tag:theconversation.com,2011:/au/topics/investors-33793/articles
Investors – The Conversation
2024-03-14T12:42:30Z
tag:theconversation.com,2011:article/225610
2024-03-14T12:42:30Z
2024-03-14T12:42:30Z
Wendy’s ‘surge pricing’ mess looks like a case study in stakeholder conflict
<p>Just two words created a publicity nightmare for fast-food giant Wendy’s: <a href="https://theconversation.com/whats-dynamic-pricing-an-operations-management-scholar-explains-188265">dynamic pricing</a>.</p>
<p>In late February 2024, news broke that the chain was considering charging different prices at different times of day — a tactic usually associated with airlines and ride-hailing companies. As headlines like “<a href="https://www.foxbusiness.com/media/wendys-roll-uber-style-surge-pricing-menu-prices-fluctuating-based-demand">Wendy’s to roll out Uber-style surge-pricing</a>” flooded the news, #BoycottWendys trended on social media. Wendy’s rival Burger King quickly took advantage of the news with a “<a href="https://www.bk.com/terms">No urge to surge</a>” promotion.</p>
<p>The backlash put Wendy’s on the defensive.</p>
<p>Within days, Wendy’s said that <a href="https://www.wendys.com/blog/wendys-digital-news-update">it never intended to raise prices</a> at times of peak demand, Instead, it only intended to lower prices when store traffic was slow. It also announced a monthlong $1 burger deal that observers were <a href="https://www.foodandwine.com/wendys-march-madness-burger-deals-8604311">quick to connect</a> to the pricing fiasco. </p>
<p>It looked like a classic PR disaster – and as a <a href="https://scholar.google.com/citations?user=N1Fxik0AAAAJ&hl=en">professor of marketing</a>, I couldn’t turn away. How did this all go wrong?</p>
<h2>Divergent stakeholder interests, with a side of fries</h2>
<p>I suspect this burger brouhaha came down to a classic case of investors’ interests colliding with those of consumers.</p>
<p>The whole mess seems to have started on Feb. 15, 2024, when Wendy’s <a href="https://www.irwendys.com/news/news-details/2024/THE-WENDYS-COMPANY-REPORTS-FOURTH-QUARTER-AND-FULL-YEAR-2023-RESULTS/default.aspx">released its fourth-quarter earnings</a> and held a <a href="https://www.irwendys.com/events-and-presentations/event-details/2024/Preliminary-Date-Q4-2023-The-Wendys-Company-Earnings-2024-uusGd41PbC/default.aspx">conference call with investors</a>. </p>
<p>That day, Wendy’s announced a multimillion-dollar investment to roll out digital menu boards across all its U.S. stores. This investment would support “dynamic pricing and menu offerings,” according to a slide from the conference call. While presenting the slides, Wendy’s chief executive officer <a href="https://www.fool.com/earnings/call-transcripts/2024/02/15/wendys-wen-q4-2023-earnings-call-transcript/">said</a>, “Beginning as early as 2025, we will begin testing more enhanced features like dynamic pricing and day-part offerings along with AI-enabled dynamic pricing menu changes and suggestive selling.”</p>
<p>While some people argue that Wendy’s may have never meant to hike prices at all, I’m skeptical. Of course there’s nothing wrong with raising prices – companies would go out of business if they didn’t. The issue is how to frame the price hike. For example, Starbucks increased prices <a href="https://www.cbsnews.com/news/starbucks-prices-inflation/">three times</a> in just four months between October 2021 and February 2022. It blamed the hikes on inflation and didn’t face much of a backlash.</p>
<p>But no matter how you frame it, raising prices is a company action that benefits investors but not consumers. And while the dining public has been outraged by the whole affair, Wendy’s investors seem relatively unconcerned. Wendy’s stock price has remained <a href="https://finance.yahoo.com/quote/WEN/history">relatively stable</a> since Feb. 26, when the media picked up the story and boycott calls commenced.</p>
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<figcaption><span class="caption">It’s a bad sign when your company’s pricing controversy makes it onto “Good Morning America.”</span></figcaption>
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<p>This asymmetry makes sense and is well documented in <a href="https://doi.org/10.1016/j.ijresmar.2018.06.001">academic research</a>. On average, investors are motivated by a company’s profits. Moves to raise revenue, such as hiking prices, make them happy. That’s why companies often announce those increases well before they put them into effect – not for the customers’ sake, but <a href="https://doi.org/10.1016/j.ijresmar.2018.06.001">for the investors’</a>.</p>
<p>Of course, higher prices feel different if you’re the one paying them. And consumers tend to believe sellers aren’t being fair when they set prices: They think sale prices are set much <a href="https://doi.org/10.1086/346244">higher than fair prices</a>, underestimate <a href="https://doi.org/10.1177/0092070304269953">the impact of inflation</a>, overattribute the cause of price increase to profit-seeking, and fail to consider company costs. Their backlash is both <a href="https://doi.org/10.1086/346244">economically rational and predictable</a>.</p>
<p>What also makes sense is Burger King trying to act like a typical rival – aiming to benefit from the backlash Wendy’s received.</p>
<h2>A needless food fight</h2>
<p>In my opinion, Wendy’s early announcement of its dynamic pricing was a serious mistake. Remember that its CEO said that Wendy’s would introduce dynamic pricing “as early as 2025.” That means it announced the news at least nine months before customers needed to hear about it. I assume Wendy’s did this because it wanted to impress its shareholders and boost its stock price.</p>
<p>In fact, the cynic in me wonders whether this incident was “staged” – that is, Wendy’s was testing the waters to see whether they could preannounce the price hike to impress shareholders, and then not actually implement the changes. </p>
<p>Indeed, research has shown that <a href="https://doi.org/10.1016/j.ijresmar.2018.06.001">companies often preannounce price increases</a> a few days to several months in advance, and may withdraw some of these preannouncements if they realize that the price hike may cause more damage than increase in revenue.</p>
<p>But either way, announcing a decision nine months in advance seems premature. And I haven’t seen any evidence that Wendy’s planned for customers to hear the news along with investors.</p>
<p>My advice is for executives to be astute in communicating price increases so consumers take the company’s perspective and don’t <a href="https://doi.org/10.1177/0092070304269953">view the hike as unfair</a>. That may mean avoiding terms that elicit hostile reactions, or <a href="https://doi.org/10.1016/j.ijresmar.2018.06.001">providing explanations</a> for their decisions, such as an increase in the cost of ingredients or employee salaries. Consumers who understand the reasons for a price hike may be more accommodating.</p>
<p>Interestingly, even after the Wendy’s wobble, other restaurants are reportedly <a href="https://www.wsj.com/business/hospitality/surge-pricing-is-coming-to-more-menus-near-you-66a245f3">considering increasing menu prices</a> during hours of high demand. I hope they learn from Wendy’s error and frame their price increases strategically.</p>
<p>Otherwise, they shouldn’t be surprised when competitors eat their lunch.</p><img src="https://counter.theconversation.com/content/225610/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vivek Astvansh does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Sometimes, good news for investors is bad for consumers.
Vivek Astvansh, Associate Professor of Quantitative Marketing and Analytics, McGill University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/223861
2024-03-13T01:26:38Z
2024-03-13T01:26:38Z
Be wary of the ‘vibes’: positive investor sentiment doesn’t necessarily match the true value of stocks
<p>Global stock prices dropped across the board late last year, by between <a href="https://www.nasdaq.com/articles/monthly-market-wrap-september-2023#:%7E:text=September%202023%20Market%20Summary,the%20NASDAQ%20ended%205.8%25%20lower">10% and 15% in a matter of weeks</a>. </p>
<p>Fears of a recession took hold after a series of interest rate increases, stubborn inflation and geopolitical tensions in Europe and the Middle East. Uncertainty gripped the market and eroded investor sentiment, only for markets to <a href="https://fortune.com/2023/12/29/stocks-2023-sp-nasdaq-soaring-economy/">bounce back</a> and finish the year on a high. </p>
<p>Stockmarket history is full of similar periods characterised by either extreme levels or dramatic changes in stock prices. This creates patterns that are difficult to reconcile with asset-pricing models. These models are based on the assumption that prices always reflect reasonable expectations about future cash flows determined by rational investors. </p>
<p>But investors are not always rational. Rather, a <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.1986.tb04513.x">large body</a> of <a href="https://www.journals.uchicago.edu/doi/abs/10.1086/261703">academic literature</a> shows market-wide sentiment can cause prices to depart from their true values. </p>
<p>In an ongoing collaboration between the University of Canterbury and the New Zealand Shareholder Association (NZSA), we have developed the <a href="https://www.nzshareholders.co.nz/nz-retail-investor-sentiment-index/">NZ Retail Investor Sentiment Index</a> as a representative survey of retail investors in New Zealand. </p>
<p>The goal is to understand the behaviour of New Zealand’s investors and how they compare with their overseas colleagues when predicting the patterns of the stockmarket. </p>
<h2>Measuring market sentiment</h2>
<p>Market sentiment refers to the overall attitude of investors. It is commonly summarised as bullish (expecting increasing prices), bearish (expecting decreasing prices), or neutral (expecting no or only little changes in price). Such sentiment is not always based on fundamentals such as revenue, profitability and growth opportunities. </p>
<p>Several studies show investor sentiment predicts stock returns and <a href="https://www.aeaweb.org/articles?id=10.1257/jep.21.2.129">can be used as a contrarian signal</a> since subsequent returns tend to be relatively high when sentiment is low and vice versa. Therefore, a contrarian investor would buy stocks when sentiment is low and sell stocks when sentiment is high.</p>
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Read more:
<a href="https://theconversation.com/mood-music-and-money-what-our-spotify-playlists-reveal-about-the-emotional-nature-of-financial-markets-166166">Mood, music and money: what our Spotify playlists reveal about the emotional nature of financial markets</a>
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<p>Every week since January 2020, we asked registered members of the NZSA whether they expected the stockmarket to increase (bullish), decrease (bearish) or stay the same (neutral) over the next six months. The NZSA has about 1,200 members, a quarter of whom receive email invitations to participate in the survey. </p>
<p>Our index is constructed similarly to those in the <a href="https://www.aaii.com/sentimentsurvey">United States</a> and Europe, which are often cited in the <a href="https://www.nasdaq.com/articles/the-rollercoaster-of-investor-sentiment">media</a> and widely used in <a href="https://doi.org/10.1016/j.jempfin.2002.12.001">research</a>. All these benchmarks provide insights into the mood of investors and shed light on the short-term outlook for the local equity market. </p>
<h2>2024 forecast for the NZ equity market</h2>
<p>During the first four weeks of this year, expectations that stock prices will rise over the next six months remained elevated at 40%. In other words, 40% of the surveyed investors believe the NZ equity market will increase in the first six months of 2024. At the same time, bearish sentiment, expectations that stock prices will fall over the next six months, fluctuated around 16%. </p>
<p>So, despite the mounting global and local uncertainties, retail investors are optimistic about the equity market. Bullish sentiment is stronger and bearish sentiment weaker than the historical average levels of 28% and 36%, respectively. </p>
<p>On the back of last year’s strong market performance and a better-than-expected economy, investor optimism carries forward.</p>
<p>However, since sentiment is known to be a contrarian indicator, informed investors should be cautious going further into the new year. </p>
<h2>Why investor sentiment matters</h2>
<p>In general, investor sentiment affects the demand (buying) and supply (selling) of stocks. At the aggregate level, this can affect stock prices and volatility. </p>
<p>Understanding the level and changes in the overall attitude or mood of investors therefore has important implications for investors to make better investment decisions. </p>
<p>At the same time, policymakers should monitor and include investor sentiment in their decision-making to reduce undue market volatility. <a href="https://doi.org/10.1016/j.irfa.2007.04.001">Research has shown</a> sentiment as a determinant of stock prices is driven by rational factors, such as inflation, overall market return and dividend yield, and less rational factors.</p>
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Read more:
<a href="https://theconversation.com/its-the-vibe-of-the-thing-the-critical-art-of-measuring-business-and-consumer-confidence-37166">It's the 'vibe' of the thing: the critical art of measuring business and consumer confidence</a>
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<p>Regulators typically focus on the former, which by extension contributes to maintaining stability in sentiment and associated price volatility induced by fundamentals. </p>
<p>But <a href="https://doi.org/10.1016/j.irfa.2016.10.003">changes in sentiment unrelated to fundamentals</a> are just as important. They can occur without warning and spread widely through the market. This has been found to play an important role for price run-ups and corresponding corrections that can have negative impacts on the <a href="https://www.sec.gov/investor/locinvestorbehaviorreport.pdf">functioning of the financial market</a> and <a href="https://www.federalreserve.gov/boarddocs/speeches/2002/20021015/default.htm">asset price bubbles and monetary policy</a>. </p>
<p>Considering the importance of investor behaviour for the wider economy, the patterns identified by our index give us a road map to better understand the ups and downs of the New Zealand stock exchange.</p><img src="https://counter.theconversation.com/content/223861/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Prof Jedrzej Bialkowski is a member of the American Finance Association (AFA), European Finance Association (EFA), Financial Management Association (FMA), Western Finance Association (WFA) and Institute of Finance Professionals New Zealand (INFINZ).
</span></em></p><p class="fine-print"><em><span>Moritz Wagner is a member of the American Finance Association (AFA), European Finance Association (EFA), Financial Management Association (FMA), Institute of Finance Professionals New Zealand (INFINZ) and the Nez Zealand Shareholder Association (NZSA).</span></em></p>
A new index gives us insight into how sentiment impacts investor behaviour in New Zealand. How investors feel about the market does not always match the mounting global and local uncertainties.
Jedrzej Bialkowski, Professor and Head of Department, Economics and Finance, University of Canterbury
Moritz Wagner, Senior Lecturer, Department of Economics and Finance, University of Canterbury
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/219944
2024-01-03T20:10:27Z
2024-01-03T20:10:27Z
No one can predict how financial markets will behave with absolute certainty. Here’s why
<figure><img src="https://images.theconversation.com/files/565828/original/file-20231101-23-xjz2ys.jpg?ixlib=rb-1.1.0&rect=1%2C1%2C992%2C664&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's a mistake to assume that financial enthusiasts can predict the uncertain behaviour of markets.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>Some stock market enthusiasts claim to be able to predict financial market trends with fantastic accuracy. </p>
<p>Despite the complexity of international finance, they assure us that substantial profits are within our reach if we follow their recommendations and imitate their behaviour.</p>
<p>But is it really possible to accurately predict the behaviour of financial markets?</p>
<p>As an expert in the psychology of decision-making who specializes in complexity research, I have had the opportunity to deepen my understanding of human cognition and its capacity to control real-world complex environments. For now, my conclusions are sobering and not simple.</p>
<h2>Complex decisions</h2>
<p>According to many researchers in decision-making science, understanding and managing <a href="https://sloanreview.mit.edu/article/revisiting-complexity-in-the-digital-age/">complexity is the greatest challenge of the digital age</a>. Complexity refers to the uncertain nature of the environments in which we make decisions every day. </p>
<p>While some of our financial choices may seem simple and self-evident (saving a portion of our income, setting a budget, repaying a debt), the environment in which these choices are made is <a href="https://www.taylorfrancis.com/chapters/edit/10.4324/9781315091938-2/complex-problem-solving-european-perspective%E2%80%9410-years-joachim-funke-peter-frensch">unpredictable</a>. </p>
<p>The strategies we adopt are certainly not infallible; our knowledge does not guarantee our success, and the effects of each of our decisions are uncertain and unique. This explains why the environments in which we make everyday decisions are actually highly complex. They include many interrelated factors that are constantly changing, with or without our intervention. Not to mention that the objectives we cherish are often themselves <a href="https://www.mdpi.com/2079-3200/9/3/38">contradictory</a>. </p>
<p>For example, how can we maximize investment returns while minimizing exposure to market fluctuations?</p>
<h2>Facing financial complexity</h2>
<p>Faced with financial complexity, human cognition tends to favour a reductionist approach to information processing, sometimes called <a href="https://journals.sagepub.com/doi/abs/10.1177/154193120104500415">“tunneling.”</a> Faced with the overload of information generated by complexity, we tend to concentrate on one or a few specific aspects of a situation rather than all available information because <a href="https://www.sciencedirect.com/science/article/pii/S2451958822000562">too much information kills information</a>. In other words, we take shortcuts. And guess what? These simplistic ways of thinking can lead to biased decisions. </p>
<p>We often make the mistake of attributing poor performance of our equity portfolio to a single event that stands out in our minds. We mistakenly believe that our investments will grow linearly when, in fact, they are vulnerable to exponential fluctuations caused by crises and unexpected events. We react poorly to unsuccessful investments by focusing on the consequences that could explain our financial difficulties, rather than by deepening our understanding of why the company in which we had blind faith (or the sector in which it operates) is experiencing difficulties.</p>
<p>Finally — and this is human nature — we tend to attribute responsibility for our failures to external factors beyond our control. For example, we might be tempted to blame losses incurred by certain businesses in the tourism sector on poor summer weather conditions. But in doing so, we overlook the importance of the quality of the products and services the businesses offer, or how hospitable their staff are. </p>
<h2>And market enthusiasts in all this?</h2>
<p><a href="https://corpus.ulaval.ca/entities/publication/e1743fb3-e5d8-4532-9d3f-042954bbff15">My most recent work</a> supports the literature on complex problem-solving: whether we are experts or novices, understanding and mastering complexity is a daunting challenge. </p>
<p>Many market enthusiasts will demonstrate greater skill in devising an investment strategy, managing a portfolio or accessing certain investments. </p>
<p>However, it is a mistake to assume that they can predict the uncertain behaviour of the markets. The issue is not necessarily financial knowledge, but the natural limitations of human cognition when faced with complexity. </p>
<p>Faced with international finance, there is a “wall of complexity” beyond which it is particularly difficult to progress, and we are all subject to bias and errors.</p>
<h2>So, how do we navigate through this?</h2>
<p>Despite the many challenges of financial complexity, there is light at the end of the tunnel, provided we know what to do. While there are many studies to be conducted, researchers remain optimistic about specific methods that can already help us make more informed decisions.</p>
<p><strong>1. Learn to think in systems</strong></p>
<p><a href="https://fnhpa.ca/_Library/KC_BP_5_Skills/SYSTEMS_THINKING.pdf">Systems thinking</a> is a way of perceiving reality that helps us to better understand and work with real-world complex environments. </p>
<p>Whether you want to learn how to manage your budget better or invest wisely in the stock market, get into the habit of drawing visual representations of the financial challenges you want to tackle. </p>
<p>Cause-and-effect diagrams, which use simple symbols (a + sign to show a change in the same direction between two factors, and a – sign to show opposite changes), allow you to quickly illustrate the extent and scope of a problem by representing the relationships between the parts of the same system. </p>
<p>But make no mistake, some factors are difficult to predict. </p>
<p>In short, learn to think about the “consequences of the consequences” of your choices before making any decision.</p>
<p><strong>2. Be bold, tolerate uncertainty</strong></p>
<p>Learn to tolerate situations that, at first sight, have no clear solutions and leave you in doubt. </p>
<p>Financial markets are unpredictable and poorly structured, which creates <a href="https://www.sympoetic.net/Managing_Complexity/complexity_files/1973%20Rittel%20and%20Webber%20Wicked%20Problems.pdf">“wicked problems.”</a></p>
<p>In these environments, ambiguity is the norm. Embracing uncertainty allows us to translate problems into opportunities, rather than making hasty decisions or locking ourselves into inaction. </p>
<p>There is no single “right solution” to a complex financial problem. Take a moment to evaluate your options.</p>
<p><strong>3. Test your beliefs and biases</strong></p>
<p>Don’t try to research and interpret financial information based on an assumption you hold dear. Confront your preconceived ideas using sources you would not normally consult because they take the opposite position. </p>
<p>What would a friend or colleague whom you like, but who fundamentally disagrees with you, say?</p>
<p><strong>4. Don’t trust what comes easily to mind</strong></p>
<p>Attending an inspiring conference on the sustainable economy or listening attentively to a TV report on financial ethics does not guarantee that the information that comes out of it will be helpful in the decision you have to make.</p>
<p>Although this information may be easier to retrieve from memory, it is not necessarily relevant. Don’t overestimate the likelihood of an event just because you can imagine it in great detail. </p>
<p>Get information from several sources and verify their reliability.</p>
<h2>Now what?</h2>
<p>One cannot become proficient in any area without putting in the necessary practice. Therefore, it is important for you to personally delve into the world of finance. </p>
<p>Through experience, you will develop your skills to better appreciate complexity.
To help you do this, it’s a good idea to seek the assistance of a competent professional to guide you through this highly sophisticated process. </p>
<p>But remember this: when it comes to complexity, you are human, as are those who claim to be able to read the future.</p><img src="https://counter.theconversation.com/content/219944/count.gif" alt="La Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Benoît Béchard received funding from the Social Sciences and Humanities Research Council of Canada (SSHRC), the Fonds de recherche du Québec – Société et Culture (FRQSC), and Mitacs Canada.</span></em></p>
The complexity of the financial market is far beyond the information processing capabilities of human cognition.
Benoît Béchard, Docteur en psychologie de la décision Ph. D., Université Laval
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/219070
2023-12-11T12:37:19Z
2023-12-11T12:37:19Z
Most investors aren’t paying attention to climate risks – the financial system needs to change
<figure><img src="https://images.theconversation.com/files/563999/original/file-20231206-29-q2o1yi.jpg?ixlib=rb-1.1.0&rect=0%2C45%2C5120%2C2828&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/financial-analysts-day-traders-working-on-2088641623">Gorodenkoff/Shutterstock</a></span></figcaption></figure><p>Climate change is increasing the frequency of extreme weather events. For example, extreme sea-level events, where large storm surges and high tides temporarily push the sea much higher than normal, currently occur once a century. However, they are <a href="https://www.ipcc.ch/report/ar6/syr/figures/figure-4-3">projected</a> to strike coastal areas every decade, if not yearly, by 2040.</p>
<p>Events like these have significant consequences for the global financial system, such as depressing economic growth. According to <a href="https://www.nber.org/system/files/working_papers/w20352/w20352.pdf">research</a>, a once-in-a-hundred year cyclone is linked to an average income loss across all countries of nearly 15% per person, surpassing the 9% average income reduction typically observed in the aftermath of a financial crisis.</p>
<p>The extensive damage that extreme weather inflicts on infrastructure, homes and the economy could also lead to debt that a country may struggle to repay, potentially making it harder for it to borrow money in the future. <a href="https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2023.4869">Research</a> I carried out with colleagues found that, by 2030, climate change should result in 59 countries seeing a deterioration in their ability to repay their debts, and a subsequent increase in their cost of borrowing.</p>
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<a href="https://theconversation.com/climate-change-is-making-debt-more-expensive-new-study-211009">Climate change is making debt more expensive – new study</a>
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<p>However, it appears that investors (fund managers in charge of large amounts of investments) are not paying attention to these risks. A recent article in the <a href="https://www.ft.com/content/830e3ae6-0c3c-4da9-87e7-4ff72aa3e249">Financial Times</a> revealed that oil and gas firms are facing virtually no additional borrowing costs, despite the fact that the future of the entire industry is at risk from the shift towards clean energy and global efforts to reduce carbon emissions.</p>
<p><a href="https://www.sciencedirect.com/science/article/abs/pii/S037842662300153X?dgcid=author">Research</a> has also found that, while investors expressed some concern about the risks associated with climate policy, the direct risks from extreme weather itself had no impact on the price of US stocks between 2000 and 2018.</p>
<p>Why are investors responding in this way? Not having access to the right information is only part of the equation. Investors also need to believe that climate change will actually have material consequences for financial markets.</p>
<figure class="align-center ">
<img alt="A bridge that has been destroyed by a hurricane." src="https://images.theconversation.com/files/563992/original/file-20231206-21-yeures.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/563992/original/file-20231206-21-yeures.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/563992/original/file-20231206-21-yeures.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/563992/original/file-20231206-21-yeures.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/563992/original/file-20231206-21-yeures.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/563992/original/file-20231206-21-yeures.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/563992/original/file-20231206-21-yeures.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Hurricane Katrina destroyed the Biloxi bridge in Mississippi.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/hurricane-katrina-destroyed-biloxi-bridge-990842">Robert A. Mansker/Shutterstock</a></span>
</figcaption>
</figure>
<h2>Access to information</h2>
<p>If a country seeks to borrow from financial markets for investments in public infrastructure, its credit rating will determine the cost of borrowing. The credit rating influences the interest the government will pay, akin to how an individual’s credit rating affects their mortgage repayments. </p>
<p>However, credit rating agencies <a href="https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op303%7Eeaa6fe6583.en.pdf">do not</a> consistently incorporate climate risks into their assessments. Government debt simply does not have the right climate metrics for investors to make informed decisions.</p>
<p>But, when investors are given the right information, they do generally make appropriate decisions. For example, <a href="https://academic.oup.com/rfs/article-abstract/36/11/4588/7156853?redirectedFrom=fulltext">research</a> published in May 2023 explored the impact of exposure to sea-level rise on municipal bond yields in the US. (When an investor buys a municipal bond, they loan money to the local government in exchange for a number of interest payments over a defined period.)</p>
<p>Once presented with worst-case sea-level rise projections, investors adjusted their required rate of return on municipal bonds in coastal communities. In fact, a one-standard-deviation increase in exposure to rising sea levels resulted in a 7% to 10% increase in the cost of borrowing. </p>
<p>The availability of information on the financial risks associated with climate change is improving. However, much of this information is not brought together into a single place that helps financial markets analyse it.</p>
<p>Financial markets also require new tools to help them understand this new information. Part of the problem is that finance simply lacks the skills to understand environmental data.</p>
<h2>Processing it differently</h2>
<p>Access to the right information is, however, only one part of the problem. Even when investors do have access to this information, they process it differently to one another. </p>
<p>The same study suggests that investors in “less worried” (according to a survey of climate opinions) locations ignore sea-level projections completely. In the US state of North Carolina, for example, lawmakers have <a href="https://www.reuters.com/article/us-usa-northcarolina-idUSBRE86217I20120703">removed the requirement</a> for long-term sea level rise projections to be included in planning applications.</p>
<p>The effect of sea level projections (information) on municipal bonds thus appears to be conditional on investors’ prior beliefs about climate change. The findings revealed that the projected increase in the interest rate associated with rising sea levels was only present in “more worried” locations. </p>
<p>Of course, investors in these locations not only needed to be worried about climate change, they also needed the right information for it to make a difference to the markets.</p>
<figure class="align-center ">
<img alt="An aerial shot of Wrightsville beach in North Carolina." src="https://images.theconversation.com/files/563994/original/file-20231206-25-2ut3cq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/563994/original/file-20231206-25-2ut3cq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/563994/original/file-20231206-25-2ut3cq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/563994/original/file-20231206-25-2ut3cq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/563994/original/file-20231206-25-2ut3cq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/563994/original/file-20231206-25-2ut3cq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/563994/original/file-20231206-25-2ut3cq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The US coastal state of North Carolina appears to be ignoring the risk posed by climate change.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/wrightsville-beach-north-carolina-usa-dusk-2297688905">Sean Pavone/Shutterstock</a></span>
</figcaption>
</figure>
<h2>What’s the solution?</h2>
<p>Having financial data that accounts for the risks posed by climate change is a necessary requirement for incorporating these risks into asset prices. It should not be surprising that oil and gas firms maintain low borrowing costs with high credit ratings when these ratings do not consider climate risks. </p>
<p>Nevertheless, access to financial indicators that are adjusted for climate risks is only one aspect of the challenge. Before this new data is integrated into the decisions that investors make, the investors must be convinced that climate change actually holds significant consequences for financial markets. </p>
<p>In this sense, encouraging investors to recognise the impact of climate change may ultimately pose more of a sociological challenge than an economic one.</p><img src="https://counter.theconversation.com/content/219070/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matt Burke received funding from the International Network for Sustainable Financial Policy Insights, Research and Exchange (INSPIRE).</span></em></p>
Investors seem not to care about climate risks, but they really should.
