Environmental, social, and governance (ESG) investing continues to gain momentum among U.S. pension investors and public defined benefit (DB) plans with the largest public DB plans moving quickly to build ESG considerations into investment processes, Cerulli Associates highlights in a recent analysis.
“Some of the largest public plans in the U.S. have blazed a trail toward full incorporation of ESG themes in their portfolios, especially those related to climate change“, reveals the latest “Cerulli Edge—U.S. Institutional Edition“. In this sense, it shows that approximately 20 U.S. DB plans, including the top-five public pension plans in the U.S., are now listed as members of Climate Action 100+, an initiative to fight climate change through engagement with corporate greenhouse gas emitters. “These plans, while only a small portion of the group, represent a significant portion of assets given their collective asset base”, it adds.
The report points out that many defined benefit plans (especially smaller ones) are reluctant to purse ESG considerations due to the murky regulatory environment, especially for ERISA-regulated corporate pensions. In late 2020, the Trump administration placed a ban on ESG investing for corporate DB plans that was quickly overturned by the Biden administration, moving regulation back in line with investor consensus on ESG and giving these institutional investors the freedom to pursue better performing portfolios by taking ESG risks into consideration along with traditional financial considerations.
Despite mixed signals from the Department of Labor, Cerulli believes that demand will remain high for ESG strategies. According to the research, over 90% of respondents feel that public pensions will have moderate to high demand for ESG strategies in the near future. The firm thinks that managers that can demonstrate capabilities in this area and offer competitively priced products with strong net-of-fees performance will thrive as ESG continues to move into the investment mainstream.
“Those who can communicate their genuine beliefs about ESG investing to pensioners, board members, and other stakeholders, sharing insights grounded in facts and empirical proof of ESG’s efficacy, will build lasting relationships based on a relatively new and deeply meaningful set of investment management criteria,” says Robert Nelson, director.
Allianz Global Investors has appointed this week Carlos Carranza as Director and Senior Investment Strategist of its Emerging Markets Debt team.
Carranza will be based in the New York office and report to Richard House, Chief Investment Officer for Emerging Markets Debt. He joins from JP Morgan where he worked for thirteen years, leading the Latin America FX and Local Rates Strategy team as part of the Emerging Markets Research Group.
In his new role at Allianz GI, Carranza will provide macroeconomic, political, and ESG analysis of Latin American countries to develop and maintain country-specific macroeconomic and ESG models for investment trade ideas, portfolio monitoring, and positioning.
Carranza is bilingual in English and Spanish and received his Bachelor’s Degree in Actuarial Science from the University of Buenos Aires and Master’s in Finance from the University of Macroeconomic Studies, both in Argentina.
Recently, the Fed spoke about how the U.S. economy was developing better than they had expected. They saw both growth and inflation as higher than they previously forecasted. This prompted the board of governors to move their timing of hikes forward by a few months, although still a couple of years from now. This was a punch in the market’s gut.
The timing estimate alteration was more due to positioning differences, really than a huge change in communication from the Fed. I would say that the Fed unanimously adopted a new inflation targeting framework last year, and part of that inflation targeting framework was that they would wait much longer to act than they had previously. It would be very unusual if the Fed were to change that framework again so quickly, and more likely the statement was simply the acknowledgement of the fact that growth and inflation were maybe notably higher, but still not likely to change their trajectory much.
However, inflation expectations are picking up. There are a lot of questions around the effects of inflation, both in the United States and globally. Although it’s difficult to figure out how temporary supply/demand balances might pass through to long-term price pressures, what investors really need to be looking at are the changes to levels of global wages. Wages are much stickier than goods prices. Lumber costs can go up and down, and commodity costs generally can go up and down, but once you get an increase, it’s hard to unring that bell. As somebody once said to me, “A raise is a raise for about three months, then it’s just your salary.” It almost never goes the other way. We’re seeing some wage pressures and some elements of a labor shortage, definitely in the U.S. and potentially globally. Keep an eye out.
Real Yields are Negative, but Consumer Balance Sheets are Strong
Real yields across the world in developed markets are essentially negative. This is an unprecedented condition and something which is extremely stimulative to the global economy, but the removal of that stimulus and the removal of that combination are challenging as we have seen recently. The market’s reaction to Fed remarks may be exaggerated, but negative real yields continue to be a dominant force. One of the reasons why Bond Connect is so interesting and so important is that China represents a vast market with positive real yields—hard to find elsewhere.
