Steve Freedman (Pictet AM): “The Planetary Boundaries Framework Is a Way to Look for Solutions to Environmental Challenges”

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Pictet Asset Management (Pictet AM) has been investing in environmental themes for more than two decades. In 2014, the firm decided it was time to step up their capabilities in terms of investing in environmental solutions. For this purpose, Pictet AM adopted the Planetary Boundaries framework. This framework was developed over a decade ago by by a group of 28 leading Earth System and environmental scientists led by Johan Rockström from the Stockholm Resilience Centre and Will Steffen from the Australian National University.

The Stockholm Resilience Centre (SRC) is an international research center on resilience and sustainability science that is a joint initiative between Stockholm University and the Beijer Institute of Ecological Economics at the Royal Swedish Academy Sciences.

What is the Planetary Boundaries framework?

The Planetary Boundaries framework evaluates the current human footprint for nine dimensions of planetary health, -including biodiversity loss, biochemical flows, chemical pollution, land-system change, freshwater use, ocean acidification, ozone depletion and atmospheric aerosol loading-. It then attempts to establish their safe operating space, in other words, how far each of these dimensions can change without risk of provoking sudden, irreversible damage to the environment.

According to Dr. Sarah Cornell, Research Scientist at the Stockholm Resilience Centre, the framework provides a summary overview of how the planetary system changes due to human activity. It is a scientific evaluation of long-term, large scale planetary dynamics and it points out several threats for humanity.

“The Planetary Boundaries framework flags a set of global sustainability critical issues. It is a compilation of the issues that collectively are changing Earth’s system dynamics most profoundly. There is a strong scientific consensus that we are already in a red alert state for several issues. The list of the nine processes and the fundamental justification of the Planetary Boundaries framework itself have turned out to be really robust over this decade of research and application, and actually quite a lot of debate,” explained Dr. Sarah Cornell.

The framework was launched in 2009, updated in 2015 and it is currently undergoing a new updating process. This time the priority among this international science network is to work hard on providing more clarity about the global importance of chemical pollution created by novel human made entities and ultra-fine particles in the atmosphere. The updates have been focusing on what could happen if current economic intensity on the nine dimensions of the Planetary Boundaries framework moved outside of the safe operation space for humanity. The 2015 update included space mapping with some preliminary analysis of interaction between the processes, and right now the SRC is much more focused on functional interactions, working on ideas like the nexus approach to understand the interactions among climate, biodiversity and resource use.

“For most of the Planetary Boundaries, we are not only already in the red alert state, we are also heading on the wrong trajectory. The human drivers of change are intensifying, they are entangling the risks. Even though, for many of the Planetary Boundaries, there is already a global policy consensus that action is needed now. So, the framework provides a long-term global view within our system and it sets today the rapid human changes into the context of non-negotiable dynamics, which are long-term. The precautionary boundaries are defined in terms of avoiding unwanted shifts in our system functioning. They should be considered as a global complement to local impact indicators, and not as a substitute for good practices and policies to deal with local sustainability problems. This framework is scientifically defined and is of interest to business and policy makers,” she said.

Under the 2015 UN Sustainable Development Goals Paris Agreement on Climate, governments agreed that there is a need for a shift towards sustainability and that it must be a priority in this decade. Although policy structures provided to support the change have been around for decades already, there is a huge implementation gap and the world relies to a large extent on corporations for this action to happen.   

 The scientific community has provided already so much information to governments and authorities, but why is so little happening? The Planetary Boundaries metrics need to be translated into measures of economic intensity of industry activities. This challenge was tackled a few years ago in the research paper “Towards defining an environmental investment universe within planetary boundaries”, written by Christoph Butz (Senior Investment Manager at Pictet AM), Jurg Liechti (CEO and Managing Director at Neosys AG), Julia Bodin (Researcher at Ecole Polytechnique Federale de Lausane) and Sarah Cornell.

“In our scientific publication, we applied some assessments that combined economic flows with estimates on materials and energy resources use, as well as environmental emissions and waste. This life cycle approach gives us a relative impact, being able to compare different types of products, materials, services or industries,” she observed.

For example, the Planetary Boundaries framework measures human impact on climate change in atmospheric concentrations of greenhouse gases on parts per million. However, this measure is not useful for investors, because it focuses on the end state, not the amount of greenhouse gas emitted per unit of economic activity. Instead, the environmental impact for every million US dollar of economic activity can be calculated by dividing the allowable emission level (14.25 billion tonnes of CO2 per year globally, according to United Nations Framework Convention on Climate Change) by the annual economic output (USD 75.6 trillion) to obtain an economic intensity boundary threshold equivalent to 188.5 tonnes of carbon dioxide per million of US dollars of output, 70% lower than the current level of emissions to the atmosphere, which was 639 tonnes per million of US dollars output in 2018.

