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Author Topic: potential impact of green financial regulation on investment funds and banks  (Read 233 times)

bluesky

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Dear all,

Although I am more interested in the science underlying climate change, ultimately, financial regulation if used appropriately could be a quick driver for change (far from being the only one, I do believe in "walking the the walk" and day to day personal change to reduce carbon footprint, and external pressure from active NGO in climate change awareness). L'argent c'est le nerf de la guerre...

I hope there are a few ASIF members who are secretly reading the forum and hold major position in the financial community, (whether regulator, central banks or investment funds) attempting to change from the inside but I doubt it. For the moment there is almost exclusively "green washing" in the financial world. Green bonds, despite developing fast are still a very tiny fraction of the overall funds invested worldwide, and they are subject to scrutiny and challenge in relation to their proper definition and labelling, there is likely some green washing within the green bond issuance market. Many of the so called "sustainable", "ethical", and other type of "greenish" investment funds are widely using the green washing recycling tools.

some ideas:

- Central banks of key countries , eg, US, Europe, UK, Japan, agreeing to take a larger haircut when accepting collateral on fossil fuel industry, this could be graded depending on the "dirtiness" of the brown investment  and graded with time , eg 10% year one on coal, oil and gas energetic company ramping up 5% the first 3 years and 10% thereafter...
(if you have a few penny or more in a pension fund, watch out, so many in the UK and US have at least a few percentage in oil companies, even if they are ethical, sustainable, and for fund of funds or most popular index linked funds this is a given... meaning that if your pension fund is managed by Blackrock, Vanguard or State Street, you're surely biting in dirty investment...)

-Central bank of key countries implementing "selective" Quantitative Easing (or "QE" = central bank buying bonds in order to provide liquidity to the financial market), i.e. not buying bonds issued by the largest carbon emitter, with degree of carbon emitter strengthened year on year. Again it would have to be at least from one or several of the largest central banks.

-Compulsory information to citizen who owns pensions funds or investment funds, that their funds are invested partly either directly or indirectly related fossil fuel industry, the warning should be accompany by a plain language word summary of the latest IPCC report or a video about climate change based on science and stressing the impact on the personal life of the investors and its children. Many do not review their funds for many years, it could be made through a change of security process making compulsory for all to login to their fund website, then the  investment and climate warning would be unfolded, the process of re sining off your login could not be completed as  long as the personal investor would not have viewed the climate video entirely. The warning should also tell that with ramping up of renewable and regulation on climate change, most of fossil fuel assets in the balance sheet of these companies have been largely overvalued and could be flattened to zero in the near future.
This could be easily implemented through regulation, EU and UK could start first without needing any other to do so. This would have the benefit to involve US banks and pensions funds trading in Europe (the Blackrock, Vanguard and others...) and then some key states in the US could follow (California, New York...)

-Also of interest if you have any efficient idea to force the largest investors on the planet (again Blackrock, Vanguard, State Street... investing far more than the largest banks...) to ditch their obvious collusion with the dirty fossil fuel industry

Any thoughts?
« Last Edit: November 10, 2019, 10:26:25 AM by bluesky »

sidd

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the thread "Global economics and finances - impacts"  in "Policy and Solutions" has some previous discussion. Mebbe take it there ?

sidd

El Cid

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bluesky,

- Central banks' QE is usually done by buying government bonds, not corporate bonds (except Japan)
- Central banks don't accept collateral from corporates
- Pension funds selling existing shares of oil companies wouldn't achieve anything because that would not influence the oil companies per se. Buying and selling existing (already issues) shares does not change company financial. The only thing that does is buying/not buying newly issued shares. Oil companies have not issued new shares for years (The Saudi state will soon sell Saudi Aramco shares but the proceeds will go to the Saudi state, not the company eventually)
- Big fund managers: As said above it won't change a thing whether any of them stop holding oil company shares, the companies' operations will not be influenced

To make it more understandable: If you are betting or not betting on a horse will not change how fast that horse runs or whether it even takes part in the race. The financial sector is a betting house. You need to deal with the horse


The real solution is not what you have written about, but direct Government investments (see Green New Deal) or very serious incentives (eg tax breaks) for the private sector.

bluesky

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bluesky,

- Central banks' QE is usually done by buying government bonds, not corporate bonds (except Japan)
- Central banks don't accept collateral from corporates



Good point, another way would be to require banks to hold significantly more capital for any fossile fuel investment, any trade related to it, any loans, making this industry loss making on bank balance sheet< Global impact on bank balance sheet could be neutralised by less capital requirement for green assets loans and trading. There is something call Basel III regulating bank capital, there could be a green version of Basel III, the EU and the UK could unilaterally implement an environmentally based Basel IV, that would massively boost economic transformation of Europe, but EU is still bickering to switch the European Investment Bank, into a green bank and lagging behind...there are far more dirty assets in EU main banks' balance sheet than the potential of green investment through the EIB should it be transformed into a green bank.