Global households in many places around the world are in much better shape than governments or companies. The consumer balance sheet, in aggregate, is strong relative to both historical metrics as well as versus the health of corporate and government balance sheets. The ability for consumers to service and pay down debt provides a strong fundamental tailwind for securitized bonds, particularly consumer-backed ABS and residential mortgage securities. Securitized bond investing allows investors to access sectors and securities with different risk/reward characteristics, underlying loan diversification, and loss protection features.
Increased Market Size Does Not Equal Greater Liquidity
I would caution investors who believe that lots of supply and larger market size equals good liquidity. Unrestrained issuance doesn’t necessarily lead to better investment opportunities.
In fact, liquidity tends to increase in good times, and evaporate in very bad times, and this exacerbates the market cycles that we’re seeing. When markets have a thirst for liquidity, it’s nowhere to be found, and that’s the environment we’re in, and a direct result of how markets have evolved due to regulation and to investor preference.
Liquidity is particularly important, given flows can be dramatic. One of the reasons why we saw the fastest downturn in credit markets in history in March 2020, was that flows in the worst week were 18 times worse in 2020 than the worst week in 2008. So, more money into markets, more money in and out of markets means that liquidity management is more and more important. That provides an opportunity. If you have got cash when other people don’t, you get some great prices, and ultimately that’s how we’re structured to manage and that’s what we executed in 2020.
Summary: Risk Up, Reward Potential Down
Generally, however, the compensation for taking on risks of over and above high-quality fixed income is pretty low. Heavy issuance by both corporates and the government at low rates has created a lot of unattractive paper. Therefore, we’re risk adverse, but the risk we are taking is more in global consumer balance sheets versus corporate or Treasury balance sheets.
And lastly, across the world you’ve seen a significant increase in duration and interest rate risk with a significant decrease in yield: The global aggregate index is at a duration of 7.4 years and a yield of 1.1. In 2010, the global aggregate had a duration of 5 years, so less interest rate risk, and a yield of 3.1, so almost three times as much yield. In 2000, back when everybody was buying internet stocks, just like they are today, the global aggregate had a duration of 5, so the same as 2010, but its yield was 5.8, which was a significant real yield, significant over and above inflation.
All this is to say risks are relatively high in fixed income and rewards are relatively low. Fixed income is really being used as a policy tool globally, and that’s just something that we as investors both in global fixed income and in global equities are required to navigate, and it’s producing some very unusual markets.
Jason Brady, CFA, is President and CEO at Thornburg Investment Management.
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Founded in 1982, Thornburg Investment Management is a privately-owned global investment firm that offers a range of multi-strategy solutions for institutions and financial advisors around the world. A recognized leader in fixed income, equity, and alternatives investing, the firm oversees US$45 billion ($43.3 billion in assets under management and $1.8 billion in assets under advisement) as of 31 December 2020 across mutual funds, institutional accounts, separate accounts for high-net-worth investors, and UCITS funds for non-U.S. investors. Thornburg is headquartered in Santa Fe, New Mexico, USA, with additional offices in London, Hong Kong and Shanghai.
Banco Santander has announced that its U.S. holding company, Santander Holdings USA, has reached an agreement to acquire Amherst Pierpont Securities, a market-leading fixed-income broker dealer. The operation will take place through the purchase of its parent holding company, Pierpont Capital Holdings LLC, for approximately 600 million dollars.
In a press release, the bank has revealed that, with this transaction, Amherst Pierpont will become part of Santander Corporate & Investment Banking (Santander CIB) global business line. It is expected to close by the end of the first quarter of 2022, subject to regulatory approvals and customary closing conditions.
“This acquisition is consistent with our customer focused strategy and our commitment to profitable growth in the USA. It complements our product offerings and capabilities, allowing us to strengthen our relationships with our corporate and institutional clients”, Ana Botín, Santander Group executive chairman, said.
In her view, the new team brings a successful track record and experience in delivering value for their clients. “We look forward to incorporating their many strengths into our very successful and growing CIB organization”, she concluded.
