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BlackRock warns SEC on plans to end ESG greenwash – Industry roundup: 23 August

BlackRock warns that new ESG rule could hurt investors

Asset management heavyweight BlackRock has warned the US Securities and Exchange Commission (SEC) that its proposed rules aimed at fighting “greenwashing” by fund managers risks confusing investors.

BlackRock made the claims in a letter filed to the SEC in response to its proposal issued in May to prevent funds making unfounded claims about their environmental, social and corporate governance (ESG) credentials. The rules also aim to create more standardization around ESG disclosures.

Regulators and activists believe that US funds looking to benefit from the growing popularity of ESG investing may be exaggerating their ESG credentials and misleading shareholders.

Although BlackRock concedes there is a need to boost oversight, it questions the SEC's demand for more details on how funds should categorize strategies and describe their ESG impact, arguing such details could mislead investors about how much ESG really matters when managers select stocks and bonds.

“The proposed requirements would increase the potential for greenwashing and lead to investor confusion,” BlackRock claims in its letter. “The granular nature of requirements will inevitably lead to the disclosure of proprietary information about these strategies, reducing the competitive advantage of those unique insights.”

There is also debate over the SEC’s proposal outlining how ESG funds should be marketed and how investment advisors should disclose their reasoning when labelling a fund. SEC Chair Gary Gensler said in a May statement that the measures are in response to growing investor demand for such details, but industry groups warn the agency’s aim to standardise ESG labels risks reducing investor choice.

The Washington, DC-based Managed Funds Association (MFA) said that it also supported the SEC’s goal to promote better disclosure but had reservations about the means. “Requiring an adviser to provide extensive disclosures concerning how it integrates ESG factors – no matter how incidental the consideration may be—will result in undue emphasis on an otherwise immaterial strategy,” the group said.

EY requests US tax guidance on “split offs”

Accountancy giant Ernst & Young has written to the US Treasury Department for “immediate” tax guidance, following the signing into law by President Biden on 16 August of the Inflation Reduction Law, a major Democratic spending bill that aims to combat climate change, raise taxes on corporations and expand health care coverage.

The CFO Dive website reports that within two days of the bill being signed, EY focused on ithe inclusion of a new 15% Corporate Alternative Minimum Tax (AMT) and asked the Treasury Department how so-called split-off divestitures will be treated for the purposes of calculating whether a firm is an “applicable corporation” that is subject to the new tax, according to a copy of the letter sent to CFO Dive.

According to CFO Dive: “EY is asking in essence that relief in the form of an exception be given so that, for the purposes of AMT, split-off transactions would not result in a financial reporting gain, meaning that they would not have the potential to boost a company’s book income above the threshold that would make it subject to the new tax. The tax will effectively apply to companies with book income of US$1 billion or more.”

The letter comes from a group of EY executives led by Karen Gilbreath Sowell, EY Global Transaction Advisory Leader, and comments: “Corporations that have been carefully planning to separate businesses through a ‘split-off’ may be harmed if guidance is not provided that excepts split-offs from the calculation of financial statement income for purposes of the Corporate AMT. Taxpayers that would otherwise not have been subject to the Corporate AMT would either need to abandon their current plan to undertake a ‘split-off’ or be willing to pay tax under the Corporate AMT.”

Drought impacts on China’s economy

A record-breaking drought in China has triggered a nationwide alert, with south-west regions impacted most heavily and major companies forced to suspend work. Several rivers, including parts of the Yangtze have dried up, affecting hydropower, halting shipping, and forcing businesses to temporarily suspend operations.

The drought has affected at least 2.46 million people and 2.2 million hectares of agricultural land in the provinces of Sichuan, Hebei, Hunan, Jiangxi, Anhui and Chongqing. More than 780,000 people have needed direct government support, according to China’s ministry of emergency management. Drinking water has been diverted to areas where residential supplies have completely dried up. High temperatures in July alone caused direct economic losses of 2.73 billion yuan (CNY) (£340m), affecting 5.5 million people, the emergency ministry said last week.

The loss of water flow to China’s extensive hydropower system has sparked a “grave situation” in Sichuan, which gets more than 80% of its energy from hydropower. Last week Sichuan suspended or limited power supply to thousands of factories and rationed public electricity usage due to the shortage. Toyota, Foxconn and Tesla are among companies reported to have suspended operations at some plants over the past fortnight and reports suggest that a planned resumption of production this week has been delayed.

Over the weekend the provincial government declared it was at the highest warning level of “particularly severe”, with water flow to Sichuan’s hydropower reservoirs dropping by half. The demand for electricity has increased by 25% this summer, state local media reports. The reduction in hydropower has also reportedly affected downstream populations, including Chongqing city and Hubei province.

Chinese authorities have repeatedly attributed the drought and heatwave to the climate crisis. Chen Lijuan, the chief forecaster of the country’s national climate centre, last week described the combined heatwave and drought as a “pressure cooker”.

“We have to face the fact that similar heatwaves will occur frequently in the future … it will become a new normal,” Chen said.