The application of the Planetary Boundaries framework research provides Pictet AM with an absolute benchmark for comparison, being able to assess if a company’s environmental impact is good enough from a planetary perspective.

“In our work with Pictet AM, we have tried and tested a method to bring global environment megatrends better into the world of investments”, commented Dr. Sarah Cornell.  

How is the Planetary Boundaries framework applied in Pictet AM’s portfolios?

As stated by Dr. Steve Freedman, Senior Product Specialist within Pictet Asset Management’s Thematic Equities team, Pictet AM feels it is becoming increasingly urgent to invest in environmental solutions that lead into action on several environmental challenges.

“The Planetary Boundaries framework is one way to visualize the urgency of changes, but information is not enough to create value. Information needs to turn into awareness in a broader portion of the population which leads to pressure on government authorities and ultimately into action. This chain of value has already been played out a number of times in the past”, explained Freedman.

For example, in China, between 2011 and 2012, the so-called air apocalypse episode took place. The levels of pollution were so high in the major cities, that even in a non-democratic regime like China this led to enough pressure to improve in terms of environmental policy making, becoming in many ways a leader in terms of the priorities on the environment. Something similar is happening in Europe, where the European Commission was elected with a green mandate based on the popular awareness of these topics. Global society is going through a phase in which these changes are happening quickly. This is creating both risks and opportunities for investors.

For Pictet AM, the Planetary Boundaries framework is a source of inspiration at three levels. First, the framework is used to build portfolios both in terms of applying a “do no harm” risk perspective on environmental aspects, but also in terms of looking for solutions to environmental challenges. Secondly, Pictet AM also uses the Planetary Boundaries framework as a reporting framework for environmental impact.

When a company’s business model is operating beyond its economic intensity threshold in any of the nine dimensions of the framework, its environmental footprint is greater than the safe operating space. This may not backfire on the company right the way, but taking a long-term view, this is essentially not sustainable. What Pictet AM is ultimately trying to determine here is which companies have an environmental footprint that is compatible with the safe operating space of each dimension. In addition, the firm is looking for types of companies that have products and services that are actively solving environmental challenges, this generally implies a robust business model to resume for the long term.

To obtain the environmental footprint of a company, Pictet AM analyzes every activity in the production of a good or service, from raw material extraction to product use and disposal. They consider the full supply chain and once the sale has been done, they consider the replacement value and their disposal. A comprehensive Life Cycle Assessment (LCA) is performed in more than 200 industries for each of the nine Planetary Boundaries.   

“For us, the combination of a Life Cycle assessment with the Planetary Boundaries is really a robust way to incorporate what we think really represents the consensus in environmental science. This methodology is included as part of the screening process when building our environmental solutions portfolios”, said Freedman.

Another aspect of the Planetary Boundary framework is that it can be used as a test of whether a business model is an environmental solution. By using the comprehensive Life Cycle Assessment based on environmental footprints, Pictet AM can check and see what a company’s footprint will be like and whether its business model helps alleviate the pressure on some planetary boundary dimensions. When a company represents an environmental solution, it should be included in the environmental themes of thematic equity portfolios.

For example, the environmental footprint of the global equity markets (MSCI All Country World index) on both freshwater and climate change dimensions is positive. This means that it has an overall negative environment impact. On the other hand, Ecolab, a water company that provides treatment solutions, and Vestas, a company that is one of the key manufactures of wind turbines, have a negative environmental footprint, therefore they contribute for a positive change.  

Finally, the Planetary Boundary framework also serves as a reporting method. When Pictet AM talks about investing in environmental solutions, they consider the broader part of impact investing, while they are looking to achieve a positive change. In that sense, Pictet AM believes they need to be transparent about what they are achieving, and they do so by using impact reporting.   

Pictet AM looks across portfolios and uses the Life Cycle Assessment methodology to determine their environmental footprint in each of the nine dimensions of the Planetary Boundary framework. The results are then compared to those of a broader global equity index, like the MSCI All Country World Index. This provides an overview of the impact that using a robust scientific framework has on Pictet AM’s investment process.

“Science is evolving, and this is not a static process, but this explanation should give you a glimpse of where we stand as of now”, concluded Freedman.  