Matt Burke, WTW Research Fellow, University of Oxford
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/216592
2023-11-29T17:07:55Z
2023-11-29T17:07:55Z
Tech startups with diverse founding teams are more likely to seek IPO or acquisition
<figure><img src="https://images.theconversation.com/files/561608/original/file-20231124-15-d0f1q9.jpg?ixlib=rb-1.1.0&rect=62%2C35%2C5865%2C3925&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Immigrant entrepreneurship has a substantial positive impact on innovation in the high-tech sector. </span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/tech-startups-with-diverse-founding-teams-are-more-likely-to-seek-ipo-or-acquisition" width="100%" height="400"></iframe>
<p>The importance of immigrant entrepreneurs and diversity in management has been <a href="https://doi.org/10.1002/smj.2976">widely demonstrated in academic literature</a>. When management teams are diverse, they are able to bring a variety of perspectives to the decision-making process.</p>
<p>Immigrant entrepreneurship has a <a href="https://doi.org/10.1257/mac.2.2.31">substantial positive impact on innovation</a> in the high-tech sector. Immigrant tech founders are known to <a href="https://innovationeconomycouncil.com/reports/relocation-nation/">boost Canadian innovation</a> and, as an <a href="https://www.forbes.com/sites/stuartanderson/2023/09/14/us-immigrant-entrepreneurs-also-lured-to-canada/?sh=1e05345a3fa2">immigration destination</a>, the effects of this should interest Canada.</p>
<p>Immigrants in the United States have similarly become a <a href="https://nfap.com/wp-content/uploads/2022/07/2022-BILLION-DOLLAR-STARTUPS.NFAP-Policy-Brief.2022.pdf">major driving force in the creation</a> of new, fast-growing technology startups. Studies <a href="https://doi.org/10.1111/j.1435-5957.2009.00271.x">in Germany</a> and <a href="https://doi.org/10.1177/0308518X16660085">England</a> have found the same. </p>
<p>While there is a wealth of evidence supporting the contributions of immigrant entrepreneurs, there is a lack of research on how diversity specifically impacts the strategy and performance of founding teams in high-tech startups. </p>
<p>Only one study has been done on this topic; it found that <a href="https://doi.org/10.1016/j.jbusvent.2006.07.004">new technology startups with at least one immigrant founder</a> were more likely to emphasize product innovation and encourage the exploration of new market opportunities. Filling this research gap is important, as it could significantly impact a variety of parties, including entrepreneurs, investors and policymakers.</p>
<h2>Exits in high-tech startups</h2>
<p>New technology startups and their investors often seek exit strategies that outline how investors or founders can cash out or divest their ownership. This can involve startups going public with an initial public offering (IPO) or by having another company acquire the venture.</p>
<p>A crucial factor in this decision is the stage a company is at when considering a potential exit. Is the startup just starting to generate revenues, or is it already in the phase of revenue growth? Founders must decide whether to exit early in the sales phase or stay with the company until it achieves broader market success.</p>
<p>Research shows <a href="https://doi.org/10.1016/j.jbusvent.2006.07.004">immigrant entrepreneurs are more likely</a> than their native-born counterparts to seek new growth options by entering new markets and developing new products. As a result, technology startups with immigrant founders are more likely to pursue an exit strategy for financial gains during the initial revenue stage — as opposed to waiting until the next stage — which is more profitable, but also more risky.</p>
<figure class="align-center ">
<img alt="Three people stand behing a glass wall covered in sticky notes. One of the people is writing on the glass wall with a whiteboard marker." src="https://images.theconversation.com/files/561187/original/file-20231122-23-5os4ob.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/561187/original/file-20231122-23-5os4ob.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/561187/original/file-20231122-23-5os4ob.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/561187/original/file-20231122-23-5os4ob.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/561187/original/file-20231122-23-5os4ob.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/561187/original/file-20231122-23-5os4ob.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/561187/original/file-20231122-23-5os4ob.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">New technology startups and their investors often seek exit strategies that outline how investors or founders can cash out or divest their ownership.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<h2>Immigrants and exit strategies</h2>
<p>To address the previously mentioned research gap, <a href="https://doi.org/10.1177/10422587231211006">I conducted a study alongside fellow researchers</a> Ilanit Gavious and Orit Milo from Ben-Gurion University. We sought to understand how diversity in founder teams affects exit decisions in high-tech startups.</p>
<p>In our analysis, we considered factors like team size, the countries where founders were born, prior business experience, gender, prior experience abroad, prior startup experience, level of education, research and development investment, whether the CEO was a founder or not, the location of the venture and firm size. </p>
<figure class="align-center ">
<img alt="An ethnically diverse group of people have a conversation while looking at a computer screen." src="https://images.theconversation.com/files/561185/original/file-20231122-23-ejni3y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/561185/original/file-20231122-23-ejni3y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/561185/original/file-20231122-23-ejni3y.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/561185/original/file-20231122-23-ejni3y.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/561185/original/file-20231122-23-ejni3y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/561185/original/file-20231122-23-ejni3y.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/561185/original/file-20231122-23-ejni3y.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">New research could help entrepreneurs make better decisions about the composition of their startup leadership teams.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<p>We also looked at different ways of measuring national cultural diversity. This included whether there was at least one immigrant founder, the percentage of immigrant founding team members and a diversity index. We defined immigrant founders as those who were born in another country, had a non-native surname and completed at least their undergraduate degree outside of Israel. </p>
<p>We studied 582 cases where Israeli tech startups were sold. We found that 65 of them had team members who were immigrants, while 517 did not. Our results strongly support the idea that having immigrants on the founding team substantially increases the chances of an exit strategy with an IPO or acquisition. This is notable, as it highlights the importance of diversity in founding teams for early investors in order to maximize the return on their investments. </p>
<h2>Insights for financial success</h2>
<p>Our research offers valuable insights for entrepreneurs, investors and policymakers in the startup ecosystem. Entrepreneurs can use our findings to make better decisions about the composition of the founding team in their ventures. Founders aiming for financial success through exit strategies should consider teaming up with founders from diverse cultural backgrounds. </p>
<p>Our study could help entrepreneurs make better decisions about the composition of the founding team in their ventures. Specifically, founders with IPO and acquisition exit strategies should make sure to collaborate with founders who come from different national cultures. </p>
<p>Investors, like angels and venture capitalists, can use our study’s insights to make better decisions about which startups to support and invest in. It can also provide insights into potential returns from investments. </p>
<p>Policymakers could use our findings in two ways. First, they should consider the diversity within founding teams when making decisions about loans and grant programs for startups. Second, they can use our insights when making decisions about accelerators and incubators, considering the impact of immigrants in the founding teams. </p>
<p>By directing resources towards incubators and accelerators that focus on startups with diverse founding teams, policymakers can increase the likelihood of future exits and improve the expected returns on government-supported startup programs.</p><img src="https://counter.theconversation.com/content/216592/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ramy Elitzur does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
New research has found that technology startups with immigrant founders are more likely to pursue an exit strategy during the initial revenue stage — which is more profitable, but also more risky.
Ramy Elitzur, Professor, Rotman School of Management, University of Toronto
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/218092
2023-11-26T19:58:11Z
2023-11-26T19:58:11Z
Responsible ESG investing in the Global South requires overcoming the Global North’s saviour complex
<figure><img src="https://images.theconversation.com/files/561682/original/file-20231126-15-kmvdhe.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C2683%2C1510&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Socially responsible investing in the Global South should respond to local needs rather than investors' egos.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/responsible-esg-investing-in-the-global-south-requires-overcoming-the-global-norths-saviour-complex" width="100%" height="400"></iframe>
<p>ESG standards (Environment, Social and Governance) are metrics designed to guide responsible investing. The “S” in ESG has evolved into the financial innovation of social impact investing (SII), which promotes social benefits such as <a href="https://doi.org/10.1007/s10551-014-2327-0">environmental protection, gender equality and human development</a>, and also generates profits for beneficiaries and investors.</p>
<p>As rosy as this seems, how to get it done is far from settled. SII in the Global South is difficult, resulting in a paradox where — despite the best of altruistic intentions — the egos and <a href="https://global.oup.com/academic/product/the-white-mans-burden-9780199226115?lang=3n&cc=jo">saviour complexes</a> of investors benefit more than intended beneficiaries. Recent research offers some ways to mitigate this paradox.</p>
<h2>ESG culture wars</h2>
<p>ESG was co-opted into the culture wars when conservative politicians became concerned that <a href="https://hbr.org/2023/02/rescuing-esg-from-the-culture-wars">businesses had become too focused on progressive social issues</a>. </p>
<p>On one side, there are those who believe ESG <a href="https://www.irmagazine.com/esg/esg-transition-can-sustainability-still-save-world">promotes sustainability</a> and <a href="https://www.mckinsey.com/%7E/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx">value creation</a> for firms. On the other side of the debate, it is maintained that ESG will <a href="https://hbr.org/2022/08/esg-investing-isnt-designed-to-save-the-planet">not save the planet</a> and that it amounts to <a href="https://www.hachettebookgroup.com/titles/vivek-ramaswamy/woke-inc/9781546090786/">empty virtue signalling</a>.</p>
<p>The <a href="https://www.economist.com/the-economist-explains/2023/06/21/how-esg-became-part-of-americas-culture-wars">ESG culture war</a> exposes the paradox of <a href="https://dx.doi.org/10.2139/ssrn.1977714">ego versus altruism</a>.</p>
<p>SII promoters cast themselves as <a href="https://doi.org/10.1177/0308518X17738253">saviours with the moral vision to solve worldwide suffering</a>, but this does not always translate into promised results in the postcolonial Global South. </p>
<p>Ironically, SII investors often <a href="https://dx.doi.org/10.2139/ssrn.1977714">bask in the glory of a victory lap, whether they deliver social impact or not</a>. What is so difficult about the Global South that authentic, altruistic motivations can go so woefully wrong?</p>
<h2>Why the Global South is so challenging</h2>
<p>Even if ESG and SII can succeed within the Global North, it is different when investing from the Global North to the Global South. Given the sums involved, it is important to understand the Global South contexts. SII is worth <a href="https://thegiin.org/assets/2022-Market%20Sizing%20Report-Final.pdf">US$1 trillion with 92 per cent of the investors based in the Global North</a> and <a href="https://thegiin.org/assets/GIIN%20Annual%20Impact%20Investor%20Survey%202020.pdf">59 per cent of the investments made in the Global South</a>.</p>
<p>Doing business in the Global South involves having to account for cultural biases and historical context, for example, in the <a href="https://doi.org/10.1108/cpoib-03-2020-0016">postcolonial behaviours of former colonizers and their subjects</a>. Failing to do so fully results in <a href="https://doi.org/10.1007/s11575-011-0113-0">strategies based on imagined rather than actual contexts</a>, reflecting an incomplete understanding of how <a href="https://doi.org/10.1002/ijfe.2554">advanced standards are adopted in developing contexts</a>. We are often left with the ill-fitting propagation of <a href="https://doi.org/10.1108/cpoib-05-2015-0017">neoliberal assumptions on what success means</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/561406/original/file-20231123-15-lr10ai.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="a village market scene" src="https://images.theconversation.com/files/561406/original/file-20231123-15-lr10ai.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/561406/original/file-20231123-15-lr10ai.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/561406/original/file-20231123-15-lr10ai.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/561406/original/file-20231123-15-lr10ai.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/561406/original/file-20231123-15-lr10ai.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/561406/original/file-20231123-15-lr10ai.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/561406/original/file-20231123-15-lr10ai.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Conducting business in the Global South requires an understanding of cultural and historical contexts.</span>
<span class="attribution"><span class="source">(Max Brown/Unsplash)</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>It is important to get SII right in the Global South. We already know that decades of crusading development and aid programs under the banner of the “<a href="https://doi.org/10.1111/j.1468-2486.2007.00705.x">white man’s burden</a>” did not work. Handouts failed to alleviate long-term poverty. </p>
<p>Taking over from the failed development initiatives, what can be done to make SII better? Maybe we can start by straightening out the ego versus altruism paradox. </p>
<h2>Mitigating the ego versus altruism paradox</h2>
<p><a href="https://doi.org/10.1108/cpoib-05-2020-0036">My recent research on SII ventures in the Global South</a> recommends three solutions for mitigating the ego versus altruism paradox: </p>
<p>• Investment narratives should be more self-aware in balancing ego with altruism. Third-party scrutiny of results should ensure that marketing of SII does not overstate or misrepresent social impact. One’s pride in their efforts to alleviate social challenges should not eclipse the results delivered.</p>
<p>• Ensure that the money is going where you want it to. Ownership structures based on local and Indigenous sensibilities is more effective at getting investment into the right hands. The SII process usually follows the neoliberal, accounting-based conventions of Global North capital markets which continue a <a href="https://www.taylorfrancis.com/chapters/edit/10.4324/9781315142876-7/financialization-socio-technical-process-eve-chiapello">“process of colonisation and value capture”</a>. Alternatively, unique structures <a href="https://www.taylorfrancis.com/books/mono/10.4324/9781351276245/measuring-improving-social-impacts-marc-epstein-kristi-yuthas">aligning qualitative or quantitative measures to constructs</a> can be created based on active discussions with beneficiaries.</p>
<p>• Take postcolonial power imbalances into consideration. Making people less poor is not a win by itself, as they remain very poor. Financial metrics should be complemented with other indications of human dignity and flourishing. This requires SII investors to make the extra effort to build direct relationships with beneficiaries, and avoid outsourcing impact activities through local intermediaries who may be exerting power over the beneficiaries.</p>
<p>SII investors should reflect on and declare their invisible power and neoliberal privilege to create a space where issues of equality and power-sharing can be discussed with beneficiaries. Engage with beneficiaries not just as business partners, but as equal human beings to avoid an <a href="https://doi.org/10.1007/s10551-015-2737-7">inadvertent, but dehumanizing colonial gaze</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/561403/original/file-20231123-15-24qirl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="a digital image of a globe showing the African continent resting on a mossy surface" src="https://images.theconversation.com/files/561403/original/file-20231123-15-24qirl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/561403/original/file-20231123-15-24qirl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=415&fit=crop&dpr=1 600w, https://images.theconversation.com/files/561403/original/file-20231123-15-24qirl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=415&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/561403/original/file-20231123-15-24qirl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=415&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/561403/original/file-20231123-15-24qirl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=522&fit=crop&dpr=1 754w, https://images.theconversation.com/files/561403/original/file-20231123-15-24qirl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=522&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/561403/original/file-20231123-15-24qirl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=522&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">With a commitment to equitable collaboration and partnership, social impact investing can produce positive change.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<h2>Optimism for the way forward</h2>
<p>There continue to be real opportunities for SII directed to the Global South. It is still possible to contribute to the “<a href="https://foreignpolicy.com/2009/10/02/the-poor-mans-burden/">revolution from the bottom</a>” imagined over a decade ago. </p>
<p>Witnessed by <a href="https://theconversation.com/how-global-business-could-be-the-unexpected-cop26-solution-to-climate-change-172133">proposals during COP26</a>, business plays an important role in redressing imbalances between the Global North and Global South and finding whole-planet solutions for whole-planet problems, including climate change. </p>
<p>Rather than giving in to the cynicism around ESG, we can improve our toolkit. SII remains a well-intentioned and important initiative. We do not have many other options and time is of the essence.</p><img src="https://counter.theconversation.com/content/218092/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>F. Haider Alvi does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Ensuring that ego and prestige of the Global North does not get in the way of on-the-ground results in the Global South will be the key to effective social impact investing in the years to come.
F. Haider Alvi, Associate Professor of Innovation Finance, Faculty of Business, Athabasca University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/217145
2023-11-10T15:20:07Z
2023-11-10T15:20:07Z
Shareholder activists can inadvertently raise CEO pay – here’s how to help make pay rises more equal for all
<figure><img src="https://images.theconversation.com/files/558308/original/file-20231108-23-mh28g3.jpg?ixlib=rb-1.1.0&rect=0%2C14%2C9387%2C6207&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/business-candidate-imbalance-comparison-money-leverage-2036243690">Andrey_Popov/Shutterstock</a></span></figcaption></figure><p>Activist investors or shareholders can be a powerful force in the corporate world, capable of driving significant change within companies. Their influence can be a force for good. It can extend beyond financial decisions to advocate that a company makes important societal, ethical and, increasingly, <a href="https://www.npr.org/2023/04/09/1168446621/businesses-face-more-and-more-pressure-from-investors-to-act-on-climate-change">environmental changes</a>. </p>
<p>Recently, shareholder collaboration initiatives like <a href="https://sayonclimate.org/">Say on Climate</a> have led investors to influence companies’ environmental policies and practices. But investors are also speaking out on social issues such as <a href="https://www.unpri.org/research/why-and-how-investors-can-respond-to-income-inequality/3777.article#Public_policy_760481">income inequality</a>. </p>
<p>As rising CEO compensation contrasts with stagnant employee pay, the resulting CEO-to-worker pay disparities can fuel income inequality and cause employee unrest. In the US, for example, the United Auto Workers (UAW) union recently declared a strike against auto giants such as Ford and Stellantis, demanding a 40% employee pay rise after double-digit jumps in their <a href="https://www.bbc.co.uk/news/business-66847747">CEOs’ pay packets</a>.</p>
<p>Such large pay disparities can have negative consequences including lowering morale and productivity among employees, and eroding CEO accountability to shareholders. They can also affect a company’s reputation, influence customer loyalty and undermine shareholder confidence. This could impair a company’s overall performance and long-term sustainability.</p>
<p>Companies are required to show how much their managers get paid compared to their employees in their financial reports. In the <a href="https://www.sec.gov/news/press-release/2015-160">US</a>, for instance, financial regulator the Securities and Exchange Commission mandates the reporting of the CEO-to-worker pay ratio. In the <a href="https://www.gov.uk/government/news/new-executive-pay-transparency-measures-come-into-force">UK</a>, a similar rule has been introduced by the Department for Business, Energy and Industrial Strategy. </p>
<p>Disclosing the CEO-to-worker pay gap is seen by regulators as a way to reinforce corporate accountability. It gives more information and control to shareholders over the fairness of compensation practices. But it’s <a href="https://hbr.org/2017/02/why-we-need-to-stop-obsessing-over-ceo-pay-ratios">still not fully understood</a> how such disclosures actually affect CEO-to-worker pay disparities.</p>
<h2>How shareholder activism affects CEO pay</h2>
<p>We <a href="https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2866">recently investigated</a> how shareholders affect CEO-to-worker pay ratios and their influence on CEO compensation. We studied companies listed on the <a href="https://www.investopedia.com/terms/r/russell_3000.asp">Russell 3000 Index</a>, which tracks the largest 3,000 US companies by market capitalisation. We wanted to better understand how shareholders might influence pay disparities and also whether regulatory initiatives aimed at reducing them actually work.</p>
<p>As the pay gap between CEOs and workers gets larger, we found that shareholders are more likely to vote against the CEO’s pay package. This suggests that shareholders are paying more attention to CEO pay and are concerned about the negative effects that large pay disparities can have on employees. In theory, this heightened vigilance should deter executive excess.</p>
<p>However, we also found that when shareholders voice their concerns about pay disparities, CEO compensation can increase. Why? The votes of shareholders may prompt remuneration committees that decide what CEOs should get paid to revisit the CEO pay package. </p>
<p>But instead of decreasing CEO compensation, we found that remuneration committees are inclined to change how CEOs are paid to make it more closely linked to performance. This action, in turn, could result in increased CEO compensation in cases where the CEO performs well.</p>
<p>And so, the remuneration committee may use shareholder dissent votes to justify paying CEOs more. But this typically only happens if CEOs meet their performance targets. This delicate balance underscores the complexity of shareholder influence on CEO pay and raises questions about whether the new rules designed to make pay more equal actually work.</p>
<figure class="align-center ">
<img alt="Group of people in suits with raised hands, man in suit pointing to himself." src="https://images.theconversation.com/files/558301/original/file-20231108-21-626r1r.jpg?ixlib=rb-1.1.0&rect=0%2C11%2C7940%2C4773&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/558301/original/file-20231108-21-626r1r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=362&fit=crop&dpr=1 600w, https://images.theconversation.com/files/558301/original/file-20231108-21-626r1r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=362&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/558301/original/file-20231108-21-626r1r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=362&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/558301/original/file-20231108-21-626r1r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/558301/original/file-20231108-21-626r1r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/558301/original/file-20231108-21-626r1r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=454&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Sometimes the pay gap widens after shareholders highlight CEO-to-employee wage disparities.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/audience-raised-their-hands-ask-question-1998393134">Party people studio/Shutterstock</a></span>
</figcaption>
</figure>
<h2>What can be done about excessive CEO pay?</h2>
<p>Of course, governments and politicians have a role to play in reducing the CEO-to-worker pay ratios. They could <a href="https://www.bbc.com/worklife/article/20210610-the-push-to-penalise-big-corporations-with-huge-pay-gaps">impose penalties</a> on corporations with excessively large pay gaps. The city of Portland in Oregon already <a href="https://www.portland.gov/policies/licensing-and-income-taxes/fees/lic-502-pay-ratio-surtax">imposes such a tax</a>. </p>
<p>At a national level, US Senator Bernie Sanders has introduced the <a href="https://www.congress.gov/bill/117th-congress/senate-bill/794/text">Tax Excessive CEO Pay Act of 2021</a>. If passed, it would set higher tax rates for corporations with disproportionate pay ratios. Non-governmental organisations (NGOs) already report pay disparities, but they could also <a href="https://www.theguardian.com/global-development/poverty-matters/2012/mar/13/ngos-need-third-way-collaboration">push harder for change</a> by advocating for reforms and championing transparency.</p>
<p>You can also play a role. If you work, consider joining a union to fight for fairer wages and more transparent compensation practices. Employees can use unions to collectively voice concerns about pay disparity and ensure their interests are <a href="https://aflcio.org/paywatch/company-pay-ratios">adequately represented</a> in compensation discussions. Collective bargaining can exert significant pressure on corporations and help <a href="https://www.ilo.org/infostories/Stories/Labour-Relations/Can-Collective-Bargaining-Create-a-Fairer-Economy#right-to-be-heard/collective-bargaining-inequality">reduce income inequality</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/recent-pay-rises-suggest-that-collective-bargaining-may-be-on-the-way-back-199436">Recent pay rises suggest that collective bargaining may be on the way back</a>
</strong>
</em>
</p>
<hr>
<p>As a consumer, you could also vote with your feet. Use your <a href="https://www.ethicalconsumer.org/ethicalcampaigns/boycotts">purchasing power</a> to support companies with fairer compensation practices and shun those that perpetuate income inequality.</p>
<p>In the ongoing battle against income inequality, enhancing shareholder engagement to reduce CEO-to-worker pay disparities is essential. It is also important to consider the unintended consequences – the effect on employee morale and productivity, for example – that may result in increased CEO compensation. These actions will help shape a more equitable and responsible corporate landscape.</p><img src="https://counter.theconversation.com/content/217145/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Research shows that when shareholders complain about pay gaps between CEOs and their employees widening, it can cause even more disparity.
Etienne Develay, Lecturer in Sustainability Accounting and Finance, Nottingham Trent University
Stephanie Giamporcaro, Associate Professor, ESG and Sustainable Finance, Nottingham Trent University
Yan Wang, Associate Professor in Accounting and Finance, Nottingham Trent University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/216894
2023-11-05T23:10:02Z
2023-11-05T23:10:02Z
A new Silicon Valley manifesto reveals the bleak, dangerous philosophy driving the tech industry
<figure><img src="https://images.theconversation.com/files/557386/original/file-20231103-27-6s620e.jpg?ixlib=rb-1.1.0&rect=110%2C16%2C5402%2C3743&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://unsplash.com/photos/worms-eye-view-of-buildings-l5Tzv1alcps">Alex Wong/Unsplash</a></span></figcaption></figure><p>In 1993, Marc Andreessen was an undergraduate at the University of Illinois Urbana-Champaign, where he also worked at the US-government funded <a href="https://www.ncsa.illinois.edu/">National Center for Supercomputing Applications</a>. With a colleague, the young software engineer authored the <a href="https://www.ncsa.illinois.edu/research/project-highlights/ncsa-mosaic/">Mosaic web browser</a>, which set the standard for cruising the information superhighway in the 1990s. </p>
<p>Andreessen went on to cofound Netscape Communications, making a fortune in 1999 when the company was <a href="https://web.archive.org/web/20171107021707/http://news.morningstar.com/articlenet/article.aspx?id=741">acquired by AOL for US$4.3 billion</a>. </p>
<p>Since then, through his venture capital firm <a href="https://a16z.com/about/">Andreessen Horowitz</a>, the outspoken billionaire has become one of the most influential wallets in Silicon Valley. His investments – in companies including <a href="https://a16z.com/portfolio/">Facebook, Foursquare, Github, Lyft, Oculus and Twitter</a> – have definitively shaped tech over the past 15 years. (He once <a href="https://www.newyorker.com/magazine/2015/05/18/tomorrows-advance-man">described his approach</a> as “funding imperial, will-to-power people”.)</p>
<p>Because of all this, it’s worth paying attention to Andreessen’s recent “<a href="https://a16z.com/the-techno-optimist-manifesto/">techno-optimist manifesto</a>”. Opening with the claim that “we are being lied to”, the lengthy blog post takes in a section on “becoming technological supermen”, musings on the meaning of life, and a long list of enemies. It offers a revealing glimpse into the philosophy of Silicon Valley entrepreneurs, where more technology is the only way forward – and a warning about the kind of world they’re trying to build. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1713930459779129358"}"></div></p>
<h2>Tech utopia gone sour</h2>
<p>Since Silicon Valley’s birth in the 1960s, its promoters have held utopian ideas about technology, from the “<a href="https://press.uchicago.edu/Misc/Chicago/817415_chap4.html">new communalism</a>” of <a href="https://www.theguardian.com/books/2013/may/05/stewart-brand-whole-earth-catalog">Stewart Brand</a> to the <a href="https://techliberation.com/2009/08/12/cyber-libertarianism-the-case-for-real-internet-freedom/">cyber-libertarianism</a> of <a href="https://kk.org/">Kevin Kelly</a> and <a href="https://www.eff.org/cyberspace-independence">John Perry Barlow</a>. In the 1990s, supporters of this “<a href="https://www.metamute.org/editorial/articles/californian-ideology">Californian ideology</a>” saw the rise of the Internet as proof of the growing importance of technology (and the diminishing power of governments). </p>
<p>Andreessen’s essay shows what these ideals have become in 2023. The political and economic worldview beneath its ideas about technology is most visible towards the end of the manifesto, in a list of “enemies”. </p>
<p>Remarkably, these include “sustainability”, “trust and safety”, “tech ethics” and “social responsibility”. According to Andreessen, who describes himself as an “<a href="https://www.smh.com.au/technology/we-are-conquerors-why-silicon-valley-s-latest-fad-is-its-deadliest-20231027-p5efho.html">accelerationist</a>”, such ideas are holding back the advance of technology and therefore human progress.</p>
<p>Although the manifesto purports to believe in democracy, what Andreessen really argues for is a kind of technocracy based on “economic strength (financial power), cultural strength (soft power), and military strength”.</p>
<p>This is a vision of dominance. By proposing to abolish concern with ethics and the environment, for example, individuals like Andreessen can have free rein to develop, promote and profit from their inventions (including those <a href="https://www.washingtonpost.com/politics/2019/07/17/silicon-valley-portrays-itself-hotbed-free-market-enterprise-new-book-explains-how-government-helped-build-it/">funded by taxpayers</a>) without interference.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/557387/original/file-20231103-29-ca7aiz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A very large circular building with greenery around it viewed directly from above" src="https://images.theconversation.com/files/557387/original/file-20231103-29-ca7aiz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/557387/original/file-20231103-29-ca7aiz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/557387/original/file-20231103-29-ca7aiz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/557387/original/file-20231103-29-ca7aiz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/557387/original/file-20231103-29-ca7aiz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/557387/original/file-20231103-29-ca7aiz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/557387/original/file-20231103-29-ca7aiz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Bird’s-eye view of Apple Park in California’s Silicon Valley.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/silicon-valley-looking-down-aerial-view-2280061483">Faysal06/Shutterstock</a></span>
</figcaption>
</figure>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/silicon-valley-investors-want-to-create-a-new-city-is-california-forever-a-utopian-dream-or-just-smart-business-213062">Silicon Valley investors want to create a new city – is 'California Forever’ a utopian dream or just smart business?</a>
</strong>
</em>
</p>
<hr>
<h2>A colonial vision</h2>
<p>We don’t have to look too deeply into history to find parallels to this kind of worldview. Simply put, it is the worldview of colonialism: it sees both nature and other people as domains to be conquered and exploited for “growth”. </p>
<p>Andreessen describes his mission in explicitly colonial terms: “mapping uncharted territory, conquering dragons, and bringing home the spoils for our community”. This is a worldview in which territories must be constantly expanded (“our descendants will live in the stars”) in a perpetual war for supremacy.</p>
<p>Technology has played an instrumental role in colonial conquest. Anthropologist Jared Diamond’s famous “<a href="http://www.jareddiamond.org/Jared_Diamond/Guns,_Germs,_and_Steel.html">guns, germs, and steel</a>” were all technologies vital to the European conquest of the Americas. We might add to this list ships (including slave ships), navigation instruments, telegraphs, and so on. </p>
<p>Even the technologies of the industrial revolution – so important to the narrative of technological progress imagined by Andreessen and his ilk – were enabled by the availability and exploitation of <a href="https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1752-5209.2009.00032.x">cheap labour and markets in the Global South</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/colonialism-was-a-disaster-and-the-facts-prove-it-84496">Colonialism was a disaster and the facts prove it</a>
</strong>
</em>
</p>
<hr>
<p>The mission of techno-optimists appears to be to pick up where the European and American empires of the 19th century left off, using technological, political and economic power to bully, coerce and bludgeon other societies into acquiescence.</p>
<p>For Andreessen, all this is supported, like colonialism, by a kind of <a href="https://www.princeton.edu/%7Etleonard/papers/myth.pdf">social Darwinism</a>. He sees an evolutionary war in which “smart people and smart societies outperform less smart ones on virtually every metric we can measure”. </p>
<p>Andreessen writes “technology doesn’t care about your ethnicity, race, religion, national origin, gender, sexuality, political views, height, weight, hair or lack thereof”. However, his talk of “America and her allies” and “our civilisation” suggests Andreessen himself cares quite a bit about these things. The West should, he implies, embrace its rightful place as the world’s technological (and civilisational) leader. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/557388/original/file-20231103-15-2sq5e0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Illustration of a fictional Mars colony of round domes on a red planet with mountains in the background" src="https://images.theconversation.com/files/557388/original/file-20231103-15-2sq5e0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/557388/original/file-20231103-15-2sq5e0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=320&fit=crop&dpr=1 600w, https://images.theconversation.com/files/557388/original/file-20231103-15-2sq5e0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=320&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/557388/original/file-20231103-15-2sq5e0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=320&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/557388/original/file-20231103-15-2sq5e0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=402&fit=crop&dpr=1 754w, https://images.theconversation.com/files/557388/original/file-20231103-15-2sq5e0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=402&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/557388/original/file-20231103-15-2sq5e0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=402&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Imaginary future colonies of people ‘living in the stars’ are reminiscent of a worldview where territories must constantly be expanded.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/colony-on-planet-mars-habitats-martian-2215202557">Dotted Yeti/Shutterstock</a></span>
</figcaption>
</figure>
<h2>A warning</h2>
<p>All this reveals some of what Silicon Valley entrepreneurs really think of the rest of the world, and of us (non-techno-optimists). </p>
<p>We should take it as a warning about the kind of world that Silicon Valley technologists want. It will be a world built with technology, yes, but also a world that values power, force and wealth over all else.</p>
<p>Andreessen is right about one thing: we do need technology. We are unlikely to solve many of the problems facing our planet without it. </p>
<p>But the stripped-down, raw, blunt version of technology – a technology without ethics, without values, and without a conscience – is not the only way. Instead, we need to support technological innovation and at the same time support democratic participation, pluralism, ethics and our natural environment.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/is-it-wrong-to-steal-from-large-corporations-a-philosopher-debates-the-ethics-182193">Is it wrong to steal from large corporations? A philosopher debates the ethics</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/216894/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hallam Stevens has previously received funding from the Ministry for Education (Singapore) and the National Heritage Board (Singapore). </span></em></p>
Venture capitalist billionaire Marc Andreessen dreams of ‘becoming technological supermen’ in a ‘techno-optimist’ manifesto built on a dark colonial vision.
