tag:theconversation.com,2011:/id/topics/institutional-investors-7042/articlesinstitutional investors – The Conversation2024-01-22T23:25:32Ztag:theconversation.com,2011:article/2210182024-01-22T23:25:32Z2024-01-22T23:25:32ZHow Australia’s huge superannuation funds can do much more to fight climate change, with a little help<p>Few of us pay much attention to our superannuation. Under the <a href="https://www.fairwork.gov.au/pay-and-wages/tax-and-superannuation#super-guarantee">Superannuation Guarantee</a>, employers pay at least 11% of salaries into their employees’ super funds without workers having to do anything.</p>
<p>These accumulating automatic payments have turned the Australian super fund industry into one of the world’s largest, and <a href="https://www.bloomberg.com/news/articles/2023-07-24/wall-street-is-partnering-with-cashed-up-fast-growing-australian-pension-funds">the fastest-growing</a>. Worth $A3.5 trillion, our superfunds sit alongside funds from Canada, Japan, Netherlands, Switzerland, the United Kingdom and United States to make up <a href="https://www.thinkingaheadinstitute.org/research-papers/global-pension-assets-study-2023/">92% of total global pension assets.</a></p>
<p>But none of these funds are investing enough in the net zero transition. Institutional investors, of which super funds are a vital part, provided less than 1% of all direct private climate change finance globally in <a href="https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2023/">2021/2022</a>- a contribution of around $US6 billion. This is far from the trillions <a href="https://www.allenovery.com/en-gb/global/news-and-insights/news/new-study-reveals-usd200-trillion-of-investment-will-be-needed-to-deliver-net-zero">needed</a> every year to finance renewable energy projects, cleaner industrial processes, and replacing fossil fuels in transport, among other initiatives.</p>
<p>At the same time, many Australian funds continue to invest in carbon-producing companies, such as oil and gas, even when they <a href="https://www.abc.net.au/news/2023-12-14/sustainable-ethical-super-funds-with-fossil-fuel-investment/103196032">claim to be making “green” investments</a>.</p>
<p>This article outlines reforms the federal government could undertake to encourage super funds to tackle the climate crisis. This would help align the super system with its original purpose: to provide a better standard of living for the millions of us who will retire on a climate-damaged planet.</p>
<h2>The Albanese government’s sustainable finance plan</h2>
<p>Treasurer Jim Chalmers is aware of the unmet potential of super funds. Treasury’s <a href="https://theconversation.com/making-money-green-australia-takes-its-first-steps-towards-a-net-zero-finance-strategy-214063">Sustainable Finance Strategy</a>, released in November, outlines measures underway or in development to enable more sustainable investment. The <a href="https://www.asfi.org.au/taxonomy">Australian Sustainable Finance Taxonomy</a>, for example, helps investors and regulators to identify whether an investment is “green”.</p>
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Read more:
<a href="https://theconversation.com/making-money-green-australia-takes-its-first-steps-towards-a-net-zero-finance-strategy-214063">Making money green: Australia takes its first steps towards a net zero finance strategy</a>
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<p>Last month <a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/investor-roundtable-help-modernise-economy-maximise-advantages">Chalmers held</a> an “Investor Roundtable” that brought together heads of superannuation funds and others to discuss how to scale up investment in climate change.</p>
<p>Funds expressed their intent to make more investments aligned with net zero. <a href="https://www.rightlane.com.au/wp-content/uploads/2023/05/Right-Lane-Consulting_May-2023_Staying-the-course-on-net-zero.pdf">Studies</a> consistently show most large Australian funds have pledged to support net zero and established investment targets. Yet they say several regulatory roadblocks hinder them from turning their commitments into action.</p>
<p>The government has said it will make reforms on one roadblock – the <a href="https://ministers.treasury.gov.au/ministers/stephen-jones-2022/media-releases/your-future-your-super-review-outcomes">funds’ performance-testing framework</a>.</p>
<h2>Why super funds rarely invest in clean energy</h2>
<p>Because superannuation funds are <a href="https://www.unimelb.edu.au/__data/assets/word_doc/0011/4609586/MCF-submission_31032023.docx">required by law</a> to invest retirement savings for the best return for their members, they give preference to investments that offer the best financial returns with the lowest level of risk.</p>
<p>Funds see companies that are developing and deploying new technologies or operating in areas of significant public policy change as higher risk. That’s a big reason why new green technologies struggle to attract institutional capital compared to those based on fossil fuels.</p>
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Read more:
<a href="https://theconversation.com/as-australias-net-zero-transition-threatens-to-stall-rooftop-solar-could-help-provide-the-power-we-need-220050">As Australia's net zero transition threatens to stall, rooftop solar could help provide the power we need</a>
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<p>Super funds <a href="https://igcc.org.au/wp-content/uploads/2023/03/IGCC-The-State-of-Australian-Net-Zero-Investment_March2023.pdf">consistently note in annual surveys</a> that the lack of green investment opportunities with the right risk-adjusted return profile is a huge barrier to exapanding climate-aligned investment. And recent legislative changes have made the situation worse.</p>
<p>Under the <a href="https://www.apra.gov.au/your-future-your-super-legislation-and-supporting-material">Your Super Your Future</a> scheme, announced in the 2020-21 Budget, the financial regulator for super funds evaluates funds each year by comparing their performance over an eight-year time period against one of 11 “benchmark” investment portfolios.</p>
<p>This process aims to weed out underachieving funds and to protect members from losing money. Funds that are found to underperform must disclose the fact to their members, and persistent failures cannot accept new member funds. This tough sanction has led funds to “<a href="https://treasury.gov.au/sites/default/files/2023-04/c2022-313936-yfys-review.docx">hug the benchmark</a>”, meaning they pursue investment strategies to beat the performance test and their peers.</p>
<p>The result, as studies <a href="https://theconexusinstitute.org.au/wp-content/uploads/2022/11/YFYS-Performance-Test-Constraint-on-ESG-Sustainability-and-Carbon-Transition-Activities-20221109-Final.pdf">show</a>, is that funds are discouraged from pursuing climate-related investments. The test encourages funds to invest in companies or projects that deliver returns over time frames that are too short for most climate-related investments to achieve returns.</p>
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Read more:
<a href="https://theconversation.com/australian-homes-can-be-made-climate-ready-reducing-bills-and-emissions-a-new-report-shows-how-219113">Australian homes can be made climate-ready, reducing bills and emissions – a new report shows how</a>
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<p>Treasury has <a href="https://ministers.treasury.gov.au/ministers/stephen-jones-2022/media-releases/your-future-your-super-review-outcomes">announced</a> it will extend the performance test period to ten years, and adjust it “to ensure that funds are not unintentionally discouraged from investing in certain assets”. These are encouraging first steps but they are not enough.</p>
<h2>Letting ordinary fund members invest in a greener planet</h2>
<p>Melbourne Climate Futures’ <a href="https://law.unimelb.edu.au/centres/mcle/research/current-research-projects/advancing-investor-action-on-energy-transition">research</a> has uncovered further regulatory barriers that are stalling investment. One relates to the way individual members choose investments.</p>
<p>Since its establishment by the Keating government in 1992, the Superannuation Guarantee has given individuals some choice over how they handle their superannuation. While many <a href="https://www.ato.gov.au/businesses-and-organisations/super-for-employers/setting-up-super-for-your-business/select-your-default-super-fund">are placed into a fund</a> with a default investment option when they begin work, they are able to choose different investment approaches.</p>
<p>Some of these focus on a theme, such as sustainability, and some offer different levels of risk exposure. Encouraging individuals to direct more of their super to green companies and projects could be a powerful tool to enable more climate investment.</p>
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Read more:
<a href="https://theconversation.com/why-australia-urgently-needs-a-climate-plan-and-a-net-zero-national-cabinet-committee-to-implement-it-213866">Why Australia urgently needs a climate plan and a Net Zero National Cabinet Committee to implement it</a>
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<p>Surveys show <a href="https://responsibleinvestment.org/resources/benchmark-report/#:%7E:text=The%20Responsible%20Investment%20Benchmark%20Report,comprehensive%20approach%20to%20responsible%20investment.">more than half of Australians</a> support greater climate action. While many people would not support their super fund making climate investments that hurt their returns, <a href="https://www.afr.com/politics/federal/super-should-go-green-but-not-for-lower-returns-say-afr-readers-20231210-p5eqcr">at least some members</a> would. Yet the rigid nature of the best-financial-interest duty, combined with the performance test, prevents funds from offering members the option to put the climate first.</p>
<p>This needs to change. The government could amend the best-financial-interest duty so individuals can instruct their funds to invest their money in projects that reduce long-term and systemic financial risks such as climate change. A tax break or a matching contribution from government could also encourage individuals to choose sustainable investment options.</p>
<p>Climate change poses a grave risk to the health, wellbeing and finances of all Australians, including retirees. Federal policy reform is urgently needed to unlock more superannuation for green investment, harness the power and preferences of individual members and help reduce future climate impacts. </p>
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<a href="https://theconversation.com/too-hard-basket-why-climate-change-is-defeating-our-political-system-214382">Too hard basket: why climate change is defeating our political system</a>
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<p class="fine-print"><em><span>Arjuna Dibley is a Fellow at the Centre for Policy Development, a Board Member at CarbonPlan and Environmental Justice Australia. He is part of a research team at the University of Melbourne that receives funding from the Australian Research Council to study institutional investors and climate investing. </span></em></p>Our super funds say they want to invest more in the net zero transition but that regulation blocks them. It’s time to put them to the test, and turn their piles of money toward a greener future.Arjuna Dibley, Head of Sustainable Finance Hub, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2114782023-10-26T12:32:45Z2023-10-26T12:32:45ZI studied 1 million home sales in metro Atlanta and found that Black families are being squeezed out of homeownership by corporate investors<figure><img src="https://images.theconversation.com/files/554093/original/file-20231016-21-isn6c7.jpg?ixlib=rb-1.1.0&rect=40%2C32%2C5414%2C3026&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Corporate investors own nearly one-third of all single-family rental properties in Atlanta.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/atlanta-georgia-usa-downtown-skyline-aerial-royalty-free-image/1184733973">Kruck20/iStock via Getty Images</a></span></figcaption></figure><p>In the years since the Great Recession, when <a href="https://www.federalreservehistory.org/essays/great-recession-and-its-aftermath">housing prices dramatically fell</a>, Wall Street investors have been buying large numbers of single-family homes to use as rentals. As of 2022, big investment firms <a href="https://www.urban.org/research/publication/profile-institutional-investor-owned-single-family-rental-properties">owned nearly 600,000 such properties nationwide</a>.</p>
<p><a href="https://www.huduser.gov/portal/periodicals/em/winter23/highlight1.html#title">Critics say</a> this practice drives up home prices and worsens the housing shortage, making it harder for families to afford to buy. Industry advocates <a href="https://thehill.com/opinion/congress-blog/3496390-providers-of-single-family-rental-homes-are-an-important-part-of-americas-housing-ecosystem/">dismiss such charges</a>, arguing that large investment firms own a tiny fraction of single-family rental housing across the U.S. – <a href="https://www.urban.org/research/publication/profile-institutional-investor-owned-single-family-rental-properties">less than 4%</a> of the total.</p>
<p>As a <a href="https://scholar.google.com/citations?user=cxLejGQAAAAJ&hl=en&oi=ao">professor of public policy at Georgia Tech</a>, I wanted to understand how this trend was affecting my neighbors. So I analyzed <a href="https://doi.org/10.1177/0739456X231176072">more than 1 million property sales</a> in the Atlanta metropolitan area from 2007 to 2016. Since the study period included the <a href="https://www.federalreservehistory.org/essays/subprime-mortgage-crisis">mortgage crisis</a>, I excluded bulk sales, such as the packages of
foreclosed homes, that aren’t available to typical homebuyers. I examined only <a href="https://www.investopedia.com/terms/a/armslength.asp">arm’s-length transactions</a> of single-family detached homes, where buyers and sellers act independently. </p>
<p>I found that global investment firms buying up local properties are indeed hurting Atlanta families – specifically, Black ones. </p>
<h2>Neighborhood transformations</h2>
<p>In the period I studied, homeownership declined across the Atlanta metro area by <a href="https://www.census.gov/housing/hvs/data/rates/tab6a_msa_05_2014_hmr.xlsx">more than 5 percentage points</a>, similar to a nationwide trend. For an average neighborhood, home purchasing by large corporate investors explained one-quarter of that decline. </p>
<p>But when I broke the analysis down by race, I found that Black families were hit much harder: Large investment firms buying up local properties explained fully three-quarters of the decline in African American homeownership. In contrast, non-Hispanic whites were largely unaffected. </p>
<p>It turns out that while Wall Street firms control just a sliver of the single-family rental market nationally, they can have much more influence at the local level. In the Atlanta metro area, these firms own nearly one-third of all single-family rental properties. They’re even more concentrated <a href="https://www.washingtonpost.com/business/interactive/2021/investors-rental-foreclosure">in predominantly Black neighborhoods</a>, where <a href="https://www.ajc.com/american-dream/investor-owned-houses-atlanta/">more than 10 houses in a row</a> can be owned by the same corporation.</p>
<p>In my study, I found that large investors tend to snap up housing in majority-nonwhite, lower-income suburban neighborhoods. This makes homebuying even more challenging for middle-class families of color, as they get <a href="https://www.huduser.gov/portal/periodicals/em/winter23/highlight1.html">pushed out of the bidding market</a> by global investors. </p>
<h2>Home is where the financial security is</h2>
<p>Homeownership has long been one of the main pathways for the American middle class to accumulate wealth. Despite this, the national homeownership rate declined <a href="https://fred.stlouisfed.org/series/RHORUSQ156N">by 5.5 percentage points</a> between 2007 and 2016, reaching a five-decade low of 62.9%. Although homeownership has rebounded somewhat since 2016, it remains below pre-2008 levels. </p>
<p>And who owns these homes is starkly divided by race. Between 2015 and 2019, more than 70% of white families owned a home, compared with <a href="https://www.jchs.harvard.edu/blog/nearly-every-state-people-color-are-less-likely-own-homes-compared-white-households">just 41% of Black families</a>, according to an analysis by Harvard University’s Joint Center for Housing Studies. </p>
<p>To be sure, policies like <a href="https://www.nytimes.com/2021/08/17/realestate/racism-home-deeds.html">racial covenants</a>, <a href="https://uncpress.org/book/9781469663883/race-for-profit/">discriminatory mortgage lending practices</a> <a href="https://www.epi.org/publication/the-color-of-law-a-forgotten-history-of-how-our-government-segregated-america/">and redlining</a> fueled low homeownership rates for Black Americans long before the Great Recession. But global investors’ growing control of single-family homes only widens existing racial gaps in homeownership and wealth.</p>
<h2>Directions for new research</h2>
<p>While my study focused on Atlanta, it’s not the only place where residents are <a href="https://www.huduser.gov/portal/periodicals/em/winter23/highlight1.html">competing with global investors</a> for housing. Investment firms’ single-family rental portfolios are largely <a href="https://www.urban.org/sites/default/files/2023-08/A%20Profile%20of%20Institutional%20Investor%E2%80%93Owned%20Single-Family%20Rental%20Properties.pdf">concentrated in Sun Belt metro areas</a>, including Phoenix, Charlotte and Jacksonville. It wouldn’t be surprising to see similar conflicts playing out in those cities. </p>
<p>Since my analysis stopped in 2016, I can’t be sure that Black Atlanta residents are still affected by Wall Street firms buying up housing. Many investment firms have recently been <a href="https://www.wsj.com/real-estate/americas-biggest-landlords-cant-find-houses-to-buy-either-ea893213">switching from a buy-to-rent</a> business model to a <a href="https://www.wsj.com/articles/building-and-renting-single-family-homes-is-top-performing-investment-11636453800">build-to-rent model</a>, which could complicate matters.</p>
<p>In the meantime, while <a href="https://www.banking.senate.gov/hearings/how-institutional-landlords-are-changing-the-housing-market">residents and policymakers have claimed</a> that large corporations don’t invest in local communities, researchers lack robust evidence this is the case. Academics should study whether properties owned by institutional landlords are more likely to be <a href="https://www.ajc.com/american-dream/investor-owned-houses-atlanta/">poorly maintained</a> or have <a href="https://www.washingtonpost.com/business/2022/07/12/invitation-homes-corporate-landlord-permits/">code violations</a>, as anecdotal evidence suggests.</p>
<p>It’s also worth investigating whether big investment firms undermine local revenue collection by <a href="https://www.charlotteobserver.com/news/business/article277638663.html">serially filing property tax appeals</a>. </p>
<h2>An open-source tool for housing policy research</h2>
<p>It’s been hard for researchers to identify corporate-owned, single-family homes, since it requires proprietary real-estate data and labor-intensive number crunching. In a separate project, my colleagues and I have developed a <a href="https://repository.gatech.edu/entities/publication/472788f9-a5e6-4d9b-8238-422d20333bcb">simple, user-friendly methodology</a> that gets around such challenges with the use of open-source software and public tax parcel data. </p>