Patrick Zweifel (Pictet Asset Management): “This crisis disproportionately impacts the service sector”

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Photo: Patrick Zweifel, Chief Economist at Pictet Asset Management. Photo: Patrick Zweifel, Chief Economist at Pictet Asset Management

While the sanitary crisis is not over, some countries have done a better job controlling the spread of the coronavirus among their population. The four largest countries in the Euro Zone by population, Germany, France, Italy and Spain, took a firmer approach on reducing the activity in the services sectors that has in turn led to a lower number of COVID-19 cases. While other countries that took a more flexible approach are still struggling with the outbreaks, as it would be the case in the United States, United Kingdom, India, and most of Latin American countries. Signaling that there has been a clear trade-off between the number of COVID cases and the restrictions imposed in mobility during the lockdowns.

According to Patrick Zweifel, Chief Economist at Pictet AM, the new orders to inventory data extracted from the IHS Markit’s World manufacturing surveys shows that the collapse in the supply side of the industrial activity has been very similar to the one that happened during the Global Financial Crisis. What is new this time is the length of the crisis. While it took about a year, from 2008 to 2009, for the World manufacturing surveys to hit the 50 threshold, this time around it has only taken about three months for the industrial activity to recover from a level of 34 to 52.3.

When focusing on the average output and new orders per country as activity components of the World manufacturing survey, the majority of the countries are recovering or accelerating their production, while a third of them are above the 50 threshold, and as of the end of June they are not showing signs of deterioration versus the previous month.

On the demand side, global car sales collapsed during the first months of the year, experiencing a 43% decrease on its 6-years trend levels for 2019. The global demand for cars hit its trough in April and rebounded in May up to 16% below its trend.

Despite the diversity of patterns and measures taken to contain the virus by the governments of the three major economic regions, -United States, China and the Euro zone-, their real retail sales had a rebound in May up to levels that are only 5% below their average levels for 2019. The data from June confirmed the severity of the fall, but considering only the current information, the rebound seems to be quite strong. However, Pictet AM’s forecasts a peak to trough drop of 10% in global GDP.

US growth projections and disposable income

The US retail sales data is another way to obtain a reflection of what happened on the demand side. Their rebound in May suggests that the actual numbers are better than Pictet AM’s estimate on US monthly real GDP projections. It seems that the US economy is now in a better situation than Pictet AM’s base case scenario, which already is a bit more optimistic than the consensus on its forecast for 2020. Although this scenario could change if there is a second wave of coronavirus outbreak.   

The two main risks for the US economy are the levels of disposable income for US households and their consumption rate. So far, there has been a huge fiscal policy response in the world, and particularly in the US, in form of government transfers during the months of April and May to offset the decline in normal sources of income. Consequently, the US household income is now 7% above its December levels, but going forward two questions remain unknown: until when are these government transfers and fiscal responses going to be maintained and even if they are extended on time, will they be enough to offset the deterioration of normal sources of income?

Another source of uncertainty is how much of this net government transfer will be used for spending, US household savings as percentage of disposable income peaked at 32% in April and closed the month of June at 23%. These are two uncertainties that make Pictet AM’s to remain cautiously optimistic.

Activity recovery in China and Emerging Markets

China’s supply and demand, -respectively measured by industrial production and retail sales and investment in fixed assets, have experienced a strong recovery. Its production output is close to its December level, however investing and consumption spending are lagging a bit, 2% and 8% below the year end levels.    

The policy response in China has been supportive, and similar in magnitude to the impulse that the country had during the Global Financial Crisis. This in turn, will also serve as support to the entire global economy.

The recovery in Emerging Markets (EM) is at least as obvious as it is in the Developed Markets (DM), if not better in some cases. Pictet AM’s forecast for global activity shows a widening growth gap between Developed and Emerging Markets ahead in the cycle. It is not only that the collapse has been less pronounced in the latter, but that the recovery should be a bit better in as well. The reason that explains this behavior is that Emerging Market economies have a much lower share of services in their GDP, an average of 54% vs the 72% in Developed Markets, and this crisis disproportionately impacts the service sector.

The global fiscal stimulus to fight COVID-19 damage

This time the fiscal response has been stronger than in any other previous crisis. The median response for Development Markets has been about 4.5% of their GDP, this compares to 2.5% of GDP for Emerging Markets for a total of 5% in global GDP, which is about three times the amount of stimulus registered during the Global Financial Crisis.

To all the loan guarantees that have been offered by the governments to large companies, it should be added to all the tax referrals that have been announced by various governments. If all these measures are taken into consideration, the total amount of fiscal packages amounts to 13% of global GDP, a considerably high figure.