Hallam Stevens, Professor of Interdisciplinary Studies, James Cook University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/211485
2023-08-17T18:00:56Z
2023-08-17T18:00:56Z
A carbon tax on investment income could be more fair and make it less profitable to pollute – a new analysis shows why
<figure><img src="https://images.theconversation.com/files/543299/original/file-20230817-15-9p8mxz.jpg?ixlib=rb-1.1.0&rect=1575%2C0%2C2161%2C1402&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Investor pressure could drive down greenhouse gas emissions.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/businessman-partnership-making-handshake-agreement-royalty-free-image/1548518397">Tippapatt/iStock/Getty Images Plus</a></span></figcaption></figure><p>About 10 years ago, a very thick book written by a French economist became a surprising bestseller. It was called <a href="https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Century">“Capital in the 21st Century</a>.” In it, Thomas Piketty traces the history of income and wealth inequality over the past couple of hundred years.</p>
<p>The book’s insights struck a chord with people who felt a growing sense of economic inequality but didn’t have the data to back it up. I was one of them. It made me wonder, how much carbon pollution is being generated to create wealth for a small group of extremely rich households? Two kids, 10 years and a Ph.D. later, I finally have some answers.</p>
<p>In a <a href="https://doi.org/10.1371/journal.pclm.0000190">new study</a>, colleagues and I investigated U.S. households’ personal responsibility for greenhouse gas emissions from 1990 to 2019. We previously studied emissions tied to consumption – <a href="https://www.sciencedirect.com/science/article/abs/pii/S0921800922003597">the stuff people buy</a>. This time, we looked at emissions used in generating people’s incomes, including investment income.</p>
<p>If you’ve ever thought about how oil company CEOs and shareholders get rich at the expense of the climate, then you’ve been thinking in an “income-responsibility” way.</p>
<p>While it may seem intuitive that those getting rich from fossil fuels bear responsibility for the emissions, very little research has been done to quantify this. Recent efforts have started to look at emissions related to household <a href="https://doi.org/10.1111/jiec.13383">wages in France</a>, <a href="https://www.nature.com/articles/s41893-022-00955-z">global consumption and investments of different income groups</a> and <a href="https://policy-practice.oxfam.org/resources/carbon-billionaires-the-investment-emissions-of-the-worlds-richest-people-621446/">billionaires’ investments</a>. But no one has analyzed households across a whole country based on the emissions used to generate their full range of income, including wages, investments and retirement income, until now.</p>
<p>We linked a <a href="https://worldmrio.com/">global data set</a> of financial transactions and emissions <a href="https://cps.ipums.org/cps/">to microdata</a> from the U.S. Census Bureau and Bureau of Labor Statistics’ monthly labor force survey, which includes respondents’ job, demographics and income from 35 categories, including wages and investments. People’s wages we connected to the emission intensity of the industries that employ them, and we based the emissions intensity of investment income on a portfolio that mirrors the overall economy.</p>
<p>The results of our analysis were eye-opening, and they could have profound implications for producing more effective and fair climate policies in the future.</p>
<p><iframe id="I5sZ8" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/I5sZ8/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>A view from the top 1%</h2>
<p>Both our consumption- and income-based approaches reveal that the highest-earning households are responsible for much more than an equitable share of carbon emissions. What’s more surprising is how different the level of responsibility is depending on whether you look at consumption or income.</p>
<p>In the income-based approach, the share of national emissions coming from the top 1% of households is 15% to 17% of national emissions. That’s about 2.5 times higher than their consumer-related emissions, which is about 6%.</p>
<p>In the bottom 50% of households, however, the trend is the exact opposite: Their share of consumption-based national emissions is 31%, about two times larger than their income-based emissions of 14%.</p>
<p>Why is that?</p>
<p>A couple things are going on here. First, the lowest earning 50% of U.S. households spend all that they earn, and often more via social assistance or debt. The top income groups, on the other hand, are able to save and reinvest more of their income. </p>
<p>Second, while high-income households have very high overall spending and emissions, the carbon intensity – tons of carbon dioxide emitted per dollar – of their purchases is actually lower than that of low-income households. This is because low-income households spend a large share of their income on carbon-intensive basic necessities, like home heating and transportation. High-income households spend more of their income on less-carbon-intensive services, like financial services or higher education.</p>
<p><iframe id="OS218" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/OS218/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p><iframe id="20VBh" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/20VBh/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Implications for a carbon tax</h2>
<p>Our detailed comparison could help change how governments think about carbon taxes.</p>
<p>Typically, a carbon tax is applied to fossil fuels when they enter the economy. Coal, oil and gas producers then pass this tax on to consumers. <a href="https://openknowledge.worldbank.org/entities/publication/58f2a409-9bb7-4ee6-899d-be47835c838f">More than two dozen countries</a> have a carbon tax, and U.S. policymakers have <a href="https://www.nytimes.com/2021/09/24/us/politics/carbon-tax-democrats.html">proposed adding one in recent years</a>. The idea is that raising the price of these products by taxing them will get consumers to shift to cheaper and presumably less carbon-intensive alternatives.</p>
<p>But our studies show that this kind of tax would disproportionately fall on poorer Americans. Even if a <a href="https://www.sciencedirect.com/science/article/pii/S092180091731580X?casa_token=jTRcE1-pQhoAAAAA:p1QyeAg1SrXIVSJUre9vaNV2DCbVPp7RlC2UGWQN59aQwCRXq-eieRkX5alAlzyvPL7xRBRB7A">universal dividend check</a> was adopted, consumer-facing carbon taxes have no impact on saved income. Generating that income likely contributed to greenhouse gas emissions, but as long as the money is used to buy stocks rather than consumables, it is excluded from carbon taxes. So, this kind of carbon tax disproportionately affects people whose income goes primarily toward consumption.</p>
<h2>A profit-focused carbon tax</h2>
<p>What if, instead of focusing on consumption, carbon taxes addressed greenhouse gases as an outcome of profit generation?</p>
<p>The vast majority of American corporations operate under the principle of “<a href="https://corpgov.law.harvard.edu/2019/08/22/so-long-to-shareholder-primacy/">shareholder primacy</a>,” where they see a fiduciary duty to maximize profit for <a href="https://corpgov.law.harvard.edu/2019/02/11/towards-accountable-capitalism-remaking-corporate-law-through-stakeholder-governance/">their investors</a>. Products – and the greenhouse gases used to make them – are not created for the benefit of the consumer, but because the sale of those products will benefit the shareholders.</p>
<p>If carbon taxes were focused on shareholder income linked to greenhouse gas emissions rather than consumption, they could target those receiving the most economic benefits resulting from these emissions.</p>
<p><iframe id="jRvUY" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/jRvUY/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>The impact</h2>
<p>A couple of interesting things might result, particularly if the tax was set based on the carbon intensity of the company.</p>
<p>Corporate executives and boards would have incentive to reduce emissions to lower taxes for shareholders. Shareholders would have incentive, out of self-interest, to pressure companies to do so. </p>
<p>Investors would also have incentive to shift their portfolios to less-polluting companies to avoid the tax. Pension and private wealth fund managers would have incentive to divest from carbon-polluting investments out of a fiduciary duty to their clients. To keep the tax focused on large shareholders, I could see retirement accounts being excluded from the tax, or a minimum asset threshold before the tax applies.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/CgA0UgSEDjI?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Jared Starr explains the new study’s findings and the implications.</span></figcaption>
</figure>
<p>Revenue generated from the carbon tax could help fund <a href="https://www.unep.org/resources/adaptation-gap-report-2022?gclid=CjwKCAjw5_GmBhBIEiwA5QSMxFUxJNkRuBfUZTRp8JK00-u1lzHYGnuW9xeCHlS-sr6d5-FknWIScRoCawcQAvD_BwE">adaptation</a> and the transition to clean energy.</p>
<p>Instead of putting the responsibility for cutting emissions on consumers, maybe policies should more directly tie that responsibility to corporate executives, board members and investors who have the most knowledge and power over their industries. Based on our analysis of the consumption and income benefits produced by greenhouse gas emissions, I believe a shareholder-based carbon tax is worth exploring.</p><img src="https://counter.theconversation.com/content/211485/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jared Starr does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Taxing consumption that contributes to climate change hits the poor the hardest, while overlooking the huge profits tied to greenhouse gas emissions.
Jared Starr, Sustainability Scientist, UMass Amherst
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/206922
2023-06-08T12:31:17Z
2023-06-08T12:31:17Z
Republicans’ anti-ESG attack may be silencing insurers, but it isn’t changing their pro-climate business decisions
<figure><img src="https://images.theconversation.com/files/530508/original/file-20230607-19-fldsij.jpg?ixlib=rb-1.1.0&rect=12%2C6%2C3995%2C2661&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Insurers are facing rising costs from effects of climate change.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/aerial-view-of-new-york-city-skyline-at-night-royalty-free-image/1368629737">© Marco Bottigelli/Moments via Getty Imagse</a></span></figcaption></figure><p>Over recent months there has been an orchestrated pushback against investors and insurers who integrate the risks of climate change into their business models. That pushback – emanating from Republican-led states – is having an impact on how companies speak publicly. But whether it will affect their efforts to respond to climate change is less clear.</p>
<p>The latest targets have been global insurance companies, and their responses offer some insight. </p>
<p>Under pressure, several major insurers, including <a href="https://www.reinsurancene.ws/axa-and-allianz-have-announced-their-exit-from-the-nzia/">AXA, Allianz</a>, <a href="https://www.reinsurancene.ws/lloyds-becomes-the-10th-major-player-to-mark-its-exit-from-nzia/">Lloyd’s</a> and <a href="https://www.reinsurancene.ws/swiss-re-joins-other-major-re-insurers-in-leaving-net-zero-insurance-alliance/">Swiss Re</a>, have pulled out of a United Nations-organized alliance committed to a global goal of net-zero emissions by mid-century. There’s a word for companies going quiet in the face of orchestrated attacks: “<a href="https://twitter.com/Ros_Rodriguez_/status/1663806010538983426">greenhushing</a>.”</p>
<p>But while the insurers’ departures from the alliance might look like a victory for politicians and political donors who want to delay action on climate change, the companies say leaving doesn’t change their business decisions.</p>
<p>I have worked with businesses globally on sustainable development for <a href="https://fletcher.tufts.edu/people/staff/rachel-kyte">over 20 years</a> and follow both what they say and what they do. The insurance industry has obvious reasons to care about climate change and efforts to slow it, starting with the fact that disasters cost them money and the risks are rising.</p>
<h2>The assault on protecting the climate</h2>
<p>Republicans began <a href="https://www.reuters.com/world/us/industry-targets-us-republicans-anti-esg-efforts-2023-04-22/">targeting ESG investors</a> – those who incorporate environmental, social and governance performance standards in making investment decisions – a few years ago as <a href="https://www.bloomberg.com/company/press/esg-may-surpass-41-trillion-assets-in-2022-but-not-without-challenges-finds-bloomberg-intelligence/">ESG-managed assets grew</a> into the tens of trillions of dollars. Texas led the way in 2021 <a href="https://www.texastribune.org/2022/08/24/texas-boycott-companies-fossil-fuels/">with a law</a> prohibiting state entities from investing with firms that cut their investments in fossil fuel industries. </p>
<p>In 2022, Republican state attorneys general began to go after the <a href="https://www.gfanzero.com/">Glasgow Financial Alliance for Net Zero</a>, or GFANZ, an umbrella body for insurers, banks, asset owners and asset managers. The influential group had a starting membership of over 400 financial institutions representing over US$130 trillion of assets under management. </p>
<p>One line of attack accuses GFANZ members of <a href="https://judiciary.house.gov/media/press-releases/judiciary-republicans-woke-companies-pursuing-esg-policies-may-violate">breaking antitrust rules</a>, claiming that when companies participate in groups committed to lowering greenhouse gas emissions, competitors are cooperating in ways that affect prices in violation of U.S. law.</p>
<p><iframe id="A9b1v" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/A9b1v/6/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>“Net-zero” is shorthand for taking steps to limit global warming to 1.5 degrees Celsius, an international goal to prevent increasingly severe climate damage that is <a href="https://theconversation.com/the-water-cycle-is-intensifying-as-the-climate-warms-ipcc-report-warns-that-means-more-intense-storms-and-flooding-165590">fueling severe storms</a>, <a href="https://www.drought.gov/news/study-shows-climate-change-main-driver-increasing-fire-weather-western-us">heat and wildfires</a>. Clubs have formed across the financial value chain to find solutions. Among them is the U.N.-convened <a href="https://www.unepfi.org/net-zero-insurance/">Net-Zero Insurance Alliance (NZIA)</a>, a group of some of the world’s leading insurers and reinsurers. Members commit to transitioning their insurance and reinsurance underwriting portfolios to net-zero greenhouse gas emissions by 2050.</p>
<p>In a letter on May 15, 2023, <a href="https://www.propertyinsurancecoveragelaw.com/files/2023/05/2023-05-15-NZIA-Letter.pdf">23 Republican attorneys general</a> took their criticism further and attempted to blame the insurance alliance – rather than the rising cost of disasters like wildfires and hurricanes – for economic ills from rising insurance premiums, fuel prices and inflation.</p>
<p>Facing the threat of lawsuits, whether viable or not, and the potential for reputational harm, several mainly European-based insurers and reinsurers with substantial investments in the U.S. left the group.</p>
<p>The attacks have dampened the public discussion on evolving practices in net-zero pathways and ESG investing, even for those who stay. Fewer firms are keen to draw attention to their progress because, in a global market, the backlash from the U.S. threatens any of them. </p>
<p>GFANZ has stated that the “political attacks are now <a href="https://www.reuters.com/sustainability/political-attacks-are-damaging-insurers-climate-efforts-gfanz-2023-05-26/">interfering with insurers’ independent efforts</a> to price climate risk, which will harm policyholders, main street investors and local economies.”</p>
<h2>Silencing climate voices, but not actions</h2>
<p>However, while the insurers might not be speaking out, their assessment of climate trends hasn’t changed, nor has the impact of those trends on their businesses.</p>
<p>When Lloyd’s pulled out of the alliance in late May 2023, the London-based insurance and reinsurance company made clear that it remains “committed to delivering our sustainability strategy including supporting the global economy’s transition.” It said it <a href="https://www.lloyds.com/news-and-insights/news/lloyds-has-decided-to-withdraw-from-the-nzia">continues to</a> support the U.N.’s <a href="https://www.unepfi.org/insurance/insurance/">Principles for Sustainable Insurance</a> and <a href="https://sdgs.un.org/goals">Sustainable Development Goals</a>.</p>
<p>Swiss Re also stressed that it has kept its sustainability strategy the same and that its pullout doesn’t reflect a lesser commitment to climate policies. It remains a member of the <a href="https://www.unepfi.org/net-zero-alliance/">Net Zero Asset Owner Alliance</a>.</p>
<p>Swiss Re Group’s data clearly shows the reason why. In 2021, some <a href="https://www.swissre.com/institute/research/sigma-research/sigma-2022-01.html">$270 billion in losses</a> were attributable to natural catastrophes worldwide. The $111 billion of those losses that were insured represented the fourth highest payout since Swiss Re Institute, the insurer’s research arm, began keeping records in 1970.</p>
<p>The World Meteorological Organization reports that weather and climate disasters such as floods, heat waves and forest fires have <a href="https://news.un.org/en/story/2021/09/1098662">increased fivefold in the past 50 years</a>. These disasters have caused environmental harm, the loss of <a href="https://library.wmo.int/index.php?lvl=notice_display&id=21930">more than 2 million lives</a> and more than $3.64 trillion in economic damage.</p>
<p>Not talking about these risks doesn’t help homeowners and businesses that rely on insurance, and doing nothing to stop climate change <a href="https://www.unep.org/resources/emissions-gap-report-2022">worsens the threats</a>. Some consultants and auditors have started sounding the alarm that increasing natural catastrophes could <a href="https://www.pwc.com/us/en/industries/financial-services/library/insurance-industry-trends.html">collapse the insurance market model</a> we know today.</p>
<h2>An economy-wide problem</h2>
<p>The insurance industry plays a crucial role in the overall functioning of economies. It promotes resilience by providing a safety net against unexpected events, helping individuals and businesses to recover more quickly. It facilitates commerce and trade; for instance, marine insurance covers the risks of shipping goods, ensuring that trade flows smoothly. It also encourages risk-management practices.</p>
<p>Without insurance, disaster costs would fall heavily on individuals and businesses, hindering economic growth and stability.</p>
<figure class="align-center ">
<img alt="A man with a tape measure on his belt and camera looks at debris piles left between buildings after Hurricane Michael hit Florida. The siding of the building is also ripped off." src="https://images.theconversation.com/files/530512/original/file-20230607-28-g6nfvo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/530512/original/file-20230607-28-g6nfvo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/530512/original/file-20230607-28-g6nfvo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/530512/original/file-20230607-28-g6nfvo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/530512/original/file-20230607-28-g6nfvo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/530512/original/file-20230607-28-g6nfvo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/530512/original/file-20230607-28-g6nfvo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">An insurance adjuster reviews a property in Mexico Beach, Fla., after Hurricane Michael in 2018. The storm caused about $25 billion in damage.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/an-insurance-adjuster-looks-over-damage-to-the-home-of-news-photo/1052458328?adppopup=true">Scott Olson/Getty Images</a></span>
</figcaption>
</figure>
<p>Already, as climate risks increase, some regions are becoming increasingly uninsurable. State Farm and Allstate cited wildfire risks when they recently announced they would <a href="https://theconversation.com/why-insurance-companies-are-pulling-out-of-california-and-florida-and-ways-to-fix-the-problem-207172">stop selling new home insurance policies in California</a>, putting pressure on outdated regulation of the insurance industry.</p>
<h2>Looking ahead</h2>
<p>As the United States heads into its long election season, the ESG backlash risks pushing more companies’ transition pathways into the quiet zone and slowing much-needed regulation.</p>
<p>The world is at an inflection point in its climate transition efforts. Capital is <a href="https://about.bnef.com/blog/global-low-carbon-energy-technology-investment-surges-past-1-trillion-for-the-first-time/">shifting to low-emissions technologies</a> and, in some cases, <a href="https://www.washingtonpost.com/business/energy/2023/05/17/energy-transition-who-wants-to-become-a-heat-pump-billionaire/393c2a9e-f46a-11ed-918d-012572d64930_story.html">reshaping industries</a> faster than imagined. </p>
<p>Insurers have the ability to accelerate the transition through their underwriting practices and promoting risk mitigation through their substantial investment portfolios. They also recognize that, to protect their balance sheets and for the sake of the planet, society needs to pick up the pace in the transition to net zero.</p><img src="https://counter.theconversation.com/content/206922/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rachel Kyte does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
A ‘greenhushing’ campaign is targeting insurers, who have the power to accelerate the transition to cleaner energy in how they write policies and invest.
Rachel Kyte, Dean of the Fletcher School, Tufts University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/203737
2023-05-22T11:34:42Z
2023-05-22T11:34:42Z
Catch-22: Canada’s attempts to phase out fossil fuel might result in it paying the polluters
<p><a href="https://www.cbc.ca/news/canada/montreal/gnl-quebec-arbitration-1.6786674">US$20 billion</a>: That’s how much American investors think Canadian taxpayers should fork over to compensate them for their failed bid to develop a liquefied natural gas (LNG) facility in Québec.</p>
<p>That’s almost <a href="https://montreal.ctvnews.ca/quebec-budget-2023-2024-here-are-the-highlights-1.6322761">a fifth of the province’s total budget</a> for this year.</p>
<p>Ruby River Capital LLC, the U.S.-based owner of GNL Québec Inc., filed a <a href="http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C11097/DS18460_En.pdf">claim</a> against Canada under the <a href="https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/nafta-alena/fta-ale/index.aspx?lang=eng">North American Free Trade Agreement (NAFTA)</a> after its <a href="https://iaac-aeic.gc.ca/050/evaluations/proj/80115">Énergie Saguenay</a> project failed to pass a federal environmental impact assessment. </p>
<p>The proposed LNG terminal had already been <a href="https://www.cbc.ca/news/canada/montreal/lng-quebec-saguenay-1.6111248">rejected by the Québec government</a> over concerns that it would increase greenhouse gas emissions and negatively impact First Nations and marine mammals. </p>
<p>Canada faces a no-win situation — a catch-22. If the government does not rapidly phase out fossil fuels, it will fail to meet its commitments under the <a href="https://unfccc.int/process-and-meetings/the-paris-agreement">Paris Agreement</a> to address the climate crisis. But when it takes steps to do so, foreign investors invoke <a href="https://investmentpolicy.unctad.org/international-investment-agreements">international trade and investment agreements</a> like NAFTA and threaten to drain public coffers.</p>
<h2>Paying the polluters</h2>
<p>Unlike environmental treaties, trade and investment agreements have teeth. They are enforceable through a system known as <a href="https://ccsi.columbia.edu/content/primer-international-investment-treaties-and-investor-state-dispute-settlement">Investor-State Dispute Settlement</a> (ISDS) that allows foreign investors to bypass local courts and bring claims for monetary compensation to a panel of three arbitrators. More than <a href="https://investmentpolicy.unctad.org/investment-dispute-settlement">1,200 ISDS</a> cases have been launched against governments around the world in the last 25 years.</p>
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<p>Between 1996 and 2018, <a href="https://policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2021/04/The_Rise_and_Demise_of_NAFTA_Chapter_11.pdf">Canada was sued more than 40 times</a> by American investors through the investment chapter in NAFTA. To date, Canada has lost or settled (with compensation) 10 claims. Canadian governments have paid out more than $263 million in damages and settlements. </p>
<p>When NAFTA was replaced in 2018 with the <a href="https://can-mex-usa-sec.org/secretariat/agreement-accord-acuerdo/index.aspx?lang=eng">U.S.-Mexico-Canada Agreement (USMCA)</a>, it did not include an ISDS mechanism between Canada and the U.S. Chrystia Freeland, the then-deputy prime minister of Canada, noted at the time that the removal of ISDS <a href="https://pm.gc.ca/en/news/speeches/2018/10/01/prime-minister-trudeau-and-minister-freeland-speaking-notes-united-states">“strengthened our government’s right to regulate in the public interest, to protect public health and the environment.”</a></p>
<p>Ruby River was only able to launch its case because USMCA allowed firms that had made investments before NAFTA’s termination — on July 1, 2020, — to continue to bring ISDS claims for three years — until June 30, 2023. </p>
<p>Importantly, Ruby River <a href="https://www.cbc.ca/news/canada/montreal/gnl-quebec-arbitration-1.6786674">spent only about CDN$165 million</a> on the Énergie Saguenay project proposal. However, the firm is permitted within the ISDS system to seek “lost future profits” based on speculation about the performance of notoriously volatile oil and gas markets.</p>
<h2>Risks to climate policy</h2>
<p>Québec is a member of the global <a href="https://beyondoilandgasalliance.org/">Beyond Oil and Gas Alliance</a> and is the <a href="https://www.theenergymix.com/2022/04/13/quebec-becomes-worlds-first-jurisdiction-to-ban-oil-and-gas-exploration/">first jurisdiction in the world</a> to ban all oil and gas production. The province is being <a href="https://financialpost.com/commodities/energy/oil-gas/utica-resources-files-lawsuit-seeking-billions-of-dollars-if-quebec-implements-bill-21">sued</a> over this ban by several fossil fuel firms — seeking more compensation than was <a href="https://montrealgazette.com/news/local-news/quebec-votes-100-million-in-compensation-to-oil-and-gas-companies">offered</a> — in Québec’s Superior Court. </p>
<p>Had these companies been foreign, and thereby qualified for the protection of an investment treaty, they likely would have chosen ISDS instead. This is because ISDS generally provides <a href="https://www.cigionline.org/articles/it-time-redesign-or-terminate-investor-state-arbitration/">broader scope for claims — and larger awards — than domestic courts</a>.</p>
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<figcaption><span class="caption">Companies are suing governments for shifting away from fossil fuels. Allowing these companies to demand billions in compensation could dampen necessary policy action.</span></figcaption>
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<p>Other jurisdictions need to follow Québec’s lead. The global carbon budget has no room for new coal, oil or gas developments. Construction of new fossil fuel infrastructure also needs to be limited, as it would lock in continued extraction long into the future.</p>
<p>Despite clear messages to this effect from the <a href="https://www.theguardian.com/environment/2022/apr/04/its-over-for-fossil-fuels-ipcc-spells-out-whats-needed-to-avert-climate-disaster">Intergovernmental Panel on Climate Change</a> and the <a href="https://www.iea.org/reports/net-zero-by-2050">International Energy Agency</a>, investors continue to propose new fossil fuel projects. They do so in full knowledge that governments need to act to curb emissions in line with their international commitments and that future climate policies may negatively impact their investments. </p>
<p>Allowing these companies to demand billions in compensation creates <a href="https://www.iisd.org/itn/en/2011/04/07/the-problem-of-moral-hazard/">moral hazard</a> and could dampen necessary policy action.</p>
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Read more:
<a href="https://theconversation.com/a-secretive-legal-system-lets-fossil-fuel-investors-sue-countries-over-policies-to-keep-oil-and-gas-in-the-ground-podcast-191804">A secretive legal system lets fossil fuel investors sue countries over policies to keep oil and gas in the ground – podcast</a>
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<p>Governments are increasingly aware of this risk and many are taking action. The European Union is seeking to withdraw from the <a href="https://www.reuters.com/world/europe/brussels-says-eu-exit-energy-charter-treaty-unavoidable-2023-02-07/">Energy Charter Treaty</a>, the largest investment treaty in the world, because it “<a href="https://www.europarl.europa.eu/doceo/document/TA-9-2022-0421_EN.html">is not aligned with the Paris Agreement, the EU Climate Law or the objectives of the European Green Deal</a>.” </p>
<p>The Biden administration is committed to not signing up to new agreements with ISDS and a <a href="https://www.reuters.com/business/33-democrats-urge-ban-investor-state-dispute-provisions-all-us-trade-deals-2023-05-03/">number of Democrats</a> are calling for the removal of the mechanism from existing deals. Other countries such as <a href="https://www.afr.com/politics/federal/aussie-companies-to-lose-right-to-sue-under-free-trade-pacts-20221113-p5bxs1">Australia</a> and <a href="https://www.beehive.govt.nz/release/new-zealand-signs-side-letters-curbing-investor-state-dispute-settlement">New Zealand</a> have worked to exclude ISDS from some of their trade agreements.</p>
<h2>Future threats</h2>
<p>Canada will soon escape from the legacy of NAFTA. However, the government remains exposed to the threat of ISDS through other trade agreements such as the <a href="https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cptpp-ptpgp/index.aspx?lang=eng">Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)</a>, as well as dozens of bilateral investment treaties. </p>
<p>When the <a href="https://monitormag.ca/articles/u-k-membership-in-pacific-trade-deal-threatens-canadian-climate-action/">U.K. officially joins the CPTPP</a>, the risk of ISDS claims from fossil fuel firms will <a href="https://theecologist.org/2023/apr/12/rough-trade">increase dramatically</a>.</p>
<p>The idea that public finance, desperately needed for the energy transition and climate adaptation, will be redirected to compensate fossil fuel firms currently making <a href="https://blog.ucsusa.org/shaina-sadai/fossil-fuel-companies-make-billions-in-profit-as-we-suffer-billions-in-losses/">record profits</a> is offensive. </p>
<p>In light of the increasing <a href="https://theconversation.com/what-big-oil-knew-about-climate-change-in-its-own-words-170642">body of evidence</a> that documents how the industry has <a href="https://theconversation.com/big-oils-trade-group-allies-outspent-clean-energy-groups-by-a-whopping-27x-with-billions-in-ads-and-lobbying-to-keep-fossil-fuels-flowing-198286">actively obstructed climate action</a> and helped to spread disinformation about climate science, it is <a href="https://theconversation.com/directors-are-in-the-crosshairs-of-corporate-climate-litigation-117737">communities impacted by climate change</a> that should be compensated by fossil fuel firms, not the other way around. </p>
<p>The Canadian government should adopt a consistent approach to ISDS. The exclusion of ISDS from USMCA should be emulated in any future agreements, and Canada should work with treaty partners to remove access to the system in all current ones.</p><img src="https://counter.theconversation.com/content/203737/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kyla Tienhaara receives funding from the Canada Research Chairs Program and SSHRC (Government of Canada). She collaborates with and provides pro bono advice for a number of non-profit organizations working on climate and investment issues.</span></em></p>
To address the climate crisis, governments need to limit new fossil fuel developments. But foreign investors are often protected under trade and investment agreements.