Amherst Pierpont is an independent broker-dealer based in the U.S., with a premier fixed-income and structured product franchise. It was designated a primary dealer of U.S. Treasuries by the Federal Reserve Bank of New York in 2019 and is currently one of only three non-banks to hold that designation. It has approximately 230 employees serving more than 1,300 active institutional clients from its headquarters in New York and offices in Chicago, San Francisco, Austin, other US locations and Hong Kong.
The bank believes that the operation enhances Santander CIB’s infrastructure and capabilities in market making of US fixed income capital markets, provides a platform for self-clearing of fixed income securities for the group globally, grows its institutional client footprint, and expands its structuring and advisory capabilities for asset originators in the real estate and specialty finance markets.
The combined platform will also have strong capabilities in corporate debt and securities finance across the US and emerging markets. The acquisition creates a comprehensive suite of fixed income and debt products and services that will drive deeper and more valuable relationships across its respective client bases.
Joe Walsh, Amherst Pierpont’s CEO, pointed out that Santander Group is one of the world’s “most respected” financial institutions and “an ideal partner” for their growing franchise. “With Santander’s global reach we will be able to significantly expandour product offering, grow our client base and increase the level of service we can provide to our clients”, he added.
The broker dealer has generated attractive returns, with an average return on equity (RoE) of approximately 15% since 2016. In 2020 it generated a RoE of 28% and an estimated return on risk weighted assets of 3%. Its acquisition is expected to be almost 1% accretive to group earnings per share and generate a return on invested capital of 11% by year 3 (post-synergies), with a -9 basis point impact on group capital at closing.
The press release has revealed that Wachtell, Lipton, Rosen & Katz and WilmerHale served as legal advisors to Santander in connection with the transaction. Meanwhile, Barclays served as financial advisor to Amherst Pierpont, and Shearman&Sterling as legal advisor.
BlackRock and SpiderRock Advisors have entered into a strategic venture to expand access for wealth firms and financial advisors to professionally managed, options-based separately managed account (SMA) strategies. As part of the agreement, BlackRock will make a minority investment in SpiderRock Advisors.
This new venture builds on BlackRock’s position as a market leader in personalized SMAs, with its franchise managing over 190 billion dollars in SMAs as of March 31. This includes the acquisition of Aperio, a provider of personalized index solutions, which took place at the end of 2020.
SpiderRock Advisors will offer wealth management firms and financial advisors more tools to deliver tax-efficient, personalized portfolios and risk management solutions. This leading provider of customized options strategies in the U.S. wealth market manages approximately 2.5 billion dollars in client assets as of March 31, 2021.
The firm’s strategies are available through all of the major RIA custodians and are focused on risk management and yield enhancement for diversified portfolios as well as concentrated stock positions. BlackRock’s market leaders and consultants in U.S. Wealth Advisory will serve as the primary distribution and marketing team in introducing SpiderRock Advisors’ advisory services and strategies to wealth firms and financial advisors.
BlackRock is already an industry leader in SMAs for U.S. wealth management-focused intermediaries. The firm’s SMA franchise specializes in providing customized actively managed fixed income, equity, and multi-asset strategies. In its view, the venture with SpiderRock Advisors will expand the breadth of personalization capabilities available to wealth managers through this firm.
!We are excited to partner with BlackRock to introduce SpiderRock Advisors and our options management capabilities to a wider audience of firms and their clients,” said Eric Metz, President and Chief Investment Officer of SpiderRock Advisors. He believes that innovative advisors understand the value of managing risk “as we navigate a challenging capital markets landscape”.
“Between potential tax reform, historically low interest rates, and volatile equity markets, options-based strategies and solutions can often solve client objectives more efficiently than conventional allocations and techniques. With BlackRock’s breadth of industry relationships, SpiderRock Advisors will be able to partner with more advisors to deliver tailored portfolios and help investors achieve their investment goals“, he concluded.
The independent investment advisory firm Insigneo has announced the incorporation of a new team of four financial advisors who formed Green Grove Wealth Management. This group of women is comprised of Isadora “Sisi” Del Llano, Yzana Oestreicher, Maria Elena Garcia, and Nilia Gasson, who represent for the company “decades of dynamic international financial experience serving high net worth clients”.
They all serve as Managing Director at Green Grove WM and together they manage over 800 million dollars in assets catering to clients in the United States, the Caribbean, South America, Central America, and Europe.
