and policies for financial markets to foster a low-carbon transition. To coincide with the event, two OECD reports were developed for the G20 Sustainable Finance Working Group: Financial Markets and Climate Transition: Opportunities, Challenges and Policy Implications; ESG Investing and Climate Transition: Market Practices, Issues and Policy Considerations….

How Investment Funds Can Drive the Green Transition – IMF Blog - The transition to net-zero greenhouse gas emissions requires unprecedented change by companies and governments, as well as additional investment of as much as $20 trillion over the next two decades. Strong fiscal policies, complemented by a broad range of regulatory and financial policies, will be necessary to facilitate the green transition. The world’s $50 trillion investment fund industry, especially funds with a sustainability focus, can play an important role financing the transition to a greener economy and helping to avoid some of the most perilous effects of climate change, according to recent analysis as part of the IMF’s?Global Financial Stability Report. The report shows how investment funds have stepped up proxy voting behavior with firms on climate-related matters. Conventional investment funds voted in favor of almost 50 percent of climate-related shareholder resolutions in 2020, up from about 20 percent in 2015. Funds with a sustainability focus had an even stronger track record, voting in favor of about 60 percent of such resolutions, and even close to 70 percent in the case of environment-themed funds. Still too small - even though sustainability is becoming mainstream in investment strategies, sustainable investment funds still represent only a small fraction of the investment fund universe. At the end of 2020, funds with a sustainability label totaled about $3.6 trillion, representing only 7 percent of the overall investment fund sector. Funds with a specific climate focus accounted for a meager $130 billion of that total. An emerging trend sees sustainable investment funds growing faster than conventional peers. Net flows into sustainable funds increased notably in 2020, and climate-themed funds grew especially fast, surging by a staggering 48 percent of assets under management….

Caught Short: The Importance of Clear Reporting on the Use of Derivatives in Climate Strategies - Short selling refers to securities trading activities that position an investor to benefit from a fall in a stock’s price. The use of this tactic as a tool to manage climate risks has been a hot topic recently. Some investors are reporting near-zero portfolio emissions after using shorting tactics to net out the greenhouse gas production of the companies they invest in. From an accounting perspective this can make theoretical sense. Unless this number is presented transparently and in context with real world impacts, however, an observer may be fooled into believing that the investor managed to remove Greenhouse Gases from the atmosphere simply by shorting. This is not the case. The real-world environmental impacts of a shorting strategy are potential, and inevitably, always in the future. Shorts could be leveraged for climate arbitrage strategies. In this approach, an investor establishes a market-neutral portfolio consisting of long positions in companies that are actively reducing their carbon-related risk, and short positions in companies that do not. Over time, as performance of the companies diverges, investors may enjoy returns without being exposed to market risk. Similarly, derivatives such as futures, warrants, and swaps, can be used to modify the exposure of an investor’s portfolio to climate-related and other risks, both for hedging and speculative purposes….

Closing thoughts....

I am sure this brief collection of topics doesn’t reflect everything you are working on but I hope it reflects some of the things you should be interested in….and I hope you find it of use!

Until the next time, I would be pleased to receive your views on any areas of mutual interest.?