Kyla Tienhaara, Canada Research Chair in Economy and Environment, Queen's University, Ontario
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/205799
2023-05-17T15:55:12Z
2023-05-17T15:55:12Z
The Ottawa Senators bidding war is about a lot more than ticket sales and star power
<figure><img src="https://images.theconversation.com/files/526643/original/file-20230516-34490-s2bn16.JPG?ixlib=rb-1.1.0&rect=0%2C75%2C1048%2C509&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Snoop Dogg shouted out Canada's First Nations in his ongoing social media campaign to promote his bid to buy the NHL's Ottawa Senators. Snoop posted a video to Instagram in a recording studio and wearing an Ottawa Senators jersey. </span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Handout: Instagram @snoopdogg</span></span></figcaption></figure><p>A <a href="https://www.bnnbloomberg.ca/celebrity-bidding-war-for-ottawa-senators-could-be-a-boon-for-the-franchise-experts-1.1918374">bidding war has erupted over the NHL’s Ottawa Senators</a>, and fans are as starstruck by the names involved as they are sticker-shocked by the price. </p>
<p>Four groups submitted final bids on May 15 and <a href="https://www.sportico.com/business/team-sales/2023/ottawa-senators-sale-1234722937/">at least one reached US$1 billion</a>. Two remaining groups boast major stars. </p>
<p>Hip hop icon Snoop Dogg is part of Hollywood producer Neko Sparks’s bid. Toronto superstar The Weeknd was folded in by Harlo Capital’s Jeffrey and Michael Kimel. Canadian actor Ryan Reynolds was in the mix until he and his partners, real estate moguls the Remington Group, pulled out at the last minute.</p>
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<p>Most observers are mildly surprised that a small-market Canadian hockey club has captured <a href="https://www.bbc.com/news/world-us-canada-65566069">global headlines</a> but absolutely astonished that it could fetch a billion dollars.</p>
<p>We shouldn’t be surprised. Pro sports franchises are some of the hottest commodities on the market, with <a href="https://www.nba.com/news/report-joseph-tsai-buy-nets-23-billion">billionaires from tech</a> <a href="https://www.espn.com/nba/story/_/id/35605269/nba-board-governors-approves-sale-suns-mercury-mat-ishbia">and finance</a> pouncing on almost every premier franchise that’s become available. </p>
<p>These are high-profile, scarce assets with escalating valuations that offer entry into a hyper-exclusive club. They also carry deep emotional and historical ties to local communities and fan bases distributed around the globe.</p>
<h2>Benefits of ownership</h2>
<p>But status, scarcity and emotion aren’t the only reasons sports ownership is suddenly so appealing. Over the last 25 years, franchises have transformed from live entertainment holdings serving local populations to global, financialized assets. </p>
<p>They provide avenues for forms of investment and financial engineering not traditionally the purview of pro sports. They are leveraged for real estate and land development and provide <a href="https://www.economist.com/finance-and-economics/2019/02/21/countries-are-seeking-help-to-deal-with-corporate-tax-avoidance">“creative” tax scenarios</a>. They garner good will with local citizens and governments to the benefit of the owners’ other business interests. They provide <a href="https://doi.org/10.1080/10304312.2010.510599">robust transmedia</a> brands and intellectual property that can be monetized elsewhere.</p>
<p>These speculative forms of valuing franchises have been historically overlooked, but they are at the centre of the Senators sale. The purchaser will acquire the team, its current arena and 70 acres of land in Kanata on which the Canadian Tire Centre rests. </p>
<p>They will also acquire the opportunity to negotiate exclusive development rights at LeBreton Flats, 7.5 acres of prime real estate on the edge of Ottawa’s downtown. The Sens were selected last year by the National Capital Commission as its <a href="https://ncc-ccn.gc.ca/projects/lebreton-major-attractions">preferred development bid</a> for this parcel of Crown land, which has tantalized developers for two decades.</p>
<p>Hence the many real estate magnates figuring prominently in the Senators sale. <a href="https://ottawasun.com/sports/hockey/nhl/ottawa-senators/ryan-reynolds-and-remington-group-prepping-billion-dollar-bid-for-senators">Reports suggest</a> Reynolds and Remington, when still involved, planned to build a downtown arena district while redeveloping the Kanata land. </p>
<p>Most other bids appear keen to follow a similar path. </p>
<figure class="align-center ">
<img alt="A large tract of undeveloped land with the skyline of a city in the background." src="https://images.theconversation.com/files/526649/original/file-20230516-29403-sabyzj.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/526649/original/file-20230516-29403-sabyzj.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=396&fit=crop&dpr=1 600w, https://images.theconversation.com/files/526649/original/file-20230516-29403-sabyzj.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=396&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/526649/original/file-20230516-29403-sabyzj.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=396&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/526649/original/file-20230516-29403-sabyzj.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=498&fit=crop&dpr=1 754w, https://images.theconversation.com/files/526649/original/file-20230516-29403-sabyzj.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=498&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/526649/original/file-20230516-29403-sabyzj.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=498&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">In this photo taken using a drone, LeBreton Flats is seen west of downtown Ottawa.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Adrian Wyld</span></span>
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<h2>Potential rewards are massive</h2>
<p>These projects are inherently speculative. Despite no binding agreements with the city or the National Capital Commission, the bet is they will lead to revenue, land and franchise value increases that will justify a billion-dollar investment.</p>
<p>Such projections are based on examples like Edmonton’s <a href="https://icedistrict.com/">ICE District</a>, which has rewarded Oilers owner <a href="https://www.forbes.com/profile/daryl-katz/?sh=16d2767e2ed4">Daryl Katz</a> handsomely for his 2008 purchase of the team. Katz is co-developer of the district, where blocks of restaurants, bars, condos and transit infrastructure were built around Rogers Place arena. </p>
<p>It typifies a new norm of stadium development that sees developers and policymakers mobilize public speculation to garner support. They assert that these projects will catalyze further development and economic activity in areas that are deemed in need of “regeneration” — although whether they actually do is <a href="https://www.cbc.ca/news/canada/calgary/critics-calgary-arena-deal-1.6823842">endlessly debated</a>.</p>
<p>These lucrative development plays contribute to rising franchise values, but real estate is only part of the story. A second and relatively novel form of speculation is increasingly important: leveraging sports teams as “IP,” the buzzword now used to describe intellectual property.</p>
<p>After purchasing the Welsh football club Wrexham AFC in 2021, Reynolds and his partner Rob McElhenney produced a docu-series, <a href="https://worldsoccertalk.com/news/why-americans-find-welcome-to-wrexham-so-compelling-20230113-WST-415264.html"><em>Welcome to Wrexham</em>,</a> that has been a streaming smash. Reynolds integrated the club with his other business interests through ad campaigns and other brand “synergies” to <a href="https://www.forbes.com/sites/marisadellatto/2023/03/15/ryan-reynolds-mint-mobile-acquired-by-t-mobile-for-13-billion/?sh=1b9bc9b56860">lucrative results</a>. </p>
<p>The actors have used their star power to push the Wrexham AFC into areas not usually available to lower-tier soccer clubs, such as EA Sports’ FIFA video game franchise and a high-profile partnership with TikTok. Given their success, it was not surprising to see Reynolds trying to break into a major North American sports league.</p>
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<img alt="Two men with crossed arms are side by side as they watch a soccer game from the stands." src="https://images.theconversation.com/files/526847/original/file-20230517-22717-3y1un3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/526847/original/file-20230517-22717-3y1un3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=480&fit=crop&dpr=1 600w, https://images.theconversation.com/files/526847/original/file-20230517-22717-3y1un3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=480&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/526847/original/file-20230517-22717-3y1un3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=480&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/526847/original/file-20230517-22717-3y1un3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=603&fit=crop&dpr=1 754w, https://images.theconversation.com/files/526847/original/file-20230517-22717-3y1un3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=603&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/526847/original/file-20230517-22717-3y1un3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=603&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Rob McElhenney, left, and Ryan Reynolds are seen in the stands from a scene in the docuseries ‘Welcome to Wrexham’ that follows them as they takeover the lower-league Welsh soccer team Wrexham AFC.</span>
<span class="attribution"><span class="source">(Patrick McElhenney/FX via AP)</span></span>
</figcaption>
</figure>
<h2>Betting on future outcomes</h2>
<p>Sports and business pundits have been slow to consider these speculative modes of valuing franchises, but financial markets and fans have not. It’s no coincidence that the influx of investors from finance and tech has overlapped with the rise of sports gambling. </p>
<p><a href="https://www.miamiherald.com/betting/article258413928.html">Betting apps like FanDuel and DraftKings</a> break sporting events down into ever smaller units — derivatives — that fan-users can bet on at every moment of an event.</p>
<p>Wagering on outcomes in this way is inherently speculative, mirroring activities that structure most financial markets in 2023. Arbitrage and futures trading, derivative markets and speculative real estate plays are about leveraging and monetizing uncertainty. They are less about reacting to past events than gaming scenarios and betting on probabilities. They seek to project and engineer future outcomes.</p>
<p>We should therefore understand the Senators sale not just in terms of recent transformations in sports business, but as symptomatic of these broader trends in which every aspect of culture and economy <a href="https://doi.org/10.1353/cj.2020.0041">bends toward financialization</a> and speculation.</p><img src="https://counter.theconversation.com/content/205799/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Liam Cole Young does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
The Ottawa Senators’ bidding war has important lessons about speculation and financialization in pro sports.
Liam Cole Young, Associate Professor of Communication and Media Studies, Carleton University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/205180
2023-05-08T12:19:57Z
2023-05-08T12:19:57Z
What is insider trading? Two finance experts explain why it matters to everyone
<figure><img src="https://images.theconversation.com/files/524789/original/file-20230507-15-rcy73r.jpg?ixlib=rb-1.1.0&rect=140%2C126%2C4548%2C2952&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Financier Ivan Boesky was the real-life inspiration for Gordon Gekko of 'Wall Street.'</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/le-financier-ivan-boesky-en-avion-au-dessus-de-new-york-le-news-photo/999012440">Yves Gellie/Gamma-Rapho via Getty Images</a></span></figcaption></figure><p><a href="https://www.investopedia.com/terms/i/insidertrading.asp">Insider trading</a> is the term used to describe the illegal act in which someone relies on market-moving, nonpublic information to decide whether to buy or sell a financial asset.</p>
<p>For example, say you work as an executive at a company that plans to make an acquisition. If it’s not public, that would count as inside information. It becomes a crime if you either tell a friend about it – and that person then buys or sells a financial asset using that information – or if you make a trade yourself. </p>
<p>Punishment, if <a href="https://www.investopedia.com/articles/investing/021815/how-sec-tracks-insider-trading.asp">you’re convicted for insider trading</a>, can range from a few months to over a decade behind bars.</p>
<p>Insider trading became illegal in the U.S. in 1934 after Congress passed the <a href="https://www.investopedia.com/terms/s/seact1934.asp">Securities Exchange Act</a> in the wake of the <a href="https://www.investopedia.com/terms/s/stock-market-crash-1929.asp">worst sustained decline in stocks in history</a>. </p>
<p>From Black Monday 1929 through the summer of 1932, the <a href="https://www.federalreservehistory.org/essays/stock-market-crash-of-1929">stock market lost 89% of its value</a>. The act was meant to prevent a whole litany of abuses from recurring, including <a href="https://www.investopedia.com/articles/stocks/09/insider-trading.asp">insider trading</a>. </p>
<p>While insider trading typically involves trading stocks of individual companies based on information about them, it can involve any kind of information <a href="https://www.cnbc.com/2023/05/05/jobs-report-april-2023-job-growth-totals-25300-in-april.html">about the economy</a>, a commodity or anything else that <a href="https://www.cnbc.com/2022/02/09/stock-market-futures-open-to-close-news.html">moves markets</a>.</p>
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<iframe width="440" height="260" src="https://www.youtube.com/embed/2WDBI4nLtXQ?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Insider trading was dramatized in Oliver Stone’s 1987 classic movie “Wall Street.” Here, ruthless financier Gordon Gekko explains why information is so valuable.</span></figcaption>
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<h2>Why insider trading matters</h2>
<p>Insider trading is not a victimless crime. People trading on inside information benefit at the expense of others.</p>
<p>A key characteristic of well-functioning financial markets is high liquidity, which means it is easy to make large trades at low transaction costs. But when traders fear losing money to counterparts with inside information, <a href="http://dx.doi.org/10.2139/ssrn.276179">they charge higher transaction costs</a>, which leads to less liquidity and lower investor returns. And since a lot of people have a stake in financial markets – <a href="https://www.federalreserve.gov/publications/files/scf20.pdf">about half of U.S. families own stocks</a> either directly or indirectly – this behavior hurts most Americans.</p>
<p>Insider trading also <a href="https://ssrn.com/abstract=249708">makes it more expensive</a> for companies to issue stocks and bonds. If investors think that insiders might be trading bonds of a company, they will demand a higher return on the bonds to compensate for their disadvantage – increasing the cost to the company. As a result, the company has less money to hire more workers or invest in a new factory.</p>
<p>There are also broader impacts of insider trading. It <a href="http://dx.doi.org/10.2139/ssrn.3645579">undermines public confidence</a> in financial markets and feeds the common view that the odds are stacked in favor of the elite and against everyone else. </p>
<p>Furthermore, since inside traders profit from privileged access to information rather than work, this makes people believe that <a href="https://ethics.org.au/wp-content/uploads/2019/02/The-Ethics-Centre_180410-on-trust-and-legitimacy.original.pdf">the system is rigged</a>. </p>
<figure class="align-center ">
<img alt="Martha Stewart, flanked by U.S. Marshals, leaves court" src="https://images.theconversation.com/files/447122/original/file-20220217-23-1xrykmz.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/447122/original/file-20220217-23-1xrykmz.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=533&fit=crop&dpr=1 600w, https://images.theconversation.com/files/447122/original/file-20220217-23-1xrykmz.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=533&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/447122/original/file-20220217-23-1xrykmz.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=533&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/447122/original/file-20220217-23-1xrykmz.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=669&fit=crop&dpr=1 754w, https://images.theconversation.com/files/447122/original/file-20220217-23-1xrykmz.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=669&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/447122/original/file-20220217-23-1xrykmz.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=669&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Martha Stewart was found guilty of insider trading in 2004.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/EnronMirageEconomy/3101174e18964ced96e4e87edc376790/photo?Query=Martha%20stewart%202004&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=7&currentItemNo=6">AP Photo/Bebeto Matthews</a></span>
</figcaption>
</figure>
<h2>Hard to prove</h2>
<p>Research shows that <a href="https://dealbook.nytimes.com/2014/06/16/study-asserts-startling-numbers-of-insider-trading-rogues/">insider trading is common and profitable</a> yet <a href="https://knowledge.wharton.upenn.edu/article/why-insider-trading-is-hard-to-define-prove-and-prevent/">notoriously hard to prove and prevent</a>. </p>
<p>A recent study estimated that <a href="https://dx.doi.org/10.2139/ssrn.3764192">overall only about 15% of insider trading</a> in the U.S. is detected and prosecuted but suggested more of it is coming to light in recent years because of increased enforcement.</p>
<p>One of the more famous – and few – examples of insider trading being prosecuted was the <a href="https://www.chicagotribune.com/sns-ap-martha-stewart-chronology-story.html">2004 conviction</a> of businesswoman and media personality Martha Stewart for <a href="https://www.sec.gov/news/press/2003-69.htm">selling shares based on an illegal tip</a> from a broker.</p>
<p>The sudden collapse of several banks in 2023 <a href="https://www.forbes.com/sites/nicholasreimann/2023/05/05/first-republic-bank-executives-reportedly-under-investigation-for-possible-insider-trading/">has also caught the attention of authorities</a>. The Securities and Exchange Commission is reportedly investigating executives at both Silicon Valley Bank and First Republic Bank, which was seized and sold on May 1, for potential insider trading. </p>
<p>And, so, the cat-and-mouse game between regulators and those who want to game the system continues.</p>
<p><em>This is an updated and shortened version of an <a href="https://theconversation.com/link-176940">article that was originally published</a> on Feb. 18, 2022.</em></p><img src="https://counter.theconversation.com/content/205180/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
The SEC is investigating whether executives at First Republic Bank, which was seized by regulators and sold to JPMorgan Chase, improperly traded on inside information.
Alexander Kurov, Professor of Finance and Fred T. Tattersall Research Chair in Finance, West Virginia University
Marketa Wolfe, Associate Professor of Economics, Skidmore College
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/203639
2023-05-03T18:30:37Z
2023-05-03T18:30:37Z
Fed rate hikes, recession fears and political backlash leave ESG investors at a crossroads
<figure><img src="https://images.theconversation.com/files/523943/original/file-20230502-26-p3xlrc.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5464%2C3631&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">ESG investing looks for companies that do well on environmental, social and governance benchmarks. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/directly-above-the-downtown-district-royalty-free-image/1328074262">Zhengshun Tang/Moment via Getty Images</a></span></figcaption></figure><p>The Federal Reserve <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20230503a.htm">raised interest rates</a> again on May 3, 2023, by a quarter point, making it the <a href="https://www.federalreserve.gov/monetarypolicy/openmarket.htm">Fed’s 10th rate hike</a> since March 2022 in an ongoing fight to tame inflation. These rate hikes have been reverberating through the economy, raising prospects of a recession amid heightened <a href="https://www.nber.org/papers/w31048">concerns about the fragile state of banks</a>. </p>
<p>The rate hikes are also rattling sustainability-focused investing, better known as ESG investing.</p>
<p>The trend toward ESG investing, which puts pressure on companies to meet environmental, social and governance benchmarks, has almost redefined asset management over the past decade. ESG funds today are a <a href="https://www.ussif.org//Files/Trends/2022/Overview%20infographic.pdf">multitrillion-dollar market</a>.</p>
<p>However, the high uncertainty around interest rates today, along with the prospects of a looming recession and a <a href="https://www.yahoo.com/now/larry-fink-face-esg-says-213102226.html">political backlash</a>, has put the future of ESG investors at a crossroads.</p>
<p>I <a href="https://warrington.ufl.edu/directory/person/7627/">specialize in sustainable finance</a>, and my recent work has documented the <a href="https://doi.org/10.1017/S0022109022001296">impact that tough economic times</a> can have on ESG investing demand. Investments into U.S. sustainable mutual funds have <a href="https://www.morningstar.com/articles/1133418/us-sustainable-funds-suffer-a-worse-quarter-than-conventional-peers">visibly slowed</a> since 2022, suffering their worst net flows in five years. Here are how three critical factors can affect investors’ zeal for socially conscious investing going forward.</p>
<p><iframe id="KYfr3" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/KYfr3/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Interest rate uncertainty</h2>
<p>One of the primary arguments that big institutional investors like BlackRock make for ESG investing is that it <a href="https://www.blackrock.com/ch/individual/en/themes/sustainable-investing">creates long-term value for shareholders</a>. Companies that pay careful attention to environmental, social and governance issues are believed to be better prepared for distant future risks, including regulatory risks and physical risks from climate change.</p>
<p>However, heightened uncertainty about interest rates poses a challenge today. That’s because higher rates can disproportionately affect the present value that investors assign to long-term investment outcomes. Let me explain.</p>
<p>Within the past year, the Federal Reserve has raised its benchmark lending rate from almost zero to a target <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20230503a.htm">range of 5% to 5.25%</a> to combat inflation. In financial markets, higher interest rates lead to higher discount rates. That means that future cash generated by long-term investments is considered to be worth considerably less at today’s higher interest rates.</p>
<p>The more distant an asset’s value lies in the future, the more heavily it will be discounted in value when rates are high. So, long-duration investments – like most ESG investments – are especially sensitive to changes in interest rates.</p>
<p>This economic mechanism was also part of the backdrop of the recent rout in tech stocks and the <a href="https://theconversation.com/why-svb-and-signature-bank-failed-so-fast-and-the-us-banking-crisis-isnt-over-yet-201737">series of bank failures</a> that started with the <a href="https://theconversation.com/silicon-valley-bank-how-interest-rates-helped-trigger-its-collapse-and-what-central-bankers-should-do-next-201697">collapse of Silicon Valley Bank</a>. </p>
<h2>Looming recession</h2>
<p>Another factor that could affect ESG investing is the potential for an economic downturn.</p>
<p>As <a href="https://doi.org/10.1111/jofi.12547">research shows</a>, investors do not necessarily make ESG investments for greater long-term returns, but often for altruistic reasons or due to personal preferences to hold greener assets. For these ESG investors, a looming recession could change their perspective on these “luxuries.”</p>
<p>In an early warning about this possibility, <a href="https://doi.org/10.1017/S0022109022001296">a recent study</a> I conducted with an economist at the Rotterdam School of Management found that retail investors showed signs of shying away from investing in sustainable mutual funds during the early months of the COVID-19 shock in 2020. This was a period when many households experienced layoffs and furloughs, which likely pushed them to set aside luxuries to prioritize protecting the values of their 401(k)s, IRAs and other investment portfolios.</p>
<p>In other words, investors may be all for ESG, <a href="https://www.wsj.com/articles/investors-are-all-for-esg-except-that-is-when-times-are-tough-11675527842">except when times are tough</a>.</p>
<p><iframe id="Yun0K" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/Yun0K/5/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>Prominent economists, such as former Treasury Secretary Larry Summers, have warned of a <a href="https://www.bloomberg.com/news/articles/2023-04-07/larry-summers-sees-higher-chance-of-recession-fed-nearing-the-end#xj4y7vzkg">likely recession</a> as inflation and the Fed’s battle against it persist. The International Monetary Fund also <a href="https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023">lowered its global economic growth outlook</a> from 3.4% in 2022 to 2.8% in 2023. </p>
<h2>Political backlash</h2>
<p>Finally, recent political friction and anti-ESG policies across states have started to create headwinds for pension funds and large institutions that serve them.</p>
<p>For example, <a href="https://www.reuters.com/business/sustainable-business/desantis-signs-sweeping-anti-esg-legislation-florida-2023-05-02/">Florida</a> and <a href="https://apnews.com/article/esg-woke-investing-kansas-culture-war-vetoes-20842bdda84432add49f267adb897df3">Kansas</a> passed laws in recent weeks and <a href="https://corpgov.law.harvard.edu/2023/03/11/esg-battlegrounds-how-the-states-are-shaping-the-regulatory-landscape-in-the-u-s/">several other states</a> including <a href="https://www.texastribune.org/2022/08/24/texas-boycott-companies-fossil-fuels/">Texas</a> and <a href="https://www.nytimes.com/2023/02/24/your-money/anti-esg-investing-kentucky.html">Kentucky</a> have taken actions to restrict the ability of state public pension funds to invest in companies based on their ESG performance, citing concerns about fraudulent greenwashing and potential fiduciary duty violations, referring to the obligation institutional investors have to seek the highest returns for the lowest risk possible.</p>
<p>These restrictions can severely limit the capacity for ESG investing by institutional investors, which have played a significant role in driving the growth of ESG investing.</p>
<figure class="align-center ">
<img alt="Lark Fink, in business attire and glasses, sits in a news studio being interviewed." src="https://images.theconversation.com/files/523942/original/file-20230502-321-8ju3yp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/523942/original/file-20230502-321-8ju3yp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/523942/original/file-20230502-321-8ju3yp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/523942/original/file-20230502-321-8ju3yp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/523942/original/file-20230502-321-8ju3yp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/523942/original/file-20230502-321-8ju3yp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/523942/original/file-20230502-321-8ju3yp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Blackrock CEO Larry Fink, shown during an earlier interview, told Bloomberg in 2023: ‘For the first time in my professional career, attacks are now personal. They’re trying to demonize the issues.’</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/blackrock-chairman-ceo-laurence-d-fink-appears-on-opening-news-photo/470074732">Taylor Hill/Getty Images</a></span>
</figcaption>
</figure>
<p>While <a href="https://dx.doi.org/10.2139/ssrn.3837706">concerns about greenwashing</a> and <a href="https://dx.doi.org/10.2139/ssrn.3887716">high fees</a> in ESG investing are not totally unwarranted, these political interventions can also have unintended consequences.</p>
<p>A <a href="https://dx.doi.org/10.2139/ssrn.4123366">recent study</a> from economists at Wharton and the Federal Reserve Bank of Chicago found that a Texas law enacted in 2021 prohibiting municipalities from contracting with banks with ESG policies had a distorting side effect on those municipalities’ borrowing costs. The policy ended up raising the cost of public finance, meaning the law ultimately cost taxpayers.</p>
<h2>Navigating the crossroads</h2>
<p>As companies hold their 2023 annual meetings, the discussions among corporate officials, investors and stakeholders will serve as an important barometer for the current state and future of ESG investing.</p>
<p>Due to high interest rate uncertainty, prospects of a recession and political upheaval, ESG is under pressure. Perceived in recent years as a paradigm shift in how market mechanisms can address harms to society, stakeholders are now <a href="https://www.eenews.net/articles/they-helped-create-esg-two-decades-later-some-see-a-mess/">scrutinizing ESG investing</a> with a critical lens regarding how strongly it can persist and how much impact it can have.</p>
<p>The next few years will be its most important stress test yet.</p><img src="https://counter.theconversation.com/content/203639/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sehoon Kim does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Three forces are pulling down ESG’s once-rapid rise in the investment world.