“We are thrilled that Sisi, Yzana, Maria Elena and Nilia have joined our family of independent international financial advisors in Miami. They each come to us with decades of experience, and we look forward to supporting them and helping them grow their business,” said Javier Rivero, President and COO of Insigneo.
Del Llano studied at the University of Puerto Rico and joins Insigneo after 21 years at Wells Fargo Advisors and its predecessor firms, Wachovia Securities and First Union Brokerage Services. Before Wells Fargo, she worked at Paine Webber and Dean Witter. Her clientele is high net worth professionals and business owners throughout the U.S., Latin America, the Caribbean, and Europe.
Oestreicher is joining the firm with 26 years of experience in the financial services industry, 24 of them in Wells Fargo Advisors and its predecessor firms. Prior to that she worked at the Prudential Securities & Dean Witter. She services high net worth clients from Latin America and the Caribbean such as Suriname, Venezuela, Trinidad, Aruba, and several others from the Caribbean. She received her bachelor’s degree in International Finance and Marketing from the University of Miami and her master’s degree in International Business from NOVA University.
García is a 45-year veteran in the financial industry. She started her career at Chase Banking International, and then spent the remaining 30 years at Wells Fargo Advisors and its predecessor firms. Maria Elena focuses on servicing high net worth clients from US, Caribbean, Central America, and Europe.
Gasson has been living in Miami since 1965 and has served 40 years in the industry as a Financial Advisor, 30 of them at Wells Fargo Advisors and its predecessor firms. Previously, she worked at Southeast Bank Brokerage Services. She services clients across three different continents including the United States, Central and South America, the Caribbean, and Europe.
The Green Grove WM team claimed to be “honored” to be partnering with an “exceptional” firm like Insigneo. “This partnership allows for mutual growth and independence that will benefit all of us, but most importantly our clients. Miami is a premier location for the work we do as it grants us strategic access not only to domestic clients, but also markets in Latin America, the Caribbean and Europe. We look forward to a long and fruitful relationship”, they said.
At Insigneo they will leverage the firm’s technology platform, multi-custodian capabilities, robust product offering and open architecture to serve their global client base. The firm has joined the battle to recruit advisors from Wells Fargo’s US Offshore business after the wirehouse announced in January that it was exiting its international segment.
Foto cedidaLaura González, Global Head de Wealth Management en Allfunds.. Allfunds: “Desembarcamos en Miami con negocio y relaciones de largo plazo ya muy consolidadas”
Allfunds, the world’s largest fund distribution network, debuted its first office in North America in October 2020. We spoke with Laura González, Global Head of Wealth Management at Allfunds and responsible for leading this new expansion from Miami, that will serve as the distributor’s wealtech hub for US Offshore activity.
Allfunds debuted its first office in North America in October 2020. How’s been reaching such a milestone amidst the coronavirus pandemic?
Reaching a new market at the start of an exceptional situation like the one we have experienced and with limited face-to-face meetings is not an ideal situation. It probably didn’t help that our core customer base in the US is made up of private banks either, a market segment that remains highly relational. However, we were lucky enough to land in Miami with well-established business and long-term relationships already in place. We like to arrive at a new location with a strong portfolio and the confidence that we’re there to stay.
If US offshore had been a blank page, the interpretation of the pandemic would have been different.
Joining Allfunds in 2011, you hold a wealth of knowledge on US offshore after working several years with the Latam market. What excites you most about the challenge of leading the Miami office?
Nothing compares to the excitement of opening in a new market. And the more barriers there are to enter the said market, the more exciting it is.
When we decided to launch in Brazil, a lot of people told us that we weren’t going to make it. At the time, we were trying to enter the market with a history of double-digit interest rates, very little permeability to international investment, a high number of talented local managers and many stories of failure in terms of foreign firms entering the market. But the unexpected happened and we had the market before we had the office.
Sometimes being contrarian pays off and I’m sure that we’re going to repeat this same success story in the US. The difference is that this market presents another scale, where there’s a very strong offshore private banking network, which is accompanied by flows, legal certainty, business freedom and many other factors that differ from other places.
The Miami office will serve as Allfunds wealthtech entry point for US offshore activity. In your commitment to the North American market, what can regional clients expect from Allfunds?
