Financial Markets

On May 15, the Sunday Times (English, Johannesburg) published rumors of the impending arrest of Finance Minister Pravin Gordhan over alleged revenue service irregularities. However, on May 16, Beeld (Afrikaans, Johannesburg) reported that President Zuma denied the Sunday Times report. Nevertheless, the South African national currency, the rand (ZAR), fell the following two days, reaching its weakest level in two months; it has fallen 2.1 percent against the U.S. dollar since March 15. Bloomberg sees the Gordhan investigation as evidence that Zuma is trying to get rid of the finance minister, who has been curbing government spending and corruption and seeks to retain the country’s investment-grade credit rating.  Bloomberg quotes Peter Attard Montalto, an emerging markets strategist, as saying, “We think that markets are vastly underestimating the political risk. The arrest of a respected finance minister in order to engineer a reshuffle to achieve rent-extraction aims would be a major, catastrophic, market event from which it would be difficult to recover.” The Daily Maverick, long critical of Zuma, suggests credibly that the Sunday Times report of the rumor of Gordhan’s impending arrest could have been designed to test the market’s reaction should he be removed. The fall of the rand indicates that the markets would respond as negatively as they did in December 2015 when Zuma fired the respected Nhanhla Nene as finance minister and replaced him with a largely unknown parliamentarian. The blowback was so strong that Zuma was forced to appoint the well-regarded Gordhan as finance minister.  He had previously held the position from 2009 to 2014. Few think the drama is over. Warrick Butler, head of emerging market spot tradition at Standard Bank Group, Ltd., is quoted by Bloomberg as saying, “People are getting tired of the circus and investors don’t like uncertainty.”

This post features a conversation with Audrey Choi, chief executive officer of Morgan Stanley’s Institute for Sustainable Investing and managing director of its Global Sustainable Finance Group. Choi talks about the evolving $20 trillion sector, including important U.S. policy changes and her thoughts on where sustainable investing is headed. 1) What does sustainable investing mean, and how has it evolved in recent years? There has been an evolution in sustainable investing over the past five to ten years in both definition and practice. Investors have moved away from predominately avoiding—or divesting from—industries and companies considered harmful toward taking a more proactive approach as well. They are pursuing positive social and environmental impact while also expecting competitive financial returns. Traditionally, there was a tendency to divide investing and philanthropy, using the first to build wealth and the other to make a positive social difference. Sustainable investing, which includes values-based, environmental, social, and governance (ESG) integration, thematic investing, and impact investing approaches, allows investors to align their values or mission with their investment portfolio. Another shift has been the increase in research addressing the misconception that doing good requires a financial trade-off. Harvard University and Brookings compared a portfolio of companies that performed poorly on sustainability with a portfolio of companies that performed very well on the same issues. One dollar in the low performance portfolio grew to $14.46 between 1993 and 2014. The same dollar in the high performance portfolio rose to $28.36 over the same period. And at Morgan Stanley’s Institute for Sustainable Investing, we examined ten thousand mutual funds across seven years of performance, comparing sustainable to traditional investing strategies. We found that 64 percent of the time, sustainable strategies performed either the same, or slightly better, than traditional ones. Meanwhile, volatility for those strategies was the same, or slightly less, 64 percent of the time. Finally, the University of Oxford conducted a meta-analysis of over two hundred studies and found that incorporating ESG business practices resulted in better operational performance, lower cost of capital, and better stock price performance. We’re also seeing a shift in how sustainability factors into stock and company valuations. More and more investors and analysts are asking how to incorporate ESG into existing models of valuation. Whether a multinational company disposes of waste responsibly, monitors its water usage, and recycles increasingly matters. Sustainability efforts are more than corporate reports—they are considerations that can be materially relevant to core business practices and results. 