Sehoon Kim, Assistant Professor of Finance, University of Florida
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/196777
2023-02-28T19:47:11Z
2023-02-28T19:47:11Z
Growing farmland inequality in the Prairies poses problems for all Canadians
<figure><img src="https://images.theconversation.com/files/512091/original/file-20230223-20-aqfkhr.JPG?ixlib=rb-1.1.0&rect=113%2C5%2C3874%2C2323&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Research found that investor ownership of farmland in Saskatchewan was negligible in 2002, but by 2018 had climbed to nearly one million acres — almost 18 times the size of Saskatoon.</span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Jeff McIntosh</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/growing-farmland-inequality-in-the-prairies-poses-problems-for-all-canadians" width="100%" height="400"></iframe>
<p>Real estate is a hot topic in Canada. Most Canadians are acutely aware of how home prices and rents have <a href="https://theconversation.com/new-study-reveals-intensified-housing-inequality-in-canada-from-1981-to-2016-173633">skyrocketed in the last 15 years or so</a>. In large cities, investor ownership of condos and houses has attracted the attention of policymakers and the public at large, prompting <a href="https://www.ctvnews.ca/business/who-s-exempt-from-canada-s-foreign-homebuyers-ban-here-s-what-you-need-to-know-1.6214997">the federal government to crack down on foreign buyers</a>. </p>
<p>While many are familiar with these urban real estate trends, few are aware of the <a href="https://www.landfoodsovereignty.ca/podcast">restructuring of farmland ownership occurring in rural areas</a>. Since 2014, we’ve been studying changing land tenure patterns in the Prairies, where 70 per cent of Canada’s agricultural land is situated. </p>
<p>Our research reveals three major trends — ongoing farm consolidation, increasing land concentration and expanding investor ownership of farmland — leading to <a href="https://policyalternatives.ca/publications/reports/concentration-matters">growing land inequality</a>. Like the transformation of urban real estate, who benefits from these changes is highly contested.</p>
<h2>Investor interest in farmland</h2>
<p>Investor purchases of farmland worldwide increased significantly as part of the <a href="https://grain.org/article/entries/93-seized-the-2008-landgrab-for-food-and-financial-security">global landgrab spurred by the food price spikes</a> of 2007 and 2008. High food prices, a growing global demand for food and environmental pressures <a href="https://www.producer.com/news/dont-farm-just-own/">convinced many global investors that farmland was a safe bet</a> in an increasingly volatile world. </p>
<p>As hedge funds, pension funds and wealthy individuals poured billions of dollars into farmland, researchers like us began to write about the financialization of agriculture — that is, the growing influence of financial players and financial motives over farming and food production.</p>
<p>Our research found that investor ownership of farmland in Saskatchewan was negligible in 2002, but had climbed to nearly one million acres by 2018 — almost 18 times the size of Saskatoon. (A million acres is about 4,050 square kilometres). While Saskatchewan sought to <a href="https://docs.legassembly.sk.ca/legdocs/Bills/27L4S/Bill27-187.pdf">tighten rules on farmland ownership in 2016</a>, this seems to have done little to slow down the pace of investor acquisitions. </p>
<p>Robert Andjelic, an investor from Alberta, is <a href="https://www.theglobeandmail.com/business/article-farmland-ownership-canada-andjelic/">now Canada’s largest farmland owner</a> with <a href="https://andjelic.ca/">225,435 acres in 92 Saskatchewan rural municipalities</a>. His company leases farmland to dozens of farmers and undertakes “land improvements,” such as clearing trees, brush and other natural habitat, as well as filling in wetlands in order to farm from corner to corner of every parcel.</p>
<p>Another major investor is <a href="https://www.avenuelivingam.com/fund/agricultural-land-trust/">Avenue Living</a>, which has a foot in both urban real estate (as the owner of multi-family housing units across North America) and farmland, with a portfolio of some 83,000 acres.</p>
<figure class="align-center ">
<img alt="A map of Saskatchewan showing the land holdings of investors and farmer-investor hybrids in blue" src="https://images.theconversation.com/files/512089/original/file-20230223-20-u1qbht.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/512089/original/file-20230223-20-u1qbht.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=464&fit=crop&dpr=1 600w, https://images.theconversation.com/files/512089/original/file-20230223-20-u1qbht.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=464&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/512089/original/file-20230223-20-u1qbht.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=464&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/512089/original/file-20230223-20-u1qbht.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=583&fit=crop&dpr=1 754w, https://images.theconversation.com/files/512089/original/file-20230223-20-u1qbht.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=583&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/512089/original/file-20230223-20-u1qbht.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=583&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Land holdings (in blue) of investors and farmer-investor hybrids in Saskatchewan in 2018. Collectively, these entities owned 969,769 acres across the province.</span>
<span class="attribution"><span class="source">(Sarina Gersher with data from Information Services Corporation)</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>As investors gobble up more land, there is growing unease among farmers. <a href="https://bonnefield.com/farmers/">Investors argue they are helping farmers</a> by relieving them of their assets and providing young farmers with
access to land through rental agreements. Given that, on average, investors <a href="https://policyalternatives.ca/publications/reports/who-buying-farm">pay more for land compared to other buyers</a>, these deep-pocketed buyers have undoubtedly contributed to the rapid increase of farmland prices.</p>
<p>In our <a href="https://static1.squarespace.com/static/62251c157af1ef4305dfdfe6/t/633b97a841d091158b52bcca/1664849835129/Wild+West+Report+2022+%281%29.pdf">survey of 400 prairie farmers</a>, 76 per cent of farmers under 35 indicated that non-farmer investor activity has had a negative or very negative effect on the local farmland market. 83.2 per cent of older farmers indicated that investor activity has had negative or very negative impact on the local community. </p>
<p>Farmers also expressed unease about the growing economic clout of large farmers (over 10,000 acres) and mega-farms (over 30,000 acres) in the region.</p>
<h2>Mega-farms keep accumulating land</h2>
<p>Investors are not the only entities with vast landholdings. Some of Saskatchewan’s largest grain farms now own and control tens of thousands of acres. According to our research, Monette Farms owned some 63,000 acres of land in 2018, and farms much more than that with <a href="https://monettefarms.ca/about/">production sites in Montana, Arizona and Saskatchewan</a>. </p>
<p>One Organic Farms <a href="https://www.oneorganicfarm.com/ourstory">reportedly operates on a land base of 40,000 acres</a>, with the large majority of the land rented from Andjelic Land Inc., Saskatchewan’s largest investor-owner. </p>
<p>In-depth interviews with over 100 farmers in <a href="http://hdl.handle.net/1993/35283">Alberta</a>, <a href="http://hdl.handle.net/1993/35780">Saskatchewan</a> and <a href="http://hdl.handle.net/1993/35482">Manitoba</a> revealed many are deeply concerned about the environmental degradation wrought by big agriculture. Others argued these players out-compete locals for farmland and contribute little to local communities.</p>
<h2>Why should city dwellers care?</h2>
<p><a href="https://www.oxfam.org/en/research/uneven-ground-land-inequality-heart-unequal-societies">Land inequality has significant implications</a> for the vibrancy of democracy, the viability of rural communities and the sustainability of agriculture.</p>
<p>Accessing land is currently the <a href="https://doi.org/10.15353/cfs-rcea.v5i3.288">biggest barrier for young and new farmers</a> who want to get into farming and land prices continue <a href="https://www.parklandinstitute.ca/finance_in_the_fields">to soar above what is justified by its productive value</a>. At the same time, <a href="https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3210005101">farm debt is the highest it’s ever been</a> and the prairies are experiencing <a href="https://doi.org/10.1007/s10460-022-10353-y">an emptying out of the countryside</a>. </p>
<p>We should also be concerned about the financialized logic promoted by investors and mega-farmers, which seeks to extract monetary value from every square inch of farmland.</p>
<figure class="align-center ">
<img alt="Overhead view of two tractors harvesting wheat in a huge field" src="https://images.theconversation.com/files/512092/original/file-20230223-26-huby4v.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/512092/original/file-20230223-26-huby4v.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/512092/original/file-20230223-26-huby4v.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/512092/original/file-20230223-26-huby4v.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/512092/original/file-20230223-26-huby4v.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/512092/original/file-20230223-26-huby4v.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/512092/original/file-20230223-26-huby4v.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Agriculture is a significant contributor to Canada’s greenhouse gas emissions.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Jeff McIntosh</span></span>
</figcaption>
</figure>
<p>Given that agriculture is a <a href="https://www.nfu.ca/publications/agricultural-greenhouse-gas-emissions-in-canada-2nd-edition/">significant contributor to Canada’s greenhouse gas emissions</a>, doubling-down on this hyper-productive, fossil-fuel dependent model will only make it harder for Canada to meet its <a href="https://www.canada.ca/en/services/environment/weather/climatechange/climate-plan/net-zero-emissions-2050.html">climate change commitment</a>.</p>
<p>The question is: what kind of agriculture do Canadians want? Growing land inequality undermines the social, economic and environmental sustainability of agriculture. </p>
<p>Progressive agrarian and food movements <a href="http://www.ipes-food.org/pages/LongFoodMovement">propose a different future</a> — one based on food sovereignty. This would entail equitable access to land for farmers, sustainable livelihoods and valuing farmland for its social and ecological worth, as well as its productive value. </p>
<p>As the climate crisis intensifies, there has never been a better time for urban and rural Canadians to work together to transform food systems.</p><img src="https://counter.theconversation.com/content/196777/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Annette Desmarais receives funding from the Canada Research Chair Program and the Social Sciences and Humanities Council of Canada.
</span></em></p><p class="fine-print"><em><span>André Magnan receives funding from the Social Sciences and Humanities Research Council of Canada. </span></em></p>
Farm consolidation, increasing land concentration and expanding investor ownership of farmland is leading to growing land inequality in the Canadian Prairies.
Annette Desmarais, Canada Research Chair in Human Rights, Social Justice and Food Sovereignty, University of Manitoba
André Magnan, Associate Professor, Sociology and Social Studies, University of Regina
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/198239
2023-01-25T09:45:32Z
2023-01-25T09:45:32Z
Ghana’s domestic debt restructuring has stalled: four reasons why
<figure><img src="https://images.theconversation.com/files/506072/original/file-20230124-25-1zkzkc.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ghana is trying to put together a debt restructuring programme to satisfy major stakeholders</span> <span class="attribution"><span class="source">Wikimedia Commons</span></span></figcaption></figure><p>Ghana is <a href="https://theconversation.com/ghana-had-a-bad-time-in-2022-4-reads-to-catch-up-on-what-happened-196087">facing</a> multiple financial and economic challenges and <a href="https://www.imf.org/en/News/Articles/2022/12/12/pr22427-imf-reaches-staff-level-agreement-on-a-3-billion-three-years-ecf-with-ghana">has requested a US$3 billion</a> bailout from the International Monetary Fund (IMF) to help it restore macroeconomic stability. This will include bringing public debt down to more manageable levels from the <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/38092/EnglishReport.pdf?sequence=9&isAllowed=y">currently estimated</a> 105% of GDP to 55% in present value terms by 2028. </p>
<p>IMF assistance, which is yet to be approved by the fund’s executive board, is <a href="https://www.imf.org/en/News/Articles/2022/12/12/pr22427-imf-reaches-staff-level-agreement-on-a-3-billion-three-years-ecf-with-ghana">conditional</a> on Ghana restructuring its public debt – domestic and external – which in turn requires the buy-in of bondholders. This means that those who lent money to the government by buying bonds will have to agree to the restructuring, such as a longer repayment period.</p>
<p>As a first step of the debt restructuring, the Ghanaian government announced a voluntary Domestic Debt Exchange Programme (DDEP) in early December 2022. It seeks to exchange about GHS137.3 billion (US$11.45 billion or about 15% of 2021 <a href="https://www.google.com/search?q=ghana+gdp&rlz=1C1GCEU_en-GBGB1004GB1004&oq=ghana+gdp&aqs=chrome.0.69i59j0i10i512l5j69i65l2.5032j1j7&sourceid=chrome&ie=UTF-8">GDP</a>) of existing <a href="https://twitter.com/mytheoz/status/1599531393570459652">domestic notes and bonds</a> held by various local investors for a package of 12 (initially four) new bonds with different payout dates. </p>
<p>For any sovereign debt restructuring exercise to succeed, a <a href="https://www.imf.org/-/media/Files/Publications/WP/2020/English/wpiea2020162-print-pdf.ashx">qualifying majority</a> (usually 75%) of debt holders must agree to change the contract’s key financial terms. This prevents a minority investor group from holding out and preventing the debt restructuring from proceeding.</p>
<p>But the subscription to this programme is below 50%, well below the government’s 80% target. Bondholders have stated that the terms offered mean that they will lose money. </p>
<p>Groups such as the Ghana Individual Bondholders Forum have <a href="https://www.theghanareport.com/bondholders-to-lose-88-2-of-investments-at-current-inflation-rate-ghana-individual-bondholders-forum/">estimated</a> losses of 50% to 90% on their investments if they exchange their current instruments. </p>
<p>That’s where things are stuck, forcing government to extend the closing date for the bond exchange three times already since early December 2022. </p>
<p>So what’s gone wrong? Why has the government not been able to get domestic bondholders to accept the terms it has put on the table?</p>
<p>I offer four reasons: investors face significant losses; the government’s “take-it-or-leave-it” approach; a lack of faith in the government; and the fact that there’s no sense of sharing the burden.</p>
<h2>What’s behind the standoff</h2>
<p><strong>Significant losses by investors:</strong> My colleague <a href="https://www.myjoyonline.com/dr-yakubu-abdul-salam-haircuts-in-ghanas-domestic-debt-exchange-programme-a-not-so-simple-explainer/">Dr Yakubu Abdul-Salam</a> estimates that investors will lose 62.40% of their bond’s original market value. The Ghana Individual Bondholders Forum <a href="https://www.theghanareport.com/bondholders-to-lose-88-2-of-investments-at-current-inflation-rate-ghana-individual-bondholders-forum/">says</a> bondholders will lose about 88.2% of their investments at current inflation levels. Several bondholders have refused to participate. This is contrary to the government’s earlier expectation of “<a href="https://mofep.gov.gh/press-release/2022-12-05/commencement-of-domestic-debt-exchange">overwhelming support for this exchange</a>”.</p>
<p>Ghana’s government has so far <a href="https://mofep.gov.gh/press-release/2023-01-16/domestic-debt-exchange-programme-extension">announced three extensions</a> of the deadline as it struggles to reach the industry benchmark of a qualifying majority. The new 31 January 2023 deadline may not be met either.</p>
<p><strong>Government’s take-it-or-leave-it approach</strong>: Government has presented the plan as a free or voluntary choice. But there are no real alternatives on the table. </p>
<p>If the restructuring is not carefully managed, it could have a substantial impact on the domestic financial sector, which owns a large portion of the bonds. Any losses within the financial sector then cascade into adverse effects on economic growth, employment and inequality.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/ghana-and-the-imf-debt-restructuring-must-go-hand-in-hand-with-managing-finances-better-191877">Ghana and the IMF: debt restructuring must go hand-in-hand with managing finances better</a>
</strong>
</em>
</p>
<hr>
<p>The government’s approach has been to “divide and conquer”. Instead of meeting all the bondholders’ representatives through, for example, a national debt forum, the government has met some groups individually to offer or change concessions. </p>
<p>This strategy means one group loses out and another gains. For example, individual bondholders were initially excluded from the bond exchange programme. They were included after pension funds were exempted from the programme.</p>
<p><strong>Lack of good faith in the government:</strong> Bondholders feel that the government has not been truthful about the dire state of the economy.</p>
<p>The current administration has sought to <a href="https://allafrica.com/stories/202209220502.html">blame</a> the Russia-Ukraine conflict and the COVID-19 pandemic for Ghana’s current economic and financial challenges. The conflict has been a contributing factor but several studies, including one by the <a href="https://documents1.worldbank.org/curated/en/829241580327419447/pdf/Ghana-Joint-World-Bank-IMF-Debt-Sustainability-Analysis-December-2019.pdf">World Bank</a>, have shown that Ghana’s finances were precarious even before the pandemic. For example, the country’s external (foreign) and overall debt were at a high risk of distress as far back as 2019. </p>
<p>In other words, the country had been living beyond its means for years. It only needed an external shock to expose the weakness.</p>
<p><strong>No sense of burden-sharing:</strong> Bondholders have also expressed reservations about the burden of the bond swap not being shared across the society. Nor is it being pitched as though it would achieve better outcomes for the country. </p>
<p>One of the key lessons from Jamaica’s successful debt exchange programme, as highlighted in a 2012 <a href="https://www.imf.org/external/pubs/ft/wp/2012/wp12244.pdf">IMF study</a>, is that</p>
<blockquote>
<p>there was a perception that the burden was being shared across the society to achieve a better outcome for the country as a whole. </p>
</blockquote>
<p>This made the plan acceptable to those directly affected. </p>
<p>In Ghana’s case, the government’s divisive approach has made it difficult for bondholders to appreciate the severity of the situation and thus reach acceptable comprises. One demonstration of <a href="https://www.myjoyonline.com/government-should-adopt-principle-of-burden-sharing-dr-assibey-yeboah/">burden sharing</a>, for example, would be to cut wasteful public expenditure and the size of government. Without this, the terms of the bond swap amount to what the convener of the Individual Bondholders Forum has described as</p>
<blockquote>
<p><a href="https://theindependentghana.com/individual-bondholders-forum-debt-exchange-program-state-sponsored-pickpocketing/">state-sponsored theft or pickpocketing</a>.</p>
</blockquote>
<h2>How can uptake be improved?</h2>
<p>Ghana must comprehensively restructure its public debt and improve its public finances. But the proposed bond exchange must be restructured to increase its chances of acceptance by domestic bondholders. </p>
<p>How can this be done?</p>
<p>Firstly, by organising a national debt forum with all stakeholders. The forum would offer an opportunity for frank conversations with all bondholders present rather than the current siloed divide-and-rule approach whose outcome has been the inclusion, exclusion and re-inclusion of certain categories of domestic bondholders.</p>
<p>Secondly, the government must renegotiate with the IMF to extend the “below 55% of GDP in NPV terms by 2028” public debt target to at least 2032. This would buy the country time to adjust gradually. The scale of cuts and debt restructuring needed now could be milder. It would also mitigate the ripple effects on the economy, which includes some domestic financial institutions possibly going under due to considerable losses. </p>
<p>Thirdly, the government must share the burden by cutting down on wasteful expenditure. In <a href="https://www.imf.org/external/pubs/ft/wp/2012/wp12244.pdf">Jamaica</a>, they understood the need “to change course, away from a history of continued public debt expansion and government deficits, which had not delivered in terms of economic growth and improved standards of living”. The same could be said of Ghana.</p><img src="https://counter.theconversation.com/content/198239/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Theophilus Acheampong is affiliated with the IMANI Centre for Policy and Education, Accra, Ghana.</span></em></p>
Ghana’s finance ministry is struggling to build consensus on the country’s debt burden.
Theophilus Acheampong, Associate Lecturer, University of Aberdeen
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/196640
2022-12-15T21:47:42Z
2022-12-15T21:47:42Z
COP15: A call to action for investors to help us meet vital biodiversity goals
<figure><img src="https://images.theconversation.com/files/501385/original/file-20221215-15-d0euu7.jpg?ixlib=rb-1.1.0&rect=326%2C293%2C10353%2C5356&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Businesses and investors have a critical role to play in biodiversity and conservation efforts and need to invest in sustainable production and extraction methods</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>The UN Secretary-General, António Guterres, opened the <a href="https://www.cbd.int/">UN Convention on Biological Diversity</a> (COP15) in Montréal with a stark message: “<a href="https://journalbreak.com/fate-of-the-living-world-will-be-decided-at-cop15-say-scientists-cop15/">Without nature, we are nothing. Nature is our life-support system, and yet humanity seems hell bent on destruction</a>.”</p>
<p>The summit brought together delegates from over 190 countries to negotiate the post-2020 <a href="https://www.cbd.int/doc/c/abb5/591f/2e46096d3f0330b08ce87a45/wg2020-03-03-en.pdf">Global Biodiversity Framework</a>, the implementation of which will require a transformation in the way we produce, consume and trade goods and services that rely on and impact biodiversity. </p>
<p>Companies and investors have, therefore, been paying close attention. Businesses and investors have a critical role to play in biodiversity and conservation efforts and need <a href="https://news.un.org/en/story/2022/12/1131482">to invest in sustainable production and extraction methods</a>.</p>
<p>On Dec. 14, the <a href="https://www.cbd.int/article/cop15-finance-and-biodiversity-day">Finance and Biodiversity Day</a> of the summit, speakers across the financial sector discussed various ways of aligning financial investments with the new biodiversity framework. In anticipation of these finance talks, a new global engagement initiative, <a href="https://www.prnewswire.com/news-releases/at-cop15-investors-announce-nature-action-100-to-tackle-nature-loss-and-biodiversity-decline-301699719.html">Nature Action 100</a> was launched to drive investors’ action on nature-related risks and opportunities. </p>
<p>As a scholar in sustainable finance, I believe that while these initiatives and discussions are important, we need more targeted and urgent investments in nature-friendly solutions to reverse biodiversity loss.</p>
<h2>“Without nature, we are nothing”</h2>
<p>Numerous scientific studies point to alarming statistics on the rates of biodiversity loss. The <a href="https://livingplanet.panda.org/">Living Planet Report 2022</a> shows an average decline of 69 per cent in wildlife populations since 1970, thus emphasizing the dual crises of biodiversity loss and climate change driven by human activities. </p>
<figure class="align-center ">
<img alt="A vast stretch of mangrove with a river running in between" src="https://images.theconversation.com/files/501402/original/file-20221215-11129-13xluz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/501402/original/file-20221215-11129-13xluz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/501402/original/file-20221215-11129-13xluz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/501402/original/file-20221215-11129-13xluz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/501402/original/file-20221215-11129-13xluz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/501402/original/file-20221215-11129-13xluz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/501402/original/file-20221215-11129-13xluz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Ecosystem services from biodiversity, such as flood protection and carbon sequestration, are worth an estimated US$125-140 trillion per year.</span>
<span class="attribution"><span class="source">(AP Photo/Al-emrun Garjon)</span></span>
</figcaption>
</figure>
<p>Unlike the climate crisis that led to the <a href="https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement">signing of the Paris Agreement</a>, biodiversity loss has received little attention until now. However, the risks from biodiversity loss are enormous. </p>
<p>According to an <a href="https://www.oecd.org/environment/resources/biodiversity/G7-report-Biodiversity-Finance-and-the-Economic-and-Business-Case-for-Action.pdf">OECD report</a>, ecosystem services from biodiversity, such as crop pollination, water purification, flood protection and carbon sequestration, are worth an estimated US$125-140 trillion per year. About<a href="https://planet-tracker.org/wp-content/uploads/2022/10/NDE-report.pdf"> US$44 trillion per year of this global output</a> is dependent on nature . </p>
<h2>Bending the curve of biodiversity loss</h2>
<p>The Convention on Biological Diversity’s <a href="https://www.cbd.int/gbo/gbo5/publication/gbo-5-spm-en.pdf">fifth Global Biodiversity Outlook</a> summary report for policymakers, published in 2020, suggests a portfolio of actions to restore biodiversity.</p>
<p>These actions include the restoration of landscapes and marine and coastal ecosystems, redesigning agricultural systems through innovative productivity-enhancing approaches, deploying green infrastructure, enabling sustainable and healthy diets, rapidly phasing out fossil fuel use, and many more.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/501378/original/file-20221215-11129-zd431c.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph of the potential trend changes after following CBD's action plan" src="https://images.theconversation.com/files/501378/original/file-20221215-11129-zd431c.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/501378/original/file-20221215-11129-zd431c.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=501&fit=crop&dpr=1 600w, https://images.theconversation.com/files/501378/original/file-20221215-11129-zd431c.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=501&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/501378/original/file-20221215-11129-zd431c.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=501&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/501378/original/file-20221215-11129-zd431c.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=629&fit=crop&dpr=1 754w, https://images.theconversation.com/files/501378/original/file-20221215-11129-zd431c.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=629&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/501378/original/file-20221215-11129-zd431c.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=629&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The Global Biodiversity Outlook report offers climate actions that could halt and reverse the rate of biodiversity decline (bend the curve), potentially leading to net biodiversity gains after 2030.</span>
<span class="attribution"><span class="source">(CBD/Global Biodiversity Outlook 5, Summary for Policymakers)</span></span>
</figcaption>
</figure>
<p>Businesses and investors have a critical role to play in each of these action domains, especially when it comes to shifting to more sustainable production and manufacturing processes, investing in energy efficiency and waste reduction, conservation of natural resources, and investing in climate solutions that also support biodiversity.</p>
<h2>Biodiversity awareness in the world of finance</h2>
<p>The awareness about biodiversity risks remains very limited within the finance community. This year, the non-profit CDP, which runs the world’s environmental disclosure system, included <a href="https://dfge.de/biodiversity-cdp-2022-questionnaire/">new questions to assess firms’ approaches to biodiversity</a>. </p>
<p>The results show that three-quarters of 7,700 respondent companies do not assess their impact on biodiversity. Most companies in nature-damaging sectors, such as apparel and manufacturing, are still failing to take meaningful action to stop biodiversity loss and environmental degradation. </p>
<p>According to a <a href="https://www.oecd-ilibrary.org/docserver/1a1ae114-en.pdf?expires=1670922228&id=id&accname=guest&checksum=BEFF7F6094BF8F10746F39F98A4E16A5">2021 OECD report</a>, nature-related dependencies, impacts and risks are poorly understood and almost entirely uncompensated for in the financial sector. This leads to capital misallocation that ultimately undermines the wellbeing of society. </p>
<p>There are, however, positive signs. Thirty-one per cent of companies in the CDP survey have made a public commitment and/or endorsed biodiversity-related initiatives, and 25 per cent of respondents are planning to do so within the next two years.</p>
<p>The growing awareness is confirmed by the 2022 Global Risks Report, which found that biodiversity loss ranks third among the <a href="https://assets.weforum.org/editor/responsive_large_webp_uN-wLneixIqA0YQRRbytTiHbpvtbRYoXXytgYRwzJ-o.webp">top 10 global risks by severity over the next 10 years</a>.</p>
<h2>Integrating biodiversity in financial decisions</h2>
<p>One of the key challenges for investors and lenders is getting the relevant data to make evidence-based decisions to allocate funds. This is in line with the ever-increasing demand for environmental, social and governance (ESG) data disclosure. </p>
<p>The newly launched international initiative <a href="https://tnfd.global/">Taskforce on Nature-related Financial Disclosures</a> is developing a risk management and disclosure framework for organizations to report and act on evolving nature-related financial risks.</p>
<p>Biodiversity is also attracting the attention of financial policymakers. In March 2022, the <a href="https://www.ngfs.net/en">Network for Greening the Financial System</a>, a coalition of more than 120 central banks and supervisors, <a href="http://www.ngfs.net/sites/default/files/medias/documents/statement_on_nature_related_financial_risks_-_final.pdf">published a new statement</a>, acknowledging that biodiversity loss could lead to significant macroeconomic and financial stability risks. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1602025756581937152"}"></div></p>
<p>The new investor-led initiative <a href="https://www.prnewswire.com/news-releases/at-cop15-investors-announce-nature-action-100-to-tackle-nature-loss-and-biodiversity-decline-301699719.html">Nature Action 100</a> builds on <a href="https://www.climateaction100.org/">similar initiatives</a> to help investors engage with companies that are contributing to biodiversity loss. Engaging with companies to reduce their negative impact on nature can be a powerful tool for change, especially when coming from large investors and asset owners. </p>
<p>The International Sustainability Standards Board (ISSB) is now considering biodiversity in the development of new ESG disclosure standards. Addressing COP15 delegates, Emmanuel Faber, chair of the ISSB, announced the appointment of two <a href="https://www.ifrs.org/news-and-events/news/2022/12/issb-describes-the-concept-of-sustainability/?utm_medium=email&utm_source=website-follows-alert&utm_campaign=immediate">special advisors to provide strategic counsel on issues relating to natural ecosystems and ‘just transition.’</a> </p>
<h2>The future lies in impact investing</h2>
<p>While these initiatives are crucial, focusing on data disclosure is not sufficient. Even if we quickly agree on disclosure frameworks and measurements around biodiversity, disclosures that are voluntary and not supported by regulation are vulnerable to <a href="https://theconversation.com/greenwashing-corporate-tree-planting-generates-goodwill-but-may-sometimes-harm-the-planet-103457">greenwashing</a> which is widespread in the ESG space. </p>
<p>We need to encourage more targeted investments in nature-positive solutions that reverse biodiversity loss. Impact investing — investing money with the intention to benefit society and the environment — offers a framework for this. </p>
<p>Impact investing starts with identifying a societal challenge and then screens for investment opportunities that provide measurable solutions. But <a href="https://thegiin.org/research/publication/impact-investing-market-size-2022/">impact investments remain very small</a> relative to other responsible investment strategies. Many impact investors use the <a href="https://sdgs.un.org/goals">UN Sustainable Development Goals (SDGs)</a> to set their impact goals and measure outcomes.</p>
<p>To tackle biodiversity loss, we need more investments in SDG14 (life below water) and SDG15 (life on land). Despite the importance of ocean ecosystems for local livelihoods, food security and carbon sequestration, <a href="https://sdgs.un.org/events/accelerating-investments-sdg-14-and-sustainable-blue-economy-48934">SDG14 receives the least amount of funding</a> of any of the SDGs. </p>
<figure class="align-center ">
<img alt="Windmills" src="https://images.theconversation.com/files/501406/original/file-20221215-12-9gcc7c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/501406/original/file-20221215-12-9gcc7c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=438&fit=crop&dpr=1 600w, https://images.theconversation.com/files/501406/original/file-20221215-12-9gcc7c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=438&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/501406/original/file-20221215-12-9gcc7c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=438&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/501406/original/file-20221215-12-9gcc7c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=551&fit=crop&dpr=1 754w, https://images.theconversation.com/files/501406/original/file-20221215-12-9gcc7c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=551&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/501406/original/file-20221215-12-9gcc7c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=551&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Canada is a global leader in clean tech innovation.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Andrew Vaughan</span></span>
</figcaption>
</figure>
<p><a href="https://www.canadaaction.ca/cleantech-innovation-index-ranking">Canada is a global leader in clean tech innovation</a> and many companies at the nexus of nature and climate are emerging across the country, including innovation in ocean tech, clean marine transportation and regenerative agriculture. </p>
<p>But financing remains a challenge, especially at early stages when risk is high and scale is lacking to attract large investors. More innovative financing mechanisms and instruments are needed to fill this gap. </p>
<p>Investing in Indigenous-led projects can also advance both reconciliation and biodiversity goals, because Indigenous lands contain <a href="https://www.un.org/development/desa/indigenouspeoples/wp-content/uploads/sites/19/2018/04/Indigenous-Peoples-Collective-Rights-to-Lands-Territories-Resources.pdf">80 per cent of the world’s remaining biodiversity</a>. </p>
<p>The <a href="https://www.cbd.int/article/cop15-finance-and-biodiversity-day">Finance and Biodiversity Day</a> at COP15 stimulated important discussions on how to align financial flows with the new biodiversity framework, but real actions remain to be seen. We need action now, as time is not on our side.</p><img src="https://counter.theconversation.com/content/196640/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Basma Majerbi receives funding from Canada's Social Sciences and Humanities Research Council (SSHRC), Mitacs and the Pacific Institute for Climate Solutions (PICS) at the University of Victoria. She's a volunteer Board member with the South Island Prosperity Partnership and a member of the Research Advisory Council of the Institute for Sustainable Finance.</span></em></p>
We need more targeted investments in solutions that have a positive impact on nature to reverse biodiversity loss.