However, the immediate impact on electricity supplies has put pressure on Beijing’s climate change commitments. Last week the vice-premier Han Zheng said the government would provide more support for coal-fired power production.

A continued drought could drive up energy prices as hydro and nuclear power are reduced as the lower levels of water cannot sufficiently cool reactors. Higher transport costs and supply chain disruptions could also raise food prices, adding to inflationary forces and squeezing a global trade system that was already under pressure from the coronavirus pandemic.

Cineworld considers Chapter 11 bankruptcy filing

Cinemas chain Cineworld confirmed admitted that is considering filing for bankruptcy in the US as it struggles under the weight of a £7.5 billion (US$8.8bn) debt burden.

The company, worth less than £50 million following a slide in its share price, warned last week it was in survival talks amid a lack of blockbusters and weaker than expected sales. 

Cineworld said yesterday options include a Chapter 11 bankruptcy filing, which would let it stay in business while restructuring its debt. The filing would protect it from its lenders while bosses negotiate a rescue deal. Cineworld will have to file separately for insolvency in the UK, where it could opt for a company voluntary arrangement (CVA) to keep the business afloat while a deal is agreed.

However, report suggest than equity swap is a more likely option, under which the owners of the cinema chain’s debts would end up owning the business while the investors who bought its listed shares will end up with nothing.

Cineworld has already warned that its shareholders will take a “very significant” hit, raising the prospect they could be wiped out. The shares have fallen to below 4 pence, having traded above £3 before the Covid-19 pandemic struck. 

“The strategic options through which Cineworld may achieve its restructuring objectives include a possible voluntary Chapter 11 filing in the United States and associated ancillary proceedings in other jurisdictions as part of an orderly implementation process,” the company announced. “Cineworld is in discussions with many of its major stakeholders, including its secured lenders and their legal and financial advisers.”

The business said its UK Cineworld and Picturehouse cinemas and its US Regal chain remain “open for business” and the filing would not have a significant impact on its employees or operations. But it did not rule out potential closures in the UK.

The world’s second-largest cinema chain has struggled after failing to experience a quick enough recovery following the Covid-19 outbreak, which forced most of its sites to close during lockdowns. It reported a US$708 million loss for 2021 and accumulated US$4.8 billion of debt while its cinemas were shut.

Cineworld’s woes have been compounded by the financial fallout from its abandoned takeover of the rival chain Cineplex. The decision in June 2020 to abandon the US$1.65 billion deal means the company now faces a $1bn payout to the Canadian firm following a court ruling last December in Cineplex’s favour.

Standard Bank aims to strengthen position in Africa

South Africa's largest lender, Standard Bank Group, wants to use its position to expand its business banking services amid increasing competition. Announcing record earnings for the first half of 2022, the bank’s CEO, Sim Tshabalala, said that it intended  to make the most of its scale and geographical footprint to fuel its growth.

That could mean cross selling a variety of financial solutions, such as insurance and transactional accounts, he told investors. “We’re very well able to take any combination of established competitors and digital insurgents and take them on head-on,” Tshabalala said.

He also said the bank is increasing its focus on climate change and expects its green loan book to reach at least 250 billion rand (ZARR) (US$15 billion) by the end of 2026, up from an expected ZAR 50 billion at the end of this year.

Standard Bank reported a 33% increase in its headline earnings to ZAR 15.3 billion in the six months to 30 June. “The pandemic hit Africa’s economies and businesses hard, and Standard Bank's operations were no exception. We started to clear signs of recovery last year, and that recovery has accelerated significantly over the first half of 2022,” said Tshabalala.

The bank said as lockdown restrictions eased further in 2022, transactional and account activity moved back to exceed pre-pandemic levels, resulting in a 10% growth in its net fee and commission revenue. The fees were further boosted by the annual price increases.

Renminbi’s global status “set to be tested”

China’s gradual opening up of its bond market to foreign investors has helped elevate the renminbi’s (RRMB) status globally, but the currency is about to face a big test according to a newly published paper by the National Bureau of Economic Research (NBER).

The US private non-profit research organisation notes that over the past two decades, China has gradually allowed more traders and central banks to buy into its RMB-denominated bond market, Chinese bonds are now treated more like debt from a developed nation, rather than from an emerging market, the paper’s authors suggest.

Beijing staggered the entry of stable investors into its debt with a series of policy moves that included varying quotas, lock-up periods, and registration requirements. As a result, “we find that China’s reputation is in between emerging markets and developed countries and has drifted upwards in recent years,” they write.

While the RMB still has a long way to go before it can challenge the US dollar on the world stage, China’s currency is becoming more international and Russia’s war on Ukraine and the Western sanctions that followed have spurred greater use of the currency, the paper adds. Russia is now the third-largest market for RMB transactions outside the Chinese mainland, as it takes payment for its energy exports in RMB instead of the dollar, which is the primary currency for most commodities.

This has established the RMB as the fifth most widely used currency in international payments markets, according to SWIFT data. The US dollar remains top, followed by the euro, British pound and Japanese yen.

