The Banker Shorts - January 16, 2023

Your quick guide to the week of January 16, 2023 on

Climate change and the cost-of-living crisis, along with the decline of SPACs and the growing influence of Generation Z, all fuelled discussion at The Banker this week. In addition, our global economic takes come to you from India, the UK, Panama and Ethiopia. 

Articles from the week

Irene Monasterolo of EDHEC Business School and Stefano Battiston of the University of Zurich and Ca’ Foscari University of Venice, speak with Sustainable Views editor Silvia Pavoni about climate financing and risk, and the roles that multilateral development banks, governments and the private sector should play in this space.

“The climate-finance conversation is broader than blended finance. The problem of climate change cannot be solved by blended finance alone. No financial intervention, public or private, can address climate change in the absence of credible economic and energy policies for decarbonisation.

“Policy credibility makes investors’ expectations and risk assessment self-fulfilling, which in turn is key to reallocating capital into low-carbon and adaptation activities. In other words, investments in climate mitigation make financial sense, especially if governments commit to an energy transition path compatible with the Paris Agreement’s goal of below two degrees Celsius.” – Stefano Battisto 

Marie Kemplay speaks to Joseph Nganga, vice-president for Africa at the Global Energy Alliance for People and Planet, about the ambitious new Africa Carbon Markets Initiative.

Q: What types of carbon credits do you feel Africa is well-positioned to provide?

A: As a relatively unindustrialised part of the world, a significant proportion of our credits are likely to come from nature-based solutions. In the Congo Basin, for example, we have a fantastic rainforest that has been preserved; but current carbon credit methodologies typically do not support continued preservation of existing forests — they are more geared towards those that are under threat.

That creates a disincentive because it is almost that there needs to be a threat of destruction before those natural resources can be monetised, rather than encouraging preservation from the outset. So that is one area where we want to re-examine those kinds of methodologies, to ensure they are supportive towards African nature-based solutions.

Another example is encouraging farmers to do positive things, such as planting trees on their land or engaging in regenerative agriculture, and ensuring there are the right methodologies and mechanisms in place for financial incentives to flow back to them. These are often smallholder farmers, so it will be important to ensure there aren’t too many intermediaries and there aren’t too many transaction costs, or else the benefits will not reach the farmers.

Massively increasing the flow of investment capital from the developed to developing world to support decarbonisation efforts makes both economic and financial sense, says Ahmed M Saeed, vice-president for east Asia, south-east Asia and the Pacific at the Asian Development Bank.

“The G7 is committing multiple billions to ‘Just Energy Transition Partnerships’ with developing countries, the Glasgow Financial Alliance for Net Zero is self-organising more than $100tn of private capital to address these problems, and global philanthropy is increasingly willing to step in and provide risk capital at a scale that historically was strictly the provenance of government.

“Our work at the Asian Development Bank is a microcosm of these efforts. We are substantially raising our ambition to $100bn in total climate finance by 2030. And we are launching experimental new partnership platforms, philanthropic vehicles, blended finance tools and new forms of transition finance, working with a broader range of partners than ever.

The most important and powerful reason for optimism is that massively increasing the flow of investment capital to the developing world just makes basic economic and financial sense.”

Banks are under fire for failing to live up to commitments under the Glasgow Financial Alliance for Net Zero and continue to invest heavily in fossil fuel projects. Philippa Nuttall reports. 

HSBC, singled out by the report as the “largest fossil fuel expander” in the UK, announced new restrictions on oil and gas financing in December 2022. Reclaim Finance says the bank has approved 58 transactions worth $12bn in capital to fossil fuel developers since joining the NZBA in April 2021.

A spokesperson for HSBC said the bank aimed to “reduce emissions in line with a [1.5C] pathway, promote energy security, and ensure energy affordability and access, as part of our commitment to a net-zero future”. The bank will “no longer provide new finance or advisory for the specific purposes of new oil and gas fields or related infrastructure, or for the most carbon-intensive oil assets,” they added. 