2) How is “sustainability” measured, and what counts as sustainable investing? We take the broad view that sustainable investing encompasses both financial sustainability and environmental and social sustainability. As part of the sustainable investing evolution, there has been a great deal of work in the field to better understand the type of sustainability considerations that can have both real business and investment impact. The United Nations Principles for Responsible Investment (UNPRI) and the Sustainable Accounting Standards Board (SASB) are two important examples of increasingly-recognized bodies developing standards and frameworks for measuring and reporting on sustainability. UNPRI has not only established what responsible investment should entail, but as a membership organization, it is a platform for signatories (asset managers, owners, and service providers) to express their commitment to a more sustainable global financial system. And SASB has created standards for ESG considerations across eighty industries, helping public corporations disclose material issues to investors.  As part of its standard-setting work, SASB found that climate change alone affects seventy-two of seventy-nine industries—each in specific and different ways. That’s 93 percent of the capital markets, or $33.8 trillion dollars. 3) How does sustainable investing compare to philanthropy or development aid, through NGOs and others? Are there some areas that should be left to private donors rather than investors? Ultimately, driving large-scale positive social and environmental change requires government, philanthropy, and investment dollars to work in common cause. Tax dollars and philanthropy alone are not sufficient to fix the world’s problems. Private investment can play a crucial role in filling that gap. Still, sustainable investing should not be seen as a replacement to philanthropy. Indeed, there are critical situations when philanthropy and government aid should be the first resort, such as when an immediate response is required, as in humanitarian efforts and disaster relief. Aid is critical in these instances where financial returns, cannot, or should not, be expected. But governments and philanthropies also play critical roles as catalytic investors. They provide the visionary risk capital to enable discovery and innovation, setting the stage for future markets. For example, microfinance began as a donor-led space, eventually growing to a robust field where private sector investment has enabled scale and reach. 4) What are the U.S. rules and regulations that have helped, or hindered, sustainable investing? In the U.S. context, one of the most important recent changes was the revision to U.S. Department of Labor guidance around ESG investing for Employee Retirement Income Security Act (ERISA) plans, announced late last year by Secretary Thomas Perez. Employee retirement plans, such as pension funds or 401(k)s, are bound by the ERISA, which sets a fiduciary duty, or legal obligation, for managers to act in the interest of plan participants. In October 2015, Secretary Perez and the Department of Labor issued a clarification that “environmental, social, and governance factors may have a direct relationship to the economic and financial value of an investment.”  Rather than an external and separate consideration, ESG factors could now be considered relevant in evaluating an investment’s economic qualities. This clarification went a long way in addressing the perception that ESG consideration might be at odds with fulfilling fiduciary duty. Globally, another important development was the Paris Climate Conference (COP21) agreement that set binding targets to limit global emissions. It sent a clear signal of change that may open new conversations on ESG and sustainable investing, as well as the inclusion of climate change-related risk as a material financial consideration. 5) Looking ahead, what is the outlook for sustainable investing, in the short and long term? Within ten to fifteen years, we believe sustainable investing should be perceived as a redundant term. Sustainability considerations will be a part of a best-in-class investing thesis, rather than being a separate analysis. Just as political and cyber risk has become a core part of the risk and return analysis, so too do we believe that sustainability factors will become a core part of risk and return analysis. There has already been impressive growth in the field. In 2012, the U.S. Sustainable Investing Forum reported one out of every nine dollars invested in the United States had some type of sustainable mandate to it. From 2012 to 2014, that figure grew by 76 percent to one out of every six dollars. Though the starting point was small, we are seeing rapid growth, with more than $20 trillion dollars now invested in the sector globally. Another driver of change in sustainable investing is the influence of millennials. Compared to other generations, millennials are three times as likely to pick an employer based on their ESG performance. They are also twice as likely to check product packaging for sustainable sourcing information before they choose a product. And this philosophy carries over to their investing decisions. Millennials are twice as likely to check a mutual fund or equity investment and choose it because of sustainability, and twice as likely to divest—or walk away—because of objectionable corporate activity. As this generation is set to inherit more than $30 trillion in the United States over the next thirty to forty years, it will be significant how they integrate their sustainability priorities into their investment decisions going forward.  