Basma Majerbi, Associate Professor, Peter B. Gustavson School of Business, University of Victoria
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/195752
2022-12-02T13:35:53Z
2022-12-02T13:35:53Z
How China’s response to zero-COVID protests could affect global business
<p>The recent protests in China against the country’s zero-COVID policy have been unprecedented in their scale, intensity and distribution. Protestors numbering in the thousands were <a href="https://www.economist.com/graphic-detail/2022/11/16/how-common-are-protests-in-china">reported</a> in dozens of cities. Not since <a href="https://www.bbc.co.uk/news/world-asia-48445934">1989’s Tiananmen Square protests</a> has there been such widespread civil disobedience.</p>
<p>The protests do not signify the imminent collapse of the Chinese Communist Party regime, but they are a big challenge to the authority of the party’s general secretary Xi Jinping, the president of China. They also have far-reaching implications for China’s domestic economy and society, as well as for international firms and the global economy.</p>
<p>International reaction to the protests was a mix of awe at the scale and <a href="https://www.theguardian.com/world/2022/nov/28/clashes-in-shanghai-as-protests-over-zero-covid-policy-grip-china#:%7E:text=Chinese%20stocks%20fell%20sharply">fear about the consequences</a>. But there was also hope that <a href="https://uk.finance.yahoo.com/news/oil-prices-slide-concerns-over-014448364.html">COVID controls might be loosened further</a>, reopening China and unblocking recent global supply chain bottlenecks.</p>
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Read more:
<a href="https://theconversation.com/shanghai-worlds-biggest-port-is-returning-to-normal-but-supply-chains-will-get-worse-before-they-get-better-182720">Shanghai: world's biggest port is returning to normal, but supply chains will get worse before they get better</a>
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<p>World stock markets <a href="https://www.cnbc.com/2022/11/28/china-covid-protests-send-global-stocks-lower-as-strategists-see-disruption-persisting.html">dived initially</a> on the Monday following the first weekend of protests on November 26 and 27. By Tuesday, a massive police presence at protest sites and early arrests of protestors led to a <a href="https://www.reuters.com/breakingviews/china-investors-desperately-seek-market-bottom-2022-11-02/">market rebound</a> as foreign investors poured back into Chinese markets.</p>
<p>Investors now appear to have discounted further protests and are <a href="https://www.ft.com/content/78a9ce92-286d-4b1c-852e-750d68e7768e?desktop=true&segmentId=7c8f09b9-9b61-4fbb-9430-9208a9e233c8#myft:notification:daily-email:content">reportedly optimistic</a> that Beijing will be forced to change course and open up the economy again. There have already been signs of a <a href="https://www.bbc.co.uk/news/world-asia-china-63805188">loosening of controls</a>, with vice-premier Sun Chunalan quoted as saying the current virus iteration is less virulent. However, enthusiastic investors risk ignoring the long-term challenges of China’s current political culture, domestic economy and outlook for international business.</p>
<figure class="align-center ">
<img alt="President of the People's Republic of China, Xi Jinping during the G20 summit in Hangzhou, China" src="https://images.theconversation.com/files/498561/original/file-20221201-20-1hg0bx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/498561/original/file-20221201-20-1hg0bx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/498561/original/file-20221201-20-1hg0bx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/498561/original/file-20221201-20-1hg0bx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/498561/original/file-20221201-20-1hg0bx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/498561/original/file-20221201-20-1hg0bx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/498561/original/file-20221201-20-1hg0bx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">President of China, Xi Jinping.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/hangzhou-china-09052016-president-peoples-republic-1376982239">Gil Corzo / Shutterstock</a></span>
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<h2>Shifting Chinese policy</h2>
<p>At the heart of contemporary political culture in China is regime survival. Xi wants China to be rich and powerful, but believes controlling domestic politics and addressing geopolitical challenges matters most. The economy comes second to security, a view Xi has expressed many times and <a href="https://www.fmprc.gov.cn/eng/zxxx_662805/202210/t20221025_10791908.html">reiterated at the Party Congress</a> in October. International investors need to realise this because China’s domestic economy and politics affect international firms involved with the country, as well as global markets.</p>
<p>So it’s important for investors and businesses to note that China is not prepared for a surge in COVID infections. Only two-thirds of the over-60s have had a third booster vaccination, although the government wants to <a href="https://www.reuters.com/world/china/china-ramp-up-covid-vaccinations-elderly-2022-11-29/">increase this</a>. But opening the economy again could bring a <a href="https://www.ft.com/content/9b81b9f0-e13d-4b0a-8bdf-91c97c7d61e7">massive increase in deaths</a> because of China’s fragile health system, <a href="https://www.researchgate.net/publication/338520008_Critical_Care_Bed_Capacity_in_Asian_Countries_and_Regions">insufficient ICU beds</a> and low natural immunity.</p>
<p>Any economic growth from the lifting of COVID controls is also likely to be short-lived for China. The domestic economy is floundering. Growth has been anaemic since 2020, after discounting initial bounces from periodic loosening. GDP <a href="http://www.stats.gov.cn/english/PressRelease/202210/t20221025_1889685.html">grew just 3%</a> for the first three quarters of 2022 and will miss the government’s target of 5.5%.</p>
<p>House prices and investment have also been on a slide. Apartment prices have been flat or negative for most of the 70 largest cities in China since 2020 – both for <a href="http://www.stats.gov.cn/english/PressRelease/202211/t20221116_1890350.html">new builds</a> and <a href="http://www.stats.gov.cn/english/PressRelease/202211/t20221116_1890352.html">resales</a>. Investment in residential floor space is down 38.5% for the year to October. Property sector woes have squeezed the revenues of local government, which bears the costs of Beijing’s dictates to control virus outbreaks. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/china-property-crisis-why-the-housing-market-is-collapsing-and-the-risks-to-the-wider-economy-189082">China property crisis: why the housing market is collapsing – and the risks to the wider economy</a>
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<p>Meanwhile, for the first ten months of 2022, <a href="http://www.stats.gov.cn/english/PressRelease/202211/t20221116_1890351.html">consumer retail sales</a> were down 0.5% and sales of food services were down 8.1% – although that is better than the 23% year-on-year fall during the spring 2020 lockdowns in Shanghai, Sichuan and Guangdong. And the <a href="http://www.stats.gov.cn/english/PressRelease/202211/t20221101_1889909.html">Purchasing Managers’ Index</a> (which gives an idea of how positive the manufacturing and services industries are feeling) declined in October to 49.2 and has been below 50 for six of the first ten months this year. Any number less than 50 indicates the economy is contracting.</p>
<h2>China’s global role</h2>
<p>Internationally, China’s role as the motor of the global economy could diminish. The continuing slowing of the Chinese economy – whether COVID controls are lifted or not – and Beijing’s prioritising of security over the economy will push international firms to act. </p>
<p>While many firms have already relocated, others have stayed – such as Apple, which gets much of its <a href="https://www.ft.com/content/e917d76a-62af-4cfc-95d1-aec67cde4e84">new iPhone Pro stock</a> from the large Foxconn-owned plant in Zhengzhou. This plant was the scene of battles between police and workers in November protesting COVID controls and <a href="https://www.reuters.com/technology/foxconn-covid-woes-may-hit-up-30-iphone-nov-shipments-zhengzhou-plant-source-2022-10-31/">lack of benefits</a>. Apple’s share price has held up remarkably well this year, as have those of major carmakers, but all are heavily dependent on China as a market and manufacturing base.</p>
<figure class="align-center ">
<img alt="Head and shoulders shot of UK prime minister Rishi Sunak at an event in Cardiff, Wales in August 2022." src="https://images.theconversation.com/files/498560/original/file-20221201-6191-b952h6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/498560/original/file-20221201-6191-b952h6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/498560/original/file-20221201-6191-b952h6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/498560/original/file-20221201-6191-b952h6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/498560/original/file-20221201-6191-b952h6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/498560/original/file-20221201-6191-b952h6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/498560/original/file-20221201-6191-b952h6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Prime minister Rishi Sunak has signalled a change in relations between the UK and China.</span>
<span class="attribution"><span class="source">ComposedPix / Shutterstock</span></span>
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<p>For some politicians in the west, one solution is to <a href="https://www.bbc.co.uk/news/uk-politics-63787877">accelerate decoupling from China</a>. But doing so is neither feasible nor desirable despite their justified security concerns. Science and technology innovation is international in scope and depends on openness and exchange to a certain extent. It will be difficult to freeze China out if western firms want to share in Chinese growth and developments in these areas. </p>
<p>Recent US efforts to restrict the sale of semiconductors have come about only because of a belated realisation of how aggressive China has been acquiring technology since the 2000s. Too many people in the west were not reading Xi’s speeches in the early 2010s, only waking up around 2016 after Beijing had laid bare its strategy in the <a href="https://www.cfr.org/backgrounder/made-china-2025-threat-global-trade">Made in China 2025 plan</a>.</p>
<p>The pursuit of profits in China’s very large domestic market has led international firms to neglect the politics of the China marketplace. It’s time to realise that <a href="https://doi.org/10.2307/j.ctv1mvw8x7.11">the business of government in China</a> ultimately rests on ensuring business serves the interest of the party-state and its goals.</p><img src="https://counter.theconversation.com/content/195752/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephen Morgan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Recent unrest will affect China’s domestic economy as well as international businesses with a stake in the country.
Stephen Morgan, Professor of Economic History (Emeritus), University of Nottingham
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/191877
2022-10-10T07:37:49Z
2022-10-10T07:37:49Z
Ghana and the IMF: debt restructuring must go hand-in-hand with managing finances better
<figure><img src="https://images.theconversation.com/files/488725/original/file-20221007-14-cp946.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ghana is engaging the IMF over a bailout</span> <span class="attribution"><span class="source">Wikimedia Commons</span></span></figcaption></figure><p>Ghana is struggling with managing its <a href="https://theconversation.com/ghanas-return-to-the-imf-within-three-years-underscores-its-deeper-economic-problems-187041">debt</a>, 20-year high inflation, a weak currency, and rising inequality.
For example, <a href="https://statsghana.gov.gh/cpigraph.php?graphindicators=MTI0MDM5Njc1Ny42OTU1/cpigraph/n1r7pr567p">inflation</a> rose to 33.9% in August 2022 from 9.7% a year earlier, while the cedi has <a href="https://www.google.com/finance/quote/GHS-USD?sa=X&ved=2ahUKEwi_gMry88T6AhVoSEEAHfAVAoAQmY0JegQIAxAb&window=YTD">depreciated</a> by 41% year-to-date against the US dollar. These vulnerabilities have been worsened by the aftershocks of the ongoing Russia–<a href="https://theconversation.com/ukraine-war-how-ghana-is-vulnerable-and-what-can-be-done-178528">Ukraine war</a> and the COVID-19 pandemic.</p>
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Read more:
<a href="https://theconversation.com/ghanas-return-to-the-imf-within-three-years-underscores-its-deeper-economic-problems-187041">Ghana’s return to the IMF within three years underscores its deeper economic problems</a>
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<p>These challenges have forced Ghana’s government to <a href="https://mofep.gov.gh/press-release/2022-09-26/ghana-starts-imf-negotiations">approach</a> the International Monetary Fund (IMF) for an economic support package. Part of the engagement will involve a new <a href="https://www.imf.org/external/pubs/ft/dsa/">assessment</a> of the sustainability of the country’s debt. </p>
<p>Debt sustainability analysis <a href="https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/39/Debt-Sustainability-Framework-for-Low-Income-Countries">classifies</a> countries into four bands: low risk, moderate risk, high risk, and in debt distress. This is based on certain thresholds for key public debt indicators. Ghana’s last <a href="https://documents.worldbank.org/en/publication/documents-reports/documentdetail/973971632340489819/ghana-joint-world-bank-imf-debt-sustainability-analysis">analysis</a>, conducted in mid-2021, classified the country as being at high risk of external debt distress and overall debt distress. The assessment was carried out jointly by the IMF and the World Bank. </p>
<p>If the new assessment concludes Ghana’s debt levels aren’t sustainable, the country will have to take steps to restructure its debt to qualify for IMF assistance. The Fund <a href="https://www.imf.org/en/About/FAQ/sovereign-debt">states</a> that it won’t lend to countries that have unsustainable debts unless the member takes steps to restore debt sustainability, which can include debt restructuring.</p>
<p>Recently, Zambia had to <a href="https://www.theguardian.com/global-development/2022/sep/02/crisis-hit-zambia-secures-13bn-imf-loan-to-rebuild-stricken-economy">negotiate</a> with all its external lenders, including bilateral and commercial creditors, as a pre-condition for accessing IMF funding. The process lasted almost two years.</p>
<p>Ghana needs to address its current crisis by tackling two issues. </p>
<p>Firstly, the restructuring of its debt. Here a good option would be to restructure its external debt as well as some limited domestic debt restructuring. </p>
<p>And secondly, it needs urgently to take six steps on the domestic front to get its financial house in order. This includes putting an end to <a href="https://imaniafrica.org/wp-content/uploads/2022/05/2ND-IMANI-FISCAL-RECKLESSNESS-INDEX-2020.pdf">profligacy</a> in government spending and ensuring it lives within its means.</p>
<h2>Ghana’s public debt dynamics</h2>
<p>A country’s debt dynamics includes both external and domestic debt, and debt accruing to <a href="https://www.imf.org/en/Publications/fandd/issues/2020/09/what-is-debt-sustainability-basics">state-owned enterprises</a> and its maturity structure. All need to be considered when considering any debt restructuring. </p>
<p>Ghana’s total public debt as of June 2022 was US$54.4 billion (GHS393 billion or 78.3% of GDP) from US$32.3 billion (GHS143 billion or 55.5% of GDP) in 2017, according to <a href="https://www.bog.gov.gh/wp-content/uploads/2022/08/Summary-of-Economic-and-Financial-Data-July-2022_1.pdf">central bank</a> and <a href="https://mofep.gov.gh/sites/default/files/reports/economic/2021-Annual-Public-Debt-Report.pdf">finance ministry</a> data. </p>
<p>Of this, external debt was US$28.1 billion (GHS203.4 billion or 40.5% of GDP), while domestic debt issued in cedis was US$26.3 billion (GHS190 billion or 37.8% of GDP). </p>
<p>Regarding external debt, the portfolio includes debt owed to multilaterals such as the IMF and World Bank, bilaterals, commercial loans such as Eurobonds, and other export credits. The external debt also comprises of fixed (86.5%), variable (13.1%) rate and some interest-free (0.4%) debt. As of 2021, about 72% of the external debt was also dollar-denominated.</p>
<p>In 2021, the government <a href="https://mofep.gov.gh/sites/default/files/reports/economic/2021-Annual-Public-Debt-Report.pdf">spent</a> US$2.2 billion in total external debt service, including principal repayments, interest payments and charges.</p>
<p>Of the domestic debt, Ghana’s government sourced as much as 85% of its domestic debt in 2021 via the market. This included financial securities and instruments traded on the secondary market. This means that Ghanaian banks, individuals and institutional investors, such as pension funds, buy and sell government securities such as treasury bills and other fixed deposits. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/488031/original/file-20221004-16-l3wqpl.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/488031/original/file-20221004-16-l3wqpl.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=178&fit=crop&dpr=1 600w, https://images.theconversation.com/files/488031/original/file-20221004-16-l3wqpl.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=178&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/488031/original/file-20221004-16-l3wqpl.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=178&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/488031/original/file-20221004-16-l3wqpl.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=223&fit=crop&dpr=1 754w, https://images.theconversation.com/files/488031/original/file-20221004-16-l3wqpl.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=223&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/488031/original/file-20221004-16-l3wqpl.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=223&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Theo Acheampong</span></span>
</figcaption>
</figure>
<p>In 2021, Ghana’s banking sector cumulatively held 50% of the total domestic debt stock comprising commercial banks (30%) and the Bank of Ghana (20%). The non-bank sector comprised firms and institutions (22.6%), individual investors (9.2%), rural banks (1.1%), insurance companies (0.6%) and the Social Security and National Insurance Trust (0.3%). Foreign investors held 16% of the remaining domestic debt.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/488033/original/file-20221004-12-xljudb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/488033/original/file-20221004-12-xljudb.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=233&fit=crop&dpr=1 600w, https://images.theconversation.com/files/488033/original/file-20221004-12-xljudb.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=233&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/488033/original/file-20221004-12-xljudb.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=233&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/488033/original/file-20221004-12-xljudb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=292&fit=crop&dpr=1 754w, https://images.theconversation.com/files/488033/original/file-20221004-12-xljudb.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=292&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/488033/original/file-20221004-12-xljudb.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=292&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Theo Acheampong</span></span>
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<h2>Restructuring ideas</h2>
<p>There have been <a href="https://www.bloomberg.com/news/articles/2022-09-20/ghana-set-to-start-debt-restructuring-talks-for-local-bonds?srnd=premium-africa">suggestions</a> that Ghana would prioritise restructuring its domestic debt. But this begs the question: what does a debt restructuring entail and where does the burden fall especially if <a href="https://www.investopedia.com/terms/h/haircut.asp">haircuts</a> – which can include a reduction in outstanding interest payments – are part of the policy mix?</p>
<p>Ghana’s commercial banks held about <a href="https://mofep.gov.gh/sites/default/files/reports/economic/2021-Annual-Public-Debt-Report.pdf">30%</a> of the domestic debt and 31% of the total <a href="https://www.bog.gov.gh/wp-content/uploads/2022/08/Summary-of-Economic-and-Financial-Data-July-2022_1.pdf">banking sector assets</a> in 2021. Thus, any attempt to restructure the domestic debt without a compensating policy action could leave the banking sector highly vulnerable to further distress. </p>
<p>Restructuring domestic debt focused solely on haircuts would severely affect asset quality and increase non-performing loans much higher than the <a href="https://www.bog.gov.gh/wp-content/uploads/2022/08/Summary-of-Economic-and-Financial-Data-July-2022_1.pdf">current</a> 14.1%. </p>
<p>It would also reduce private sector lending, already under severe strain from 20-year high inflation. Pensions and other institutional investments are also likely to suffer.</p>
<p>When it comes to external debt, Ghana must first seek to restructure it under the principles of the <a href="https://saiia.org.za/research/africas-covid-19-recovery-challenge-how-the-g20-can-bridge-the-development-financing-gap/">G20 Common Framework</a>. Ghana delayed in applying to join the Framework during the pandemic for <a href="https://academic.oup.com/book/38922/chapter-abstract/338098258?redirectedFrom=fulltext">fears</a> of losing market access. </p>
<p>The country was eventually locked out of the international capital markets anyway after several <a href="https://www.fitchratings.com/research/sovereigns/common-framework-access-could-lead-to-sovereign-debt-default-16-02-2021">sovereign</a> rating downgrades. </p>
<p>Ghana has an opportunity to remedy this and offer a collaborative and constructive platform to engage on external debt restructuring. </p>
<p>Zambia’s recent restructuring <a href="https://www.atlanticcouncil.org/blogs/econographics/zambia-a-template-for-debt-restructuring/">exercise</a> offers valuable <a href="https://jubileedebt.org.uk/wp-content/uploads/2022/02/Zambia-debt-restructuring-needs-calculation_02.22.pdf">lessons</a>. All creditors must be treated evenly as any hints of arbitrary treatment will delay the process, as <a href="https://odi.org/en/insights/four-lessons-from-zambias-emerging-debt-default/">happened</a> in this case. </p>
<h2>Way forward</h2>
<p>There are six steps Ghana must urgently take to get government finances in order.</p>
<p>Firstly, it must enforce the <a href="http://ir.parliament.gh/bitstream/handle/123456789/1831/FISCAL%20RESPONSIBILITY%20ACT%2c%202018%20%28ACT%20982%29.pdf?sequence=1&isAllowed=y">law</a> when it comes to fiscal responsibility and impose hard sanctions on the finance minister and other ministries who flout it. Ultimately, Ghana must ensure that it lives within its means and hold politicians to account to provide funding plans for their <a href="https://blogs.worldbank.org/africacan/will-procyclicality-override-ghanas-new-fiscal-responsibility-law">political</a> campaign promises. </p>
<p>Secondly, Ghana must implement the Integrated Financial Management System as part of the broader public financing management reforms and ensure that every transaction is fully captured in the main accounting system. Media <a href="https://www.myjoyonline.com/auditor-generals-reports-are-hollow-bright-simons/">reports</a> indicate that only about a third of government transactions are fully captured. This creates many avenues for collusion and corruption.</p>
<p>Thirdly, the government must limit borrowing from the domestic market to compensate for the lack of access to the international capital markets. </p>
<p>Fourthly, President Nana Akufo-Addo must cut down the size of the government through a reshuffle to remove many of those who are not performing and reduce public expenditure. The President does not need to tell Ghanaians that his ministers are <a href="https://citinewsroom.com/2022/08/my-ministers-have-been-outstanding-akufo-addo-shoots-down-calls-for-reshuffle/">“outstanding”</a>, as the citizens would know it if cost of living is indeed improving.</p>
<p>Fifth, the government must urgently convene a broader national stakeholder forum on the economy with all key representative groups including labour, civil society, inter-faith groups, political parties, and business associations, among others.</p>
<p>In 2014 the then opposition <a href="https://www.graphic.com.gh/news/politics/npp-boycotts-national-economic-forum.html">ridiculed</a> the idea of a forum. But platforms like this can be valuable for generating new ideas for economic reforms. It will also ensure stakeholder buy-in of any proposed reform programmes.</p>
<p>Lastly, the government must be transparent in its dealings with Ghanaians and the IMF. All data must be fully and transparently disclosed, especially the indebtedness or exposure of the state-owned enterprises and other parastatals.</p><img src="https://counter.theconversation.com/content/191877/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Theophilus Acheampong is affiliated with the IMANI Centre for Policy and Education, Accra, Ghana.</span></em></p>
Ghana’s sovereign risk has been downgraded to near junk status by ratings agencies in recent times.