I’m certain that our digital value proposal can fit in here. We tend to think of the US as a hotspot for WealthTechs, but when you start thinking about these types of firms that specialize in international funds, the list of candidates starts to narrow down to almost nothing. Having the latest technology is not enough. It must be adapted to all the trends and best practices affecting our industry and it’s no secret that regulations have turned international fund distribution into a multi-jurisdictional challenge.It’s no use having a state-of-the-art digital front-end or robo-advisor if you’re unable to help your clients select the optimal product or share class for their end client, identify fiduciary or liquidity risks, and a host of other factors that have placed an unprecedented workload on our industry professionals.The US already has the Best Interest regulation, which is remarkably similar to the European spirit of MiFID, whereby everything must be in the best interest of the client.
As the world’s largest fund distribution network, what are for Allfunds the core priorities to look out for in the US offshore sphere?
We believe that there are still inefficiencies in the US offshore market. Perhaps because the domestic volume is such that many players consider offshore to be a residual activity, although the numbers are by no means negligible. It’s understandable because, like almost everything in life, this is a game of scale. But our arrival has a lot to do with this scenario. Even in the most efficient markets there are inefficiencies and we think that there’s still work to be done in the US in this sense. There’s room for a global and digital value proposal, which comes hand-in-hand with a multi-currency platform and dedicated monitoring from the investment and product department.
Recently, Allfunds advanced the launch of new blockchain-related solutions, and also enhanced its digital ecosystem Connect with an unprecedent ESG offer. Any new US-tailored product or services that you can briefly disclose to us?
The new launches you mention have their place here because we try to keep our solutions in line with the trends in all the markets in which we operate. That’s one of the reasons why we have local offices in 16 countries and tailor-made solutions for the Mexican, Brazilian, Asian market, etc. Having a ‘Euro-centric’ view of the world would have led us to have few or poorly served customers outside Europe. The American market is no exception to this adaptation process. If the intermediation of funds on blockchain technology brings improvements to the industry, we’ll gladly try to make it available on the market.
Sometimes our products may have been incubated in markets where regulation is more demanding and end up being too sophisticated for markets where offshore is just starting out, but that path, rather than the other way around, is pretty straightforward.
What’s Allfunds outlook for the year ahead (in the US)?
We’re literally just getting started in terms of structure, so we still have an exciting challenge before us: building a team that will join us for the long-term. Our company’s history is that of a passionate team that’s seen this company grow exponentially, expand globally, be listed on the stock exchange…It’s important that whoever joins at this perhaps somewhat more mature time has that same passion. It’s essential in order to make a difference.
From a business point of view, we’re happy. We’ve had a great year in the US despite the pandemic, and although the pipeline is a predictive exercise that we can’t talk about, I can say that it gives us extraordinary peace of mind.Our numbers have been good, despite Covid, and the best is yet to come.
Miami is the fifteenth local office for Allfunds. Will we see the company further expanding its global footprint any time soon?
In our more than 20 years of history, we can proudly say that we’re the only platform operating in over 15 countries and with a non-existent office closure ratio. We like to approach each market humbly and work hard so that we can stay in each market forever.
Coming to a wrap, is there anything else you’d like to share with our readers?
Of course. Our door is always open to discuss any concerns regarding the distribution of international funds. We have the necessary experience and track record to help the industry with these kinds of challenges. This educational work in markets where offshore is still emerging fills us with enthusiasm.
Pixabay CC0 Public DomainWilliam de Gale, gestor del BlueBox Global Technology Fund. William de Gale, gestor del BlueBox Global Technology Fund
ACCI, asset management firm specialized in systematic strategies through its ACCI Dynamic fund family, has signed an exclusive agreement with Swiss fund manager BlueBox Asset Management to distribute its BlueBox Global Technology Fund in Latin America and Iberia (Spain, Portugal and Andorra).
In a press release, the firm has revealed that this 5-star Morningstar rated fund is managed by William de Gale, who was Portfolio Manager for 9 years for the BlackRock World Technology Fund. It was launched in March 2018 and has been backed by a broad range of institutional investors, which has allowed it to recently surpass 500 million dollars in assets under management.
In ACCI’s view, this is possible thanks to its differentiated approach among other strategies in the sector, largely avoiding mega-caps and focusing on enabler-type companies, with strong balance sheets, profitability and strong cash generation. It is a UCITS fund, available on the main trading platforms such as Allfunds, Inversis and Pershing, among others.