Emerging Voices highlights new research, thinking, and approaches to development challenges from contributing scholars and practitioners. This post is from Dr. D. Michael Shafer, president and founder of Warm Heart Worldwide and professor emeritus of political science at Rutgers University. Warm Heart is a community-based development organization dedicated to building socially- and economically-sustainable communities in rural areas of northern Thailand. Though a monumental step forward on climate change, the Paris Agreement fails to recognize one of the biggest climate change issues for developing countries: agriculture. Poor farmers’ dependence on unsustainable planting, cultivating, and harvesting techniques make them unwitting contributors to global warming by emitting black carbon and greenhouse gases (GHGs). This problem extends beyond China and India (the Paris deal’s focus) to places as diverse as Indonesia, Cameroon, and Iran. By burning field wastes, poor farmers release up to twenty-five percent of the world’s total of “black carbon”—clouds of smoke that count as the second-largest warming source after CO2—emitting 330,000 metric tons every year. And rice growers in impoverished and densely-populated areas produce high levels of methane, a hydrocarbon gas twenty-five times as warming as CO2. Traditional flooded paddy techniques account for up to fifteen percent of total GHG emissions from agriculture. These agricultural practices are bad for the environment; they are also bad for people. Degraded soil yields barely enough to feed a family. To double the global food supply by 2050—necessary to avoid shortages and malnourishment, especially in developing countries—traditional farmers will need to improve land use and water management, and adopt new seed, harvesting, and storage technologies. The good news is that solutions to reduce poor farmers’ global warming footprint and improve productivity already exist. First, they can learn to convert their agricultural waste into biochar and then into biochar fertilizer. Agricultural biochar is a “super charcoal” made by pyrolyzing (charring) rice straw, corn cobs, or maize stalks at high heat without any oxygen, a clean process that is also carbon negative—meaning it removes CO2 from the atmosphere and cools the earth instead of warms it. Making biochar is low-cost and low-tech, and its positive effects go beyond climate change mitigation to food security and health more generally. Poor farmers can use biochar as an additive to improve soil’s water penetration and retention—essential as drought conditions spread—to reduce acid levels, and to boost soil fertility. Biochar also aids in decontaminating soil near landfills, toxic waste dumps, and mines—areas where poor farmers are often relegated. For families lacking clean water access, biochar works as a natural water filter. Second, rice growers can switch from standard flooded paddy techniques to a method known as “system for rice intensification,” or SRI. Rather than flooding the paddy for an entire growing season, SRI involves regularly draining and drying out the paddy, refilling it only when the rice begins to wilt. And instead of transplanting seed bundles from the nursery to flooded paddy mud, rice growers plant individual seedlings in orderly rows. Though SRI requires more labor than traditional rice cultivation, it pays more dividends. Because SRI paddies are mostly dry, they reduce the methane released into the environment. SRI can also increase a farmer’s yields by as much as fifty percent, and reduce water needs by forty percent. Yet many poor, rural farmers are not aware that these solutions exist, for several reasons. They may be skipped over by development programs that test innovative projects in select locations—often those most likely to yield results. Others are distrustful of “development” advice from outsiders, so that even when biochar or SRI programs make it to their villages, they fail to take off. So what can work? Agricultural development in poor, rural farming communities that is spread by example. Farmers are more likely to try something when they see another’s success. Grassroots programs such as Digital Green do this by producing short, instructional videos that film poor farmers using simple, easily-replicated, and low-cost techniques. With little more than a tiny, battery-powered projector, Digital Green then shares the videos with women’s co-ops and other community members—ninety percent of whom adopt the innovation, compared to a ten percent adoption rate for expert-led trainings. From a climate change perspective, the benefits of cleaner, more productive, and more sustainable agriculture in poor, rural areas will be striking and immediate. Switching from burning field waste to making biochar would significantly reduce the amount of black carbon and CO2 equivalent released into the atmosphere each year, as well as their warming effects. And switching from flooded paddy to SRI could cut total methane emissions from rice production by between twenty-two and sixty-two percent. Converting just a quarter of Asian rice growers, who produce roughly ninety percent of the world’s rice, could reduce GHG emissions by 3.8 percent annually—nearly Japan’s annual contribution to global GHG emissions. From a human development perspective, the changes will also be immense, helping to feed the estimated 2.5 to 3 billion people the world will add by 2050. Most importantly, limiting poor farmers’ global warming contribution and improving the health and wellbeing of millions will not require expensive overheads, long-term aid interventions, or complicated, high-tech innovations. But it will require considering agriculture as vital to any climate change solution.    