<p>Local governments and nonprofits can use our methodology to unveil all the corporate-owned residential properties in any neighborhood and link them to outcomes such as code violations. Using data-driven approaches like this is an important step toward developing policy solutions.</p><img src="https://counter.theconversation.com/content/211478/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Brian Y. An 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>Black would-be homeowners pay the price when big investors buy up the neighborhood.Brian Y. An, Director of Master of Science in Public Policy Program & Assistant Professor of Public Policy, Georgia Institute of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1543552021-02-03T19:09:40Z2021-02-03T19:09:40ZWallStreetBets is disrupting financial markets — possibly permanently<figure><img src="https://images.theconversation.com/files/382265/original/file-20210203-17-bnks50.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4923%2C3242&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A street sign is displayed at the New York Stock Exchange in New York.</span> <span class="attribution"><span class="source">(AP Photo/Seth Wenig)</span></span></figcaption></figure><p>If the financial world follows the pattern seen a decade or so ago in other markets, such as <a href="https://doi.org/10.1086/680671">fashion and music</a>, Reddit’s <a href="https://www.reddit.com/r/wallstreetbets/">WallStreetBets (r/wallstreetbets)</a> phenomenon might have transformed investing forever. </p>
<p>In the fashion, financial and music markets, hundreds of thousands of people are highly engaged and share their passion online, and can fuel significant transformations <a href="https://www.wsj.com/articles/keith-gill-drove-the-gamestop-reddit-mania-he-talked-to-the-journal-11611931696">without necessarily wanting to do so</a>. </p>
<p>WallStreetBets is now reshaping financial markets in three important ways: Amateur market participants, or <a href="https://www.investopedia.com/terms/r/retailinvestor.asp">retail investors</a>, have taken on work traditionally done by financial advisers, analysts and educators, changing who does what in the market. They’ve introduced new ways of thinking about investing. And they’ve strengthened the influence of retail investors across the board.</p>
<p>In response, professional financial stakeholders are trying to delegitimize retail investors to maintain their influence. </p>
<h2>Who does what and how?</h2>
<p>The changes have been brought about by retail investors meeting and exchanging information online, such as <a href="https://www.reddit.com/r/investing/">on Reddit forums</a>, Discord groups, <a href="https://www.youtube.com/c/RoaringKitty">YouTube channels</a>, Twitter and Stocktwits, on how to perform the type of work traditionally done by financial sector advisers and analysts. </p>
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<span class="caption">The Reddit logo on a mobile device in New York.</span>
<span class="attribution"><span class="source">(AP Photo/Tali Arbel)</span></span>
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<p>Instead of getting their investment education the usual way, via courses at colleges and universities, retail investors learned online, among themselves.</p>
<p>Consequently, retail investors have spurred changes in the work performed by professional financial advisers, analysts and educators, as well as institutional investors. Some have argued that the greater transparency regarding the investment techniques being discussed openly online could “<a href="https://markets.businessinsider.com/news/stocks/chamath-palihapitiya-wallstreetbets-traders-analysis-hedge-funds-gamestop-retail-stocks-2021-1-1030011632">force greater transparency on the institutional side</a>.” </p>
<h2>New ways to think about investing</h2>
<p>These new retail investors are also fuelling a different way of thinking about investing. At least for some members of WallStreetBets, investing is part bet, part joke, part driven by <a href="https://www.reddit.com/r/wallstreetbets/comments/hrorfa/i_will_invest_100000_into_whatever_is_the_top/">mischievous Redditors</a> and part get-rich-quick scheme. </p>
<p>For others, WallStreetBets represents an opportunity to <a href="https://www.bloomberg.com/news/articles/2020-02-26/reddit-s-profane-greedy-traders-are-shaking-up-the-stock-market">exploit and expose weaknesses</a> in the financial markets. Others, though, <a href="https://isthesqueezesquoze.com/">are competent</a> <a href="https://www.vice.com/en/article/nedzqm/you-probably-shouldnt-bet-your-savings-on-reddits-wallstreetbets">investors</a>. </p>
<p>Whatever the goal pursued, the beliefs and risky behaviour of this new breed of retail investors are a far cry from those that often characterize typical stock market investors, many of whom heed financial advisers and favour long-term investments in safe opportunities like blue chip stocks, mutual funds or, for the riskier investor, <a href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded funds, or ETFs</a>.</p>
<p>These contrasting beliefs are the topic of many <a href="https://www.reddit.com/r/wallstreetbets/comments/k94xpm/the_great_war_between_wsb_and_traditional/">humorous videos</a> <a href="https://knowyourmeme.com/memes/sites/wallstreetbets/">and memes</a>.</p>
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<h2>Retail investors gaining influence</h2>
<p>Until now, retail investors have usually been the customers of financial institutions. Institutional investors, such as large banks and hedge funds and their wealthy clients, were traditionally seen as the “<a href="https://www.investopedia.com/terms/s/smart-money.asp">smart money</a>” who influence the movement of markets. Smart money is typically portrayed as involving successful, respected investors who possess important knowledge of financial markets. </p>
<p>In contrast, WallStreetBets’ members are known for the self-deprecating ways they describe themselves, typically <a href="https://www.urbandictionary.com/define.php?term=YOLOing">as “yoloing”</a> cuckolds and degenerates, painting a clear contrast to the supposedly respectable smart money investors. Yet this influential group comprises “<a href="https://finance.yahoo.com/news/fighting-100-mini-mike-tysons-the-powerful-influence-of-reddit-trade-141009102.html">100s of mini Mike Tysons</a>” who together yielded enough power to cause <a href="https://www.wsj.com/articles/melvin-capital-lost-53-in-january-hurt-by-gamestop-and-other-bets-11612103117">billions of dollars in losses</a> to <a href="https://www.bloomberg.com/news/articles/2021-01-27/bros-on-reddit-bludgeon-melvin-capital-in-warning-to-wall-street">established financial firms</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/gamestop-im-one-of-the-wallstreetbets-degenerates-heres-why-retail-trading-craze-is-just-getting-started-154584">GameStop: I'm one of the WallStreetBets 'degenerates' – here's why retail trading craze is just getting started</a>
</strong>
</em>
</p>
<hr>
<h2>Reactions by finance professionals</h2>
<p>Whether they’re fashion houses or record companies or hedge funds and wealth management companies, people in power typically try to undermine the threat posed by market transformations that could upend their business model and minimize their influence.</p>
<p>In the financial world, reactions to WallStreetBets have been varied. Trading platforms have tried to curb the power of Redditors by <a href="https://www.nytimes.com/live/2021/01/28/business/us-economy-coronavirus">limiting transactions</a> under the rationale of <a href="https://www.cnbc.com/2021/01/28/robinhood-ceo-says-it-limited-buying-in-gamestop-to-protect-the-firm-and-protect-our-customers.html">protecting consumers</a>. Many analysts and investors have also derided WallStreetBets investors as uneducated people who might lose their shirts on their bets. </p>
<p>In much of the news coverage, analysts <a href="https://markets.businessinsider.com/news/stocks/leon-cooperman-gamestop-surge-will-end-very-badly-for-public-2021-1-1030019230?fbclid=iwar3bxha3wltg93ns-amdkm8fv4wz-kfon2lvzfofmivughdgjoz-lqmnua0">have reaffirmed their knowledge of the financial markets</a> and levelled insults at the WallStreetBets investors. Billionaire and hedge fund manager Leon Cooperman of Omega Advisors had this to say:</p>
<blockquote>
<p>“The reason the market is doing what it’s doing is people are sitting at home, getting their checks from the government, basically trading for no commissions and no interest rates.” </p>
</blockquote>
<h2>What the future holds</h2>
<p>As of Feb. 1, there were about eight million members on Reddit’s WallStreetBets, but it’s only one of many online sites where retail investors are learning, interacting and sharing investment ideas. Together, these amateur investors are altering some long-held beliefs about investing and they’re gaining influence in the market in the process.</p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/382295/original/file-20210203-23-1so47g3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A customer checks on his cellphone as he walks to a GameStop store." src="https://images.theconversation.com/files/382295/original/file-20210203-23-1so47g3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/382295/original/file-20210203-23-1so47g3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/382295/original/file-20210203-23-1so47g3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/382295/original/file-20210203-23-1so47g3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/382295/original/file-20210203-23-1so47g3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/382295/original/file-20210203-23-1so47g3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/382295/original/file-20210203-23-1so47g3.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 customer checks his cellphone as he walks to a GameStop store in Vernon Hills, Ill., on Jan. 28, 2021.</span>
<span class="attribution"><span class="source">(AP Photo/Nam Y. Huh)</span></span>
</figcaption>
</figure>
<p>These retail investors aren’t part of an organized movement trying to transform the workings of the financial market. Yet, as <a href="https://www.vox.com/the-goods/22249458/gamestop-stock-wallstreetbets-reddit-citron">the GameSpot saga</a> exemplifies, their online interactions have reshaped the power dynamic between retail and institutional investors. WallStreetBets Redditors helped propel GameStop’s stock price to soar, forcing a halt in trading.</p>
<p>What does the future hold for the financial world? Take your bet.</p><img src="https://counter.theconversation.com/content/154355/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pierre-Yann Dolbec receives funding from the Social Sciences and Humanities Research Council, the Fonds de Recherche du Québec, and Concordia University. </span></em></p>WallStreetBets is now reshaping financial markets: Non-professional market participants, or retail investors, are doing the work traditionally performed by financial advisers and analysts.Pierre-Yann Dolbec, Assistant professor in marketing and Research Chair in Complexity and Markets, Concordia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1542552021-01-29T02:18:33Z2021-01-29T02:18:33ZWhy GameStop shares stopped trading: 5 questions answered<figure><img src="https://images.theconversation.com/files/381248/original/file-20210129-23-9r03rc.jpg?ixlib=rb-1.1.0&rect=7%2C0%2C4779%2C2928&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">GameStop shares soared after some retail investors teamed up to jack up the price.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/GameStopStockSurge/e8c6707c9a4846b48b7db2034e05258f/photo?Query=gamestop%20AND%20stock&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=19&currentItemNo=8">AP Photo/John Minchillo</a></span></figcaption></figure><p><em>Editor’s note: <a href="https://www.bloomberg.com/news/articles/2021-01-29/day-trader-favorites-rally-back-as-robinhood-eases-trading-ban?srnd=premium&sref=Hjm5biAW">GameStop stock resumed its dramatic ascent</a> after a popular no-fee online broker said it would lift restrictions on trading its shares. In recent days, frenzied activity in the video game retailer’s stock led the New York Stock Exchange to <a href="https://www.nyse.com/trade-halt-curren">briefly halt trading multiple times</a>, while <a href="https://www.cbsnews.com/news/robinhood-block-trading-of-gamestop-stock">Robinhood and other brokers</a> restricted purchases of GameStop. That <a href="https://www.marketwatch.com/story/mark-cuban-dave-portnoy-aoc-and-others-react-to-robinhood-restricting-trades-on-gamestop-and-amc-11611855658">prompted outrage</a> among some lawmakers and investors, leading to calls for investigations in Washington. <a href="https://scholar.google.com/citations?user=y_ViJ7oAAAAJ&hl=en&oi=ao">Jena Martin</a>, a law professor who studies securities regulation, explains what’s going on, why trading is sometimes restricted and how to tell if it’s a sign of any funny business.</em></p>
<h2>1. What prompts trading in a stock to be halted?</h2>
<p>Typically, there are two reasons that an exchange <a href="https://www.finra.org/investors/alerts/when-trading-stops-what-you-need-know-about-halts-suspensions-and-other-interruptions">might stop trading in a stock</a>. The first occurs when an exchange – often at a company’s request – halts trading in that stock for a big announcement, such as a merger or a product recall. This gives investors time to absorb the news before trading resumes. </p>
<p>A second reason is when trading in a stock becomes exceptionally volatile – that is, it moves higher or lower quickly and unpredictably, especially when there is no news coming from the company that would explain the change. This halt usually happens automatically, such as if a stock jumps or plunges by a certain percentage within five minutes. That’s why shares of the Grapevine, Texas-based company GameStop <a href="https://www.marketwatch.com/story/gamestop-amc-halted-after-a-minute-of-trading-as-shares-retreat-from-massive-gains-11611844823">stopped trading several times</a> on Jan. 27 and 28, but the halts lasted only a few minutes at a time. </p>
<p>The more controversial issue <a href="https://www.cnbc.com/2021/01/28/robinhood-interactive-brokers-restrict-trading-in-gamestop-s.html">came after several brokers</a>, including Robinhood, Ameritrade and Charles Schwab, restricted trading of GameStop and a few other stocks on their platforms, whether by halting trading entirely or <a href="https://www.businesswire.com/news/home/20210129005408/en/Schwab-Issues-Statement-About-Recent-Trading-Activity">imposing more stringent margin requirements</a>. They said they had to do this to <a href="https://www.bloomberg.com/news/articles/2021-01-28/robinhood-is-said-to-draw-on-credit-lines-from-banks-amid-tumult?srnd=premium&sref=Hjm5biAW">reduce their risk</a>. Brokerages are required by the Securities and Exchange Commission to have enough cash on hand to cover a certain percentage of trades on their platform. When stock volatility is high, it drives up how much capital they need. </p>
<h2>2. How common are these types of trade restrictions?</h2>
<p>Trading halts by stock exchanges happen <a href="https://www.finra.org/investors/alerts/when-trading-stops-what-you-need-know-about-halts-suspensions-and-other-interruptions">fairly regularly</a>, but they’re rarely a big deal. The last time a NYSE trading halt of a specific stock garnered this much attention came when <a href="https://www.reuters.com/article/sppage012-n17385634-oisbn/nyse-suspends-trading-in-lehman-brothers-shares-idUSN1738563420080917">Lehman Brothers</a> went bankrupt in 2008. </p>
<p>It’s very rare, however, for brokers to suspend trading in a specific stock. I can’t remember that ever happening, and I’ve been closely following the market for 20 years – including five at the SEC. </p>
<h2>3. Does a halt in trading mean something fishy is going on?</h2>
<p>Sometimes. </p>
<p>Extreme volatility in a stock is seen as a sign of suspicious activity in the market, and may trigger an SEC investigation. </p>
<p>In the case of GameStop, the saga started when a band of retail investors on the <a href="https://www.reddit.com/r/wallstreetbets/">WallStreetBets Reddit forum</a> decided to gang up on the institutional investors they see as having too much power over the market. They noticed that hedge funds and other professional traders were betting that shares of GameStop would go down – known as shorting a stock – and so they teamed up to drive its share price higher. <a href="https://www.theguardian.com/business/2021/jan/28/sending-a-message-gamestop-investors-on-why-they-bought-shares">This “short squeeze”</a> helped drive GameStop’s share price <a href="https://finance.yahoo.com/quote/GME/">up as much as 2,000% in a matter of weeks</a>, causing some professional investors to lose <a href="https://markets.businessinsider.com/news/stocks/gamestop-short-sellers-squeezed-losses-reddit-traders-army-cohen-palihapitiya-2021-1-1030006226">billions of dollars</a>. </p>
<p>This type of trading – both the shorting and the squeezing – is often known as speculation, because it has nothing to do with the fundamental value of a company. Speculation is legal – <a href="https://www.marketwatch.com/story/how-you-could-lose-everything-by-short-selling-stocks-whether-its-betting-against-gamestop-or-tesla-2021-01-26">although very risky</a> – but it can cross the line into illegal behavior if there’s evidence of actual market manipulation. </p>
<h2>4. All right then, what’s market manipulation?</h2>
<p>According to the <a href="https://www.law.cornell.edu/uscode/text/15/78i">laws that govern the stock market</a>, market manipulation happens when someone tries to create excitement and activity in a particular stock specifically to entice people to buy that stock and drive up the price.</p>
<p>If those same initial investors then sell the stock at the heightened price, regulators get suspicious. They become concerned that said investors were just trying to create a frenzy in the market to artificially inflate the value of the stock so they can sell it at its new high price. The SEC <a href="https://www.sec.gov/news/press/2011/2011-214.htm">accused a unit of Citigroup</a> of doing this during the financial crisis when it hyped the price of a financial product tied to the housing market in an effort to unload it at an inflated price. </p>
<p>This is known as a “<a href="https://www.investor.gov/introduction-investing/investing-basics/glossary/pump-and-dump-schemes">pump-and-dump</a>” scheme, and some allege <a href="https://www.cnbc.com/2021/01/28/gamestop-now-called-a-pump-and-dump-scheme-what-you-need-to-know.html">this is exactly what the Redditor investors were doing</a>. </p>
<p>[<em>Insight, in your inbox each day.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=insight">You can get it with The Conversation’s email newsletter</a>.]</p>
<p>We don’t know yet if the SEC is looking into whether that’s what’s happening here, though the regulator has indicated it’s “<a href="https://finance.yahoo.com/news/yellen-monitoring-gamestop-market-activity-183420988.html">monitoring” the situation closely</a>. The SEC, as the primary regulator of the stock market, is responsible for enforcing securities laws. </p>
<p>To determine whether GameStop investors were involved in a pump-and-dump scheme, SEC investigators would check into their trading activity and collect other evidence to try to figure whether these investors were “<a href="https://www.law.cornell.edu/uscode/text/15/78i">trying to create a false or misleading appearance of active trading</a>.” In addition, any evidence that individuals had made false statements to help drive the stock price up <a href="https://www.fbi.gov/stats-services/publications/securities-fraud">would be considered fraud</a>. This would be particularly damning. </p>
<h2>5. What’s next?</h2>
<p>Robinhood and a few other brokers said <a href="https://www.nytimes.com/2021/01/28/business/robinhood-gamestop-restrictions.html">they will resume allowing “limited” buying</a> of GameStop after lawmakers including U.S. Rep. Alexandria Ocasio-Cortez and Sen. Ted Cruz <a href="https://www.cnbc.com/2021/01/28/gamestop-cruz-ocasio-cortez-blast-robinhood-over-trade-freeze.html">attacked them</a> for restricting trades. </p>
