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Industry Roundup: 29 March

Credit Suisse to limit exposure to Russia

Credit Suisse Group has agreed to stop pursuing new business in Russia and to further distance itself from the country, joining European peers that have decided either to exit the country or cut back their presence there following the invasion of Ukraine.

The Swiss investment bank is also helping clients reduce their exposure to Russia, according to an internal document seen by the news agency Bloomberg. Credit Suisse is also helping employees in the country to move to other locations after cutting roles in Moscow and elsewhere. According to reports, the bank had around 125 employees working across wealth management and investment bank divisions at its Russia office.

The move comes as US lawmakers ask Credit Suisse Group AG to release information related to the bank’s compliance with sanctions imposed on Russia following its invasion of Ukraine.

Congresswoman and chairwoman of the Committee on Oversight and Reform, Carolyn Maloney and Congressman and chairman of the Subcommittee on National Security Stephen Lynch have written to Credit Suisse’s chief executive Thomas Gottstein Monday asking the bank to hand over information on its financing of yachts and aircraft owned by potentially sanctioned Russian individuals.

Last week Gottstein said that the bank was in the process of reviewing its business in Russia and of had yet to finalise a decision regarding its operations there. Earlier this month, Credit Suisse estimated its market risk exposure to Russia to be US$906 million. Russian clients are said to account for nearly 4% of its wealth management assets.

Like Credit Suisse, French investment bank Société Générale halted the finance of commodities trading from Russia at the end of last month, shortly after troops entered Ukraine. Both investment banks, key financiers to commodity trade houses, are no longer providing the money needed to move raw materials such as metals and oil from Russia.

However, along with major French corporates such as food group Danone and oil and gas producer TotalEnergies, Société Générale faces criticism for continuing to operate in Russia in the face of growing international pressure to ramp up sanctions.

According to reports, Société Générale has €18 billion of exposure to Russia and employs 15,000 people in the country, mostly at its retail banking subsidiary Rosbank. The investment bank is reducing its exposure to Russia but continues to operate there.

Barclays error ‘could cost £450m’

Shares in Barclays have fallen after the bank announced that it expects to suffer a £450 million (US$588m) loss over the mishandling of US securities in 2019, and the discovery of the error will delay a £1 billion share buyback programme.

The bank admitted that it had offered and sold nearly twice as many structured notes and exchange-traded notes as it was registered to sell in the US and that they would have to be repurchased at the price at which they were sold.

Barclay issues such products to meet “actual and anticipated client demand” for such securities, but discovered that they had been oversupplied to the market for about a year, giving certain customers the right to cancel contracts.

While Barclays has yet to publish details of this “rescission offer”, the bank estimates a loss of £450 million on the issue, based on present market prices and the estimated pool of eligible customers. It said that regulatory authorities were conducting inquiries and were “making requests for information” over the error. It added that the figure — which does not include tax — was a “best estimate” of losses that would arise from the issue, but that it was also assessing the impact of these matters on previous period financial statements.

In separate news, Barclays intends to increase renewable energy financing and investment as sanctions imposed on Russia hastens the shift away from carbon emitting energy sources. “The appalling invasion of Ukraine has made it even more imperative to accelerate the energy transition,” stated Barclays chairman, Nigel Higgins.

The bank believes that recent events will boost demand for investment in low-carbon energy infrastructure and stressed in a climate strategy report that it is “determined to finance, on an even greater scale, the investment needed for transition.”

Higgins said that the onset of war in Europe and its fallout on energy markets threatened to complicate the race against global warming and could make climate pledges harder to keep. He predicted a “volatile and non-linear” path toward cutting financed emissions, citing factors “beyond our control.”

The bank is targeting a 30% reduction in the CO2 intensity of its power portfolio by 2025 and intends to cut the absolute emissions of its energy portfolio by 15% in the same period. 

Barclays also plans to cut the carbon footprint of lending and underwriting across the highest-emitting sectors in its portfolio and has added cement and steel targets to its existing energy and power goals. The bank’s executive directors will see their pay affected, as Barclays promises to align remuneration with the achievement of its climate goals.

However, its record over recent years has been criticised. According to data compiled by Bloomberg, since the Paris climate accord was struck in 2015 Barclays has underwritten over US$58 billion of fossil-fuel bonds, exceeding its European peers. Over the same period, it helped arrange more than US$40 billion in green bonds, ranking it fifth in Europe. 