Theophilus Acheampong, Associate Lecturer, University of Aberdeen
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/187832
2022-08-04T12:20:16Z
2022-08-04T12:20:16Z
Who benefits from renewable energy subsidies? In Texas, it’s often fossil fuel companies that are fighting clean energy elsewhere
<figure><img src="https://images.theconversation.com/files/476975/original/file-20220801-83105-wdx2ee.jpg?ixlib=rb-1.1.0&rect=4%2C4%2C2931%2C1914&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Texas is the No. 1 wind power producer in the U.S.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/delaware-mountain-wind-farm-photo-by-greg-smith-corbis-saba-news-photo/526768758">Greg Smith/Corbis SABA via Getty Images</a></span></figcaption></figure><p>Texas is known for fiercely promoting its oil and gas industries, but it’s also the <a href="https://www.globaltrademag.com/states-with-the-largest-increase-in-renewable-energy-production/%22%22">No. 2 renewable energy producer</a> in the country after California. In fact, more than a quarter of all the wind power produced in the United States in 2021 was generated in Texas.</p>
<p>These projects benefit from a lucrative state tax incentive program called <a href="https://comptroller.texas.gov/economy/fiscal-notes/2016/april/chap313.php">Chapter 313</a>. That incentive program expires on Dec. 31, 2022, and the rush of applications for wind and solar energy projects to secure incentives before the deadline is providing a rare window into a notoriously opaque industry.</p>
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<p><em>You can listen to more articles from The Conversation, narrated by Noa, <a href="https://theconversation.com/us/topics/audio-narrated-99682">here</a>.</em></p>
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<p>By reviewing the applications and ownership documents, we were able to track who actually builds and owns a large portion of the nation’s renewable energy, when and how those assets change hands, and who ultimately benefits from the tax incentives.</p>
<p>The results might surprise you. The majority of utility-scale solar and wind energy projects in Texas aren’t owned by companies focused on renewable energy – they’re owned by energy companies or utilities that are better known for fossil fuels, including some that have <a href="https://www.orlandosentinel.com/news/os-ne-matrix-llc-fpl-utilities-climate-change-20220727-y3ava6jmzzar3ep6a67jcgg3gu-story.html">aggressively opposed renewable energy</a> and climate policies in other states and nationally.</p>
<p>The policy implications of these findings are complex. While these subsidies might lead some energy companies to reduce their greenhouse gas emissions, they also can allow energy companies to continue polluting from existing fossil fuel assets while collecting the subsidy benefits. </p>
<h2>A subsidy program that saves companies billions</h2>
<p>Chapter 313 limits how much companies have to pay in property taxes for schools if those companies build infrastructure and agree to create jobs. The Texas Legislature passed it in 2001 when a number of large companies, including Intel and Boeing, were considering Texas for an investment location. </p>
<p>Companies using this program can <a href="https://www.texastribune.org/2021/04/29/texas-legislature-chapter-313/">save billions of dollars</a> in local property taxes. However, <a href="https://www.houstonchronicle.com/news/investigations/unfair-burden/article/unfair-burden-part-2-tax-program-costs-spiral-16164758.php">investigations have revealed</a> high costs per job and minimal requirements for companies. The <a href="https://www.texastribune.org/2019/02/15/texas-school-funding-how-it-works/">state’s school funding system</a> also suffered.</p>
<p>The program wasn’t renewed, but companies that applied for the incentive by Aug. 1, 2022, could grandfather in their investments for 10 years of tax benefits. That led to the <a href="https://www.kvue.com/article/money/economy/boomtown-2040/chapter-313-expire-tax-break-benefits-nxp-samsung-school-district-isd/269-3c3cfe26-189c-43c1-a86e-b2acf2ed2e3e">rush of applications</a>, including for wind and solar projects.</p>
<h2>Who’s proposing renewable energy projects?</h2>
<p>We reviewed 191 <a href="https://comptroller.texas.gov/economy/local/ch313/agreement-docs.php">wind and solar project applications</a> filed in 2022. If built, these projects would almost double <a href="https://comptroller.texas.gov/economy/docs/96-1359-2021.pdf">the number of renewable energy projects in Texas</a>.</p>
<p>It is notoriously difficult to track the owners of renewable energy projects in the U.S., because most are structured as <a href="https://www.investopedia.com/terms/l/llc.asp">limited liability companies</a>, or LLCs. However, the application for Texas incentives requires not only information on the owner, but also a signature of an individual representative of the owners. That provides a glimpse into the impact that subsidies can have and who benefits.</p>
<p><iframe id="qwtO6" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/qwtO6/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>We found that just over a third – 69 out of 191 proposed projects – are owned by renewable energy companies, such as Danish company Ørsted and Recurrent Energy, owned by Canadian Solar.</p>
<p>Over half the proposals – 101 – were submitted by energy companies known more for oil and gas, or utilities with fossil fuel assets. This includes the renewable energy subsidiaries of oil supermajors such as Total and BP, and utility owners including EDF, AES and Engie, all of which are major global players. </p>
<p>Some project applications came from investment groups such as DeShaw Group, Cardinal Investment Group and Horus Capital. Apex Clean Energy, a renewable energy subsidiary of the major investment manager Ares Management, frequently showed up in applications. </p>
<h2>New owners take over</h2>
<p>The proposed projects provide a snapshot of the renewable energy projects’ developers – but what happens after these projects are built?</p>
<p>To figure that out, we also looked at all renewable energy projects completed in 2020 and 2021 that participated in the Chapter 313 incentive program.</p>
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<p>To our surprise, almost half of the projects built in 2020 or 2021 had changed hands by 2022. Some were due to company acquisitions. Many other projects were sold.</p>
<p>This changed the composition of owners. While renewable energy companies owned roughly half the projects at the application stage, by 2022, two-thirds of the projects were owned by utilities and energy companies with fossil fuel assets.</p>
<p>The original developers may have benefited from the first year or so of the tax break, but the new owners are poised to reap the majority of the remaining years of the 10-year property tax incentive.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/476594/original/file-20220728-26301-6zgwcf.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/476594/original/file-20220728-26301-6zgwcf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/476594/original/file-20220728-26301-6zgwcf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=593&fit=crop&dpr=1 600w, https://images.theconversation.com/files/476594/original/file-20220728-26301-6zgwcf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=593&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/476594/original/file-20220728-26301-6zgwcf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=593&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/476594/original/file-20220728-26301-6zgwcf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=745&fit=crop&dpr=1 754w, https://images.theconversation.com/files/476594/original/file-20220728-26301-6zgwcf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=745&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/476594/original/file-20220728-26301-6zgwcf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=745&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>The most common pattern of sales was a renewable energy developer selling a project to an energy company or utility. For example, Duke Energy purchased a solar project originally owned by Recurrent Energy, and Alpin Sun sold a solar project to BP.</p>
<p>We found that ownership by self-described “venture capitalists” and other investors was rare before 2022. The lucrative and expiring incentive program likely led to a gold rush of applications, including by some companies with limited experience in renewable energy.</p>
<h2>When renewable incentives become subsidies to fossil fuel companies</h2>
<p>Many of the owners benefiting from these subsidies have parent companies with <a href="https://www.theguardian.com/environment/2019/oct/09/revealed-20-firms-third-carbon-emissions">high carbon emissions</a> and a <a href="https://doi.org/10.1016/j.gloenvcha.2021.102386">history of fighting climate policies</a>.</p>
<p>For example, the company with the most renewable energy projects subsidized under Chapter 313 from 2020 to 2022 is NextEra. NextEra is also the parent company of <a href="https://www.orlandosentinel.com/news/os-ne-matrix-llc-fpl-utilities-climate-change-20220727-y3ava6jmzzar3ep6a67jcgg3gu-story.html">Florida Power and Light</a>, a utility that has campaigned against <a href="https://www.tampabay.com/news/florida-politics/2021/12/20/floridas-largest-electric-utility-conspired-against-solar-power-documents-show/">rooftop solar in Florida</a> and <a href="https://www.utilitydive.com/news/massachusetts-top-court-denies-nextera-bid-to-block-states-ppas-with-hydro/584721/">sued</a> to block hydropower imports in Massachusetts. In Texas, however, NextEra lobbied for a continuation of Chapter 313 incentives.</p>
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<p>Other major energy companies in the owner list include France’s Total Energy, BP, Duke Energy and Savion, which is owned by Shell.</p>
<p>The data suggests some possible tensions within green energy policy.</p>
<p>Environmentalists have long argued for federal and state subsidies for renewable energy as a means of combating climate change, including in the <a href="https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_of_2022.pdf">climate- and inflation-focused bill currently in Congress</a>. </p>
<p>However, as our data analysis shows, the owners who benefit from renewable energy incentives can in some cases be the same fossil fuel companies that actively oppose a green energy transition. <a href="https://doi.org/10.1080/09692290.2021.1946708">The results of a 2021 study</a>, using data released by energy companies on earnings calls, also suggest that energy company investments in renewable energy projects are often simply diversification strategies – they aren’t replacing fossil fuels.</p>
<p>Our analysis is based on one program in Texas, but with the size of the Texas renewable energy sector, and the companies involved, it can offer insights for broader renewable energy policies. </p>
<p>Key to any subsidy program is clearly articulating the goals and tracking success in meeting them. If the goal is to reduce greenhouse as emissions, that means examining who is benefiting and determining if the subsidies are actually leading to a transition away from fossil fuels. </p>
<p>Our data begins to shine a light on the answer.</p><img src="https://counter.theconversation.com/content/187832/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nathan Jensen previously received funding from John and Laura Arnold Foundation for peer-reviewed research on the Texas Chapter 313 Program. </span></em></p><p class="fine-print"><em><span>Isabella Steinhauer does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
While Congress considers new renewable energy incentives, Texas’ sprawling wind farms tell a story about renewable energy ownership in the US – and who benefits from subsidies.
Nathan Jensen, Professor of Government, The University of Texas at Austin
Isabella Steinhauer, Master of Public Affairs Candidate and Graduate Research Assistant, The University of Texas at Austin
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/186446
2022-07-24T12:29:02Z
2022-07-24T12:29:02Z
Investing in crypto-assets: How to limit the risk of being exposed to fraud
<figure><img src="https://images.theconversation.com/files/472877/original/file-20220706-16-xsnd5q.jpg?ixlib=rb-1.1.0&rect=23%2C0%2C5185%2C3467&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Peter Thiel, co-founder of PayPal and Palantir, delivers a keynote speech at the Bitcoin Conference in April in Miami Beach, Fla.</span> <span class="attribution"><span class="source">(AP Photo/Rebecca Blackwell)</span></span></figcaption></figure><p>In 2017, thousands of investors in over 175 countries found themselves with empty pockets after having invested nearly US$4 billion in a cryptocurrency called “OneCoin”. The mastermind behind the project, <a href="https://www.bbc.com/news/stories-50435014">Ruja Ignatova</a>, vanished with what is believed to be the entire amount missing.</p>
<p>This news item struck a nerve in the cryptocurrency world. The BBC even <a href="https://www.bbc.co.uk/programmes/p07nkd84/episodes/downloads">devoted a podcast</a> to it. And while this case was one of large-scale fraud, the fact remains that fraudulent schemes are frequent in the world of crypto-assets, which includes cryptocurrencies (such as Bitcoin) and non-fungible tokens (NFTs). Possession of these tokens grants investors rights that can take different forms (either access to a good — like a work of art — a service or something similar to owning a stock).</p>
<p>I have been interested in the study of fraud for many years, first in my professional practice as an auditor and forensic accountant, then as a researcher. I am primarily interested in the factors that lead to fraud, as well as the indicators and impacts of fraud. More recently, my interest has focused on fraud related to crypto-assets, since these new technologies carry new risks and limitations that both users/investors and regulators face.</p>
<h2>An alarming amount of fraud</h2>
<p>A 2018 report from a crypto-asset firm estimates that nearly 80 per cent of all initial coin offerings (ICOs) launched in 2017 — such as the issuance of new cryptocurrencies — <a href="https://research.bloomberg.com/pub/res/d28giW28tf6G7T_Wr77aU0gDgFQ">were fraudulent</a>. Of course, it is not possible to accurately measure the number of frauds that occur each year, not least of all because most are not reported to the relevant authorities. However, this alarming figure should still raise questions for potential investors about how to manage the risks they are taking.</p>
<p>It should be noted that crypto-assets are subject to little or no regulation around the world. Regulatory bodies such as Québec’s <a href="https://lautorite.qc.ca/en/professionals/fintech-financial-technology/how-the-amf-supports-innovative-firms/legislative-guidance">Autorité des marchés financiers</a> and the <a href="https://www.sec.gov/">Security and Exchange Commission</a> in the United States, have been working on the subject for some time now, but regulation in certain areas is lagging. One reason for this is the <a href="https://www.newyorker.com/business/currency/the-challenges-of-regulating-cryptocurrency">decentralized and borderless nature of these investments</a>, which makes the development and enforcement of laws and regulations particularly difficult.</p>
<h2>Traditional indicators of fraud</h2>
<p>Investing in crypto-assets falls under the purview of finance technology, commonly referred to as <a href="https://bootcamp.cvn.columbia.edu/blog/what-is-fintech">FinTech</a>. The tools for investing in FinTech diverge significantly from those of traditional finance. Investors in FinTech are often driven by the search for quick gains, bordering on speculation.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/469572/original/file-20220617-16-h26kyk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="woman outside OneCoin office" src="https://images.theconversation.com/files/469572/original/file-20220617-16-h26kyk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/469572/original/file-20220617-16-h26kyk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/469572/original/file-20220617-16-h26kyk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/469572/original/file-20220617-16-h26kyk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/469572/original/file-20220617-16-h26kyk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/469572/original/file-20220617-16-h26kyk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/469572/original/file-20220617-16-h26kyk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A woman walks past the office of cryptocurrency OneCoin, founded by Ruja Ignatova, which defrauded investors of billions of dollars.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<p>The fact remains that signals of fraud — which have existed for a very long time in traditional finance, such as stock market investments — are also present in FinTech. One only has to think of promises of incredible returns, far beyond what regulated markets are generating. Or the pressure some financial product promoters place on investors to act quickly, which pushes investors to place their money without taking time to think through their decision.</p>
<p>This urgency is felt particularly by investors when a promoter plays on their fears of missing an incredible investment opportunity, thereby inciting them to put their money down quickly in order to beat others to the chase. A parallel could be drawn with promotions for products in stores that sell at cut-rate prices, while claiming that quantities are limited. However, in the case of investing, this often turns out to be a fraudulent scheme rather than an attractive opportunity.</p>
<h2>Explanatory documents, not regulatory documents</h2>
<p>The technological aspect of crypto-assets means that new indicators of fraud have emerged in its wake. Since these differ from what investors are used to hearing from those responsible for informing them about risks — including investment advisors — it is very important that investors pay close attention to the projects in which they are considering investing. </p>
<p>Indeed, the absence (or near absence) of regulation means that, for the time being, investors are solely responsible for protecting themselves against the fraudulent schemes that are rife in the industry. Some investment funds offer <a href="https://www.investopedia.com/investing/understanding-cryptocurrency-etfs/">cryptocurrency exchange-traded funds</a>. But the fact remains that these investments carry a <a href="https://www.forbes.com/sites/nicolelapin/2021/12/23/explaining-cryptos-volatility/?sh=fa2e1247b543">risk of volatility</a>.</p>
<p>As in the case of a traditional investment, the teams behind the ICO publish what is called a <a href="https://coinmarketcap.com/alexandria/glossary/whitepaper">“white paper”</a>. Similar to a prospectus for a public offering — when a company raises additional funds through a stock offering, for example — this document provides the potential investor with a wealth of information about the proposed project. Among other things, it explains how the project works and who the team is behind it.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/469573/original/file-20220617-19-sgjb45.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Close-up photo of gold bitcoin, ethereum and litecoin coins lying on U.S. currency paper and white keyboard" src="https://images.theconversation.com/files/469573/original/file-20220617-19-sgjb45.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/469573/original/file-20220617-19-sgjb45.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/469573/original/file-20220617-19-sgjb45.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/469573/original/file-20220617-19-sgjb45.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/469573/original/file-20220617-19-sgjb45.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/469573/original/file-20220617-19-sgjb45.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/469573/original/file-20220617-19-sgjb45.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The ease of investing, coupled with sweeping advertising (especially on social media such as Facebook), means that people are often enticed to invest in crypto-assets.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<p>However, the similarities with prospectuses end there because, unlike the latter, white papers are not regulated. An issuer can therefore show what it wants, and conversely, omit information that could prove useful to a potential investor. </p>
<p>It is important to note that for most projects, anyone can issue a white paper. But regulators strongly recommend that the entity in question be registered, not only to build confidence with potential investors, but more importantly, to ensure that the rules in place are being followed.</p>
<h2>New signals of fraud</h2>
<p>There are new signals of fraud that are unique to crypto-assets. We have seen white papers containing elements that contradict each other, incongruities or even errors in the name of a company behind a project. Some white papers are copied from other projects and quickly revised, leaving behind typos. It should be noted that as a general rule, an ICO is a unique project and a copy usually signals a fraudulent project.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/17JEm8lVL_s?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">An advertisement from the Autorité des marchés financiers, which aims to raise awareness of the risks associated with crypto-assets.</span></figcaption>
</figure>
<p>Another indicator of potential fraud is a white paper in which certain passages are too complex to be easily read. This should prompt the potential investor to question the seriousness of the project. The primary purpose of a white paper is to inform an investor, so abstruse language should never be used for projects being presented as coherent.</p>
<p>What’s more, because of the technological complexity of the work involved, the team behind the project is especially essential to its success. So if the project documentation does not include a description of the team, whether in the white paper or on its web site, this absence should raise questions in an investor’s mind. </p>
<p>For that matter, it is usually quite easy to get in touch with the team behind an ICO in order to ask questions or obtain additional information about the project, which is not the case in traditional finance. If a potential investor cannot get in touch with the team, again, there is reason to question the seriousness of the project.</p>
<p>Encountering any of the signals of fraud discussed above does not necessarily mean that a project is fraudulent. However, recognizing these signals will make an investor better equipped to manage the fraud-related investment risks that are particularly prevalent in the crypto-asset ecosystem.</p><img src="https://counter.theconversation.com/content/186446/count.gif" alt="La Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Annie Lecompte has received funding from the Quebec CPA Foundation.</span></em></p>
The craze for crypto-currencies continues to grow. However, the environment is risky for investors, not only in terms of volatility, but also because of fraud.
Annie Lecompte, Professeure - Certification, Université du Québec à Montréal (UQAM)
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/182033
2022-06-21T11:47:15Z
2022-06-21T11:47:15Z
Scams and cryptocurrency can go hand in hand – here’s how they work and what to watch out for
<figure><img src="https://images.theconversation.com/files/469023/original/file-20220615-25-5sc87d.jpg?ixlib=rb-1.1.0&rect=17%2C26%2C5779%2C3966&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The anonymous nature of cryptocurrency transactions is ideal for con artists.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/hacker-stealing-password-and-identity-computer-royalty-free-image/992840396">seksan Mongkhonkhamsao/Moment via Getty Images</a></span></figcaption></figure><p>When one of our students told us they were going to drop out of college in August 2021, it wasn’t the first time we’d heard of someone ending their studies prematurely.</p>
<hr>
<iframe id="noa-web-audio-player" style="border: none" src="https://embed-player.newsoveraudio.com/v4?key=x84olp&id=https://theconversation.com/scams-and-cryptocurrency-can-go-hand-in-hand-heres-how-they-work-and-what-to-watch-out-for-182033&bgColor=F5F5F5&color=D8352A&playColor=D8352A" width="100%" height="110px"></iframe>
<p><em>You can listen to more articles from The Conversation, narrated by Noa, <a href="https://theconversation.com/us/topics/audio-narrated-99682">here</a>.</em></p>
<hr>
<p>What was new, though, was the reason. The student had become a victim of a cryptocurrency scam and had lost all their money – including a bank loan – leaving them not just broke, but in debt. The experience was financially and psychologically traumatic, to say the least.</p>
<p>This student, unfortunately, is not alone. Currently there are hundreds of millions of cryptocurrency owners, with <a href="https://assets.ctfassets.net/hfgyig42jimx/5i8TeN1QYJDjn82pSuZB5S/85c7c9393f3ee67e456ec780f9bf11e3/Cryptodotcom_Crypto_Market_Sizing_Jan2022.pdf">estimates predicting further rapid growth</a>.
As the number of people owning cryptocurrencies has increased, so has the number of scam victims. </p>
<p>We study <a href="https://scholar.google.com/citations?hl=en&user=tLkeURsAAAAJ">behavioral economics</a> and <a href="https://scholar.google.com/citations?hl=en&view_op=list_works&gmla=AJsN-F4Duqf9w-yRoxI_zWEQFHqsNVBbjyTuzE_DcB9qQZd43DA-MXVCyxnE5gPF2STCeZGNVUb9yS-Dw3pwJFdrL22oit3ZKA&user=NsBe-cYAAAAJ">psychology</a> – and recently published a <a href="https://www.routledge.com/A-Fresh-Look-at-Fraud-Theoretical-and-Applied-Perspectives/Hanoch-Wood/p/book/9780367861445">book about the rising problem of fraud, scams and financial abuse</a>. There are reasons why cryptocurrency scams are so prevalent. And there are steps you can take to reduce your chances of becoming a victim.</p>
<h2>Crypto takes off</h2>
<p>Scams are not a recent phenomenon, with <a href="https://www.routledge.com/A-Fresh-Look-at-Fraud-Theoretical-and-Applied-Perspectives/Hanoch-Wood/p/book/9780367861445">stories about them dating back to biblical times</a>. What has fundamentally changed is the ease by which scammers can reach millions, if not billions, of individuals with a press of a button. The internet and other technologies have simply changed the rules of the game, with cryptocurrencies coming to epitomize the leading edge of these <a href="https://consumer.ftc.gov/articles/what-know-about-cryptocurrency-and-scams">new cybercrime opportunities</a>. </p>
<p>Cryptocurrencies – which are <a href="https://www.coindesk.com/learn/what-is-cryptocurrency/">decentralized, digital currencies that use cryptography to create anonymous transactions</a> – were originally driven by “<a href="https://nakamoto.com/the-cypherpunks/">cypherpunks,” individuals concerned with privacy</a>. But they have expanded to capture the minds and pockets of everyday people and criminals alike, especially during the COVID-19 pandemic, when <a href="https://harbert.auburn.edu/news/is-cryptocurrency-going-mainstream-yes-but-theres-more-to-the-story.html">the price of various cryptocurrencies shot up and cryptocurrencies became more mainstream</a>. <a href="https://www.bitdefender.com/blog/hotforsecurity/fake-covid-19-cryptocurrency-emerges-promising-to-gain-value-with-each-death">Scammers capitalized on their popularity</a>. The pandemic also caused a disruption to mainstream business, <a href="https://doi.org/10.1016/j.frl.2021.102049">leading to greater reliance on alternatives such as cryptocurrencies</a>. </p>
<p>A January 2022 report by <a href="https://www.chainalysis.com/">Chainanalysis</a>, a blockchain data platform, suggests <a href="https://blog.chainalysis.com/reports/2022-crypto-crime-report-introduction/">in 2021 close to US$14 billion was scammed</a> from investors using cryptocurrencies. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1408117635481485318"}"></div></p>
<p>For example, in 2021, two brothers from South Africa managed to <a href="https://www.bloomberg.com/news/articles/2021-06-23/s-african-brothers-vanish-and-so-does-3-6-billion-in-bitcoin">defraud investors of $3.6 billion</a> from a cryptocurrency investment platform. In February 2022, the FBI announced it had arrested a couple who used a fake cryptocurrency platform to <a href="https://www.euronews.com/next/2022/02/09/us-couple-arrested-for-alleged-fraud-after-3-6-billion-stolen-bitcoin-seized-in-a-record-h">defraud investors of another $3.6 billion</a> </p>
<p>You might wonder how they did it. </p>
<h2>Fake investments</h2>
<p>There are two main types of cryptocurrency scams that tend to target different populations. </p>
<p>One targets cryptocurrency investors, who tend to be <a href="https://doi.org/10.1093/rof/rfab034">active traders holding risky portfolios</a>. They are mostly younger investors, under 35, who <a href="https://blog.bitpanda.com/en/understanding-cryptocurrency-holders-in-europe">earn high incomes, are well educated and work in engineering, finance or IT</a>. In these types of frauds, scammers create fake coins or fake exchanges. </p>
<p><iframe id="3DI61" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/3DI61/4/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>A recent example is SQUID, a cryptocurrency coin named after the TV drama “Squid Game.” After the new coin skyrocketed in price, its creators <a href="https://www.cnn.com/2021/11/01/investing/squid-game-cryptocurrency-scam/index.html">simply disappeared with the money</a>. </p>
<p>A variation on this scam involves enticing investors to be among the first to purchase a new cryptocurrency – a process called an initial coin offering – with promises of large and fast returns. But unlike the SQUID offering, no coins are ever issued, and would-be investors are left empty-handed. In fact, <a href="https://research.bloomberg.com/pub/res/d28giW28tf6G7T_Wr77aU0gDgFQ">many initial coin offerings turn out to be fake</a>, but because of the complex and evolving nature of these new coins and technologies, even educated, experienced investors can be fooled. </p>
<p>As with all risky financial ventures, anyone considering buying cryptocurrency should follow the age-old advice to thoroughly research the offer. Who is behind the offering? What is known about the company? Is a white paper, an informational document issued by a company outlining the features of its product, available? </p>
<p>In the SQUID case, one warning sign was that investors who had bought the coins were unable to sell them. The SQUID website was also riddled with grammatical errors, which is typical of many scams. </p>
<h2>Shakedown payments</h2>
<p>The second basic type of cryptocurrency scam simply uses cryptocurrency as the payment method to transfer funds from victims to scammers. All ages and demographics can be targets. These include ransomware cases, romance scams, computer repair scams, sextortion cases, Ponzi schemes and the like. Scammers are simply capitalizing on the anonymous nature of cryptocurrencies to hide their identities and evade consequences.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/469076/original/file-20220615-14-58glsr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Close-up of man's fingers typing an 'I love you' text message on a mobile phone." src="https://images.theconversation.com/files/469076/original/file-20220615-14-58glsr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/469076/original/file-20220615-14-58glsr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=376&fit=crop&dpr=1 600w, https://images.theconversation.com/files/469076/original/file-20220615-14-58glsr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=376&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/469076/original/file-20220615-14-58glsr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=376&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/469076/original/file-20220615-14-58glsr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=473&fit=crop&dpr=1 754w, https://images.theconversation.com/files/469076/original/file-20220615-14-58glsr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=473&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/469076/original/file-20220615-14-58glsr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=473&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Romance frauds often result in requests for cryptocurrency.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/sending-i-love-you-text-message-with-mobile-phone-royalty-free-image/1158779123">Tero Vesalainen/iStock via Getty Images</a></span>
</figcaption>
</figure>
<p>In the recent past, scammers would request wire transfers or gift cards to receive money – as they are irreversible, anonymous and untraceable. However, such payment methods do require potential victims to leave their homes, where they might encounter a third party who can intervene and possibly stop them. Crypto, on the other hand, can be purchased from anywhere at any time. </p>
<p>Indeed, Bitcoin has become the most common currency requested in ransomware cases, <a href="https://blog.emsisoft.com/en/33977/is-ransomware-driving-up-the-price-of-bitcoin/#:%7E:text=Bitcoin%20accounted%20for%20about%2098,part%20of%20the%20ransomware%20model">being demanded in close to 98% of cases</a>. According to the U.K. National Cyber Security Center, sextortion scams often request individuals to <a href="https://www.ncsc.gov.uk/guidance/sextortion-scams-how-to-protect-yourself">pay in Bitcoin and other cryptocurrencies</a>. Romance scams targeting younger adults are <a href="https://www.ncsc.gov.uk/guidance/sextortion-scams-how-to-protect-yourself">increasingly using cryptocurrency</a> as part of the scam. </p>
<p>If someone is asking you to transfer money to them via cryptocurrency, you should see a giant red flag. </p>
<h2>The Wild West</h2>
<p>In the field of financial exploitation, more work has been done to study and educate elderly scam victims, because of the <a href="https://doi.org/10.1007/s11606-014-2946-2">high levels of vulnerability in this group</a>. Research has identified common traits that make someone especially vulnerable to scam solicitations. They include <a href="https://doi.org/10.1177/0963721421995489">differences in cognitive ability, education, risk-taking and self-control</a>.</p>
<p>Of course, younger adults can also be vulnerable and indeed are becoming victims, too. There is a clear need to broaden education campaigns to include all age groups, including young, educated, well-off investors. We believe authorities need to step up and employ new methods of protection. For example, the regulations that currently apply to financial advice and products could be extended to the cryptocurrency environment. Data scientists also need to better track and trace fraudulent activities. </p>
<p>Cryptocurrency scams are especially painful because the probability of retrieving lost funds is close to zero. For now, cryptocurrencies have no oversight. They are simply the Wild West of the financial world.</p><img src="https://counter.theconversation.com/content/182033/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
From initial coin offerings that are totally fake to fraudsters demanding payments in crypto, scams involving cryptocurrencies are on the rise. Two experts explain why – and how to protect yourself.