“This partnership with BlueBox will strengthen our product offering aimed at institutional clientele in Latam South and Iberia, adding a solid and consistent strategy such as BlueBox’s, with average annual returns of over 31% and 141% since its launch just over 3 years ago”, Antonio de la Oliva, Head of Distribution at ACCI, commented.
Gely Solis, Co-Founder of BlueBox Asset Management, said that this agreement with ACCI, “who have proven their impressive distribution capabilities in key regions” for us, will serve to broaden their investor base, consolidate their growth and “give access to a unique strategy such as BlueBox to a broad typology of investors in the region”.
ACCI continues its commitment to offer a wide range of high value-added strategies to institutional investors, complementing its own strategies with distribution agreements with outstanding alpha-generating asset management firms.
The transition from a fossil-fuelled economy to one powered by renewables carries the promise of being as transformational as the agricultural and industrial revolutions. But as things stand, hopes for containing climate change look ambitious.
New net zero pledges from the US, China and Europe are inadequate. They still leave the world far short of the Paris Agreement goal of limiting global temperature rises to below 2 degrees Celsius from pre-industrial levels. This is why carbon pricing is essential.
According to members of the Pictet-Clean Energy fund’s Advisory Board, a fully functioning carbon pricing mechanism could be the difference between halting climate change and allowing it to spiral out of control. Market forces, they argue, can be a powerful ally, helping change the behaviour of businesses and consumers.
The problem is finding a way to harness them effectively. Currently averaging globally at just USD 2 per tonne of CO2, the carbon market is clearly not doing the job it was set up to do. The International Energy Agency says carbon prices need to rise to as much as USD 140 by 2040 to meet Paris goals.
Breaking the tragedy
Getting there will not be straightforward. As former Bank of England Governor Mark Carney warned, the battle against climate change is hampered by the “tragedy of horizon”. In other words, the current generation has no direct incentive to fix the problem when catastrophic impacts of climate change will not be felt for decades. By making carbon emissions more costly today, however, there is the possibility of avoiding that tragedy.
The World Bank’s modelling has shown that carbon pricing has the potential to halve the cost of implementing Paris targets, saving some USD 250 billion by 2030. One problem is that carbon pricing schemes don’t cover nearly enough of the world’s emissions.
Globally, the carbon pricing market accounts for about 12 gigatonnes of CO2 equivalent – which translates into just under a quarter of all annual global greenhouse gas emissions (1).
The US, the world’s biggest polluter, does not even participate in carbon trading at the federal level while the Paris climate agreement did not include a provision for pricing carbon (2). Industry lobby groups in coal, oil and gas sectors had been fierce opponents too. And then there is a wide divergence in prices from country to country.
European countries set the example. Sweden levies the highest carbon tax in the world at SEK1,190 (EUR 117)/tonne CO2, covering about 40 per cent of its greenhouse gas emissions. In Europe, the world’s biggest and oldest market, carbon prices rose more than five-fold since 2018 to a record high in May (see Fig. 1).
But elsewhere, carbon remains under-priced. According to the IEA, the average carbon prices would need to rise almost 50-fold to USD 75-100 /tonne by 2030 and then USD 125-140 by 2040 to meet Paris Agreement goals.
University of California San Diego researchers believe even that will fall short. Their study puts the social cost of carbon – which takes into account empirical climate-driven economic damage estimations and socio-economic projections – at a staggering USD 417/tonne (3).
The lack of a harmonised market and a unified global carbon price are perhaps the most significant problems. Businesses, especially in energy-intensive industries, may relocate out of countries with high carbon costs into those with laxer emission constraints – in a phenomenon known as “carbon leakage”.
Our advisory board members say renewed international efforts to fight global warming could encourage more countries and regions to start adopting carbon pricing schemes. That should push prices higher in the long term and prevent carbon leakage.
The signs are encouraging. In China, which launched its national carbon market in February, market participants expect the price to average RMB 66/tonne (USD 10) in 2025 before rising to RMB 77 by the end of the decade (4). It has the potential to be the world’s biggest carbon market.
Elsewhere, the American Petroleum Institute, the powerful fossil fuel lobby, is now endorsing the introduction of carbon prices in a major policy reversal that underscored seriousness in tackling climate change.