Nielsen’s “Africa’s Prospects: Macro Environment, Business, Consumer and Retail Outlook Indicators” of February 2016 rank orders sub-Saharan Africa’s nine leading markets. The list represents 71% of the region’s GDP, and half of its population. Ivory Coast is ranked first, Kenya second, Tanzania third, and Nigeria is fourth. It ranks Zambia as fifth, Cameroon as sixth, South Africa as seventh, Uganda as eighth, and Ghana brings up the rear. Nielsen cites Ivory Coast’s growing economy and political stability. Nigeria, ranked first in 2015, declined because of “deteriorating macroeconomic indicators” and declining consumer confidence. A recent report from the Nigeria Bureau of Statistics notes that the inflow of capital into the economy stood at $9.6 billion, a 53 percent drop from the previous year. Nigeria has been hard hit by declining oil and gas prices, while Ivory Coast’s primary export commodity, cocoa, has not declined. Nigeria faces the challenge of the Boko Haram insurrection that has resulted in some three million internally displaced persons. It remains to be seen whether the March 13 al-Qaeda in the Islamic Maghreb (AQIM) attack at an Ivorian resort signals that Abidjan will face a sustained terrorist threat that could have an impact on investor confidence. Nielsen is a S&P 500 company. It provides a wide range of measurement services that are highly respected. Nielsen’s “Africa Prospects,” some twenty-six pages in length, includes a wide range of economic and consumer data. For example, it compares the price of a basket of commonly consumed items in various countries. Such a basket costs $34 in Angola, $27 in Ghana, but only $15.33 in South Africa. Nigerians—alongside Angolans and Ghanians—are facing rising prices due to inflationary pressures.

This article was co-authored with Fred Hu, Chairman and Founder of Primavera Capital Group, a China-based global investment firm. MILAN – Uncertainty about China’s economic prospects is roiling global markets – not least because so many questions are so difficult to answer. In fact, China’s trajectory has become almost impossible to anticipate, owing to the confusing – if not conflicting – signals being sent by policymakers. In the real economy, the export-driven tradable sector is contracting, owing to weak foreign demand. Faced with slow growth in Europe and Japan, moderate growth in the United States, and serious challenges in developing countries (with the exception of India), the Chinese trade engine has lost much of its steam. At the same time, however, rising domestic demand has kept China’s growth rate relatively high – a feat that has been achieved without a substantial increase in household indebtedness. As private consumption has expanded, services have proliferated, generating employment for many. This is clear evidence of a healthy economic rebalancing. The situation in the corporate sector is mixed. On one hand, highly innovative and dynamic private firms are driving growth. Indeed, as a forthcoming book by George S. Yip and Bruce McKern documents, these innovations are occurring in a wide range of areas, from biotechnology to renewable energy. The most visible progress has come in the information technology sector, thanks to firms like Alibaba, Tencent, Baidu, Lenovo, Huawei, and Xiaomi. On the other hand, the corporate sector remains subject to serious vulnerabilities. The rapid expansion of credit in 2009 led to huge over-investment and excess capacity in commodity sectors, basic industries like steel, and especially real estate. The now-struggling pillars of China’s old economic-growth model bear considerable responsibility for the current growth slowdown. Despite these challenges, the reality is that China’s transition to a more innovative, consumer-driven economy is well underway. This suggests that the economy is experiencing a bumpy deceleration, not a meltdown, and that moderate growth can reasonably be expected in the medium