This stimulus should have some major consequences in terms of public debt evolution and how much debt that could be developed in the future. For the time being, this enormous fiscal stimulus is sort of what made this crisis different from previous ones.

Moreover, a great part of this fiscal expansion has been monetized. In the United States, the Fed purchases of Treasuries bonds year-to-date covers about 46% of 2020 estimated borrowing needs, which are approximately USD 4 trillion, or around 20% of estimated GDP for 2020.

A similar situation applies to the Euro Zone. Even if there is a sharp increase in the public debt to GDP ratio, most of this new debt will be held by the European Central Bank. Therefore, Pictet AM expects that the overall impact of higher sovereign fiscal deficits will be less dangerous this time than in the previous crisis at least for the short and medium term.

Meanwhile, the fiscal response in Emerging Markets has been appropriate. The countries with the lowest public debt to GDP ratios, -Chile, Peru, and Thailand among others, are the ones that have announced the biggest packages of fiscal spending. Being Brazil the only exception, with a higher public debt to GDP ratio and a relatively high fiscal response.

It is also important to assess how much of this public debt is held by external creditors. In that regard, Turkey or Indonesia could appear to be at risk, less so for Indonesia which has adopted a QE type of monetary responses instead of further reductions in interest rates to avoid dysfunctionalities in their markets.

Overall, the Emerging Market debt is considerably attractive in terms of real yields. Since it is complicated to find positive real yields in developed markets, except for Italy. At least three quarters of emerging debt markets are offering positive real yields returns in their 10-year bonds. The only bonds that are offering negative real yields in the emerging market scope are the Eastern European countries, as they are linked to the yields in the Euro Zone.

 

 

Please click here for more information on Pictet AM’s fixed income emerging market capabilities.

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning.  Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.  Past performance is not a guide to future performance.  The value of investments and the income from them can fall as well as rise and is not guaranteed.  You may not get back the amount originally invested. 

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.

Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).

In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.

 

Allfunds Opens New Office in Paris and Appoints Bruno Piffeteau as Country Head of France

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Foto cedidaBruno Piffeteau, nuevo responsable de Allfunds en Francia.. Allfunds nombra a Bruno Piffeteau nuevo responsable de Francia y abre oficina en París

Allfunds has reinforced its Paris team by appointing Bruno Piffeteau as Country Head of France. In a press release, the company has stated that the arrival of Piffeteau, former Global Head of Client Service for BNP Paribas Asset Management, is another step in Allfund’s commitment to the French market.

Piffeteau will be responsible for developing Allfunds’ local business and will lead a team of experts. In this new role, he will directly manage the relationship with BNP Paribas Group and will report directly to Luca Renzini, Chief Commercial Officer at Allfunds. Furthermore, in line with its commitment to the French market, the company will open a branch in Paris.

After the announcement, Juan Alcaraz, CEO of Allfunds, commented that they are “delighted” to welcome Piffeteau. “The opening of our Paris branch is a huge milestone for our business, and I am confident that under Bruno´s leadership we will see great results. He brings with him an incredible background and extremely strong knowledge of the French market. I am certain Bruno will be a valuable addition in driving forward our ambitious plans in France”, he said.

Meanwhile, Gian Luca Renzini, CCO of Allfunds, highlighted that he brings over 20 years of experience in the financial and asset management industry and is an expert on the French market: “His appointment is a great addition to our international team. Without doubt, Bruno will contribute to expanding and reinforcing our business in France as we strive to further develop service offering in this extremely important market”.

Before joining Allfunds, Bruno Piffeteau spent the last 20 years at BNP Paribas Asset Management where he held various positions including Head of Marketing and Product Development, COO of Fundquest, Head of Global Fund Solution and lastly Global Head of Client Service. Prior to joining BNPP AM, Bruno also held a number of senior positions within BNP Paribas Group, which he had joined in 1989. Bruno Piffeteau holds a degree in finance from Northeastern University, Boston.

Marc Pinto to Retire from Janus Henderson Investors and the Investment Fund Industry

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Marc Pinto, courtesy photo. Janus Henderson Investors prepara la salida de Marc Pinto de cara a su jubilación en abril de 2021

After more than 26 years at Janus Henderson and 34 years in the industry, Marc Pinto is retiring from Janus Henderson Investors and the mutual fund industry, effective April 2, 2021.
 
As part of a robust succession planning effort for all their investment teams, the company is pleased to announce Jeremiah Buckley will assume primary portfolio management responsibilities for the Growth & Income strategy and the equity portion of the Balanced strategy, effective April 2, 2021.