What’s more, Brussels plans to present proposals to revise and possibly expand its emission trading system in line with the European Green Deal and its new target to reduce greenhouse gas emissions by at least 55 per cent by 2030.
One way to improve the emission pricing system is to expand the use of carbon credits. Governments can give out credits to businesses that lower their carbon footprint with carbon capture and storage (CCS) technology, reforestation activities or energy efficiency solutions.
This way, companies can gain flexibility in complying with carbon pricing regulations.
The discussion on carbon pricing and credits is likely to feature prominently during the landmark UN climate talks in Glasgow later this year as potential cornerstone to supporting climate goals.
Accelerating innovation
An overlooked benefit of effective carbon pricing is that it can also accelerate the pace of innovation in clean energy technologies and promote a faster and broader adoption of products and services that have yet to become commercially viable.
For example, our Advisory Board members say, certain types of hydrogen power generation that combines carbon storage could become cost competitive if carbon prices are set around EUR 60-70 per tonne of CO2.
Other technologies that could become viable at higher carbon prices include advanced power transmission mechanisms and next-generation batteries.
This would have significant benefits. The IEA estimates such technologies alone have the potential to cut global energy sector CO2 emissions by nearly 35 gigatonnes of CO2 by 2070, or 100 per cent of what’s considered sustainable in the same period.
The transition to a decarbonised economy will be among the most wrenching socio-economic shifts humans have ever experienced. Yet even though the survival of the planet is at stake, resistance to change is proving difficult to overcome. A higher carbon price can smooth the path.
(1) Carbon Pricing Dashboard, World Bank
(2) Article 6 of the Paris Agreement provides options for voluntary cooperation amongst countries in achieving their NDC (nationally-defined contributions) targets to allow for higher climate ambition, promote sustainable development, and safeguard environmental integrity
(3) Ricke, K., Drouet, L., Caldeira, K. et al. Country-level social cost of carbon. Nature Clim Change 8, 895–900 (2018). https://doi.org/10.1038/s41558-018-0282-y
(4) China Carbon Pricing Survey 2020
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The supply of private equity funds listed on the Mexican stock exchanges (BMV and BIVA), as well as AFOREs’ investments in them, have almost doubled in just over three years. Between December 2017 and March 2021, the number of vehicles increased from 88 to 172 vehicles (+ 95%) while the investments of the AFOREs rose from 7.797 million dollars to 15.365 million dollars (+ 97%).
Mexico is perhaps the only country that has private equity funds registered in its stock exchanges, however, this occurred since the institutional investor can only acquire securities that are the subject of public offering, so making it public was the solution found to give institutional investors access to this asset class in 2009.
In December 2017, investments in private equity were basically local, the real estate sector (30% of the capital called) led the list; followed by infrastructure (21%); private debt (17%); private equity (14%) and energy (11%) to name the most relevant.
By allowing global investment as of January 2018, what has been observed is a recomposition that has allowed the AFOREs to diversify both by sectors and globally.
In December 2017, 93% of the resources were concentrated in 5 local sectors, while by March 2021, 91% were concentrated in 6 sectors where 5 are local and one global. In another 5 additional sectors there are the remaining 7%.
In 2017, investments in CKDs and CERPIs accounted for 4.9% of assets under management and by May 2021 they reached 6.2%, however, it must be taken into account that in the period the assets under management of the AFOREs increased 55% from 160.251 million dollars in December 2017 to 247.825 million dollars as of May 2021.
If you break down 6.2% of the private equity investments held by the AFORE, it means that in just over three years 5.2% are local investments (from 4.9 to 5.2%) and 1% are global investments.
The incorporation of global investments in private equity is not only causing sector diversification, but also a rebalancing between local and global investments. We already observed this recomposition when the AFOREs were allowed to invest in equities (2005), where in the first instance they were allowed local investments and later global investments through a variety of vehicles such as ETFs, mandates and in recent years mutual funds. Currently 14.1% of the assets under management of the AFOREs are in international equities and 5.8% in national equities, which means that 71% of equities are international and 29% local.
Today the AFOREs’ investments in private equity, 80% are in local investments and 20% are global, so as assets continue to grow, the composition of local and global investments will continue to seek sectoral and global diversification.