HSBC, like other banks cited in the NGO analysis to which The Banker spoke, referred to the International Energy Agency's seminal Net Zero 2050 report, published in 2021, as justification for the current state of play. The report “outlines that an orderly transition requires continued financing and investment in existing oil and gas fields to maintain the necessary output and security of supply – with 2020 financing levels maintained through 2030 and declining to half thereafter,” noted HSBC.

Writing in the Editors’ Blog, deputy editor Liz Lumley considers the climate awareness campaign Make My Money Matter, which has written to the senior leadership of HSBC, Barclays, Santander, NatWest and Lloyds Banking Group to ask them to stop financing the expansion of fossil fuel reserves as part of the transition to achieving net zero.

“But real change happens with the funds and industries that gain investment. Banks only change decades- and even centuries-old ways of making money and doing business because of two reasons – regulations or money. Banks don’t make a moral judgement whether they are financing a wind farm or an oil rig. Banks follow the money. Scream that loud enough and they might listen. 

“That said, there may be something to be said about Make My Money Matter-style public shaming. Two days after the ShareAction report was published, HSBC announced it would no longer finance new oil and gas fields.”

The cost-of-living crisis tops the list of near-term concerns in the WEF’s Global Risks Report 2023, says editor Joy Macknight, but environmental challenges remain in the forefront today and for the next decade.

The cost-of-living crisis has overtaken extreme weather as the most severe risk facing the world within the next two years, according to the World Economic Forum’s (WEF’s) 18th edition of its Global Risks Report. However, environmental challenges – such as failure to mitigate climate change, large-scale environmental damage incidents and natural resource crises – continue to figure prominently in the near term and in 10 years’ time.

The WEF surveyed around 1200 experts to understand international business leaders’ main concerns ahead of its annual meeting in Davos this week (January 16–20).

Other risks in the top 10 include geo-economic confrontation, erosion of social cohesion and social polarisation, widespread cybercrime and cyber insecurity, and large-scale involuntary migration.

The IPO alternative reached a zenith and has now undergone a dramatic decline as the allure of easy money has given way to compliance-dodging reality, according to Nuno Fernandes, professor of finance at IESE Business School.

Investment scams are everywhere, from crypto to coin collections. Investors looking for quick and easy returns should be careful. 

As in prior bubbles, from the South Sea Bubble to subprime loans, when a great mania emerges, several new companies arise, and everything appears rosy. Further, when there are lots of buyers with deep pockets looking for sellers, the price tends to go up. 

Buying companies at high prices is a sure way to have low future returns and, eventually, losses. Similarly, in other areas of finance, bad incentives have also led to negative outcomes. As Warren Buffett once said, only when the tide goes out do you discover who has been swimming naked. 

Jamie Broadbent, head of digital, innovation and design at RBS International talks to Liz Lumley about fintech partnerships, Generation Z and the magic of working for a bank. 

One of the ways Mr Broadbent says Zoomers are thinking differently is that they are “seeking purpose”. This generation values diversity, equality, individualism, and fairness, but they are also financially prudent and have absolutely no relationship with the banks of today, he says. “They want to deal with organisations that stand for things that represent who they are,” he adds. 

Mr Broadbent argues that the traditional banking industry will lose this demographic if it fails to reinvent itself around them. 

“I’m not sure the folks that represent our bank at the most senior levels necessarily get that,” he adds. “We’ve got a real mountain to climb in order to reengineer in such a way that we’re going to be relevant for this next wave of consumers.”

In the fast-paced world of fintech, it seems regulators are always playing catch-up. To get ahead of the game, what factors should they focus on as the next generation enters the world of financial services? Amy Caiazza, Neel Maitra and Jess Cheng of Wilson Sonsini Goodrich & Rosati discuss. 

While members of this generation may be fluent in technology, their interactions with investment products and financial services are just beginning.  

These changes provide regulators with a unique set of challenges and opportunities to revamp regulation in a way that accommodates the use of technology in the financial services industry. For those who have never known an analogue world, it is inevitable that technology such as machine learning, online gaming and social media will be an integral part of wealth-building, banking, and consumption of goods and services. 

Regulators should get in front of this inevitable trend by proactively adopting policies that promote the benefits of new technologies in financial and commercial transactions while mitigating potential risks.  

The globe at a glance


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