Yaniv Hanoch, Associate Professor in Risk Management, University of Southampton
Stacey Wood, Professor of Psychology, Scripps College
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/179534
2022-03-22T13:04:37Z
2022-03-22T13:04:37Z
SEC proposes far-reaching climate disclosure rules for companies – here’s where the rules may be vulnerable to legal challenges
<figure><img src="https://images.theconversation.com/files/453522/original/file-20220322-25-5c2fi7.jpg?ixlib=rb-1.1.0&rect=1038%2C719%2C3754%2C2339&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The SEC's proposed rules include some reporting of so-called Scope 3 emissions, in companies' supply chains and use of their products.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/SupplyChainShipping/5a46d4cc50014b66a479457effac16d2/photo">AP Photo/Noah Berger</a></span></figcaption></figure><p>The U.S. <a href="https://www.sec.gov/">Securities and Exchange Commission</a> released its <a href="https://www.nbcnews.com/politics/congress/manchin-says-build-back-better-dead-here-s-what-he-n1288492">long-awaited proposal</a> to require companies to disclose their climate risks to investors, and it’s arguably the most significant action on climate change yet under the Biden administration.</p>
<p>SEC Commissioner <a href="https://www.sec.gov/news/statement/lee-climate-disclosure-20220321">Allison Herren Lee called</a> it a “watershed moment for investors and financial markets.” It is also a win for President Joe Biden, whose <a href="https://www.nbcnews.com/politics/congress/manchin-says-build-back-better-dead-here-s-what-he-n1288492">other climate efforts have struggled</a>. A year ago, <a href="https://www.reuters.com/article/us-usa-congress-financial-regulators/bidens-sec-nominee-vows-review-of-gamestop-trading-issues-climate-disclosures-idUSKBN2AU136">Biden appointed</a> an SEC chairman, Gary Gensler, who supports climate disclosures in principle.</p>
<p>The proposed requirements, once finalized, could help climate-conscious investors more accurately direct their money to businesses that are responding to climate risks, simultaneously strengthening both markets and the nation’s climate response.</p>
<p>But the proposal has a long way to go before it can make the transformative changes it aims for. We study <a href="https://scholar.google.com/citations?user=2g3cGE4AAAAJ&hl=en">climate regulation and business law</a> and have closely tracked debates over the proposal. Here’s what you need to know.</p>
<h2>What the rule would do</h2>
<p>If the SEC votes to finalize the rule after a public comment period, it would standardize, extend and mandate disclosure requirements that the SEC encouraged <a href="https://www.sec.gov/rules/interp/2010/33-9106.pdf">in a guidance document back in 2010</a>.</p>
<p>As the <a href="https://www.sec.gov/rules/proposed/2022/33-11042.pdf">510-page notice</a> released on March 21, 2022, makes clear, companies would be expected to include a laundry list of items in their regular filings with the SEC: information on the company’s “oversight and governance of climate-related risks,” any expected climate-related risks it faces in the future, any transition plans the business has developed, and data on certain greenhouse gas emissions linked to the company’s operations, among other things.</p>
<p>Gensler said the <a href="https://www.sec.gov/news/statement/gensler-climate-disclosure-20220321https:/www.sec.gov/news/statement/gensler-climate-disclosure-20220321">proposal draws from</a> the approach of the <a href="https://www.fsb-tcfd.org/">Task Force on Climate-Related Financial Disclosure</a>, which several countries have adopted. But the proposal is still noticeably less stringent than the <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32020R0852">European Union’s regulations</a>.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/xjSk7wWJG6o?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">SEC Chair Gary Gensler discusses what the SEC has to do with climate change.</span></figcaption>
</figure>
<p>In the leadup to the release of the SEC’s proposal, <a href="https://theconversation.com/sec-will-consider-climate-disclosure-rules-for-us-companies-on-march-21-its-already-facing-threats-of-lawsuits-178304">supporters and opponents speculated</a> about whether so-called Scope 3 emissions would be required. Under the terms of the proposal, the answer is a resounding “maybe.”</p>
<p>A company’s Scope 3 emissions result from activities of third parties, such as the emissions produced by its suppliers or, ultimately, by its consumers. As the <a href="https://www.sec.gov/rules/proposed/2022/33-11042.pdf">SEC pointed out</a>, these emissions can “represent a majority of the carbon footprint for many companies.”</p>
<figure class="align-center ">
<img alt="Lists of examples of Scope 1, 2, 3 emissions sources with an illustration of a factory in the center" src="https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=509&fit=crop&dpr=1 600w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=509&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=509&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=640&fit=crop&dpr=1 754w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=640&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=640&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">What Scope 1, 2 and 3 emissions involve.</span>
<span class="attribution"><a class="source" href="https://www.americanprogress.org/article/why-companies-should-be-required-to-disclose-their-scope-3-emissions/">Chester Hawkin/Center for American Progress</a></span>
</figcaption>
</figure>
<p>While <a href="https://www.sec.gov/files/33-11042-fact-sheet.pdf">all registered companies would be required</a> to disclose their own direct greenhouse emissions, such as emissions from manufacturing processes, as well as indirect emissions through the use of energy – Scopes 1 and 2, respectively – only some companies would need to report Scope 3 emissions under the proposal.</p>
<p>The proposal would exempt “<a href="https://www.sec.gov/corpfin/cf-manual/topic-5">small reporting companies</a>” from Scope 3 reporting. It would allow large companies to withhold Scope 3 emissions data when the company determines that the data are not “<a href="https://www.law.cornell.edu/cfr/text/17/240.12b-2">material</a>” to investors or if the company doesn’t have Scope 3 emissions targets or goals.</p>
<p>Public interest groups wanted the SEC to require disclosure of even non-material Scope 3 emissions, while industry groups pushed for the SEC to forgo any Scope 3 emissions mandate. The SEC appears to have split the baby.</p>
<h2>It’s not over ‘til it’s over</h2>
<p>The SEC’s proposal initiates what can be a perilous process of public vetting before the rule goes into effect.</p>
<p>First, the SEC will take public comments on the proposal for the next 60 days. The agency received about <a href="https://www.sec.gov/news/statement/gensler-climate-disclosure-20220321">600 unique comments</a> in its request for information before issuing the proposal. Now, with more details available, there should be substantially more engagement. When the Federal Communications Commission took public comment on its proposal to roll back net neutrality rules, it received almost <a href="https://www.pewresearch.org/internet/2017/11/29/public-comments-to-the-federal-communications-commission-about-net-neutrality-contain-many-inaccuracies-and-duplicates/">22 million comments</a>.</p>
<p>The SEC should expect to receive extensive comments both from opponents of any regulation and public interest groups that want more stringent regulations.</p>
<p><a href="https://h2o.law.harvard.edu/collages/15539">Under standard administrative law principles</a>, the SEC must consider and respond to any important arguments or data presented by public commenters. If it gets even a fraction of the comments the FCC got, this process could easily take half a year. </p>
<p>By design, this process is supposed to allow the SEC to change the terms of the proposal, although it <a href="https://h2o.law.harvard.edu/collages/44925">cannot change the proposal</a> so much that the public would not have understood during the comment period what the final rule would do.</p>
<h2>The courts lie in wait</h2>
<p>Now that the terms of the proposed rule are in place, it is easier to see where legal vulnerabilities might be.</p>
<p>Industries are likely to take issue with the SEC’s estimates of the costs companies will face to comply with the rules. <a href="https://www.sec.gov/rules/proposed/2022/33-11042.pdf">The SEC’s proposal</a> states that the cost could be “relatively small” if companies already provide similar information. The SEC will have to defend that assertion carefully.</p>
<p>In 2011, the U.S. Court of Appeals for the District of Columbia <a href="https://harvardlawreview.org/wp-content/uploads/pdfs/vol125_business_roundtable_v_SEC.pdf">threw out an SEC rule</a> on the grounds that it failed to adequately consider economic costs of compliance. Although <a href="https://www.acslaw.org/wp-content/uploads/old-uploads/originals/documents/Kraus%20and%20Raso%20-%20Rational%20Boundaries.pdf">that ruling has been widely criticized</a> for imposing a cost-benefit analysis requirement that is not required by law, the <a href="https://www.supremecourt.gov/opinions/14pdf/14-46_bqmc.pdf">U.S. Supreme Court seems sympathetic</a> to such a requirement.</p>
<p>Another vulnerability will stem from the SEC’s approach to Scope 3 emissions. </p>
<p>Both industries and public interest groups are likely to argue that the SEC misunderstood its statutory authorization – either because <a href="https://www.sec.gov/news/statement/peirce-climate-disclosure-20220321">it included Scope 3 emissions</a> or because it <a href="https://www.sec.gov/news/statement/lee-climate-disclosure-20220321">believed it was limited</a> to “material” emissions, respectively. Or challengers could argue that SEC failed to fully analyze policy considerations favoring a different approach. How well the SEC responds to critical comments will be important when the courts are asked to decide if the SEC acted in an arbitrary or capricious or unlawful manner.</p>
<p>Finally, it is possible that the matter is out of the SEC’s hands. <a href="https://www.wsj.com/articles/the-secs-climate-change-overreach-global-warming-risks-lawmakers-invertors-market-data-11647801469">Some critics have suggested</a> that the regulation of climate disclosures is too important a question for regulators and belongs with Congress. Courts have sometimes shown skepticism toward agency actions that present so-called “<a href="https://www.theregreview.org/2022/01/31/driesen-major-questions-juristocracy/">major questions</a>,” including those related to <a href="https://www.natlawreview.com/article/court-cites-major-questions-doctrine-when-striking-down-biden-social-cost-carbon">climate change</a>.</p>
<p>If the courts view climate disclosure as a major question, they may vacate the rule even if the SEC has strongly supported its approach.</p>
<h2>A long way to go</h2>
<p>The SEC has taken a major step that could boost the Biden administration’s climate change agenda, but whether it will be able to navigate a treacherous administrative and legal process without changing its approach remains to be seen. </p>
<p>The notice of proposed rulemaking is usually just the opening offer in an ongoing negotiation over the rule.</p><img src="https://counter.theconversation.com/content/179534/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
The SEC’s proposal would require companies to disclose their greenhouse gas emissions and other climate risks, but it’s not a done deal yet.
Daniel E. Walters, Assistant Professor of Law, Penn State
William M. Manson, Law Student, Penn State
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/178304
2022-03-07T13:19:32Z
2022-03-07T13:19:32Z
SEC will consider climate disclosure rules for US companies on March 21 – it’s already facing threats of lawsuits
<figure><img src="https://images.theconversation.com/files/450176/original/file-20220305-56947-9syz62.jpg?ixlib=rb-1.1.0&rect=8%2C41%2C5592%2C3686&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Some corporate climate risks are easy to spot. Others are less evident.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/oil-refinery-royalty-free-image/108806525?adppopup=true">Paul Souders via Getty Images</a></span></figcaption></figure><p>Better information leads to better decisions – this is the idea behind a regulatory device known as “<a href="https://www.jstor.org/stable/41149884?seq=1#metadata_info_tab_contents">mandated disclosure</a>.” Mandated disclosures are all around you, from calorie counts on fast food restaurant menus to conversations with doctors around informed consent. </p>
<p>But the biggest experiment yet in mandated disclosure may be an expected U.S. Securities and Exchange Commission proposal to extend these ideas to climate impacts facing U.S.-listed companies. Climate disclosure rules would require publicly traded companies to release information to investors about their emissions and how they are managing risks related to climate change and future climate regulations.</p>
<p>While it is easy to spot climate change-related risks facing companies like <a href="https://www.morningstar.com/news/business-wire/20220302005309/exxonmobil-details-plans-to-lead-in-earnings-and-cash-flow-growth-energy-transition">ExxonMobil</a> that produces and sells fossil fuels that contribute to global warming, <a href="https://www.weforum.org/agenda/2021/03/climate-policies-transition-risks/">hidden vulnerabilities exist</a> for businesses across the U.S. economy. </p>
<p>Largely in response to <a href="https://www.sec.gov/comments/climate-disclosure/cll12-8931883-245382.pdf">investors clamoring for more information</a> about climate risks, <a href="https://www.warren.senate.gov/imo/media/doc/2022.02.09%20Gensler%20Climate%20letter.pdf">as well as pressure</a> from <a href="https://www.sec.gov/comments/climate-disclosure/cll12-9360016-261669.pdf">green</a> <a href="https://www.sec.gov/comments/climate-disclosure/cll12-20109655-264012.pdf">groups</a> that believe disclosure will drive climate-conscious investing, <a href="https://www.sec.gov/news/speech/gensler-pri-2021-07-28">SEC Chair Gary Gensler announced</a> in 2021 that the commission would use its statutory authority to <a href="https://twitter.com/GaryGensler/status/1492269189289193472">require climate-related disclosures</a>. </p>
<p>The SEC <a href="https://twitter.com/GaryGensler/status/1502001539577176064">now plans</a> to consider proposals for climate-risk disclosure rules <a href="https://www.sec.gov/os/sunshine-act-notices/sunshine-act-notice-open-032122">at its March 21, 2022, meeting</a>.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/xjSk7wWJG6o?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">SEC Chair Gary Gensler discusses what the SEC has to do with climate change.</span></figcaption>
</figure>
<p>As law scholars, we <a href="https://scholar.google.com/citations?user=2g3cGE4AAAAJ&hl=en">work on legal issues involving businesses and regulation</a>. Here’s what you need to know about climate disclosures and some of the challenges the SEC faces in adopting them. </p>
<h2>What investors want to know</h2>
<p>Investor pressure for better information about climate impacts comes from two directions. </p>
<p>First, some investors want to avoid companies that will be affected by climate change. The company’s products may be <a href="https://www.reuters.com/business/sustainable-business/exxon-under-investor-pressure-discloses-emissions-burning-its-fuels-2021-01-06/">regulated in the future</a> because of their impact on the climate, or its supply chains may get more expensive over time. Investors want to know which businesses will be able to adapt and preserve profitability. </p>
<p>Second, many investors are interested in ESG investing, which involves assessing companies’ commitments to environmental, social and governance factors. Today, <a href="https://www.ussif.org/blog_home.asp?Display=155">ESG investing</a> accounts for <a href="https://www.businesswire.com/news/home/20201116005284/en/The-US-SIF-Foundation%E2%80%99s-Biennial-%E2%80%9CTrends-Report%E2%80%9D-Finds-That-Sustainable-Investing-Assets-Reach-17.1-Trillion">US$17.1 trillion</a> — or 1 in 3 dollars — of the total U.S. assets under professional management. The challenge for the SEC is to ensure that claims being made about the sustainability of a company are <a href="https://www.economist.com/leaders/2021/05/22/sustainable-finance-is-rife-with-greenwash-time-for-more-disclosure">based on reality</a>. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/esg-investing-has-a-blind-spot-that-puts-the-35-trillion-industrys-sustainability-promises-in-doubt-supply-chains-170199">ESG investing has a blind spot that puts the $35 trillion industry's sustainability promises in doubt: Supply chains</a>
</strong>
</em>
</p>
<hr>
<p>The trend toward ESG investment has led to an outpouring of voluntary disclosure: <a href="https://www.wsj.com/articles/climate-fight-brews-as-sec-moves-toward-mandate-for-risk-disclosure-11624267803?mod=article_inline">About 90% of companies</a> in the <a href="https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview">S&P 500</a> publish voluntary reports disclosing statistics on things like carbon emissions and how much renewable energy they use. </p>
<p>Some large investors require disclosure. For example, <a href="https://www.blackrock.com/us/individual">BlackRock</a>, a multinational asset manager with around $10 trillion under its control, requires companies it invests in to disclose certain climate information. The <a href="https://www.gov.uk/government/news/uk-to-enshrine-mandatory-climate-disclosures-for-largest-companies-in-law">United Kingdom</a> plans to require climate disclosure starting in April 2022, and the <a href="https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/corporate-disclosure-climate-related-information_en">European Union</a> has reporting rules in place. </p>
<p>But the U.S. has been slow to impose mandatory climate disclosure requirements. Public companies have only been subject to a more general <a href="https://www.jurist.org/features/2021/11/22/explainer-the-sec-climate-disclosures-and-a-new-global-standard/">legal standard</a> that they not materially mislead investors. The SEC <a href="https://www.sec.gov/rules/interp/2010/33-9106.pdf">released guidance</a> in 2010 to encourage climate disclosures, but <a href="https://crsreports.congress.gov/product/pdf/R/R46766">it was unenforced</a> and failed to prompt standardized disclosures.</p>
<h2>Rule benders and the effectiveness of disclosure</h2>
<p>Research on the broader use of mandated disclosure, such as for <a href="https://www.jstor.org/stable/41149884?seq=1#metadata_info_tab_contents">home mortgage lending</a> and <a href="https://www.fca.org.uk/insight/can-performance-based-regulation-succeed-where-mandated-disclosure-has-failed">consumer product labeling</a>, shows that crafting effective disclosure regulations is difficult. </p>
<p>One reason is that the companies can easily evade disclosing useful information while still complying with the letter of the law. These “<a href="https://www.cambridge.org/core/books/incomprehensible/3BD00F26FB31EF2D8944D5B083B6A72C">rule benders</a>” can be very creative. Consider the restaurant in New York City that was subject to a health inspection grading regulation and managed to <a href="https://www.wsj.com/articles/BL-METROB-8013">disguise</a> its “B” rating by simply adding “EST” to its display of its grade. Disclosure regulations can also fail when they don’t effectively communicate valuable information. </p>
<p>A <a href="https://doi.org/10.1038/s41558-021-01271-8">study of one type of climate disclosure</a> – emissions labels on consumer products – found mixed evidence as to whether consumers altered their behavior in response. Rule benders can exploit <a href="https://www.penguinrandomhouse.com/books/647557/too-much-information-by-cass-r-sunstein/">human tendencies</a> to discount or filter out warnings by providing an avalanche of unnecessary information that confuses and overwhelms the intended recipient. </p>
<h2>Expect court challenges</h2>
<p>One challenge the SEC has grappled with is whether it has statutory authority to require companies to disclose their “<a href="https://www.asyousow.org/press-releases/2022/3/8/sec-climate-disclosure-rulemaking">Scope 3”</a> <a href="https://www.americanprogress.org/article/why-companies-should-be-required-to-disclose-their-scope-3-emissions/">emissions</a>. These are emissions that a company doesn’t directly control, such as emissions from the use of its products or emissions in its supply chain. </p>
<p>A company like Amazon may have extensive upstream Scope 3 emissions in its suppliers’ transportation networks. General Motors would have extensive downstream emissions when people drive its gas-powered vehicles. </p>
<figure class="align-center ">
<img alt="Lists of examples of scope 1, 2, 3 emissions sources with an illustration of a factory in the center" src="https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=509&fit=crop&dpr=1 600w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=509&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=509&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=640&fit=crop&dpr=1 754w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=640&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=640&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">What scope 1, 2 and 3 emissions involve.</span>
<span class="attribution"><a class="source" href="https://www.americanprogress.org/article/why-companies-should-be-required-to-disclose-their-scope-3-emissions/">Chester Hawkins/Center for American Progress</a></span>
</figcaption>
</figure>
<p>The SEC’s three Democratic commissioners, who make up a majority of the commission, <a href="https://www.natlawreview.com/article/internal-dissension-sec-delays-climate-change-disclosure-regulations">have reportedly split</a> on whether certain Scope 3 emissions can be viewed as “<a href="https://www.natlawreview.com/article/made-tv-sec-s-regulatory-posture-climate-risk">material</a>” to investors and therefore subject to disclosure. </p>
<p>“<a href="https://www.law.cornell.edu/cfr/text/17/240.12b-2">Material” is defined</a> as information that a reasonable person would consider important in making an investment decision. </p>
<p>Some critics of climate disclosures, including <a href="https://www.sec.gov/comments/climate-disclosure/cll12-8915606-244835.pdf">several Republican state attorneys general</a>, suggest that the SEC has no authority to require disclosures that are not financially material. Missouri’s attorney general wrote that requiring climate reporting would impose “<a href="https://www.sec.gov/comments/climate-disclosure/cll12-8915601-244834.pdf">large costs and administrative burdens</a>” on publicly traded companies. A group of senators suggested greenhouse gas-related assets would <a href="https://www.sec.gov/comments/climate-disclosure/cll12-8911330-244285.pdf">shift to private companies</a>. West Virginia’s attorney general <a href="https://www.sec.gov/comments/climate-disclosure/cll12-8563794-230748.pdf">threatened to sue the SEC</a>. </p>
<p>The costs of disclosure would vary. Some companies already intensely monitor emissions. Others would likely face high costs if Scope 3 emissions were included. An oil company, for example, might have to <a href="https://cleanenergynews.ihsmarkit.com/research-analysis/oil-gas-companies-under-pressure-to-manage-scope-3-emissions-t.html">measure emissions from all the vehicles using its fuel</a>. </p>
<p>The Administrative Procedure Act allows courts to vacate SEC rules that are <a href="https://www.law.cornell.edu/uscode/text/5/706">deemed arbitrary or capricious</a> because the agency failed to offer sufficient justification for choosing the proposal over alternatives. The SEC is acutely aware of this risk. A prior oil and gas extraction disclosure rule <a href="https://www.jdsupra.com/legalnews/sec-resource-extraction-issuer-disclosu-84300/">was invalidated</a> by a court in 2013 as arbitrary and capricious. </p>
<h2>Proceeding with caution</h2>
<p>The SEC’s forthcoming climate risk disclosure rule will not be the final effort to use information to shape the private sector’s response to climate change.</p>
<p>What the SEC does now will affect those future moves. No wonder it is taking its time and proceeding cautiously.</p>
<p><em>This article was updated March 10, 2022, with the SEC listing the climate disclosure rule on its March 21 agenda.</em></p><img src="https://counter.theconversation.com/content/178304/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Some investors want publicly traded companies to disclose their full climate impact, including emissions from their supply chains and product use.
Daniel E. Walters, Assistant Professor of Law, Penn State
William M. Manson, Law Student, Penn State
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/175791
2022-01-26T22:50:16Z
2022-01-26T22:50:16Z
Federal Reserve plans to raise interest rates ‘soon’ to fight inflation: What that means for consumers and the economy
<figure><img src="https://images.theconversation.com/files/442823/original/file-20220126-17-12pu2mv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">All eyes are on Fed Chair Jerome Powell as the central bank prepares to raise rates for the first time in three years. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/OffTheCharts-MoneyPrinter/a6f1d62158b34b549e3c907ed60bddeb/photo?Query=federal%20reserve&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=8573&currentItemNo=17">Brendan Smialowski/Pool via AP</a></span></figcaption></figure><p><em>The Federal Reserve on Jan. 26, 2022, <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20220126a.htm">signaled plans to begin raising interest rates “soon”</a> – possibly in March – in a bid to tamp down inflation before it poses a serious risk to the U.S. economy. A separate report released the next day <a href="https://www.bloomberg.com/news/articles/2022-01-27/u-s-economic-growth-quickened-last-quarter-with-inventory-boost?srnd=premium&sref=Hjm5biAW">showed the economy grew 6.9% in the fourth quarter of 2021</a>. An interest rate hike would be the first time the central bank has increased its benchmark lending rate in over three years.</em></p>
<p><em>Lifting the borrowing costs consumers and businesses pay for loans has the effect of slowing economic activity, which in turn could curb inflation. But there are also concerns that it could put on the brakes too quickly. We asked <a href="https://scholar.google.com/citations?user=JfUEmSUAAAAJ&hl=en&oi=ao">Alexander Kurov</a>, a finance professor at West Virginia University, and <a href="https://scholar.google.com/citations?user=dnCoKIUAAAAJ&hl=en&oi=ao">Marketa Wolfe</a>, an economist at Skidmore College, to explain what the Fed is doing and what it means for you.</em> </p>
<h2>1. Why is the Fed raising interest rates?</h2>
<p>Short-term interest rates in the U.S. <a href="https://fred.stlouisfed.org/series/FEDFUNDS">are now essentially zero</a>.</p>
<p>The Fed quickly cut rates to zero at the beginning of the COVID-19 crisis in March 2020 in an attempt to soften the blow of the <a href="https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions">sharp recession that began that month</a> as the U.S. went into lockdown. As a reminder of how bad things were back then, <a href="https://fred.stlouisfed.org/series/ICSA">over 40 million workers</a> – a quarter of the American workforce – filed for unemployment in the first few months of the pandemic, a staggering number with no precedent in the job market.</p>
<p>Although the recession was short-lived – lasting only two months – and the <a href="https://www.cnn.com/business/us-economic-recovery-coronavirus">economy has mostly recovered</a>, the Fed has kept rates at rock bottom because <a href="https://www.vox.com/the-highlight/22665191/covid-economy-poverty-unemployment">many workers and businesses still need support</a> as the pandemic continues to rage. </p>
<p>The big problem for the Fed now is that U.S. consumer prices have surged. For 10 months in a row, inflation has been above the <a href="https://www.federalreserve.gov/faqs/economy_14400.htm">Fed’s 2% target</a> and <a href="https://www.bls.gov/news.release/cpi.nr0.htm">reached an annual pace of about 7% in December</a>. This is the <a href="https://fred.stlouisfed.org/graph/?g=8dGq">highest rate of inflation recorded in the U.S. in the last 40 years</a>. High inflation means the prices people pay for goods and services are continually going up – <a href="https://www.bls.gov/news.release/cpi.nr0.htm">especially for basic items</a> like meat and gasoline, as well as for manufactured goods like cars. </p>
<p>The Fed can ill afford to allow this to continue because if higher inflation becomes entrenched, it <a href="https://www.ft.com/content/ddd02d7a-1557-4357-af6f-7c433da1b406">would damage the economy</a>. And the longer it lasts, the harder – and more painful for consumers and businesses – it is going to be to bring it back to a more sustainable 2%. </p>
<p>So the Fed has to act quickly before it’s too late. </p>
<h2>2. How does the Fed raise rates?</h2>
<p>The Fed sets a target range for what is called the “<a href="https://www.chicagofed.org/research/dual-mandate/the-federal-funds-rate">federal funds rate</a>.” This rate acts like a benchmark for all interest rates in the economy. </p>
<p>While the Fed’s statement didn’t specify a time when it plans to raise rates, <a href="https://www.nytimes.com/2022/01/26/business/economy/fed-interest-rates-inflation.html">Chair Jerome Powell said</a> “the committee is of a mind to raise the federal funds rate at the March meeting, assuming that the conditions are appropriate for doing so. <a href="https://www.bloomberg.com/news/articles/2022-01-26/fed-signals-liftoff-soon-sees-asset-reduction-start-afterward?srnd=premium&sref=Hjm5biAW">Analysts expect it to be a 0.25 percentage point increase</a>. This would affect banks’ cost of borrowing, which in turn slowly filters throughout the economy as lenders charge more for loans on homes, cars, businesses, college tuition and anything else you might want to buy with debt. Banks would also gradually increase the interest they offer on deposits and savings accounts. </p>
<p>The Fed does not directly control all these other rates, and the exact path they will take is not completely predictable, but the overall trend will be up if the Fed keeps raising its target rate. </p>
<p>Markets expect the Fed to raise interest rates <a href="https://www.reuters.com/business/fed-raise-rates-three-times-this-year-tame-unruly-inflation-2022-01-20/">at least two more times in 2022</a>. </p>
<h2>3. What does that mean for consumers and businesses?</h2>
<p>Put simply, higher interest rates mean borrowers would need to pay more for the loans they get. </p>
<p>If the Fed lifts interest rates this year by 0.75 percentage point, as expected, this would translate into about US$45,000 in additional interest payments on a 30-year, $300,000 mortgage.</p>
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<p>So if you want to borrow to start a business, pay for college, buy a car or do anything else, you should expect your borrowing costs to be higher later this year. </p>
<p>On the other hand, higher rates is good news for savers and investors, as their returns from activities like making deposits and buying bonds will go up. </p>
<h2>4. And how will it affect the broader economy?</h2>
<p>Higher interest rates would likely slow down business activity. While this can help reduce inflation, it also means lower economic growth. </p>
<p>The Fed always makes decisions based on what is happening in the economy and on how economic conditions are expected to change. And changes in the economy are often hard to predict.</p>
<p>The biggest unknown at this point is what will happen to inflation later this year. This is uncertain because inflation is <a href="https://www.cwmnw.com/blog/all-you-need-to-know-about-inflation-the-reality-of-supply-chain-shortages-and-money-supply">driven by multiple factors</a>, such as supply chain shortages and strong demand. </p>
<p>In addition, the <a href="https://fred.stlouisfed.org/series/CIVPART">labor force participation rate</a> has still not recovered to pre-pandemic levels, and the economy <a href="https://www.cbsnews.com/news/covid-small-businesses-inflation-supply-chain-recruiting-federal-aid/">is experiencing labor shortages</a>, which could push wages and prices higher. If these COVID-19-related pressures don’t ease up soon, inflation could continue to stay high or continue to accelerate, which may force the Fed to increase interest rates faster than currently expected. </p>
<p>On the other hand, if economic or employment growth stalls, this will make it much harder for the Fed to raise rates without making things worse. The Fed will need to find the right balance between taming inflation and avoiding slowing down the economy too much. </p>
<p><em>Article updated to add GDP report and Powell comment.</em></p><img src="https://counter.theconversation.com/content/175791/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
The US central bank said surging inflation is guiding its decision about when to lift interest rates. Two experts on financial markets explain what might happen next.
Alexander Kurov, Professor of Finance and Fred T. Tattersall Research Chair in Finance, West Virginia University
Marketa Wolfe, Associate Professor of Economics, Skidmore College
Licensed as Creative Commons – attribution, no derivatives.