term – that is, unless the financial system’s problems intensify. As it stands, non-performing loans are on the rise, owing largely to the weaknesses in heavy industry and real estate. While official sources report that NPLs account for 1.67% of loans held by commercial banks, the Chinese investment bank CICC estimates the figure to be closer to 8%. If so, the banking sector – and the wider economy – could suffer considerably. Whether it does depends on the decisiveness of the policy response. As in the late 1990s, after the Asian financial crisis, China may need to rely on the large state balance sheet for loan consolidation, debt write-offs, and bank recapitalization. But the concerns do not end there. Net private capital outflows remain substantial, and show no signs of slowing. As a result, the reserves held by the People’s Bank of China (PBOC) have declined by roughly $500 billion over the last year, with particularly large declines of some $100 billion in each of the last two months. These outflows, together with volatility in the stock and currency markets, have left investors and policymakers increasingly worried. Unfortunately, a clear explanation for this behavior has yet to emerge. Some blame it on the combination of progress toward opening the capital market and an overvalued exchange rate, anticipating that net inflows will resume once the currency resets closer to market level. Others suspect the influence of inside information: The capital exodus is a signal that economic conditions and growth prospects are much worse than official figures imply. Still others cite the impact of President Xi Jinping’s intensive anti-corruption campaign and, more generally, declining official tolerance for heterodox views. Those who feel directly threatened by the anti-graft campaign might be inclined to take their money out of China. But many others may be doing so for fear that, far from giving the markets a more “decisive role” in the economy, the government may be moving to assert greater control. Capital tends to flow to places where rules are clear and stable. Given China’s systemic importance in the global economy, uncertainty about its plans and prospects is bound to send tremors through global capital markets. That is why it is so important that the Chinese government increase the transparency of its decision-making, including by communicating its policy decisions more effectively. Consider the soothing impact of PBOC Governor Zhou Xiaochuan’s recent statement (following a long and baffling official silence on exchange-rate policy) that the central bank would keep the renminbi “basically stable” against a basket of currencies and the dollar. But the principal unaddressed problem affecting China’s financial system is the pervasiveness of state control and ownership, and the implicit guarantees that pervade asset markets. This leads to misallocation of capital (with small and medium-size private enterprises struggling the most) and the mispricing of risk, while contributing to a lax credit culture. The absence of credit discipline is particularly problematic when combined with highly accommodative monetary policy, because it can artificially keep zombie companies afloat. To resolve this problem, China’s leaders must segregate the state balance sheet from the credit allocation system; but there is no clear roadmap for doing so. Moreover, they should build on efforts taken to open up the capital account, thereby improving the efficiency of capital allocation over time, though this process is undoubtedly complicated by the capriciousness of cross-border capital flows. China’s current bout of economic volatility is likely to persist, though increased transparency could do much to blunt it. Add to that the smart use of state resources, together with sure-footed reforms, and China should be able to achieve moderate yet sustainable long-term growth. This article originally appeared on project-syndicate.org.