- Pension funds selling existing shares of oil companies wouldn't achieve anything because that would not influence the oil companies per se. Buying and selling existing (already issues) shares does not change company financial. The only thing that does is buying/not buying newly issued shares. Oil companies have not issued new shares for years (The Saudi state will soon sell Saudi Aramco shares but the proceeds will go to the Saudi state, not the company eventually)
- Big fund managers: As said above it won't change a thing whether any of them stop holding oil company shares, the companies' operations will not be influenced


On this point I disagree, if investment and pension holders sell their oil assets, there will be more sellers than buyers after some point and the shares in oil companies will substantially decrease. The three largest assets manager hold substantial assets (6 trillion for Blackrock overall if there is 3 per cent invested in oil companies this is USD 180 billion the percentage is likely much higher through indirect investments, funds of funds, ) their weight could considerably impact the share values of oil companies. But I linked with your last point, a high transaction tax on gas oil and coal company could be an incentive, and again this tax could be progressive, 5% year 1, incremented by 5 percentage point every year.
Same for Saudi Aramco IPO, if none of the 3 largest fund managers in the world and none of the  US, UK + EU,  Japanese banks subscribe to the IPO thanks to an escalating transaction tax (you buy year 1 with a 5 % transaction tax and resell year 5 with a 25% due to the 5% yearly incremental) nobody would subscribe to the Aramco  IPO, the value of this asset for Saudi Arabia would be significantly reduced, not a bad thing, that would reduce the nuisance factor of another potential very large oil lobbyist in the world.... There would also be a need that the tax being implemented for Chinese bank... for the moment this is all theoretical



The real solution is not what you have written about, but direct Government investments (see Green New Deal) or very serious incentives (eg tax breaks) for the private sector.

Completely agree with the importance of Government investments and the Green New Deal which I fully support, my previous suggestions were to find measure incentivising the very large private investment sector to disinvest their fossil fuel investment, none of the large investment funds and largest banks have reduced their dirty money investment, they hold hundred of billions of assets in it, the question is how to relatively quickly penalise this type of investment on the banks balance sheets and on the bank account of personal and individual investors (through the largest investment funds). Blackrock, Vanguard and State Street have massive power, more than any largest banks in the world, they are very significant shareholders in the largest dirty companies in the world, they seem to play a somewhat largely unknown but major role in the dirty  unsustainable economy, and there are tens of millions of people mainly in the UK and the US which are supporting indirectly these powerful investment funds as they are investing their savings, pension funds, into funds manged by one of these three dangerous companies... Thus the 3rd suggestion I made, aiming that all individual pension funds and investment fund holders would be fully aware of their underlying investment in fossil fuel industry and their consequences

https://www.theguardian.com/business/2019/may/21/blackrock-investor-climate-crisis-blackrock-assets
"BlackRock is counted among the top three shareholders in every oil “supermajor” bar France’s Total, and is among the top 10 shareholders in seven of the 10 biggest coal producers, according to Guardian analysis of data from financial information firm S&P."

https://www.theguardian.com/environment/2019/oct/12/top-three-asset-managers-fossil-fuel-investments
"The world’s three largest money managers have built a combined $300bn fossil fuel investment portfolio using money from people’s private savings and pension contributions, the Guardian can reveal.
BlackRock, Vanguard and State Street, which together oversee assets worth more than China’s entire GDP, have continued to grow billion-dollar stakes in some of the most carbon-intensive companies since the Paris agreement, financial data shows.
The two largest asset managers, BlackRock and Vanguard, have also routinely opposed motions at fossil fuel companies that would have forced directors to take more action on climate change, the analysis reveals."

91 minutes documentary on Arte, the French German high quality TV channel, about the power of Blackrock (subtitled in English)
https://www.arte.tv/en/videos/082807-000-A/blackrock-investors-that-rule-the-world/

Anyway I very welcome your answers to my post and your constructive debate as I initially thought there would not be any interest in this topic.
« Last Edit: November 10, 2019, 10:19:06 AM by bluesky »

El Cid

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Re: potential impact of financial regulation on investment funds and banks
« Reply #4 on: November 10, 2019, 10:22:50 AM »
"On this point I disagree, if investment and pension holders sell their oil assets, there will be more sellers than buyers after some point and the shares in oil companies will substantially decrease"

Of course, share prices would go down. But then what? For an existing oil company, (or in fact any existing company!) that has no need for new capital, its share price is irrelevant. The share price is important for the investor, he gains or loses if it goes up or down. For the company, it matters not until they need new capital. These oil companies need no new capital at all. If exxon's share price is 1 dollar or 100 dollars will not change anything for exxon, it has no influence on its operation.

bluesky

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the thread "Global economics and finances - impacts"  in "Policy and Solutions" has some previous discussion. Mebbe take it there ?

sidd

This suggestion of topic is significantly more focused than the one you are suggesting to move into, and moving it there might dilute the debate  (I have renamed the topic "potential impact of green financial regulation on investment funds and banks)...into oblivion
Happy to transfer it, if Neven or another administrator of the site would consider it necessary.

bluesky

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Re: potential impact of financial regulation on investment funds and banks
« Reply #6 on: November 10, 2019, 11:11:41 AM »
"On this point I disagree, if investment and pension holders sell their oil assets, there will be more sellers than buyers after some point and the shares in oil companies will substantially decrease"

Of course, share prices would go down. But then what? For an existing oil company, (or in fact any existing company!) that has no need for new capital, its share price is irrelevant. The share price is important for the investor, he gains or loses if it goes up or down. For the company, it matters not until they need new capital. These oil companies need no new capital at all. If exxon's share price is 1 dollar or 100 dollars will not change anything for exxon, it has no influence on its operation.