<p>U.S. Rep. Maxine Waters and Sen. Sherrod Brown <a href="https://techcrunch.com/2021/01/28/gamestop-hearings-congress-waters-robinhood/">announced hearings</a> into the stock market turmoil and the “predatory” conduct of hedge funds.</p>
<p>But some officials – such as the <a href="https://www.cnbc.com/2021/01/27/gamestop-speculation-is-danger-to-whole-market-massachusetts-regulator.html">top securities regulator in Massachusetts</a> – are worried the frenzied trading in GameStop represents a broader risk to the U.S. equities market and are urging the SEC to step in and halt trading for as long as a month. The SEC does have the power to halt trading, but that is a nuclear option that the SEC uses only if it’s concerned about issues within the company itself. Were it to do that, it would be pretty clear <a href="https://www.nytimes.com/2002/03/19/business/sec-forces-new-york-stock-exchange-to-end-trading-of-a-company.html">it thinks some funny business</a> is going on.</p><img src="https://counter.theconversation.com/content/154255/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jena Martin 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>The easy answer as to why trading was halted relates to the stock’s ‘volatility’ after its dramatic climb in recent weeks. But it could also mean something fishy is going on.Jena Martin, Professor of Law, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1444082020-08-20T23:41:09Z2020-08-20T23:41:09Z$37.7 million is a new Australian record. Why our corporate chiefs are paid so well<figure><img src="https://images.theconversation.com/files/353807/original/file-20200820-14-1ct0ir6.jpg?ixlib=rb-1.1.0&rect=31%2C209%2C2650%2C1272&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">RomanR/Shutterstock</span></span></figcaption></figure><p>The annual chief executive pay report produced by the Australian Council of Superannuation Investors is a must-read for shareholders and members of superannuation funds. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/353782/original/file-20200820-16-5j6p9o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/353782/original/file-20200820-16-5j6p9o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/353782/original/file-20200820-16-5j6p9o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=915&fit=crop&dpr=1 600w, https://images.theconversation.com/files/353782/original/file-20200820-16-5j6p9o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=915&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/353782/original/file-20200820-16-5j6p9o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=915&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/353782/original/file-20200820-16-5j6p9o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1150&fit=crop&dpr=1 754w, https://images.theconversation.com/files/353782/original/file-20200820-16-5j6p9o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1150&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/353782/original/file-20200820-16-5j6p9o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1150&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption"></span>
<span class="attribution"><a class="source" href="https://acsi.org.au/wp-content/uploads/2020/08/2019-CEO-Pay-in-ASX200-companies-070820.pdf">Australian Council of Superannuation Investors</a></span>
</figcaption>
</figure>
<p>The latest report, relating to the financial year that ended in 2019, reveals a new record for the money actually paid in one year, so-called realised remuneration, of <a href="https://acsi.org.au/research-reports/ceo-pay-in-asx200-companies/">AU$37.7 million</a>. </p>
<p>The extraordinary sum went to Andrew Barkla, the chief executive of a little-known company, <a href="https://www.idp.com/global/">IDP Education</a>. He beat the previous record set by the chief executive of Domino’s Pizza Don Meij who took home $36.84 million in 2017.</p>
<p>Paul Perreault from CSL took out second place with realised pay of $30.5 million, followed by Philippe Wolgen from Clinuvel Pharmaceuticals with $20.6 million and Michael Clarke from Treasury Wine Estates with $19.9 million. </p>
<p>IDP Education is part-owned by <a href="https://www.crikey.com.au/2020/08/19/universities-australia-funding-covid-19/">Australia’s universities</a> and matches students with places in the <a href="https://investors.idp.com/FormBuilder/_Resource/_module/v1AiEHYL20-_Rje11PzkYA/FY19%20Annual%20Report%20final.pdf">major English-speaking nations</a> of Australia, Canada, Ireland, New Zealand, United Kingdom and United States.</p>
<p>Andrew Barkla’s payment was largely the result of the exercise of <a href="https://acsi.org.au/wp-content/uploads/2020/08/2019-chief%20executive-Pay-in-ASX200-companies-070820.pdf">share options</a> granted prior to the company’s share market listing in 2015. </p>
<h2>Long-term incentives that aren’t long-term</h2>
<p>Share options are meant to align executives’ interests with shareholder interests.</p>
<p>They are given shares which they won’t be able to sell until the “vesting” date, some years in the future.</p>
<p>How much they get when they sell them depends on the share price when their shares vest, meaning they can boost their payout by maximising the price. One way they can do it is through share buybacks. A company buying back its own shares is ostensibly returning capital. But it is also pushing up its share price, and can do it near to vesting day. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-last-thing-companies-should-be-doing-right-now-is-paying-dividends-135928">The last thing companies should be doing right now is paying dividends</a>
</strong>
</em>
</p>
<hr>
<p>A recent US study points to a <a href="https://ecgi.global/sites/default/files/The%20Long-Term%20Consequences%20of%20Short-Term%20Incentives-%20Paper.pdf">surge in buy-backs</a>, and hence share prices, ahead of vesting dates. After vesting dates, share prices tend to fall, perhaps because companies that have bought back shares are left with less money with which to expand and withstand shocks. </p>
<p>This suggests buy-backs serve short-term rather than long-term goals.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/353803/original/file-20200820-20-1athblp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/353803/original/file-20200820-20-1athblp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/353803/original/file-20200820-20-1athblp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/353803/original/file-20200820-20-1athblp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/353803/original/file-20200820-20-1athblp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/353803/original/file-20200820-20-1athblp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/353803/original/file-20200820-20-1athblp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/353803/original/file-20200820-20-1athblp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Andrew Barkla took home a record $37.7 million.</span>
</figcaption>
</figure>
<p>Regardless of whether or not share prices are ramped up ahead of vesting dates (and there is no suggestion this happened at IDP Education) most long-term incentives aren’t long-term at all. </p>
<p>A typical “long-term” incentive for a chief executive lasts three years, whereas super funds and many other investors have longer 10-20 year horizons. </p>
<p>The time-limited nature of “long-term” incentives might explain why firms fail to come to grips with climate change and other long-term threats.</p>
<p>Why would you, as chief executive, make investments that will make sense over 10 to 20 years, when you are only paid to consider three years?</p>
<p>Andrew Barkla’s case is instructive. </p>
<p>He was paid $37.7 million for outstanding performance up to the middle of 2019, before the pandemic hit. His firm’s share price peaked at $24.60 in February this year and now sits at $19.25, a fall of 22%. </p>
<p>The risks inherent in its business model have become clear in a way they weren’t when he received the payout.</p>
<h2>There’s hope</h2>
<p>The Australian Council of Superannuation Investors represents institutional investors including super funds. Between them they own an average of 10% of each company on the ASX200. </p>
<p>They have has been campaigning for greater accountability to stop poor performing executives receiving high bonuses when they are not deserved.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/beyond-the-bottom-line-how-to-reward-executives-for-sustainable-practice-5322">Beyond the bottom line: how to reward executives for sustainable practice</a>
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</p>
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<p>There are promising signs. Twelve chief executives in the Australian Securities Exchange’s top 100 companies received zero bonuses in the 2019 financial year, compared to only one in 2018. </p>
<p>Super funds should be doing more. One proposal is to ensure bonus shares don’t vest until <a href="https://www.sciencedirect.com/science/article/pii/S0929119914000042">two years after a chief executive’s last day in office</a>.</p>
<p>Another is to give executives conditional payments that can <a href="https://theconversation.com/confiscate-their-super-if-it-works-for-sports-stars-it-could-work-for-bankers-105833">later be withdrawn</a> if they are found to have acted badly.</p>
<p>If you’re offended by chief executive pay there are things you do. One of the first is to contact your super fund and tell them you’re concerned.</p>
<hr>
<p><strong>The 20 highest-paid ASX200 chief executives, 2019 financial year</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/353809/original/file-20200820-20-evjewo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/353809/original/file-20200820-20-evjewo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/353809/original/file-20200820-20-evjewo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=431&fit=crop&dpr=1 600w, https://images.theconversation.com/files/353809/original/file-20200820-20-evjewo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=431&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/353809/original/file-20200820-20-evjewo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=431&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/353809/original/file-20200820-20-evjewo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=542&fit=crop&dpr=1 754w, https://images.theconversation.com/files/353809/original/file-20200820-20-evjewo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=542&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/353809/original/file-20200820-20-evjewo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=542&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Realised remuneration.</span>
<span class="attribution"><a class="source" href="https://acsi.org.au/wp-content/uploads/2020/08/2019-CEO-Pay-in-ASX200-companies-070820.pdf">Australian Council of Superannuation Investors</a></span>
</figcaption>
</figure>
<hr><img src="https://counter.theconversation.com/content/144408/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Elizabeth Sheedy has received funding from the Centre for International Finance and Regulation, the Australian Prudential Regulation Authority, Deloitte Australia, the Insurance Council of Australia and five large superannuation funds. She is currently receiving funding from the Governance Risk and Compliance Institute, the Financial Institution's Remuneration Group and RSA Archer. She is a member of industry super fund Unisuper and the Risk Managers' Association of Australia.</span></em></p>Executives are often given bonuses that “vest” on a particular date. If the share price is high on that date, regardless of the reason, they get payouts.Elizabeth Sheedy, Professor - Risk governance, culture, remuneration, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1429852020-07-28T20:00:01Z2020-07-28T20:00:01ZBlue-chip, volatile, high-risk: retail investors are buying while professionals are selling<p>Stocks have held up relatively well during the COVID-19 pandemic. Following a steep decline in March, for example, the value of the Australian Stock has rebounded to be just 16% down on its February peak.</p>
<p>It’s a situation that appears to be exciting retail investors – regular people like you and I who buy shares directly. But this enthusiasm may be misplaced given the considerable uncertainty about the outlook for the economy.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-stocks-are-soaring-even-as-coronavirus-cases-surge-at-least-20-million-remain-unemployed-and-the-us-sinks-into-recession-140395">Why stocks are soaring even as coronavirus cases surge, at least 20 million remain unemployed and the US sinks into recession</a>
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</em>
</p>
<hr>
<p>We’ve analysed the trading in S&P/ASX 300 stocks from January to May 2020 to get a better understanding of what retail investors are doing.</p>
<p>Between March 23 (when the stock market started rising) and May 2, retail investors were net buyers of A$3.57 billion. At the same time the “professional” institutional investors – including super funds – were net sellers of $3.27 billion.</p>
<hr>
<p><strong>Cumulative net buying (A$ billion)</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/349826/original/file-20200728-31-1i4gpl5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/349826/original/file-20200728-31-1i4gpl5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/349826/original/file-20200728-31-1i4gpl5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=301&fit=crop&dpr=1 600w, https://images.theconversation.com/files/349826/original/file-20200728-31-1i4gpl5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=301&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/349826/original/file-20200728-31-1i4gpl5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=301&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/349826/original/file-20200728-31-1i4gpl5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=378&fit=crop&dpr=1 754w, https://images.theconversation.com/files/349826/original/file-20200728-31-1i4gpl5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=378&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/349826/original/file-20200728-31-1i4gpl5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=378&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">S&P/ASX 300, January to mid-May 2020.</span>
<span class="attribution"><span class="source">Author's calculations</span></span>
</figcaption>
</figure>
<hr>
<p>Notably, our results show retail investors weren’t just buying relatively safe “blue chip” stocks but also high-risk stocks. </p>
<h2>Retail investors rush in</h2>
<p>We decided to drill into the trading data after reports of booming retail investor activity. For example, an Australian Securities and Investments Commission <a href="https://download.asic.gov.au/media/5584799/retail-investor-trading-during-covid-19-volatility-published-6-may-2020.pdf">analysis of trading</a> between February 24 and April 3 found daily trading by retail brokers was double that of the preceding six months (A$3.3 billion compared with A$1.6 billion), and the rate of new trading accounts being opened increased 3.4 times.</p>
<p>Our <a href="https://sites.google.com/view/carole-comerton-forde/opinion-and-policy?authuser">analysis</a> shows that from the start of the year to March 3 retail investors were net sellers, offloading about A$1.64 billion in stock. Between March 3 and May 8 they became net buyers of stock, accumulating A$6.29 billion in stock. </p>
<p>In contrast, institutional investors were net buyers through to March 3 (buying about A$3.73 billion of stock) but then net sellers, shedding A$7.3 billion worth of equities by May 8.</p>
<p>Daily average trading activity (both buying and selling) by retail investors between March and May was double the average for 2019 (of A$1.12 billion, compared with $A590 million). The daily average trading by institutional investors was 30% higher (A$12.26 billion a day, compared with A$8.67 billion over 2019). </p>
<h2>What retail investors are buying</h2>
<p>We examined stock buying based on four characteristics: </p>
<ul>
<li><p>market capitalisation - the market valuation of a company based on its stock price and number of shares</p></li>
<li><p>the volatility of a stock price (how much it moves up or down) compared with the market average</p></li>
<li><p>level of debt, known as “leverage”. Companies with higher debt tend to be riskier investments in uncertain economic conditions </p></li>
<li><p>recent price changes – whether stock prices were rising or falling before our focus period.</p></li>
</ul>
<p>Our analysis shows retail investors were net buyers not only of large-cap companies such as <a href="https://www.asx.com.au/asx/share-price-research/company/BHP">BHP</a> and <a href="https://www.asx.com.au/asx/share-price-research/company/CBA">Commonwealth Bank</a> but highly volatile stocks such as <a href="https://www.asx.com.au/asx/share-price-research/company/AMP">AMP</a> and <a href="https://www.asx.com.au/asx/share-price-research/company/WEB">Webjet</a>, highly leveraged stocks such as <a href="https://www.asx.com.au/asx/share-price-research/company/DMP">Domino’s Pizza</a> and <a href="https://www.asx.com.au/asx/share-price-research/company/SEK">SEEK</a>, and stocks whose prices were falling prior to the lockdown, such as <a href="https://www.asx.com.au/asx/share-price-research/company/MYR">Myer</a> and <a href="https://www.asx.com.au/asx/share-price-research/company/FLT">Flight Centre</a>. </p>
<p>In contrast, institutional investors were net sellers of all these stocks. </p>
<p>These trends were broadly consistent across industry sectors. The one exception was software and services, where institutions were net buyers through the lockdown and retail investors were net sellers. </p>
<h2>Risky motivations</h2>
<p>Why has the COVID-19 crisis produced such novel behaviour? We don’t know for sure, but can speculate about a few possibilities. </p>
<p>It may be due to people having fewer spending opportunities and channelling their spare cash into the market in the hope of a speedy rebound and quick returns.</p>
<p>It may be due people looking for entertainment in the absence of usual leisure activities. This has been dubbed the <a href="https://www.bloomberg.com/opinion/articles/2020-06-09/the-bad-stocks-are-the-most-fun">Boredom Markets Hypothesis</a>. </p>
<p>It might also just be <a href="https://theconversation.com/gambling-on-the-stock-market-are-retail-investors-even-playing-to-win-143248">another form of gambling</a> – “taking a punt” in the absence of sports betting opportunities. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/gambling-on-the-stock-market-are-retail-investors-even-playing-to-win-143248">Gambling on the stock market: are retail investors even playing to win?</a>
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<p>But given the significant economic uncertainty, recent gains may not be sustained. Many listed companies have withdrawn or suspended the earnings guidance they usually provide to the stock exchange – key information for investors. </p>
<p>We caution awareness of the risks in hoping for the best.</p><img src="https://counter.theconversation.com/content/142985/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carole Comerton-Forde is an economic consultant on market structure for the Australian Securities and Investments Commission. </span></em></p><p class="fine-print"><em><span>Zhuo (Joe) Zhong 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>While institutional investors are selling stocks, retail investors are buying. They may not understand the risks.Carole Comerton-Forde, Professor of Finance, UNSW SydneyZhuo (Joe) Zhong, Senior Lecturer in Finance, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1432482020-07-27T19:55:59Z2020-07-27T19:55:59ZGambling on the stock market: are retail investors even playing to win?<figure><img src="https://images.theconversation.com/files/349499/original/file-20200727-23-19hrk7y.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5000%2C3323&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The COVID-19 pandemic has led to a dramatic <a href="https://www.finder.com.au/record-numbers-of-new-investors-open-share-trading-accounts">surge</a> in “mum and dad” retail investors playing stock exchanges across the world. </p>