Responsible investment charity ShareAction also believes that Barclays’ climate goals should be more ambitious and is urging investors to vote against the bank’s climate proposals.

“By failing to update its oil and gas policy it can continue to finance Paris misaligned activities such as oil sands and new oil and gas,” said Lydia Marsden, senior research officer at ShareAction.

Ukraine invasion raises ESG dilemmas

Five weeks after Russian troops invaded Ukraine, reports suggest that the war has created a dilemma for investors keen to direct their money to those companies that place importance on environmental, social and governance (ESG) issues.

As the Wall Street Journal notes: “ESG is trying to gauge the sensitivity of companies to the public mood, either for moral reasons or because the public matter as customers, suppliers and employees of the companies. But the public mood keeps changing, and what counted as the right thing to do before Russia invaded has suddenly switched.”

The crisis in Ukraine has triggered a reassessment of ESG-related issues and the lessons to be learned for other emerging markets such as China, with China’s President Xi Jinping and Russian counterpart Vladimir Putin meeting last month at the 2022 Winter Olympics in Beijing and using it as an opportunity to criticise the North Atlantic Treaty Organisation (NATO) and attack so-called “Cold War” approaches.

Soon after the invasion of Ukraine index providers MSCI Inc. and FTSE Russell cut Russian equities and bonds from their widely tracked emerging markets indexes, after investors called the Russian market “uninvestible”. On 9 March, MSCI ESG Research downgraded Russia's ESG government rating to CCC, the lowest rating possible, due to risks from the impact of international sanctions and Russia's “financial isolation”.

Some asset owners were early in starting to move away from Russia, driven by their ESG policies. The UK’s £57 billion ($76.4 billion) BT Pension Scheme started working with money managers at the start of 2022 to minimise exposure because of governance concerns and ownership rights associated with Russia.

As reports have noted, Russia has been increasingly identified with corruption and human rights abuses under the Putin regime. However, assumptions that companies doing significant business in Russia were more likely to score poorly in environmental, social, and governance (ESG) activities were contradicted in a recent analysis by Dutch academic Jurian Hendrikse. He found that the average ESG score of European companies with “substantial” activities in Russia was 78 – much higher than the average score of similarly sized companies that didn’t operate in the country (64).

The average social (the S in ESG) score of the Russia-invested group was 81, compared to just 68 for their European peers. In terms of human rights performance, companies profiting from Russian activities earned a “whopping” average score of 84, compared to just 67 for their European peer firms.

Twelve days after the 24 February invasion, over a quarter of European companies hadn’t taken “even the most modest form of public action”, such as condemning the invasion or expressing support for the Ukrainian people. However, assumptions that companies have a lower ESG score than companies that did take meaningful and timely action also proved to be unfounded.

For ESG scores to be meaningful, concludes Hendrikse, they need to do a “much better job” of reflecting companies’ activities in “suspect countries that are known for widespread corruption and human rights abuses”.

Another tricky ESG issue has been highlighted by Jon Hale, director of sustainability research for the Americas at Morningstar Sustainalytics in Chicago. He points out that while many pension funds and other asset owners are now keen to sell Russian holdings at any price, their exposure was already low through sustainable fund portfolios because of high levels of ESG risk and fossil fuel involvement. Among the sustainable emerging markets funds that Sustainalytics tracks, only one has Russia exposure higher than 4.9%, while 10 have less than 1% exposure and four have none.

Hale notes that this is not a political aversion, “it’s just that few public companies in Russia are attractive ESG investments,” particularly since the fossil fuel industry makes up around half of Russia’s market capitalisation.

For investors in emerging markets, he says the bigger question is China and other autocratic regimes. “It's easy to remove Russia from emerging markets portfolios, even if the removal is only symbolic at this point. That’s not the case with China.”

With China making up nearly 30% of emerging markets indexes, the question of whether investors want to keep putting money into a system that lacks democracy, freedom and human rights “should be on the table for discussion,” Hale suggests.

Spanish retail giant opens up to crypto

Following the announcement by Israel’s second-largest bank, Leumi, that it will launch a cryptocurrency trading service to allow customers of its digital investment platform to trade cryptocurrencies, Spain has also provided a boost for crypto.