It is effectively the case as long as the oil price remains high. However, the good thing of disinvesting (and potential losses on share price and or transaction tax on dirty assets could be effective incentive) is that it frees a relatively large investment at once (300 billion invested in oil cos by Blackrock, Vanguard and State Street), the tax could be neutralised if the 300 billion would be reinvested into clean energy. There could also be a tax on holding dirty assets, I mean, if there is no disinvestment in oil shares toward clean energy within two years, a 5% tax on these dirty  assets would implemented at the end of this 2 years timeframe, going up to 10% after 3 years, 15% four years and so on, and the transaction would be also taxed.
The benefit would be three folds: 1/ protecting the individual investors from future losses of assets if in later years oil price drop after renewable has rump up fast and progressively replaced oil gas and coal, 2/ incentivising the rapid reallocation of dirty energy investment into clean energy for several hundred billions 3/ reducing the marginal cost of renewable further through larger scale and further seed money into transferring Research and Development project into even more cheaper renewable and subsidiarily into energy storage.

Adding to this it could considerably reduce the value of future Aramco IPO (now between 500 billion and 2 trillion) and interest for it. a good thing as Aramco is likely to be an even more powerful negative lobbyist once it is owned by Blackrock, Vanguard and State street investment funds at the current expected valuation.

« Last Edit: November 10, 2019, 11:18:01 AM by bluesky »

El Cid

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What you must understand about the stock market is that the past 20-30 years there has been NO NEW EQUITY ISSUANCE. On the contrary: see attached picture.

Investors, asset managers, etc are just buying and selling stocks issued long ago. The money that is on the stock market has no (direct) effect on investments. These are just wagers. If everyone had to sell oil stocks, they would put that money into other shares not into new investments! The stock market is now just a betting house, no longer a venue to attract capital (as seen on the chart i attached)

To facilitate new green investments, you need either direct government investment, or incentives for the private sectors. Or a mix of these, eg. the creation of public-private equiy/venture capital funds where the government provides cheap financing for green projects for willing private investors. But this is outside the stock market

bluesky

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What you must understand about the stock market is that the past 20-30 years there has been NO NEW EQUITY ISSUANCE. On the contrary: see attached picture.

Investors, asset managers, etc are just buying and selling stocks issued long ago. The money that is on the stock market has no (direct) effect on investments. These are just wagers. If everyone had to sell oil stocks, they would put that money into other shares not into new investments! The stock market is now just a betting house, no longer a venue to attract capital (as seen on the chart i attached)

To facilitate new green investments, you need either direct government investment, or incentives for the private sectors. Or a mix of these, eg. the creation of public-private equiy/venture capital funds where the government provides cheap financing for green projects for willing private investors. But this is outside the stock market

Thank you I do understand that the first part of your message and knew it for a very very long time ("NO NEW EQUITY ISSUANCE"), however your message forget to take into account the transaction tax and assets tax on dirty assets combined with regulation incentive that I suggest, I absolutely agree with your mantra of direct government investment and incentives on private sectors. However I am talking about 300 billion invested by Blackrock Vanguard and State Street into very dirty assets and I am suggesting a combination of regulation and tax in the investment fund industry to quickly and efficiently switch it to clean energy investment. This could be of course complementary to the measures you are advocating an that I am also supporting of.
It is good to read a post thoroughly before answering.
I am looking for efficient tax and regulation in relation to the banking and investment fund industry to fastened the investment and asset switch (transaction and asset tax on dirty assets , capital regulation on dirty assets through green Basel III. soft conduct regulation, please read the 3rd point of my first post), not antynomic to your measures but complementary.

TerryM

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Cid


I think that Musk's preoccupation with stock price has confused many. Kimbal and Elon have faced margin calls according to recent depositions about Tesla's bail out of SolarCity. Elon actually claimed (under oath) that he was "illiquid" just prior to Tesla's "miracle month".


When the jockey and his brother owe it all to the bookies it can affect the race. 8)
Terry


El Cid

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Terry, we are talking about oil majors here. They do not issue new shares, they don't need the capital, they are cash cows.

New companies need financing, but during the last 20+ years net equity issuance has been negative on the stockmarket, as most financing of new, revolutionary companies does not happen via the stock market. Private equity firms, venture capital and the like do it. And arguably, as capitalism has become more oligopolistic, there is less room for new firms and this is obvious from economic statistics.

Tesla is the exception, not the rule. They use the stockmarket what it is for: to get capital for new, often risky ventures. Sadly, this is now a very small slice of stock trading...