<p>In Australia, retail investors were net buyers of A$9 billion of Australian stocks between late February and mid-May, according to <a href="https://www.afr.com/markets/equity-markets/retail-investors-pile-in-as-professionals-exit-20200710-p55ayi">corporate advisory firm Vesparum Capital</a>. In contrast, the professional institutional investors – superannuation funds and the like – were net sellers of A$11 billion of stock. </p>
<p>The amateurs are therefore likely responsible for most of the market’s rebound since its March 23 low.</p>
<p>An Australian Securities and Investments Commission <a href="https://download.asic.gov.au/media/5584799/retail-investor-trading-during-covid-19-volatility-published-6-may-2020.pdf">analysis of retail investor trading</a> shows from February 24 (the day after the market peaked) to April 3, retail investors’ daily buying and selling of stocks was double that of the months before (A$3.3 billion to A$1.6 billion). More than 20% of that activity was from new or reactivated accounts. </p>
<hr>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/349507/original/file-20200727-29-1ctplnf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/349507/original/file-20200727-29-1ctplnf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=406&fit=crop&dpr=1 600w, https://images.theconversation.com/files/349507/original/file-20200727-29-1ctplnf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=406&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/349507/original/file-20200727-29-1ctplnf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=406&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/349507/original/file-20200727-29-1ctplnf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=511&fit=crop&dpr=1 754w, https://images.theconversation.com/files/349507/original/file-20200727-29-1ctplnf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=511&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/349507/original/file-20200727-29-1ctplnf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=511&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">bsyJS australian stocks holding up.</span>
</figcaption>
</figure>
<hr>
<p>The securities regulator has expressed concern this rush of amateurs into the stock market is a train wreck waiting to happen. Its report notes retail investors are, on average, “not proficient” at predicting short-term market movements. </p>
<blockquote>
<p>While markets generally recover over the long run and tend to grow with economic fundamentals, short-term trading and poor market timing can be a major risk for investors in volatile markets. Therefore, retail investors should be wary of trying to “play the market” for short-term price movements by day trading.</p>
</blockquote>
<h2>COVID and risky behaviour</h2>
<p>There are several possible explanations for why people are taking a risk on the stock market. </p>
<p>Some might see this as an opportunity to get into the market at a low point, with a view to long-term gains. Others might be out of work and looking to
“day trade” - buying and selling shares on short time frames – as a source of income. Yet others may be taking the opportunity of working from home to watch the market through the day. </p>
<p>But another explanation is also worth considering. This is an alternative to gambling. So while it’s risky, it’s arguably no riskier than sports betting, casinos or poker machines.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-stocks-are-soaring-even-as-coronavirus-cases-surge-at-least-20-million-remain-unemployed-and-the-us-sinks-into-recession-140395">Why stocks are soaring even as coronavirus cases surge, at least 20 million remain unemployed and the US sinks into recession</a>
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</em>
</p>
<hr>
<h2>Risk tolerance</h2>
<p>This theory (that this is gambling by another means) explains why the appetite for risk among retail investors has ballooned when the natural response to severe economic uncertainty would be to reduce trading.</p>
<p>The financial risk individuals are happy to tolerate – known as financial risk tolerance – is mostly determined by personality. A person’s risk appetite is unlikely to change substantially over their life, even with changing economic conditions.</p>
<p>Most people, however, are adept at making different risk decisions with money allocated to different “accounts”. In behavioural finance this is known as “mental accounting”. </p>
<p>How they think about and use their different accounts isn’t necessarily “rational”. For example, someone might be very prudent with money from their regular budget account while spending frivolously from a discretionary account. </p>
<p>So extreme risk-taking can occur when opportunities arise despite a person generally being risk-averse. </p>
<h2>Gambling trends</h2>
<p>In the first three months of the year, pollster <a href="http://www.roymorgan.com/findings/8413-online-gambling-may-2020-202005220420">Roy Morgan</a> estimates about half of all Australians gambled in some form.</p>
<p>Its figures indicated 8.4 million adults spent about A$625 million on lottery tickets, 2.4 million spent about A$2.2 billion on poker machines, and 2.1 million spent about A$1 billion on betting – horses, sports etc. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/with-pokies-shut-down-coronavirus-stress-could-drive-more-people-to-reckless-online-gambling-134397">With pokies shut down, coronavirus stress could drive more people to reckless online gambling</a>
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</p>
<hr>
<p>In Australia, the closure of pubs, clubs and casinos during periods of lockdown has severely curbed these forms of gambling. Between late March and late April, for example, the Alliance for Gambling Reform estimates gamblers saved <a href="https://www.abc.net.au/news/2020-04-26/pokies-addicts-kick-habit-during-coronavirus-venues-shutdown/12183018?nw=0">more than $1 billion</a> on poker machines. The cessation of many sporting events has also reduced betting opportunities.</p>
<h2>Pros and cons for society</h2>
<p>Does this imply people see the financial markets as just another form of <a href="https://www.tandfonline.com/doi/abs/10.1080/15427560.2010.481978">gambling</a>? If so, is this necessarily a bad thing?</p>
<p>If a significant number of people are seriously looking to “day trading” as a way to make money in the short term, the securities regulator’s concerns are valid. There is a good chance most will lose money.</p>
<p>But if these new investors are driven by their interest in gambling, substituting financial markets for poker machines and sports betting, then surely most must be prepared for losses. Very few gamblers are consistent winners from betting on games of chance or sports. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/theres-another-health-crisis-looming-what-happens-when-the-pokies-switch-back-on-137995">There's another health crisis looming – what happens when the pokies switch back on?</a>
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<hr>
<p>In this context there may not be so much to worry about – albeit acknowledging a small percentage will be “problem investors”, losing more than they can afford. </p>
<p>Compared to the almost certain likelihood of losses on gambling, those rushing into the stock market might just find it more rewarding than casinos, sports betting or pokies.</p><img src="https://counter.theconversation.com/content/143248/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>The rush of ‘amateur’ investors into the stock market has regulators worried. Maybe they shouldn’t.Warren Hogan, Industry Professor, University of Technology SydneyDavid Michayluk, Professor of Finance, University of Technology SydneyGerhard Van de Venter, Associate Professor in Finance, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1414762020-06-29T12:22:42Z2020-06-29T12:22:42ZCombating climate change – why investors should keep their shares in fossil fuel companies<figure><img src="https://images.theconversation.com/files/344516/original/file-20200629-155308-1pjubif.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Contradictory messaging.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/brisbane-queensland-australia-january-10-2020-1612870882">Alex Bee / Shutterstock.com</a></span></figcaption></figure><p>As we begin to engage with the climate emergency and the impact of carbon dioxide emissions, calls have grown to stop investing in companies engaged in fossil fuel production – a practice known as divestment. </p>
<p>The University of Oxford became one of the latest institutional investors to pledge to drop all fossil fuel companies <a href="https://www.independent.co.uk/news/education/education-news/oxford-university-fossil-fuels-net-zero-student-campaigns-investment-a9478431.html">from their £3 billion endowment</a>. Enormous pressure from students and staff alike has been put on other universities to follow suit, creating a culture of shame on those <a href="https://www.independent.co.uk/news/education/education-news/university-fossil-fuels-divest-russell-group-climate-change-crisis-a9281566.html">that continue to hold these shares</a>. </p>
<p>Many scholars in the UK may be horrified to hear that one of the largest university pension schemes, the University Superannuation Scheme (or USS) has the oil company Shell <a href="https://www.uss.co.uk/how-uss-invests/the-fund/investments/uss-top-100-listed-equities">as its largest holding</a> of £500 million. Recent <a href="https://www.uss.co.uk/members/members-home/retirement-articles/2020/investment-changes-and-new-opportunities">changes to the USS investment strategy</a> ended its investment in a number of controversial holdings, including tobacco manufacturing, coal mining, cluster munitions (a form of explosive) and landmines. But USS continues to invest in a number of fossil fuel companies saying they intend to engage with them as a “force for good”.</p>
<p>So long as they do wield this influence, we believe this is the right approach for investors who want to combat climate change. Many of those lobbying for divestment will have good intentions. Divesting from fossil fuel companies is likely to make investors feel morally cleansed, having washed their hands of dirty investments that make profits from environmental damage. But it may act as a diversion tactic, allowing the lobbyists and investors who follow their lead to feel good about themselves. And yet they will have done <a href="https://theconversation.com/fossil-fuel-divestment-will-increase-carbon-emissions-not-lower-them-heres-why-126392">little to combat climate change</a>. </p>
<p>Divestment, leading to the selling of fossil fuel company shares, should put downward pressure on the share price, making it harder for the company to raise new capital. But for the majority of them, even in the face of substantial divestments, it will be very much business as usual, having no effect at all <a href="https://www.sciencedirect.com/science/article/abs/pii/S2214629618306881">on their day-to-day operations</a>.</p>
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<img alt="" src="https://images.theconversation.com/files/344520/original/file-20200629-155353-1y1zbr8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/344520/original/file-20200629-155353-1y1zbr8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/344520/original/file-20200629-155353-1y1zbr8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/344520/original/file-20200629-155353-1y1zbr8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/344520/original/file-20200629-155353-1y1zbr8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=498&fit=crop&dpr=1 754w, https://images.theconversation.com/files/344520/original/file-20200629-155353-1y1zbr8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=498&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/344520/original/file-20200629-155353-1y1zbr8.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">Dirty investment?</span>
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<p>If more people want to sell shares than buy them, this will affect the share price – but most oil companies are well beyond the situation where it would cause them significant issues. Neither BP nor Shell, for example, are likely to need to raise new financing in the foreseeable future <a href="https://www.fidelity.co.uk/markets-insights/daily-insight/why-bp-profit-hit-should-sober-us/">as they have large cash reserves</a>. Both have share repurchase schemes, where they are able to use dips in their share prices to buy their own shares back, allowing investors to benefit without paying taxable dividends. </p>
<p>But if a company’s shares become sufficiently cheap relative to its profit stream, it will be ripe for a takeover. Most likely this will come from an even bigger, non-European oil company or by a wealth fund. It is highly likely in either case that the new purchaser will be less concerned about minimising the company’s environmental impact than those divesting. And any such commitments could easily be dropped in favour of a more concentrated focus on profits. </p>
<p>More worryingly, divestment is highly likely to constitute a small step in a chain of events that will perversely lead to precisely the opposite of the lobbyist’s desired outcome. When the University of Oxford (for example) sells its shares, they won’t simply disappear – rather they will be sold on the market to another investor. And the investors that are actively buying oil shares right now are unlikely to be those who are concerned about the environment. </p>
<h2>Shareholder rights</h2>
<p>The divestor also gives up the opportunity for shareholder activism – something USS does with the fossil fuel companies <a href="https://www.uss.co.uk/how-uss-invests/responsible-investment/activities/climate-change">in which it holds investments</a>. This is where shareholders can put pressure on companies they part own to introduce more sustainable ways of doing business. Although there is still much to be done, there is growing evidence that this kind of activism is having <a href="https://www.desmog.co.uk/2018/05/16/power-shift-how-shareholder-activism-forcing-corporate-change-over-climate-profiteering">a positive effect on fossil fuel companies</a>. </p>
<p>Many European oil companies are much better than their peers when it comes to environmental performance. While oil extraction and refinement is by its nature a dirty business, Shell, for instance, has a strong commitment to climate change mitigation. It aims to cut its net carbon footprint by 30% by 2035, <a href="https://www.shell.co.uk/a-cleaner-energy-future/our-response-to-climate-change.html">and by 65% by 2050</a>, meanwhile increasing the role of renewables in its energy production. Contrast this with some oil majors in the US whose only commitment is to the development of more effective extraction processes and more efficient fuel. </p>
<p>A counter-intuitive strategy for divestment activists would be for them to actually encourage the maintenance of large equity holdings in fossil fuel companies by sympathetic institutional investors, such as universities and USS. Then, by working together with other large shareholders and shareholder activist groups, bring real ownership pressure to bear in order to reduce the polluting activities of these companies. This would work by hitting them where it hurts – for instance, by blocking the awards of executive pay rises and bonuses.</p>
<p>Divestment puts shares in big oil into the hands of those who don’t give two hoots about the climate emergency, discourages such companies from taking mitigating steps and does nothing whatsoever to curb fossil fuel usage. If the question is how to tackle climate change, divestment is not even part of the answer. </p>
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<p><em><a href="https://theconversation.com/imagine-newsletter-researchers-think-of-a-world-with-climate-action-113443?utm_source=TCUK&utm_medium=linkback&utm_campaign=TCUKengagement&utm_content=Imagineheader1126392">Click here to subscribe to our climate action newsletter. Climate change is inevitable. Our response to it isn’t.</a></em></p><img src="https://counter.theconversation.com/content/141476/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adrian R. Bell receives funding from the Arts and Humanities Research Council (AHRC) and previously from the Economic and Social Research Council (ESRC).</span></em></p><p class="fine-print"><em><span>Chris Brooks receives funding from the ESRC. </span></em></p>Investors who care about the environment are better off holding shares in and exercising their influence over fossil fuel companies.Adrian R Bell, Chair in the History of Finance and Research Dean, Prosperity and Resilience, Henley Business School, University of ReadingChris Brooks, Professor of Finance, Henley Business School, University of ReadingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1265392020-01-16T13:40:43Z2020-01-16T13:40:43ZThe devil is in the detail when it comes to responsible investing<figure><img src="https://images.theconversation.com/files/301221/original/file-20191112-178532-1kd9zom.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Civil society groups are flagging the risk of 'greenwashing' by companies</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>With the recent flood of pledges by investors to “turn up the heat” on <a href="https://edition.cnn.com/2019/09/18/investing/climate-change-investors/index.html">climate action</a>, one might think that the investment industry was in the midst of a profound shift. If only that were the case. </p>
<p>Officially, the majority of the world’s institutional investors, with assets under management worth more than US$89 trillion, subscribe to the <a href="https://www.unpri.org/pri/an-introduction-to-responsible-investment/what-are-the-principles-for-responsible-investment">Principles for Responsible Investment</a>. In doing so, these companies have agreed to integrate environmental, social and governance factors into their investment processes.</p>
<p>Yet, so far, investors’ commitment to responsible investment appears to have exerted <a href="https://journals.sagepub.com/doi/full/10.1177/0007650315570701">little influence</a> on corporate behaviour and short-term investment trends. The funding of the <a href="https://www.banktrack.org/article/banking_on_climate_change_fossil_fuel_finance_report_card_2019">fossil fuel industry</a> continues to rise. Investment giants like <a href="https://www.blackrock.com/corporate/about-us/blackrock-history">BlackRock</a> and <a href="https://www.vanguardinvestor.co.uk/why-vanguard/40-years-experience?intcmpgn=topnav_whyvanguard_40yearsexperience">Vanguard</a> keep on voting <a href="https://www.theguardian.com/environment/2019/sep/17/wall-street-asset-management-climate-change-blackrock-vanguard">against key climate resolutions</a>. Major shareholders ignore the growth of social <a href="https://justshare.org.za/media/news/investment-for-inclusion-series-investing-in-inequality-part-2-of-6">inequalities</a>.</p>
<p>Even the PRI (the organisation that governs the Principles for Responsible Investment) <a href="https://www.unepfi.org/wordpress/wp-content/uploads/2019/02/Legal-Framework-for-Impact_UNEPFI_PRI_Generation.pdf">acknowledges</a> that action lags behind awareness. Companies are often not accounting for risks to sustainability. Nor do they account for how they are addressing environmental, social and governance issues relating to climate change.</p>