“Both Marc and Jeremiah were instrumental in building the foundation of the successful effort that generated compelling risk-adjusted returns for our clients over many years. Given the lengthy transition period, Jeremiah’s 22 years of experience and their many years of partnership, we expect this to be a seamless evolution”. Ignacio de la Maza said in an emailed statement.
 
In connection with this transition, David Chung, Industrials Sector Lead and Research Analyst of the Centralized Research team, has been appointed Assistant Portfolio Manager on the Janus Henderson Balanced strategy and Janus Henderson Growth & Income strategy, effective June 30, 2020. The company stated that there are no changes to either the Fixed Income sleeve of the Balanced strategy or the Growth & Income strategy, nor to either strategy’s investment process or philosophy.
 
“I want to thank Marc for his many contributions to Janus Henderson and our clients over the past 26 years. He is an excellent investor and an exceptional leader. He and his team demonstrated their skill by delivering strong results for clients across several of our strategies over many years. Marc will continue working with the team through his retirement on April 2, 2021, which is a reflection of his professionalism and commitment to our clients.” Wrote de la Maza.
 
“I have the utmost confidence in the continuing investment team, whose investment process, philosophy and team approach remain unchanged. We are fortunate to possess significant professional depth and robust transition plans which are designed to respond to naturally occurring personnel changes without significant disruption to our clients or our business. This should result in an orderly transition for clients.” De la Maza concluded.
 

Stephen Bird is Appointed as Director and CEO-Designate at Standard Life Aberdeen

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Foto cedidaKeith Skeoch, former CEO Standard Life Aberdeen.. Stephen Bird sustituirá a Keith Skeoch como CEO de Standard Life Aberdeen

Stephen Bird joins Standard Life Aberdeen as chief executive-designate, effective July 1, replacing Keith Skeoch later in the year.

Following a handover period, and subject to regulatory approvals, Bird, who was most recently CEO of global consumer banking at Citigroup, is expected to replace Skeoch as Group CEO by Sept 30.

Skeoch will retire from the board of directors of the firm in September, after five years as group CEO and 14 years as a director. He will spend the remainder of his contract — until June 2021 — as non-executive chairman of the Aberdeen Standard Investments Research Institute. The ASIRI is the firm’s macro research unit.

Bird “is an inspiring leader with a great track record and experience in leading businesses to harness digital technology to improve both productivity and the client and consumer experience,” Sir Douglas Flint, chairman, said in the release. “This, coupled with his ability to create valuable partnerships and guide businesses through periods of major change, means that he is well placed to build on the strong foundations we have at SLA.”

Stephen Bird said: “I am delighted to be joining Standard Life Aberdeen as its next Chief Executive. This is a company with a great history, a strong brandand an exciting future. The current crisis has highlighted the importance of active asset managementas well as building greater resilience into personal financial planning. SLA’sleading asset management, platforms and wealth capabilities give great scopeto help clients and customers navigate these challenges; thisis what attracted me to the company. I am looking forward to working with my new colleagues tocreate a better future for all our stakeholders.”

Standard Life Aberdeen, which has £544.6 billion ($671.6 billion) in assets under management and administration, was formed in 2017 following a merger between Standard Life and Aberdeeen Asset Management. The group is made up of two businesses: The £486.5 billion money manager Aberdeen Standard Investments and Standard Life. Mr. Skeoch was CEO of insurer Standard Life prior to the merger. The group has a strategic partnership with insurance firm Phoenix Group, which acquired Standard Life Assurance in 2018.

Credit Suisse Asset Management Launches Two New ETFs

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Valerio Schmitz-Esser, courtesy photo. Credit Suisse AM amplía su gama de ETFs con dos nuevos fondos de renta variable que invierten en small cap y en el sector inmobiliario

Credit Suisse Asset Management has launched two additional ETFs. The CSIF (IE) MSCI USA Small Cap ESG Leaders Blue UCITS ETF and CSIF (IE) FTSE EPRA Nareit Developed Green Blue UCITS ETF. The two funds are trading on SIX Swiss Exchange, Deutsche Börse, and Borsa Italiana.

Like the existing Credit Suisse Asset Management ETFs, the new products are being launched under the Credit Suisse Index Fund (IE) ETF ICAV umbrella. With US small caps and global real estate, the funds offer exposure to two interesting and promising segments. Both new ETFs bear the label “Blue”, which stands for Credit Suisse Index Funds without securities lending, and both fit into the strict Credit Suisse ESG framework.