But Beijing now faces a big test as China’s bond market has seen record outflows. In recent months, the RMB has been losing value as central banks around the world hike interest rates while the People’s Bank of China (PBoC) has begun trimming rates. The decline has coincided with a record outflow from China’s bond market, presenting a major test for Beijing, which could be tempted to restrict capital to stop the outflow.

Ultimately, the authors write, the trajectory for RMB-denominated bonds will not be a straight line as China’s reputation will fluctuate based on any restrictions on foreign investment in the face of future crises.

“By beginning with allowing investment from more stable investors and only later allowing in flightier ones, China has put itself on a path towards becoming an international currency while trying to minimize the risks it faces on the transition path,” the NBER paper concludes. “Whether it is able to achieve this while avoiding costly episodes of capital flight and the imposition of capital outflow controls is an open question.”

MEA firms aim to modernise payments

Banks and fintech firms in the Middle East and Africa (MEA) are planning more investment in payments modernization over the next two years than any other region in the world, reports cloud payments and financial messaging specialist Volante Technologies.

Data from the report Payments Modernisation; The Big Survey 2022 published by Finextra in collaboration with Volante, indicates that the beginning of 2022 has been an incredibly busy period for payments modernisation, propelled by mandates at the national and cross-border infrastructure level, and the drive towards instant and real-time payments.

The survey elicited the highest proportion of responses confirming modernization plans in the 12 to 24 months timeframe from MEA (22.3%) compared with the rest of the world. Although Covid-19 put several projects on hold at the start of 2021, planning for payments modernization was well underway at that stage and led to this flurry of activity in 2022, according to the report.

An important underpinning factor for competitive differentiation is the shift to cloud and Payments as a Service (PaaS) technology, which accelerates speed to market in the MEA region through the development of value-added services.

Vijay Oddiraju, CEO at Volante Technologies, said: “Our discussions with MEA financial institutions clearly show that there is now a race towards becoming real-time 24/7 in the MEA payments space, and the future is taking payments into the cloud. We are committed to investing our time and resources in MEA, working as trusted partners to banks in the region to ensure they are ready with the right payments modernization technology: microservices enabled, highly configurable, real-time, API enabled, ISO 20022 fluent, and powered by low-code.”

Sustainable export LC launched by ADM and Standard Chartered

US nutrition corporation ADM and Standard Chartered announced the successful execution of a US$500 million Sustainable Export Letter of Credit (LC) program.

A release said that the initiative implements and expands sustainability practices across ADM’s global supply chains. It is the first green focussed transaction of its type for the Bank and is linked to ADM’s utilisation of soft commodities such as soybeans, oilseeds and cotton.

The ADM sustainability LC transaction concept was first conceived in the fourth quarter of 2021 however as a “trail blazing” deal specific information such as flow, detailed sustainability certifications and other items took time to be ironed out and implemented into the operational process. After this process was completed the soy crop procurement season was winding down.

The LC program demonstrates a commitment by both enterprises to sustainable practices including farming and production processes, supply chain transparency and “trackability”, the promotion of resource efficiency, energy use and social impact. The LC program structure was executed under StanChart’s Sustainable Trade and Working capital finance framework, introduced in Q2 2021. For deals under its purview, suppliers are mandated to present eligible sustainability certificates issued by third parties with accredited programs, and these must relate directly to the underlying transaction financed.

“The successful execution of this Export LC programme is testament to the significant opportunity we have in catalysing finance to scale impact,” said Standard Chartered Global Head of Trade and Working Capital, Kai Fehr. “Not only are the bank’s clients increasingly prioritising sustainability across their supply chains to make improvements to their own business agendas, but they are doing so to ensure a more resilient growth for the wider economy.”

Funding Societies signs US$50m credit facility with HSBC

Funding Societies, Southeast Asia’s largest small and medium enterprises (SME) digital financing platform, has signed a US$50 million credit facility with HSBC Singapore to continue expanding the firm’s reach to serving underserved SMEs in the region.

In its release, it noted that commercial lending in Asia Pacific is projected to grow at a compound annual growth rate (CAGR) of 16.5%, generating a revenue of more than US$7 trillion by 2028 - which makes up about 25% of the global market size of US$27.4 trillion.

“Generally, the digital experience for SMEs is still particularly underserved and is not at the same pace of digital transformation as with retail lending,” the release added. “Funding Societies has a track record of loan disbursement of over more than US$2.6 billion through more than 5.1 million transactions across the region. Through this new facility the fintech lender will be able to channel the funds via its range of tailored financing solutions across SME segments across all its five markets.”

SMEs make up 97% of all enterprises in Southeast Asia bringing 40% of GDP value across the region. In Singapore, the Department of Statistics’ 2021 report shows that 99% of enterprises are SMEs – which contributed to 44% of the nominal value added at approximately S$212 billion. “The signing will enable HSBC to extend its global capabilities by tapping on the underserved segments across the region. Furthermore, HSBC will act as the structuring bank, lender, facility and security agent in providing a flexible, scalable and pan-regional financing solution to support Funding Societies’ business expansion in the region,” the release added.

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