<p>Civil society organisations, academics and journalists have begun questioning whether responsible investment can bring about the level and pace of change required to enable an inclusive climate change transition. They are also highlighting the high risk of <a href="https://qz.com/1490365/esg-investing-risks-becoming-a-victim-of-its-own-success/">greenwashing</a> – when companies set ambitious climate goals but have no plans for how to get there.</p>
<p>To better understand whether the financial industry is really shifting, we looked to South Africa, a country with a leading regulatory framework for responsible investment. Since 2011, all pension funds have been required to take a responsible investment approach as part of their fiduciary duty. A <a href="https://www.iodsa.co.za/page/CRISACode">Code for Responsible Investment in South Africa)</a> was released and in 2013 it supplied practice recommendations for institutional investors and their service providers. As a result, most South African institutional investors publicly pledged their support for responsible investment. </p>
<p>But <a href="https://journals.sagepub.com/doi/pdf/10.1177/0170840619878467">our study</a>, which tracks implementation from 2013 to 2019, found that the changes to investment practices were mostly superficial. </p>
<h2>More talk than action</h2>
<p>We looked at what South African institutional investors said they were doing on their websites or in their financial and other reports. The changes focused on publishing annual general meeting voting results and creating policies to increase transparency. Sustainability policies were generally rudimentary, using tailor-made definitions. They did not depart from “business as usual”.</p>
<p>And when we spoke to industry insiders, we found that even among responsible investment leaders, core investment practices and incentive structures remain largely unchanged.</p>
<p>Portfolio managers talked about environmental, social and governance factors being an irritation. They said these often came at the wrong time in the investment process. Others explained that environmental or social data were still seen as “fluffy” and difficult to factor into investment decisions.</p>
<p>Our findings are backed up by a <a href="https://www.unepfi.org/publications/regions-publications/africa-middle-east-publications/fiduciary-duty-in-the-21st-century-south-africa-roadmap/">recent report</a> concluding that South African investors might be aware of these issues in theory, “but may not understand what it means in practice”.</p>
<h2>Is ambiguity causing the implementation gap?</h2>
<p>We believe that part of the problem may lie in the way the concept of responsible investment was introduced. How a concept is initially framed guides how it will be interpreted and implemented. The initial framing defines the core problem and attributes responsibility. It also articulates potential solutions and motivates action.</p>
<p>In an effort to bring companies on board, the principles for responsible investment were initially <a href="https://journals.sagepub.com/doi/full/10.1177/0170840614563742">framed</a> using language that was flexible and compatible with investors’ priorities around risk and returns. At the same time, the language sought to accommodate society’s environmental and social concerns. For instance, in their <a href="https://www.unpri.org/signatories/become-a-signatory">declarations</a>, PRI signatories recognise that “environmental, social, and corporate governance issues can affect the performance of investment portfolios”. Considering them “may better align investors with broader objectives of society”. </p>
<p>This early framing shifted the problem from the need to address environmental and social issues into a duty to consider how such factors might affect risks and returns. It failed to attribute any responsibility and it overly emphasised disclosure as a solution. As a result, investors’ obligation to review their practices was left open to interpretation.</p>
<p>While this framing boosted early adoption, it may have done so at the expense of effective change in the long term. The ambiguity of the language attracted investors to sign up to the principles. But it also allowed them to interpret the principles in a manner consistent with how they had always done business. They weren’t forced to review and change their practices and priorities. </p>
<p>By appearing to acknowledge societal demands for change, the framing of responsible investment seems to have inadvertently conveyed a false impression of progress. When we spoke with civil society organisations, they lamented how seeing their language reflected in the early framing may have delayed their efforts to hold investors to account.</p>
<h2>The need to reframe responsible investment</h2>
<p>As emissions and inequality continue to rise, responsible investment needs a reframing. The new frame needs to be clear on the core problem. It must attribute responsibility, motivate action and outline solutions. The focus needs to be squarely on reducing inequality and achieving an inclusive climate transition. If investors want to understand what society demands of them, they need only look to the <a href="https://sustainabledevelopment.un.org">Sustainable Development Goals</a>. But investors will also need to be held to account. The framing of responsible investment must clearly express the depth and pace of change required in the investment industry. Initiatives like the <a href="https://www.fsb-tcfd.org">Task Force on Climate-related Financial Disclosures</a> are starting to guide the way.</p>
<p>As emphasised during the 2019 <a href="https://www.un.org/en/climatechange/index.shtml">UN climate action summit</a> and the discussions from <a href="https://unfccc.int/cop25">COP25</a>, the <a href="https://www.nature.com/articles/d41586-019-03595-0">next 10 years</a> are crucial to avoid irreversible change to the climate system and the furthering of social inequality that will accompany it. Investors must play a critical role in enabling the transformation that is urgently needed.</p><img src="https://counter.theconversation.com/content/126539/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephanie Bertels receives funding from the Social Sciences and Humanities Research Council of Canada. </span></em></p><p class="fine-print"><em><span>Cecile Feront 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>Major investors profess support for efforts against climate change but have very little to show for their promises.Cecile Feront, PhD candidate, Graduate School of Business, University of Cape TownStephanie Bertels, Associate Professor, Beedie School of Business, Simon Fraser UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/959272018-05-02T20:22:36Z2018-05-02T20:22:36ZRio Tinto’s climate resolution marks a significant shift in investor culture<p>What does the advocacy group the Australian Centre for Corporate Responsibility (<a href="http://www.accr.org.au/">ACCR</a>) have in common with the <a href="https://www.lgsuper.com.au/">Local Government Super fund</a>, the <a href="https://www.churchofengland.org/about/leadership-and-governance/church-england-pensions-board">Church of England Pensions Board</a>, and the <a href="http://www.government.se/government-agencies/seventh-ap-fund/">Seventh Swedish National Pension Fund</a>?</p>
<p>Quite a lot, it seems. These three institutional investors joined with the ACCR to co-file a shareholder resolution on climate change at mining giant Rio Tinto’s Australian annual general meeting in Melbourne yesterday. While Rio’s board <a href="https://www.asx.com.au/asxpdf/20180314/pdf/43sf7h344xgrbd.pdf">advised shareholders to vote against the resolution</a>, there was a very healthy showing of <a href="https://www.asx.com.au/asxpdf/20180502/pdf/43tqsy22jfb8xx.pdf">18.3% shareholders voting in support</a> (over 20% including abstentions).</p>
<p>The <a href="http://www.accr.org.au/rio_tinto">resolution</a> called on Rio to review and comprehensively report on its membership of industry associations such as the Minerals Council of Australia (<a href="http://www.minerals.org.au/">MCA</a>). The MCA’s pro-coal political lobbying has been distinctly at odds with the position of companies such as Rio, which publicly support measures to reduce carbon emissions in line with the <a href="https://theconversation.com/the-paris-climate-agreement-at-a-glance-50465">Paris climate agreement</a>.</p>
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<a href="https://theconversation.com/is-bhp-really-about-to-split-from-the-minerals-councils-hive-mind-84407">Is BHP really about to split from the Minerals Council's hive mind?</a>
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<p>This alliance between civil society and institutional investors is significant for several reasons.</p>
<p>Institutional investors (large investors such as superannuation funds which pool money to buy shares and other assets) are increasingly concerned about the long-term resilience of their investments to the business risks posed by climate change.</p>
<p>For an energy-hungry miner such as Rio, these risks include changing energy prices and markets, as well as operational disruptions caused by climate impacts such as storms, floods, and droughts.</p>
<p>Investors want companies to disclose these risks fully and to outline how they will manage them to maintain company value over the long term. As the Rio resolution suggests, they also want companies to be transparent and consistent in their approach to climate change. Paying multimillion-dollar memberships for industry associations that lobby against climate action is inconsistent with the long-term investment goals of such shareholders.</p>
<h2>New phenomenon</h2>
<p>Shareholder resolutions on climate change are a relatively new phenomenon in Australia. In the United States, however, there is a long history of using resolutions to pressure companies to address human rights abuses and change their approach to <a href="https://www.ceres.org/resources/tools/climate-and-sustainability-shareholder-resolutions-database">issues like climate change</a>. </p>
<p>In Australia, advocacy groups such as ACCR (and its counterpart <a href="https://www.marketforces.org.au/">Market Forces</a>) have taken up this tool more recently and lodged <a href="http://www.accr.org.au/australia">resolutions to Australian banks, utilities, oil and gas companies, insurers</a>, and now the big miners, asking for improved disclosure and better management of climate risks. </p>
<p>What’s more, institutional investors are increasingly <a href="https://www.smh.com.au/business/investments/big-investors-take-a-public-stand-on-climate-change-risk-20180215-p4z0gr.html">backing these requests</a>. This latest resolution to Rio Tinto is also reportedly <a href="https://www.smh.com.au/business/companies/super-funds-put-heat-on-rio-tinto-over-lobby-groups-20180424-p4zbfc.html">supported by key voting advisors ACSI and Regnan, as well as other major Australian super funds</a>. </p>
<p>As a result, it marks a significant shift in investor culture in Australia, signalling an increased willingness to engage proactively and publicly on environmental, social and governance issues.</p>
<p>Compared with the US and UK, shareholders in Australia have more limited rights to bring resolutions to an AGM expressing their views or requesting that certain actions be undertaken by company management. <a href="http://www.afr.com/news/cba-wins-shareholder-activism-test-case-against-accr-20160610-gpgb4y">Australian court decisions</a> have upheld a strict division of powers between company management and shareholders. Nonbinding advisory resolutions on matters that interfere with company management are not permitted. This means shareholders must lodge a special resolution to change the company constitution to allow them to put forward an advisory resolution on a substantive matter such as climate change. </p>
<p>This is not only clunky and inefficient, but also acts as a significant deterrent for investors to support a substantive resolution with which they would otherwise concur. There are <a href="https://www.acsi.org.au/images/stories/ACSIDocuments/generalresearchpublic/Shareholder-resolutions-in-Australia.Oct17.pdf">renewed calls for law reform</a>, widely supported by institutional investors and also, increasingly, by some of the <a href="https://www.asx.com.au/asxpdf/20180314/pdf/43sf7h344xgrbd.pdf">companies facing these resolutions</a>, to change the law to allow for a more consistent and orderly approach in Australia.</p>
<h2>Do these resolutions actually change behaviour?</h2>
<p>From their brief history in Australia so far, it appears that shareholder resolutions on climate change, together with a range of other influences, do have the potential to drive change. Many Australian companies that have faced these resolutions so far have responded with significant improvements in climate risk disclosure and management. </p>
<p>Santos recently released its first <a href="https://www.santos.com/media/4323/santos-climate-change-report.pdf">Climate Change Report</a>; AGL has developed a long term <a href="https://www.agl.com.au/about-agl/what-we-stand-for/sustainability/climate-change">energy transition strategy</a>; and BHP Billiton (which <a href="https://theconversation.com/is-bhp-really-about-to-split-from-the-minerals-councils-hive-mind-84407">faced a similar resolution</a> to Rio Tinto on its membership of industry associations in 2017) has announced its <a href="http://www.abc.net.au/news/2017-12-19/bhp-threatens-minerals-council-withdrawal/9271472">withdrawal from the World Coal Association</a> and <a href="https://www.bhp.com/-/media/documents/ourapproach/operatingwithintegrity/industryassociations/171219_bhpindustryassociationreview.pdf?la=en">reviewed its other industry association memberships</a>, including the MCA. </p>
<p>While these developments are undoubtedly the result of many factors – including technology and market developments, behind-the-scenes engagement with investors on climate risks, and increased pressure from financial institutions and regulators – it seems that shareholder resolutions can help to focus a company’s attention on ensuring its climate stance is defensible to shareholders. The impact of these resolutions in Australia may also be a function of their relative novelty compared with other jurisdictions such as the United States.</p>
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<a href="https://theconversation.com/why-has-bhp-distanced-itself-from-legal-threat-to-environment-groups-87093">Why has BHP distanced itself from legal threat to environment groups?</a>
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<p>This week’s resolution at Rio Tinto signals a coming of age for investor engagement on climate change in Australia. Shareholder resolutions have clearly become an important part of the toolbox for civil society in Australia seeking to influence corporate decision making on climate change. </p>
<p>As mainstream investors come on board with these resolutions, their potential impact is heightened considerably. For their part, Australian institutional investors seem to be increasingly willing to stand behind calls for better disclosure and management of climate risks by the companies in which they invest, including by forming new alliances and supporting the use of these more activist tools. </p>
<p>In a country with a relatively conservative approach to investor engagement, these are important cultural shifts. They offer promising signs that Australian businesses and investors are taking a more considered and proactive approach on climate risks.</p><img src="https://counter.theconversation.com/content/95927/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anita Foerster receives funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Jacqueline Peel receives funding from the Australian Research Council. </span></em></p>The shareholder resolution on climate change at Rio Tinto’s AGM is another indication of how much investor culture is tilting towards demanding that companies take a responsible climate stance.Anita Foerster, Senior Lecturer, Monash UniversityJacqueline Peel, Professor of Environmental and Climate Law, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/914422018-02-09T17:03:31Z2018-02-09T17:03:31ZThe EU wants to fight climate change – so why is it spending billions on a gas pipeline?<figure><img src="https://images.theconversation.com/files/205470/original/file-20180208-180813-ifievy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:TAP_in_Albania.jpg">Albinfo/Wikipedia</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Over the past few years there has been <a href="https://www.enelgreenpower.com/media/news/d/2017/12/renewables-exponential-growth">exponential growth</a> in clean energy investment – while fossil fuel assets are increasingly considered to be <a href="https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Annex-062817.pdf">risky</a>. Yet, on February 6, the European Investment Bank, the EU’s long-term lending institution, voted to provide a <a href="http://www.eib.org/infocentre/press/releases/all/2018/2018-030-eib-backs-eur-6-5-billion-energy-sme-transport-and-urban-investment">€1.5 billion loan</a> to the controversial Trans Adriatic Pipeline (TAP).</p>
<p>The TAP is the Western part of a larger Southern Gas Corridor proposal that would ultimately connect a large gas field in the Caspian Sea to Italy, crossing through Azerbaijan, Turkey, Greece and Albania. And while gas might be cleaner than coal, it’s still a fossil fuel. </p>
<p>So how does the EU’s support for this major project fit in with its supposed goal of addressing climate change?</p>
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<a href="https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?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">The proposed Trans Adriatic Pipeline will run nearly 900km from Greece to Italy.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Trans_Adriatic_Pipeline.png">Genti77 / wiki</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<h2>Influencing investors</h2>
<p>A key problem is the message this sends to the private sector, where renewable energy is increasingly seen as a good investment. Technologies once perceived as too risky and too expensive are now delivering worthwhile returns thanks to reduced costs and breakthroughs in energy storage. The price of electricity generated by solar, wind or hydro is now comparable with the national grid. Over the past decade, investor meetings have shifted from discussing whether the transition to a low carbon economy will start before 2050, to whether it will be completed in the same period. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"949194987337650176"}"></div></p>
<p>But there is still not enough money being spent on renewables. While clean energy investment in 2017 <a href="https://about.bnef.com/blog/runaway-53gw-solar-boom-in-china-pushed-global-clean-energy-investment-ahead-in-2017/">topped US$300 billion for the fourth year in a row</a>, this is far short of what is needed to unlock the technology revolution necessary to tackle climate change. There is clearly a gap between what is required and what is being delivered. </p>
<p>The private sector will continue to invest significant capital into energy projects over the next few decades, so one issue facing policy makers is how to influence investors away from fossil fuels and <a href="https://www.sciencedirect.com/science/article/pii/S0301421511005064">towards renewable projects</a>. To really scale up investment into renewable infrastructure, <a href="http://www.unepfi.org/fileadmin/documents/Investment-GradeClimateChangePolicy.pdf">long-term and stable policy is required</a> – which investors <a href="https://www.sciencedirect.com/science/article/pii/S0959652615006277">see as clearly lacking</a>. </p>
<p>By funding the Trans Adriatic Pipeline, the EU’s investment bank is hardly signalling to the private sector that governments are committed to a green energy transition. </p>
<h2>Risky business</h2>