The CSIF (IE) MSCI USA Small Cap ESG Leaders Blue UCITS ETF gives access to a broadly diversified portfolio of US small-cap stocks with market capitalizations below USD 10 bn. The eponymous benchmark index screens the investment universe for environmental, social, and corporate governance performance and thereby represents approximately 50% of the US small-cap opportunity set.

The CSIF (IE) FTSE EPRA Nareit Developed Green Blue UCITS ETF invests in a global portfolio of environmentally friendly real estate stocks and real estate investment trusts (REITS). In a low-yield environment, listed real estate combines stable rental income with long-term protection against inflation.

Since Credit Suisse Asset Management launched a new range of exchange-traded funds (ETFs) in March 2020, these products have already surpassed USD 2 bn in assets under management.

Credit Suisse Asset Management made its return to the ETF market on March 16, 2020. Since then, their ETFs have raised more than USD 2 bn and are fast becoming an integral part of a broader range of 98 index funds with USD 104 bn (as at May 31, 2020) in combined assets.

“Our long-standing experience in index funds has given us the requisite know-how to succeed in ETFs,” said Valerio Schmitz-Esser, Head of Credit Suisse Asset Management Index Solutions. “The efficiency of our processes and the precision of our techniques make our ETFs ideally positioned to take full advantage of the potential in this segment.”

Task Force on Climate Related Financial Disclosures (TCFD) Launches Spanish Translations Of Recommendations

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. Task Force on Climate Related Financial Disclosures (TCFD) lanza recomendaciones traducidas al español

The Task Force on Climate-related Financial Disclosures (TCFD) launched on June 26th, the Spanish translation of its recommendations at a virtual event hosted in collaboration with EY. The translations were arranged by the Embassy of the United Kingdom in Chile. While the launch event addresses Chilean market participants in particular, the translations encourage wider adoption of climate disclosure practices across the entire Spanish-speaking business community.

The online event included remarks from Head of the TCFD Secretariat Mary Schapiro, EY Chile Chairman Cristian Lefevre, and COP26 Regional Ambassador for Latin America & Caribbean Fiona Clouder, followed by a panel discussion between Alan Gómez, Vice President of Sustainability at Citibanamex and TCFD Member; Kevin Cowan, Commissioner of the Comisión para el Mercado Financiero (CMF); and Francisco Moreno, Undersecretary of Finance for the Chilean government; and moderated by Elanne Almeida, Partner at EY. The panel discussed about the risks and investment opportunities in the market associated with climate change.

“Businesses across Latin America have a vast opportunity to become global leaders in disclosing and addressing the financial threats of climate change – and helping build a more resilient global economy,” said Mary Schapiro, Head of the TCFD Secretariat and Vice Chair for Global Public Policy at Bloomberg LP. “We are proud to make the TCFD recommendations more accessible to the business community across Latin America, and hope that the translations will foster accelerated uptake across the region.”

The Task Force, which is chaired by Michael R. Bloomberg, provides recommendations for companies to disclose climate-related risks and opportunities and the financial implications of climate change on their businesses through the TCFD’s globally recognized voluntary disclosure framework. Increased transparency on climate-related issues, as a result of disclosures, will help to promote more informed financial decision-making by investors, lenders, and insurance underwriters.

“While the countries of Latin America are unique and diverse, we are unified by the fact that greater disclosure of climate risk will help the financial community better allocate capital towards companies and industries across the region that are best prepared to address those risks,” said Alan Gómez, TCFD Member and Vice President of Sustainability at Citibanamex. “We thank our partners at the UK Embassy in Chile for dedicating the time and resources to translate the TCFD recommendations into Spanish, and we look forward to supporting the entire financial community – from investors to asset owners – in the journey toward more information and greater transparency when it comes to climate risk.” 

“EY is committed to leading the dissemination of the TCFD recommendations to entities in Chile, Latin America and across the Spanish-speaking world,” said Cristian Lefevre, EY Chile Chairman. “Greater implementation of the TCFD recommendations will increase transparency and provide information to international market and global investment funds seeking to invest in companies and projects in the region that are prepared to tackle the long-term risks of climate change to their business. At EY, we are well-positioned to advise companies that want to join this voluntary disclosure framework of climate risks and opportunities.”

“As we rebuild our economies, disclosing in line with the TCFD recommendations is one of the key tools at the heart of building a resilient foundation for a clean economic recovery and net zero future,” said Fiona Clouder, COP26 Regional Ambassador for Latin America & Caribbean. “The Spanish version of these recommendations will help support key discussions on paving the path for sound, sustainable and inclusive growth across the region and raising climate ambition ahead of the COP26 next year.”