El Corte Ingles – the country’s third-biggest retailer and distributor – is reported to be about to take its first step into the cryptocurrency world. The company is said to be launching its own cryptocurrency exchange for customers of its stores. and has enrolled the assistance of Deloitte in building a new platform that will allow them to access cryptocurrencies as investments.

The report suggests that El Corte Ingles aims to take advantage of its current customer portfolio, having an already established target regarding investors. El Corte Ingles’ customers are typically small savers that the company feels could be attracted to investing in cryptocurrencies through a known company, instead of turning to newer and less familiar names.

The platform will be offered to more than 11 million customers that El Corte Ingles has associated with its credit card. The new exchange will be called Bitcor and will offer cryptocurrencies including bitcoin and ethereum. The platform will provide a further investment option for customers of the company, who have access to various other investment opportunities through El Corte Ingles’ services.

UnionPay platform offers digital yuan pay options

China’s recently launched digital yuan (CNY) is gaining traction, with merchants being offered services that allow them to sign up to receive central bank digital currency (CBDC) payments through third-party operators.

According to China National Radio, financial giant  UnionPay – the world’s largest card network – will launch a self-service signup platform for merchants who want to use the digital CNY.

UnionPay is “one of the first third-party payment service institutions” in China to sign a strategic cooperation agreement with the Digital Currency Research Institute, established in 2016 as the CBDC branch of the central People’s Bank of China (PBoC).

The deal will see UnionPay allow merchants to accept digital CNY payment in-store, as well as via their own apps and will also allow them to offer H5 payment options. In China, H5 refers to mobile web pages created for promotions and shared in the WeChat ecosystem. The deal also involves the China Construction Bank (CCB), one of the four biggest banks in the country.

According to the report the move was accelerated in response to China’s worsening coronavirus pandemic and several cities, including Shanghai, currently enforcing lockdowns.

It adds that the entire activation process “can be completed in around five minutes.” Initially, the platform will only support CCB digital CNY wallets, with plans for wallets operated by other financial institutions to be added on a one-by-one basis.

Meanwhile, businesses in China are beginning to make use of the digital CNY to make business-to-business (B2B) business payments. While the pilot has thus far mainly focused on consumer-to-business (C2B) payments, micropayments, transport fee payments, and the transferral of funds to and from individuals and government organs, inter-business transactions represent new terrain for China’s CBDC.

According to a report the Suzhou-based Suzhou High-Speed Rail New Town State-owned Assets Holding Group, a government-run industrial products retailer, completed the pioneering first transaction on 25 March. The report did not specify who the recipient of the payment was, nor what the company was paying for, but stated that the amount involved was US$ 17,263.

The group’s finance department manager was quoted as stating that the transaction had been “very safe, convenient and fast,” and had provided the payee with a “real-time account receipt,” which she noted “reduced handling fees.” She added that digital CNY payments were not limited by bank operating hours and bank holidays – allowing for 24/7/365 payments.

Gold industry adopts blockchain for integrity programme

A group of major names in the gold industry have joined forces to launch a new “integrity programme” that utilises blockchain technology for supply chain management and aims to help market participants verify the authenticity of their bullion.

London Bullion Market Association (LBMA) and the World Gold Council (WGC) announced that they are collaborating to develop an “international system of gold bar integrity, chain of custody and provenance” based on blockchain technology developed by companies aXedras and Peer Ledger. The ledger will be used to register and track gold bars at each stage of production and distribution cycle, including mining, vaulting and purchase by jewellery manufacturers. 

The so-called Gold Bar Integrity Programme is being supported by organisations such as CME Group, Metalor, Barrick Gold, Brinks, Royal Canadian Mint, Newcrest Mining, Hummingbird Resources, Argos Heraeus SA, Asahi, Aura Minerals, Perth Mint and others. LBMA and WGC said that the programme, initially developed as a pilot, the program will eventually be promoted for use across the gold industry.

Several issues such as illegal mining, laundered gold, fake bullion bars and human rights abuses have made the gold industry especially vulnerable to supply chain opacity. A 2020 report by the Organisation for Economic Cooperation and Development (OECD) offered guidance on how gold producers could avoid contributing to “serious abuses” in the mining and production process.

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