<p>If Europe really was to follow through and successfully switch to green energy – and such a transition is partially underway – then the pipeline project may even represent a risk to public finances.</p>
<p>Studies on climate change point to the need for a greater sense of urgency and ambition and, to stay within its “carbon budget” under current agreed emissions targets, the EU needs to be <a href="http://www.foeeurope.org/sites/default/files/extractive_industries/2017/can_the_climate_afford_europes_gas_addiction_report_november2017.pdf">fossil fuel free by 2030</a>. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/HSKcvoBKYxc?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<p>So any large oil and gas infrastructure projects with investment returns beyond 2030 are saddled with risk. In just a decade or two, super-cheap solar and wind power could mean that gas pipelines such as TAP would no longer make financial sense and would become worthless “<a href="https://www.carbontracker.org/terms/stranded-assets/">stranded assets</a>”. Yet TAP backers are touting economic benefits for countries such as <a href="http://www.oxfordeconomics.com/Media/Default/economic-impact/economic-impact-home/Economic-Impact-trans-Adriatic-Pipeline.pdf">Albania</a> extending to 2068 – well beyond the date when Europe must entirely ditch fossil fuels.</p>
<p>The EU’s official stance is to hail natural gas as a cleaner “bridge fuel” between coal and renewables. But <a href="http://science.sciencemag.org/content/343/6172/733.summary">high leakage rates</a> and the <a href="http://www.climatechange2013.org/images/uploads/WGIAR5_WGI-12Doc2b_FinalDraft_All.pdf">potent warming impact</a> of methane (the primary constituent of natural gas) means that the Southern Gas Corridor’s climate footprint may be <a href="https://bankwatch.org/publication/smoke-and-mirrors-why-the-climate-promises-of-the-southern-gas-corridor-don-t-add-up">as large, or larger, than equivalent coal</a>. Abundant natural gas is also highly likely to <a href="http://iopscience.iop.org/article/10.1088/1748-9326/9/9/094008/meta">delay the deployment of renewable technologies</a>. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"952216497123835906"}"></div></p>
<p>For the first decade of this century Europe prided itself on leading the political debate on tackling climate change. Now, it appears to be losing its boldness. To drive through a new technology revolution, the public sector needs to lead from the front and take bold decisions about its energy strategy.</p>
<p>A gas pipeline is not a technology of the future. If California can release <a href="https://www.youtube.com/watch?v=HSKcvoBKYxc">YouTube videos</a> describing the importance of considering stranded assets during this energy transition, and New York City can announce plans to <a href="https://twitter.com/NYCMayor/status/952216497123835906">divest from fossil fuels</a>, then maybe it is time for the EU to turn off the TAP.</p><img src="https://counter.theconversation.com/content/91442/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Aled Jones 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 European Investment Bank’s funding of the Trans Adriatic Pipeline will harm the climate and makes little financial sense.Aled Jones, Professor & Director, Global Sustainability Institute, Anglia Ruskin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/881472017-12-10T23:00:10Z2017-12-10T23:00:10ZHow divesting of fossil fuels could help save the planet<figure><img src="https://images.theconversation.com/files/198232/original/file-20171207-11335-1l3pcpr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A polar bear walks over sea ice floating in the Victoria Strait in the Canadian Arctic Archipelago in July 2017. Research suggests that divesting in fossil fuels could help nations meet their climate change goals. </span> <span class="attribution"><span class="source"> (AP Photo/David Goldman, file)</span></span></figcaption></figure><p>Recently, a number of institutional investors, including <a href="http://nationalpost.com/pmn/news-pmn/why-canadian-pension-plans-must-divest-of-fossil-fuel-investments">Caisse de dépôt et placement du Québec</a> in Canada and <a href="https://www.nytimes.com/2017/11/16/business/energy-environment/norway-fund-oil.html">Norway’s sovereign wealth fund</a>, announced their intent to reduce their exposure in investments linked to fossil fuels.</p>
<p>The announcements show that investors withdraw their funds to either mitigate financial risks or for ethical reasons. But the question remains whether divestment and divestment announcements have a financial impact on the share price of fossil fuel companies. </p>
<p>We’re a team of researchers at the School of Environment, Enterprise and Development (SEED) at the University of Waterloo. We recently conducted an analysis that suggests divestment announcements have a statistically significant negative impact on the price of fossil fuel shares. Our study aggregates the impact of more than 20 announcements across 200 publicly traded fossil fuel companies. </p>
<p>The results suggest that share prices dropped on the days that institutional investors announced they were divesting of fossil fuels.</p>
<p>We’ve concluded that investors, and the market as a whole, perceive divestment as integral to the long-term valuation of the fossil fuel industry. Lower share prices increase the costs of capital for the fossil fuel industry, which in turn decreases their ability to explore new resources and exploit proven resources. </p>
<p>And if the majority of proven reserves remains in the ground, we may be able to meet our climate change goals.</p>
<h2>Reserves must stay grounded</h2>
<p>The continued exploitation of fossil fuel reserves alone has the potential to increase greenhouse gases and global temperature well beyond the 2°C threshold required to prevent the worst effects of climate change. </p>
<p>To achieve the 2°C target, however, <a href="https://doi.org/10.1038/nature08017">no more than one-fifth of the current proven fossil fuel reserves can be burned</a>.</p>
<p>The necessity to keep the resources in the ground has a direct impact on the valuation of fossil fuel industry assets. They are predominantly influenced not only by production, but also by the value of proven fossil-fuel reserves. In other words, if these resources cannot be exploited, their value will depreciate. </p>
<p>A sudden depreciation would lead to a burst of the so-called <a href="https://www.carbontracker.org/terms/carbon-bubble/">carbon bubble,</a> leaving fossil fuel investments stranded.</p>
<p>To avoid the risk of stranded assets, <a href="https://www.arabellaadvisors.com/wp-content/uploads/2016/10/Measuring-the-Growth-of-the-Divestment-Movement.pdf">a number of influential private and institutional investors</a> have pledged to reduce their fossil fuel investments or divest from the fossil fuel industry entirely. </p>
<h2>Ethical motivations</h2>
<p>Other investors are motivated to divest from fossil fuel shares for ethical reasons. They do not want to be part of an industry that is one of the main drivers of climate change.</p>
<p>To explore the financial impact of divestment announcements on the share price of fossil-fuel sector companies, we analyzed 24 divestment announcements, endorsements and campaign events between 2012 and 2015 (see the list below).</p>
<p>These events received a lot of media coverage, with stories appearing in publications that included the Financial Times and the Wall Street Journal. </p>
<p>Our sample of fossil fuel industry representatives included 200 coal, oil and gas firms listed in <a href="https://fossilfreefunds.org/carbon-underground-200/">Carbon Underground 200</a>, which identifies the top publicly traded companies with the highest potential greenhouse gas emissions based on their reserves.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/196600/original/file-20171128-2009-16yvk0f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/196600/original/file-20171128-2009-16yvk0f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1127&fit=crop&dpr=1 600w, https://images.theconversation.com/files/196600/original/file-20171128-2009-16yvk0f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1127&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/196600/original/file-20171128-2009-16yvk0f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1127&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/196600/original/file-20171128-2009-16yvk0f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1416&fit=crop&dpr=1 754w, https://images.theconversation.com/files/196600/original/file-20171128-2009-16yvk0f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1416&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/196600/original/file-20171128-2009-16yvk0f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1416&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Divestment announcements, endorsements and campaigns.</span>
</figcaption>
</figure>
<p>A comparison of the share prices of fossil fuel shares and a global benchmark at the time of a divestment announcement suggests significant differences. </p>
<p>While the general benchmark — the MSCI All Country World Index (ACWI) — has not been affected by the announcements, the fossil fuel share prices decreased, as shown below:</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/197452/original/file-20171203-5381-lyiv2g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/197452/original/file-20171203-5381-lyiv2g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/197452/original/file-20171203-5381-lyiv2g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=268&fit=crop&dpr=1 600w, https://images.theconversation.com/files/197452/original/file-20171203-5381-lyiv2g.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=268&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/197452/original/file-20171203-5381-lyiv2g.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=268&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/197452/original/file-20171203-5381-lyiv2g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=336&fit=crop&dpr=1 754w, https://images.theconversation.com/files/197452/original/file-20171203-5381-lyiv2g.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=336&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/197452/original/file-20171203-5381-lyiv2g.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=336&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Expected returns and real returns of fossil-fuel industry share prices on event days.</span>
</figcaption>
</figure>
<p>The results suggest that fossil fuel companies experienced statistically significant negative abnormal returns on the day of a divestment announcement, and in the days following the announcement. Furthermore, our findings demonstrate that more recent divestment announcements had a stronger impact on share prices than earlier such announcements, suggesting a snowball effect.</p>
<p>In May 2014, for example, <a href="https://news.stanford.edu/news/2014/may/divest-coal-trustees-050714.html">Stanford University’s divestment announcement</a> resulted in a negative abnormal return of .009 per cent in the ensuing 10 days for companies listed on the Carbon Underground 200.</p>
<p>A few months later, in September 2014, the <a href="https://www.rbf.org/about/divestment">Rockefeller Foundation divestment announcement</a> resulted in a negative abnormal return of -.22 per cent over the following 10 days. And two months after that, the divestment announcement by the <a href="https://www.theguardian.com/environment/2015/mar/16/norways-sovereign-wealth-fund-drops-over-50-coal-companies">Norwegian sovereign wealth fund</a> resulted in -.24 percent for the shares of the companies listed on the Carbon Underground 200. </p>
<h2>Markets respond</h2>
<p>It seems financial markets are increasingly aware of the importance of divestment. </p>
<p>Divestment announcements by prominent investors signal financial risks to the market, which in turn depress share prices. Therefore, divestment announcements can have a measurable impact on the fossil fuel industry.</p>
<p>The market response to divestment can be either direct or indirect. Market players might directly perceive the announcements of big institutional investors as signalling an increased financial risk to the divested industry. If big market players announce that they divest, others follow.</p>
<p>Alternatively, divestment announcements might have an indirect impact on the reputation of fossil fuel companies. Tarnished reputations weaken confidence and trust in the long-term value of these shares and decreases their price.</p>
<p>Whether the impact is direct or indirect, decreasing share prices make acquiring financial capital more expensive for the fossil fuel industry.</p>
<p>This in turn lowers their ability to explore new resources, exploit proven reserves and secure long-term growth. In other words, lowering fossil fuel industry share prices via divestment can lead to lower productive capacity — and, consequently, to lower greenhouse gas emissions.</p><img src="https://counter.theconversation.com/content/88147/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Olaf Weber receives funding from Social Sciences and Humanities Research Council of Canada (SSHRC).</span></em></p><p class="fine-print"><em><span>Truzaar Dordi and Vasundhara Saravade 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>Fossil fuel divestment apparently works. Research suggests announcements of divestments have a significant impact on the fossil fuel industry’s share prices.Olaf Weber, Professor of Sustainable Finance and Banking, University of WaterlooTruzaar Dordi, PhD Candidate, Sustainable Finance, University of WaterlooVasundhara Saravade, Masters Candidate in Environmental Finance and Sustainability Management, University of WaterlooLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/806122017-07-07T06:21:58Z2017-07-07T06:21:58ZThe G20’s new guidelines will help investors tackle climate change<p>New guidelines being presented to the G20 this weekend will change the way individuals, companies, investors and regulators manage the financial risks of climate change. These risks include physical events, such as changing weather patterns and natural disasters, as well as new technologies and regulations.</p>
<p>As big investors adopt the guidelines, the companies in their portfolios will be pressured to report on climate change. This will make it easier for investors of all kinds to understand the impacts of climate change on their portfolios, and to assess new opportunities, such as new products and services that will be required and developed.</p>
<p>Companies like <a href="http://www.bhp.com/-/media/bhp/documents/investors/reports/2015/bhpbillitonclimatechangeporfolioanalysis2015.pdf">BHP</a> have already begun reporting on how climate change will affect their businesses. But, until now, corporate disclosure on climate change has been patchy, shallow and not always financially relevant.</p>
<p>The new guidelines will create a common language for talking about climate change as a financial risk. This will drive more detailed reporting on how climate change is impacting investment portfolios, investment decisions, financial performance and strategies to manage the risk. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/177265/original/file-20170707-26461-1t7u9do.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/177265/original/file-20170707-26461-1t7u9do.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/177265/original/file-20170707-26461-1t7u9do.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=294&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177265/original/file-20170707-26461-1t7u9do.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=294&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177265/original/file-20170707-26461-1t7u9do.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=294&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177265/original/file-20170707-26461-1t7u9do.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=369&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177265/original/file-20170707-26461-1t7u9do.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=369&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177265/original/file-20170707-26461-1t7u9do.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=369&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Annex-062817.pdf">TFCD</a></span>
</figcaption>
</figure>
<h2>What are the guidelines?</h2>
<p>The guidelines have been created by a <a href="https://www.fsb-tcfd.org/about/">G20 taskforce</a> that includes investors, businesses, accounting firms, stock exchanges and ratings agencies from around the world. The guidelines are voluntary but are already being adopted by big investors who want a standard for reporting on climate risks. As big investors adopt the guidelines they will pressure the companies in their portfolios to do the same.</p>
<p>The guidelines build on <a href="https://www.cdp.net/en">existing</a> <a href="http://www.ghgprotocol.org/">accounting</a> and <a href="https://www.globalreporting.org/Pages/default.aspx">reporting</a> frameworks. The focus is on company performance data and market information that can be used in investment decisions.</p>
<p>The guidelines cover a range of reporting requirements about the impact of climate change. Companies will need to report increased operating costs due to new regulation, necessary investment in low-emissions technology, or reduced revenue as a result of heat stress or extreme weather events. This kind of information allows investors to compare how effectively companies are managing climate-related events. </p>
<p>The taskforce is also recommending that individual companies report on their corporate governance approach to climate change, actual and potential climate impacts over the short, medium and long term and strategies for tackling these impacts, as well as their overall approach to managing climate risk. </p>
<p>There will be additional guidance for a range of specific industries that account for the largest proportion of greenhouse gas emissions, energy and water usage.</p>
<p>One of the taskforce’s key recommended disclosures responds to investor calls for companies to publish “2°C scenario analyses”. These reports assess the potential business, strategic and financial impacts of climate change, taking into consideration different climate-related scenarios. In Australia, <a href="http://www.bhp.com/-/media/bhp/documents/investors/reports/2015/bhpbillitonclimatechangeporfolioanalysis2015.pdf">BHP</a>, <a href="http://agl2016.sustainability-report.com.au/files/carbon_constrained_future.pdf">AGL</a> and <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/sustainability/WestpacCCEActionPlan.pdf">Westpac</a> have all published 2°C scenario analyses. Other major companies have work under way. </p>
<h2>What is the impact?</h2>
<p>In light of the new guidelines, a group of Australian and New Zealand institutional investors with A$1.6 trillion in assets under management have <a href="http://www.igcc.org.au/resources/Pictures/IGCC%20TRANSPARENCY%20in%20TRANSITION%20FINAL.pdf">developed a guide</a> to review and improve climate change reporting in Australia. </p>
<p>We are already seeing big investors pressure the companies in their portfolios to report on climate risks.</p>
<p>One of the world’s largest investors, Blackrock, recently <a href="http://www.reuters.com/article/us-exxonmobil-climate-idUSKBN18R0DC">voted in favour</a> of a shareholder resolution calling on oil giant ExxonMobil to increase its climate change reporting. The resolution <a href="http://cdn.exxonmobil.com/%7E/media/global/files/investor-reports/2017/summary-of-proxy-votes-2017.pdf">passed with 62% of the vote</a> after a similar resolution failed last year. </p>
<p>There is good news for the ordinary investors as well. The more big investors and companies report on the impacts of climate change, the more information will be available for everyone. You and I will be able to better understand what role our retirement savings are playing in tackling climate change. </p>