As of June 2020, more than 1,300 organizations around the world are official supporters of the TCFD. Supporting organizations and companies span the public and private sectors and include corporations, national governments, government ministries, central banks, regulators, stock exchanges and credit rating agencies. By publicly declaring their support for the TCFD and its recommendations, these companies and organizations demonstrate their commitment to building a more resilient financial system through climate-related disclosure. Widespread implementation of the TCFD recommendations will provide investors, lenders, and insurance underwriters with the information necessary to understand companies’ risks and opportunities from climate change.

UBS Expands Client Offering for SMA to Include Third Party Asset Manager Strategies With No Additional Fees

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CC-BY-SA-2.0, FlickrPhoto: Martin Abegglen . Foto:

Regulation BI is the new client-care regulation from the Securities and Exchange Commission that takes effect next Tuesday, and many firms have been leveraging its implementation to modify and sometimes prune their product offerings. That is the case of UBS Wealth Management USA, which will expand its offering of Separately Managed Accounts (SMA) with no additional investment manager fee to third party asset managers.

Starting July 7, clients will have access to nine additional strategies in this innovative pricing model, including Natixis Investment Managers/AIA, Breckinridge Capital Advisors and Goldman Sachs Asset Management, across equity and fixed income asset classes.

In August, another nine strategies are expected to join from Franklin Templeton, Invesco, Brandes Investment Partners and PIMCO. All SMA strategies will be made available via WM USA’s ACCESS, Strategic Wealth Portfolio (SWP) and/or the recently launched Advisor allocation Program (AAP) platforms.

In January 2020, UBS launched an innovative, simplified, all-inclusive pricing structure for all strategies available from UBS Asset Management and became the first firm to provide clients with access to select SMAs with no additional manager fee. The fee paid to investment managers will, instead, be borne by UBS. Certain strategies —such as sustainable investing or personalized tax management— can be selected for a fee.

“This is a win for our clients and Advisors – we’re simplifying SMA client pricing, expanding choice and transparency, and aligning our offering with the SEC’s Regulation Best Interest,” said Jason Chandler, Head of Wealth Management USA, UBS Global Wealth Management. “At the same time, we’re investing in our Advisors’ success, enhancing our advisory value proposition, and giving clients increased pricing flexibility.”

UBS is committed to offering an open and transparent platform, and as additional managers realize the benefits of this pricing model, it should allow UBS to further reduce the cost of SMAs for its clients.

“We’re committed to open architecture and are delighted that a premier group of asset managers have joined UBS Asset Management in this approach,” added Steve Mattus, Head of Americas Advisory and Planning Products. “We focus on delivering the best ideas, solutions and capabilities to our clients regardless of where those resources originate.”

How to Succeed in the Advisory Business by 2040

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According to Boston Consulting Group (BCG), “the wealth management industry is over 200 years old. Yet for most of that history, providers have operated according to the same general playbook. It took the massive digital and regulatory disruption of the past 20 years to begin shaking up industry business models, and evidence suggests that most providers have moved slowly, with many still adhering to traditional ways of private banking.”

Wealth managers must take action on multiple fronts in order to navigate ongoing market volatility and build fresh capabilities that will enable them to create sustainable competitive advantage over the next decade, according to a new report by BCG, titled Global Wealth 2020: The Future of Wealth Management—A CEO Agenda.

BCG’s 20th annual study of global wealth management takes a 20-20 view of the industry, looking back over the past two decades as well as ahead to 2040. Its review of global market sizing, which encompasses 97 markets, provides a detailed retrospective on wealth growth over the past 20 years—and its resilience through downturns—and evaluates the potential long-term impact of the COVID-19 crisis.

BCG has also created a vision for the future of wealth management, examining how the industry’s value proposition and offerings will change over the next two decades, how forms of interaction will evolve, and which new business models will emerge. Finally, BCG offers wealth management CEOs a comprehensive agenda for protecting the bottom line, prioritizing the areas in which they hope to win in the future, and building appropriate supporting capabilities. 

“Effectively serving the world’s wealthy is going to get far more complex in the years ahead,” said Anna Zakrzewski, a BCG managing director and partner, coauthor of the report, and global leader of the firm’s wealth management segment. “As the demographics of wealth shift, so will the needs and expectations of wealth clients. With all the choices available, clients don’t necessarily want more—they want better. In addition, the disruptive forces that emerged at the beginning of the century are accelerating. And as digitization lowers barriers to entry to wealth management as a business, competition will intensify and offerings that once provided differentiation will face commoditization.”