Central America’s Anticorruption Support The presidents of El Salvador, Guatemala, and Honduras were in Washington to discuss plans for the $750 million that Congress authorized to help their nations take on violence and boost economic development. The outlay comes in the wake of a record uptick in Central American migration to the United States. Nearly 3 million people have fled their homes and neighborhoods, including 100,000 unaccompanied minors who arrived at the southern border between October 2013 and July 2015. The U.S. funding requires Northern Triangle governments to address myriad domestic problems, including strengthening legal systems, protecting human rights, and rooting out corruption. U.S. anticorruption efforts will be met with broad civil society and multilateral support, dovetailing with grassroots campaigns against graft and high-level impunity in Honduras and Guatemala, and furthering the resolve of multilateral-backed bodies such as Honduras’s new Mission Against Corruption and Impunity (MACCIH). The UNDP at Fifty The United Nations Development Programme (UNDP), the multilateral’s agency dedicated to reducing poverty and inequality, turned fifty on Wednesday. Since its founding, the number of poor dropped from one in three to one in eight people globally. UNDP helped spur these positive changes through its work in 170 countries and by rallying members to make ambitious commitments through the Millennium Development Goals (MDGs) and new Sustainable Development Goals (SDGs). But development aid is changing. Though worldwide government spending reached a $134.7 billion peak in 2013, it is far short of the UN’s 0.7 percent of gross national income (GNI) target, with a rich-country average closer to 0.39 percent. And Western governments are increasingly turning their attention and dollars to security assistance. The OECD recently widened the definition of aid to include military spending in fragile countries, and the United States is allocating more foreign assistance to programs such as Countering Violent Extremism (CVE). UNDP and other believers in traditional economic and social development worry this shift will not only slow, but undermine decades of gains. Foreign Bribery Actions Up Though only settling two Foreign Corrupt Practices Act (FCPA) cases last year, the U.S. Department of Justice (DOJ) is ramping up foreign corruption prosecutions. Dedicated staff will rise by 50 percent from nineteen to twenty-nine prosecutors this year, and an assistant attorney general recently announced many pending cases. Meanwhile, foreign authorities are also upping their actions. The UK just convicted its first corporation under the five-year old Bribery Act, finding Sweett Group guilty of paying bribes to secure construction contracts in the UAE. The $3.3 million fine follows a $25.2 million settlement with the British outpost of South Africa’s Standard Bank last December for illegal payments in a Tanzanian infrastructure project. The UK law goes even further than the FCPA in scope, holding companies accountable not just for giving or taking bribes, but also for failing to prevent bribes, as Sweett Group discovered.  

This is a guest post by Allen Grane, research associate for the Council on Foreign Relations Africa Studies program. The recent rumor of Barclays PLC’s potential sale of its African businesses has caused a stir in South Africa. While Barclay’s has yet to confirm any decisions, there is plenty of reason to suspect the rumors are credible. Barclay’s has recently had to pay large regulatory fines for illegally rigging the London interbank rate, they have cut back substantially in Asia, and, perhaps worst of all, economic growth has significantly decreased in Africa. If Barclays PLC were to divest of holdings in Africa, it begs the question of who would buy their shares in Barclays Africa, specifically South Africa-based ABSA, one of the country’s largest banks. Barclays PLC currently owns sixty-two percent of ABSA and, if the sale rumors are true, it is not clear whether Barclays PLC would sell ABSA in its entirety or only a part. No matter how much of ABSA would be up for sale, it is unclear who would want to buy the shares. Gross domestic product (GDP) growth across sub-Saharan Africa was 3.5 percent in 2015, down from 4.5 percent in 2014. While this is higher than in other regions, investors are still wary. Growth is not expected to increase in the coming years, and many companies are shy about entering sub-Saharan African markets with which they are unfamiliar yet are known for political volatility. One company that is not shy of these markets is the Public Investment Corporation (PIC) in South Africa. PIC Chief Executive Officer, Daniel Matjila, has said that PIC “would be keen to participate and increase our position (in ABSA).” PIC is already the second largest shareholder in ABSA with 5.44 percent of shares. However, there is a major limitation on a potential PIC purchase of ABSA. As a state-owned corporation, PIC is unlikely to receive regulatory approval for a majority share in an international bank (ABSA operates across Africa, including Egypt, Nigeria, and Kenya). There is wider discussion in South Africa regarding the purchase of ABSA. There have been calls in South Africa for a large black-owned bank. Who or what organization would make this purchase is up in the air, but there has been hopeful speculation about black South African businessmen joining forces to purchase the ABSA shares and make this dream a reality. Barclays’ intentions are still unclear. Times may be hard, but there are still plenty of reasons for it to stay in Africa. Africa contributes about fifteen percent of the bank’s pre-tax revenue, and there are still several African countries that are expected to enjoy high GDP growth this year. It is possible that Barclays could also choose to divest of holdings in specific countries, thereby decreasing its shares by only a small margin. On March 1, when Barclays will announce its full year results, its intentions may become clear.