<p>What gets measured gets managed, including climate change. Whether it is choosing to place your savings with a fund that best mirrors your personal concerns about the climate, or selecting a specific deep green or fossil-fuel-free fund option, the more information funds produce, the better informed all of our investment decisions will be. </p>
<hr>
<p><em>Emma Herd, Chief Executive Officer of the Investor Group on Climate Change, contributed to this article.</em></p><img src="https://counter.theconversation.com/content/80612/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rosemary Sainty has facilitated a climate disclosure working group for the development of the IGCC Guide to Investor Disclosure. </span></em></p>The G20 will see new guidelines for how companies report the risks of climate change. This will allow investors to compare companies and make more informed decisions.Dr Rosemary Sainty, Scholarly Teaching Fellow, UTS Business School, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/734172017-05-03T01:14:23Z2017-05-03T01:14:23ZWhy Dodd-Frank – or its repeal – won’t save us from the next crippling Wall Street crash<p>Republicans <a href="http://www.latimes.com/business/la-fi-dodd-frank-20170504-story.html">appear poised to roll back</a> Wall Street regulations passed after the 2008 financial crisis. Democrats <a href="http://www.cnbc.com/2017/02/07/if-trump-repeals-dodd-frank-it-would-be-a-monumental-mistake-bart-chilton-commentary.html">argue doing so</a> would be a “monumental mistake.” </p>
<p>It’s been framed as a typical fight over regulation. <a href="http://www.latimes.com/business/la-fi-dodd-frank-demoocrats-20170206-story.html">Democrats want more</a> to protect taxpayers and investors from the next crisis; Republicans want less because it <a href="https://www.nytimes.com/2017/02/03/business/dealbook/trump-congress-financial-regulations.html">stifles economic growth</a>. </p>
<p>So who’s right? </p>
<p>Based on our combined 35 years of experience with securities markets and the research we’ve done for our new book, “<a href="https://www.amazon.com/When-Levees-Break-Re-visioning-Regulation/dp/0739196049">When the Levees Break: Re-visioning Regulation of the Securities Markets</a>,” we think both sides are wrong. The issue isn’t about more or less regulation but about the need for a streamlined system that supports 21st-century investing. </p>
<p>If we had our way, the whole system of financial regulation would be burned to the ground and replaced with something entirely different. </p>
<h2>Of bonds and banks</h2>
<p>Before we go any further, let’s clarify what we’re talking about. When we think of financial markets, we tend to jumble securities markets like stocks, bonds and commodities with conventional bank lending such as checking accounts and lines of credit. </p>
<p>The <a href="http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm">Dodd-Frank Act</a>, for example, was ostensibly focused on regulation of securities markets, but the rules that got the most attention were those that affect the “too big to fail” banks. That those banks straddled both worlds made the market crash life-threatening. </p>
<p>But securities trading, and in particularly derivatives, were at the root of the 2008 financial crisis. For our purposes, when we talk about financial regulation, our focus is on the securities markets. </p>
<h2>How did we get here?</h2>
<p>The financial markets meltdown in the fall of 2008 devastated our economy, but it still <a href="http://online.wsj.com/mdc/public/page/2_3024-djia_alltime.html">pales in comparison</a> with the stock market rout that preceded the Great Depression in October 1929. The Dow Jones Industrial Average <a href="https://finance.yahoo.com/quote/%5EDJI/history?period1=475822800&period2=1493697600&interval=1d&filter=history&frequency=1d">fell</a> 23 percent from Oct. 28 to Oct. 29 that year, compared with a two-day slide of at most half that throughout the 2008 crisis. </p>
<p>After the 1929 crash, lawmakers reacted by passing laws aimed at ensuring investor protection. Two groundbreaking pieces of legislation, passed in 1933 and 1934, <a href="https://www.sec.gov/about/laws/sa33.pdf">required companies</a> to submit quarterly and annual reports and <a href="https://www.sec.gov/about/laws/sea34.pdf">established the Securities and Exchange Commission</a>. These laws form the cornerstone of modern securities markets regulation. </p>
<p>But they were only the beginning. As markets expanded and changed, Congress continued to craft new laws that added more agencies to oversee Wall Street activities. As a result, we have more than two dozen agencies, self-regulatory organizations and exchanges (including the <a href="https://www.cftc.gov">Commodities & Futures Trading Commission</a>, the Treasury and the <a href="https://www.dol.gov/">Departments of Labor</a> and <a href="https://www.justice.gov">Justice</a>), not to mention state securities agencies, all with overlapping regulatory jurisdictions. </p>
<p>Moreover, the laws have been reactionary – rather than visionary – resulting in competing concerns and duplicative audit and enforcement procedures. Not surprisingly, there is largely no coordination or communication between them. </p>
<p>Meanwhile, the SEC – as primary regulator – is bogged down with too many directives, many of which are under- or unfunded. For decades, whenever Congress passed a bill to “regulate” big changes in the markets – from market crashes to “advancements” such as mutual funds and investment advisors – the SEC has been required to add oversight of these new practices to their existing responsibilities. Dodd-Frank, for example, expanded the SEC’s role and called for additional internal audits of existing practices but – like past market-related legislation – failed to include funding for those activities.</p>
<p>Amid all the regulation, investor protection seems to have gotten lost. </p>
<h2>Enter Dodd-Frank</h2>
<p>The severity of the 2008 crash and its economic impact (including investment company failures and unprecedented government bailouts) goaded Congress into action. </p>
<p>In 2010 Democratic lawmakers passed the <a href="https://www.sec.gov/about/laws/wallstreetreform-cpa.pdf">Dodd-Frank Act</a>, <a href="https://corpgov.law.harvard.edu/2010/11/20/the-financial-panic-of-2008-and-financial-regulatory-reform/">the most extensive revision of securities regulation</a> since the 1930s, with the hope that more regulation would prevent another crisis. </p>
<p>Republicans have argued for its repeal ever since, claiming <a href="http://financialservices.house.gov/dodd-frank/">the law</a> and the regulations designed to implement it (<a href="https://www.davispolk.com/Dodd-Frank-Rulemaking-Progress-Report/">many of which are behind schedule</a>) inhibit prosperity. </p>
<p>Both parties are missing the point. The current system of financial regulation is built on how stocks were traded in the 1930s – when computers and algorithmic trading had yet to be a glimmer in a <a href="https://www.merriam-webster.com/dictionary/quant">quant’s</a> eye. To paraphrase the <a href="https://www.youtube.com/watch?v=bAJ3-mbP1pY">Oldsmobile commercial</a>, it’s not your father’s stock market anymore.</p>
<h2>My, how markets have changed</h2>
<p>Financial markets have undergone a fundamental transformation over the past 80 years. </p>
<p>First of all, there are the investors themselves. The mom and pop investor that the SEC was created to protect has by and large been replaced by institutional investors, including quantitative analysts or <a href="http://www.nytimes.com/2010/02/21/business/21shelf.html">“quants”</a> that use complex algorithmic formulas to predict the best trading strategies. In fact, algorithmic trading makes up the <a href="https://www.wired.com/2010/12/ff_ai_flashtrading">majority</a> of volume in today’s markets.</p>
<p>Then there’s the issue of disclosure. Since the dawn of federal securities regulation, lawmakers and regulators have relied on <a href="http://heinonline.org/HOL/Page?handle=hein.journals/wvb118&div=6&g_sent=1&collection=journals">disclosure</a> to protect investors. Public companies are required to disclose volumes of information, from <a href="https://www.sec.gov/news/pressrelease/2015-160.html">financial information</a> to dealings with <a href="https://www.sec.gov/divisions/corpfin/cfannouncements/itr-act2012.htm">Iran</a> and even their <a href="https://www.sec.gov/rules/final/33-8177.htm">Code of Ethics</a>. As a result, <a href="https://www.transactionadvisors.com/insights/considering-ipo-costs-going-and-being-public-may-surprise-you">a company can spend</a> <a href="https://www.quora.com/How-much-time-does-a-US-company-typically-spend-on-SEC-filing">over a million dollars each year</a> complying with disclosure regulations that few people actually read. Yet every time there’s a new disaster, Congress piles on the disclosure requirements, as happened with Dodd-Frank. </p>
<p>But for all the hundreds of pages of disclosure, at no time in the past 80 years has there been a mandate to review the actual securities products issued by public companies and investment banks. There are no “safety” standards for stocks, like there are for cars or toasters. The products that brought down the house in 2008 – mortgage-backed securities and products derived from them – continue to be offered to the public, including new ones backed by credit card debt and <a href="https://www.theatlantic.com/business/archive/2013/03/dont-panic-wall-sts-going-crazy-for-student-loans-but-this-is-no-bubble/273682/">student loans</a>.</p>
<p>Finally, the SEC and other regulators are unequipped to keep up with the breathtaking changes in technology, let alone anticipate potential advances and challenges. To understand why, one must only consider the breadth of organizations that have fallen victim to hackers, from <a href="https://www.bloomberg.com/news/articles/2014-03-13/target-missed-warnings-in-epic-hack-of-credit-card-data">Target</a> and <a href="https://www.nytimes.com/2017/03/15/technology/yahoo-hack-indictment.html?_r=0">Yahoo</a> to the <a href="http://www.politico.com/story/2013/06/computer-hacking-veterans-affairs-department-092227">Veterans Administration,</a> and the <a href="http://www.reuters.com/article/us-usa-fed-cyber-idUSKCN0YN4AM">Federal Reserve itself</a>.</p>
<p>Unfortunately, however, Congress <a href="https://cup.columbia.edu/book/how-they-got-away-with-it/9780231156912">does not fund the SEC</a> in a way that would allow it to pay for the skills or systems it needs to keep up with technological and other market advances. Following Dodd-Frank, for example, the SEC’s budget was actually reduced, even as its responsibilities multiplied.</p>
<p>In sum, what we have is a regulatory system that fails in its mission to protect investors. The structure used to oversee current investment practices, corporate disclosures, product development and technological advances is based on the market failures of 1929. It’s a bit like trying to surf the internet using a typewriter. </p>
<h2>Preparing for the next crash</h2>
<p>The next “big” crash will likely be bigger than the last one. So how do we prepare for it? </p>
<p>Dodd-Frank is largely an extension of the patchwork structure and won’t protect us in the future. Yet the Republican answer, to repeal it and let markets self-regulate, won’t stop the proliferation of products that nearly brought the house down in 2008. After the next crash, institutions will not be too big to fail, they’ll be too big to save.</p>
<p>The answer, in our view, is <a href="https://revisioninginvesting.com/">a complete rethinking of how we regulate investing</a>. As the White House moves to dismantle Dodd-Frank, this is the perfect time to do exactly that. Let’s get rid of what doesn’t work – which is pretty much everything – and replace it with a system that does. </p>
<p>What we envision is a contemporary, 21st-century holistic structure built on proactive, thoughtful and streamlined laws that takes into account markets that are technology-driven and move in nanoseconds. </p>
<p>Think of it this way: Our regulatory structure is like the dike that keeps springing leaks – the makeshift plugs we’ve used are so ineffective that the dike isn’t leaking – it’s crumbling. We need to build a new dike, using all available technology, before the next tidal wave hits. </p>
<p>We don’t claim to have all the answers. But we want to get the conversation started. We invite you to join in.</p><img src="https://counter.theconversation.com/content/73417/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>Instead, we need to burn the entire system of financial regulation to the ground and replace it with something that supports investing the way it’s done today.Jena Martin, Professor of Law, West Virginia UniversityKaren Kunz, Associate Professor of Public Administration, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/607152016-06-16T13:07:43Z2016-06-16T13:07:43ZHow investors see South Africa: lots of potential, not worth the hassle<figure><img src="https://images.theconversation.com/files/126344/original/image-20160613-29222-26djv1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">International investors are still rattled by President Jacob Zuma’s sacking of respected Finance Minister Nhlanhla Nene.</span> <span class="attribution"><span class="source">Reuters/Sumaya Hisham </span></span></figcaption></figure><p>South Africa has narrowly survived a downgrade of the rating of its government bonds. The reprieve, however, is temporary because government has been warned by the <a href="https://www.ted.com/talks/annette_heuser_the_3_agencies_with_the_power_to_make_or_break_economies/transcript?language=en">Big Three</a> rating agencies – Fitch, Moody’s and Standard & Poor’s – to pull up its socks. </p>
<p>South Africa’s <a href="http://reports.weforum.org/global-competitiveness-report-2015-2016/competitiveness-rankings/">current rating</a> – just about investment grade, heading south fast – puts it more or less on par with countries such as Italy and Spain. And even with a downward trajectory through speculative grade it is still several notches away from outright “junk” or “CCC”. </p>
<p>But a downgrade to sub-investment grade would slow inward investment and the economic fallout could become a self-fulfilling prophecy: as outflows increase, the economy slows.</p>
<p>Such meta-narratives are especially powerful during periods of global turbulence as is currently being experienced, with volatile commodity prices, the oil rout, the slowdown in China and speculative investors moving large amounts of short-term capital very quickly around the world. </p>
<h2>Why sovereign debt matters</h2>
<p>When governments need to raise money they may decide to do so by borrowing on international financial markets. Such loans, or sovereign bonds, are each assigned a rating by a credit ratings agency. The rating estimates the likelihood of a government’s creditors being repaid against a range of factors. These include hard economic data, political analysis, reputation and sentiment. </p>
<p>The yield of the bond can be roughly understood as the interest rate on a loan. The lower the credit rating, the higher the risk of a default and the higher the yield payable to investors for taking on that risk.</p>
<p>It’s important to note that sovereign bonds are just another asset class investors can consider in a universe of investable assets. A downgrade is not desirable as it may slow down institutional investment and make the economy more vulnerable to speculative activity. But some investors may very well have an appetite for risky sovereign debt if it means they can make a lot of money. </p>
<p>In fact, high-end brokerages such as <a href="http://www.forbes.com/sites/charlesschwab/2016/04/22/why-global-diversification-matters/#2571f7e63870">Charles Schwab</a> advise investors on investing in high-yield, sub-investment grade emerging market debt. This sort of speculative sentiment is exactly what <a href="http://www.theguardian.com/world/2012/nov/07/africa-economy-rising-growth">drove</a> the “Africa Rising” narrative. It also <a href="https://www.moodys.com/research/Moodys-Primary-issuance-by-African-sovereigns-year-to-date-has--PR_283968">drove</a> the introduction of ratings for previously unrated sub-Saharan sovereigns, as investors sought new sources of alpha in the low-growth fallout of the financial crisis in Europe.</p>
<p>Despite this, countries need to borrow to plug the gap between projected tax revenue and budgeted expenditure. However, as debt has to be repaid at some point in the future, any debt raised should be used to finance investment such as infrastructure, which expands an economy’s capacity and therefore potential for growth and increased tax revenue. In addition, the interest government pays on its debt is of paramount importance. </p>
<h2>What there’s to like, not to like about South Africa</h2>
<p>Rating agencies have cited maintaining investor confidence as one of the critical factors towards preventing a future downgrade for South Africa. So it’s important to know what investors were thinking about South Africa in the run up to the ratings, and what they’re thinking now.</p>
<p>The first point to make is that local institutional investors and financial institutions are also influenced by the global context. The political and economic developments of all countries are viewed proportionately to other markets. For example, in the case of South Africa, Investec Asset Management evaluates the country relative to other emerging markets. It recently <a href="https://www.investecassetmanagement.com/international/professional-investor/en/insight/investment-views/emerging-market-debt-indicator">did so</a> in relation to Brazil in particular.</p>
<p>Investec’s house view on the two countries is informed by two insights. The first is that South Africa and Brazil have political headwinds that are governance risks to long-term economic development, and may present watershed moments. The other is that the strength of institutions in these countries is often overlooked. An example of this is the South African <a href="https://theconversation.com/zuma-court-ruling-south-africans-witness-a-massive-day-for-democracy-57070">Constitutional Court’s ruling</a> on President Jacob Zuma’s spending on his private home in Nkandla.</p>
<p>Publicly available international perceptions also matter. An example is the World Economic Forum competitiveness ranking. South Africa is <a href="http://reports.weforum.org/global-competitiveness-report-2015-2016/competitiveness-rankings/">ranked</a> 49th out of 140 countries and only second to China among the Brazil, Russia, India, China, South Africa group. </p>
<p>Investors also like the country’s sound fundamentals. These include a sophisticated financial markets sector, and respect for property rights and the rule of law. And despite US government complaints about infrastructure gaps and the inaccessibility of officials, it still regards South Africa as an important gateway to the rest of the continent.</p>
<p>However, inequality, unemployment, power shortages, policy incoherence around black economic empowerment and labour relations remain risk factors. The UK government, for example, <a href="https://www.gov.uk/government/publications/overseas-business-risk-south-africa/overseas-business-risk-south-africa">singles out</a> corruption, fronting around empowerment deals and dubious tender processes. </p>
<p>International investors are also still rattled about President Zuma’s <a href="http://mg.co.za/article/2015-12-09-nhlanhla-nene-removed-as-finance-minister">unexpected decision</a> late last year to replace his respected finance minister, only to reverse the decision a few days later. </p>
<p>Another bugbear is Zuma’s weakened position and how <a href="http://www.financialmail.co.za/coverstory/2016/04/28/will-cyril-ramaphosa-be-sa-s-next-president">succession</a> within the ruling African National Congress will play out, particularly the realisation that Cyril Ramaphosa, currently the deputy, may not have enough power to become president. </p>
<p><a href="http://www.bloomberg.com/news/articles/2016-05-16/zuma-factor-stymies-gordhan-s-bid-to-rescue-south-africa-economy">The competition</a> between Zuma and Finance Minister Pravin Gordhan is also being watched closely, as Gordhan is seen as a business champion.</p>
<p>Overall South Africa, right now, is viewed as a terribly difficult place to do business, with overweening bureaucracy, a collapsing education system, poor policy and militant labour groups. Kenya and Nigeria are increasingly seen as more favourable destinations. </p>
<p>As one investment advisor in London pithily described South Africa:</p>
<blockquote>
<p>Lots of potential, not worth the hassle.</p>
</blockquote>
<p>South Africa is thus particularly vulnerable with its relatively liquid portfolio flows and sophisticated financial markets. In addition, the rand, with its high interest rate, is a particular favourite commodity currency for speculators in <a href="http://www.investopedia.com/terms/c/currencycarrytrade.asp">the carry trade</a>. And indeed, both Moody’s and Standard & Poor’s have worried aloud about the combination of low growth, high debt and political risk in the current global environment.</p>
<p>But some healthy scepticism and perspective is also in order. Yes, South Africa’s parliament is out of order, but there have been <a href="http://content.time.com/time/photogallery/0,29307,1912340_1913577,00.html">fisticuffs in South Korea</a> too. </p>
<p>And there is no such thing as “idiosyncratic emerging market risk” – a patently hypocritical concept. South Africa has had its recent share of protests, but the 2011 London riots were intense, with three days of <a href="http://www.huffingtonpost.co.uk/2011/08/09/london-riots-450-arrested_n_921816.html">violence</a> during which 450 arrests were made. Nor are emerging markets essentially “corrupt”. Take Italy, for example. And rent-seeking patronage networks and what the Chinese call <a href="http://www.investopedia.com/terms/g/guanxi.asp?layout=infini&v=5E&orig=1&adtest=5E"><em>guanxi</em></a> – networks of influence – are a feature of politics everywhere.</p>
<h2>Economic policy priorities</h2>
<p>The sooner South Africans realise they have frittered away the Mandela dividend in a cutthroat global economy, the better. But this realisation does not have to come at the expense of equal negotiating power in trade and investment. By growing the economy inclusively with a focus on human development, the business environment also becomes more sustainable. Investors know this too. </p>
<p>Economic policy requires a shift away from the short-termism of a gross domestic product evangelism that is subject to the vagaries of hot money in a panicked and turbulent global economy. If this continues to be the case, economic development will only ever elicit a Pavlovian response from rating action to rating action.</p><img src="https://counter.theconversation.com/content/60715/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Desné Masie 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>South Africa has narrowly escaped a downgrade of the rating of its sovereign bonds, but government has its work cut out as it seeks to restore investor confidence and lift economic growth.Desné Masie, Visiting Researcher in International Political Economy, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/371442015-02-23T10:56:58Z2015-02-23T10:56:58ZHow retail investors can beat the pros trading on breaking news<p>A recent incident involving McDonald’s shows how negative news on one company can cause other businesses to suffer as well, but with a delay – an insight that could help small investors reap significant trading profits. </p>
<p>Claiming health and safety violations, the Russian government late last year <a href="http://www.businessinsider.com/afp-russia-takes-bite-out-of-mcdonalds-with-us-ties-in-deep-freeze-2014-10">shut down a string of McDonald’s restaurants</a> and put several hundred more under heavy scrutiny. For the average Russian, McDonald’s Golden Arches symbolize American capitalism. </p>
<p>The Russian government’s move was viewed as a tactic to “exact revenge on America” for the Western sanctions following Russia’s invasion of Crimea and backing of rebels in Ukraine. McDonald’s earns a substantial chunk of its profit from Russian consumers, so the regulatory harassment <a href="http://www.huffingtonpost.com/2015/01/23/mcdonalds-profit-plunges_n_6531190.html">hit the fast-food giant’s bottom line hard</a>.</p>
<p>McDonald’s shares <a href="http://www.bloomberg.com/quote/MCD:US">have flatlined</a> since Russia first announced the investigation in August, while the Standard & Poor’s 500 and the Dow Jones Industrial Averaged have jumped about 6% over the same period. Although other factors have certainly affected the company’s share price – including competitive challenges in its domestic market – the sanctions likely weighed on McDonald’s stock price. </p>
<h2>Other companies feel the pain</h2>
<p>But the pain apparently wasn’t felt exclusively by the burger chain. Other companies that earn sizable revenues in the Russian market have also suffered. Shares of Ford, which sells a large number of vehicles to Russians, has lost 5.9% in the period. ExxonMobil, which is deeply invested in several Russian oil fields, has dropped 10%. Shares of US banks Citigroup and JP Morgan Chase, both with significant exposure to Russian assets, have barely budged.</p>
<p>Similar to the McDonald’s shares, other factors have undoubtedly contributed to the poor performance of these companies’ stocks. But even though the authorities haven’t gone after these corporations explicitly, investors know their Russian operations are vulnerable. McDonald’s setbacks signal the increased risks for all Western firms operating in Russia, and the uncertainty has only grown worse since then. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/72544/original/image-20150219-28187-fiq981.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/72544/original/image-20150219-28187-fiq981.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/72544/original/image-20150219-28187-fiq981.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=814&fit=crop&dpr=1 600w, https://images.theconversation.com/files/72544/original/image-20150219-28187-fiq981.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=814&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/72544/original/image-20150219-28187-fiq981.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=814&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/72544/original/image-20150219-28187-fiq981.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1023&fit=crop&dpr=1 754w, https://images.theconversation.com/files/72544/original/image-20150219-28187-fiq981.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1023&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/72544/original/image-20150219-28187-fiq981.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1023&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Did somebody say capitalism?</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<p>The McDonald’s example illustrates how news about a particular company may affect market values of other companies. Likewise, an accounting scandal may spill over to other firms that use the same auditors, a labor scandal may taint firms that use similar labor practices, a successful litigation may set the precedent for other firms to be sued, and so on. </p>
<p>Information may flow in unexpected directions: the company at the center of an important news development may be smaller, operate in a different industry and within a different supply chain than others also affected by the news. If investors do not know which news to follow, they may completely miss the relevant news affecting the stocks they hold. </p>
<h2>Keeping tabs on the news is tough</h2>
<p>Because of the sheer volume of financial news and information in the market, it is nearly impossible to keep track of all potentially relevant corporate announcements. </p>
<p>In research with co-authors Andreas Neuhierl and Bernd Schlusche, I estimated that about <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1556532">218 corporate press releases</a> reporting on companies’ valuation-relevant news are issued by publicly traded US firms on a typical day.</p>
<p>Of these, only 20% involve routine announcements about earnings, sales, dividends, plans to raise or return capital, etc. The remaining 80% are about new products, partnerships, strategic plans, corporate lawsuits, expansions to new markets, changes in management and other information that is much more difficult to quantify. </p>
<h2>Leaders and followers</h2>
<p>Bernd Schlusche, an economist with the Federal Reserve Board, and I found that stocks at the center of an important unfolding news development <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2263033">lead the returns of other affected stocks</a> by reacting first to new information. We refer to the fast-reacting stocks as “return leaders” and to stocks whose returns lag behind as “return followers.”</p>
<p>How do we identify leaders and followers? We search for stocks that have been able to predict returns of other stocks over a trailing period of time, such as the previous one to three years. </p>
<p>In the McDonald’s incident, for example, its stock was the first to react to the news of Russia’s “retaliation,” because it was at the center of it, marking it as a leader. Other stocks that subsequently fell in value, apparently as a result of the McDonald’s news, would be the followers. </p>
<p>Our study shows that leader stocks’ predictive ability continues for some time in the future. </p>
<p>However, the leadership can be short-lived and disappear once the issue is resolved. Since a return leader is likely to be at the center of an important news development, we find that the stocks of companies with more news stories written about them tend to have more followers – that is, the stocks whose returns lag behind the leader’s returns.</p>
<h2>How investors can profit</h2>
<p>A company’s stock price reacts quickly to news about it, but our research shows that stock prices react to the relevant news of other firms with a delay.</p>
<p>The best way to earn a profit from trading on news is to trade the stocks of the firm’s followers. Sophisticated investors are using these trading strategies. But since the delay in the price reaction is rather short, portfolio turnover of this trading strategy is high. High portfolio turnover results in high trading costs, and trading costs are increasing in the size of trade. </p>
<p>Big institutional traders frequently leave money on the table because they have to trade large portfolios. Retail investors trade small dollar amounts and will incur lower trading costs. This would allow them to earn an after-trading-cost profit. </p>
<p>An old Wall Street adage goes: “buy on the rumor and sell on the news.” Unfortunately, retail investors do not hear nearly as many rumors as big Wall Street players. For retail investors, our advice would be: “buy or sell followers on the leaders’ news.”</p><img src="https://counter.theconversation.com/content/37144/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anna Scherbina is affiliated with the AEI.</span></em></p>The trick is to trade on companies linked to the news, not those in the news.Anna Scherbina, Associate Professor of Finance, University of California, DavisLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/355152015-01-12T14:44:23Z2015-01-12T14:44:23ZFixing the hole in the heart of corporate capitalism<figure><img src="https://images.theconversation.com/files/68681/original/image-20150112-23795-1aoivy1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Shattering. Capitalism gets harder to love.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/dskley/8105550657/in/photolist-dmg4Pp-7yN9W-9e6A1q-8nZZVz-2hcFzS-UrHr1-6YaovA-4sadNf-b8ZX6-eMtbCV-5ZQDK7-fEkNQH-c5xjZW-jZYxgd-8JxEeo-qmSpDa-beis2B-bzBuW5-gCtHJW-5YpDtG-7hwhYp-8pVxCW-4eia5n-aeZNE2-5L3Jr6-46mq2A-4uERya-4nZj4v-buHmwR-e57ior-3ZYkwR-9hkYhg-5wM7SC-4FCJxC-4DnMc-68Fdb7-cX8Y7-5bV8nV-5EZup4-5QFU7T-qxmGzA-e55JLz-c7p71w-5GHTvb-4rW7dw-6ajrT7-kNL5a-otMmo-Lsgz-3dzk5w">Dennis Skley</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>Modern capitalism has a massive structural flaw in one of the cornerstones of its existence. The corporations which form the predominant business structure and which are the main instrument for dividing wealth have been operating on a <a href="http://wp.me/P2TdaJ-3o">false premise</a>. </p>
<p>Since the 1970s, corporate governance theory has centered around maximising shareholder value. The idea behind this is that if you align your corporate strategy with the financial interests of your shareholders then you provide managers with incentives to grow corporate profits. These profits would trigger economic growth and lead to “trickle down” effects benefiting not just corporations and shareholders, but also the public (notably including pensioners). </p>
<p>However, it is now becoming increasingly apparent that a myopic focus on shareholder returns has had <a href="http://wp.me/P2TdaJ-6t">deeply damaging economic consequences</a>.</p>
<h2>You scratch my back …</h2>
<p>In brief, it has created a system where company executives are effectively employed by investors to deliver wealth to them; a two-way transaction where other beneficiaries come a distant third. It has created a sustained redistribution of income to shareholders and corporate bosses, not least through the exploding proportion of corporate wealth spent on stock options for managers and stock buybacks for shareholders.</p>
<p>Instead of wealth trickling down, it has flooded up. Instead of investing in a sustainable future, the emphasis has been on turning a fast buck, often through forms of financial engineering and successive corporate restructuring.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/68682/original/image-20150112-23807-1f3z4ai.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/68682/original/image-20150112-23807-1f3z4ai.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/68682/original/image-20150112-23807-1f3z4ai.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=413&fit=crop&dpr=1 600w, https://images.theconversation.com/files/68682/original/image-20150112-23807-1f3z4ai.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=413&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/68682/original/image-20150112-23807-1f3z4ai.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=413&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/68682/original/image-20150112-23807-1f3z4ai.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=519&fit=crop&dpr=1 754w, https://images.theconversation.com/files/68682/original/image-20150112-23807-1f3z4ai.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=519&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/68682/original/image-20150112-23807-1f3z4ai.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=519&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Race to the bottom? Cheese rolling in Gloucestershire.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/brizzlebornandbred/5777226980/in/photolist-9NvNiJ-2sKhz-N4TSD-w3Df-fXcyp-9fhWwd-6qY55Y-6swt59-4V49L8-4CgNWw-4CgNLL-4CcxFP-4CgP5G-4CcxfT-4CgQr9-4V8oiA-4CcxNM-4CgPfq-4Ccxr2-6qYsrj-jk9pNG-6rcXgp-jk9vGL-jk9Kjf-jkcmuU-kn2wG-cB5umE-6rcZ5D-6qZhvY-oFCeYg-cwgkSb-hasJr-cyhpT3-bmhsCJ-6R8wPS-6R8wAm-6R8vAj-jk8giP-MZpSj-2ffPmQ-2ffPm9-8szB6o-6swJvy-6R8xtu-6R8w3m-6ssAKr-6R8vGQ-4DeGSq-ab6CoN-6rhR1G">Paul Townsend</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Managers have been encouraged to put shareholder value over all other interests. A strategic focus on the short term is reflected in an increased emphasis on cost management, increasing asset churn (think mergers, acquisitions, buyouts and demergers). Instead of a “retain and reinvest” investment strategy, we get a “downsize and distribute” regime that rewards shareholders as it sweats assets and shrinks the labour force.</p>
<p>Maximising shareholder value is <a href="http://wp.me/P2TdaJ-3q">self-defeating at the firm level</a>. By spending corporate proceeds on managers and shareholders, or by storing it in tax havens, corporate cash flows are diverted away from productive investment and research, supporting a decline in innovation, which induces a diminishing ability to come up with new ideas and then put them into action.</p>
<h2>Impact points</h2>
<p>At a macro level, however, the damage is even harder to contain. The increase in the <a href="http://www.epi.org/publication/the-top-10-charts-of-2014/">redistribution of income</a> to shareholders and corporate executives that MSV induces, correlates with growing inequalities across countries. <a href="http://wp.me/P2TdaJ-3s">Concerns</a> about inequality and its potential disruptive effects on economies and societies are increasingly being voiced by world leaders. </p>
<p>Take your pick from <a href="http://www.washingtonpost.com/business/economy/pope-francis-denounces-trickle-down-economic-theories-in-critique-of-inequality/2013/11/26/e17ffe4e-56b6-11e3-8304-caf30787c0a9_story.html">Pope Francis</a>, <a href="http://www.bbc.com/news/business-29668372">the chair of the US Federal Reserve Janet Yellen</a>, <a href="http://www.washingtonpost.com/politics/obama-focuses-agenda-on-relieving-economic-inequality/2013/12/04/bef286ac-5cfc-11e3-be07-006c776266ed_story.html">President Barack Obama</a>, the <a href="http://www.bbc.co.uk/news/business-16511956">World Economic Forum</a>, the <a href="http://www.oecd-ilibrary.org/economics/how-was-life_9789264214262-en">Organisation for Economic Co-operation and Development (OECD)</a>, the <a href="http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf">International Montery Fund</a>, and billionaire <a href="https://www.ted.com/talks/nick_hanauer_beware_fellow_plutocrats_the_pitchforks_are_coming">Nick Hanauer</a>. </p>
<p>Inequality is in part the fallout from the effects of maximising shareholder value at the firm level. But it is also caused by the broader pressure to structure multinational corporations to work against the provision of decent employment conditions and taxation powers for national governments. This structuring <a href="http://www.bbc.com/news/business-29641109">impoverishes the many while it brings untold riches to the few</a>, often hidden away in tax havens. It also removes the basis for taxation that provides for high-quality physical and technological infrastructure, education, health and welfare and educated workers that corporations rely on for their continued operations. </p>
<p>There are projects, <a href="http://themoderncorporation.wordpress.com/">including our own</a>, which seek to make the process of corporate governance and its outcomes more equitable and sustainable, and it is vital that this work is done. A theory of corporate governance that is based on maximising value for shareholders allocates vast amounts of money to those shareholders and managers at the price of hollowing out the long-term competitive perspectives for corporations. </p>
<p>It has impeded sustainable economic growth and has induced economic instability by reallocating money to groups in society who do not use it productively. This model of corporate governance is proving to be disastrous for the legitimacy of corporations and the well-being of present, let alone future, generations as it is corrosive of the social and productive fabric of modern, democratic societies.</p><img src="https://counter.theconversation.com/content/35515/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeroen Veldman 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>Modern capitalism has a massive structural flaw in one of the cornerstones of its existence. The corporations which form the predominant business structure and which are the main instrument for dividing…Jeroen Veldman, Senior research fellow, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.