Global Wealth Growth. According to the report, a striking feature of wealth growth over the past two decades has been its extraordinary resilience. Despite multiple crises, wealth growth has been stubbornly robust, strongly recovering from even the most severe tests. Today, more wealth is in more hands, and the wealth gap that separated mature markets and growth markets at the beginning of the century has narrowed dramatically. Globally, personal financial wealth has nearly tripled over the past 20 years, rising from $80 trillion in 1999 to $226 trillion at the end of 2019.

The CEO Agenda. In the report, BCG outlines three potential scenarios for post-COVID-19 growth: “quick rebound,” “slow recovery,” and “lasting damage.” Regardless of which scenario emerges, wealth management providers are likely to face more pressure, and many of them were already in challenging positions before COVID-19. Client needs and expectations are changing at an accelerated pace, competition is intensifying, and cost-to-income ratios have been significantly higher than prior to the previous financial crisis (77% in 2018 compared with 60% in 2007).

Although some wealth management providers have made advances in recent years in adapting their businesses to the changing environment, nearly all still have considerable work to do. CEOs must treat 2020 as a pivotal point. BCG’s recommended agenda for wealth management CEOs features three key imperatives:

  • Protect the bottom line by pursuing smart revenue uplift, optimizing the front-office setup, streamlining compliance and risk-management processes, and improving structural efficiency.
  • Win the future by developing more-personalized value propositions, enhancing ESG and impact-investment offerings, designing challenger plays, and leveraging ecosystems and M&A. 
  • Build capabilities by gaining better client understanding, attracting top talent, investing in digital and data, and designing a state-of-the-art technology platform.

“The last twenty years have witnessed many peaks and valleys,” said BCG’s Anna Zakrzewski, “and the next twenty will likely bring the same. Although some of the necessary initiatives may not be new, there is much more progress to be made. By acting decisively now, wealth managers have an opportunity to build on their current momentum and position themselves optimally for the future.” 

In BCG’s opinion, the melding of technology and human capabilities will enable levels of customization for clients that previously would’ve been too costly, and the wealth management model will expand and refocus during the next two decades as the divide between people and machines fade. However, this will also put further pressure on margins.

“In addition, younger generations, accustomed to pricing transparency in other parts of their professional and personal lives, will insist on greater fee transparency from their wealth advisors,” the report said. “Online comparison tools will make it easy for them to search for the most competitive offerings. Together, these pressures could cut margins on investment services by half, with the result that wealth management providers will have to meet clients’ burgeoning demands and find new ways to drive value with just a fraction of today’s resources.”

To counter that, wealth management firms should shift to dynamic, value-based pricing not necessarily linked to assets under management.

Elsewhere, BCG said the need for scale, specialization and choice could cause the wealth management industry to remake itself around four models, Large-scale consolidation, Niche Plays, Retail Bank and Asset Manager Expansion, and Entrance of Big Tech.

A copy of the report can be downloaded here.

Has Covid-19 Thrown Up Value in the Local Currency Emerging Market Debt Universe?

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The local currency emerging market debt asset class had a strong positive return in 2019. Despite the fears of a global slowdown part way through last year, investors in the asset class enjoyed a 13.5%[1] return in USD unhedged terms. The impact of Covid-19 however has negatively affected the asset class this year. Risk aversion and uncertainty have swept through markets as investors and policy makers have grappled with the short and long run consequences of the virus. Emerging markets have been caught up in that dislocation, prompting some to question the value on offer in this segment of the fixed income market. As the dust settles and the picture becomes clearer, we find an asset class with valuations near historic lows.

The local currency emerging market debt asset class suffered a large negative return in the first quarter of 2020. The -15.2% decline was the largest quarterly fall in the JP Morgan GBI-EM Global Diversified Index since its inception in 2003 (in USD unhedged terms). It is important to separate the sources of return when looking at local currency debt and differentiate between the return from bonds and that from currencies. Historically the separate bond and currency return streams have not been highly correlated, with a correlation of 0.55. The currency element is also more volatile than the underlying bond component. In this occasion as in previous episodes of volatility, emerging currencies were more affected by the correction than bonds which proved somewhat more defensive.

While some individual countries were more exposed to their own unique and identifiable issues, the bond component of the JPM GBI-EM Global Diversified index declined by -1.4% in the first quarter of 2020 (in USD hedged terms). This was a particularly strong performance given the scale of the economic disruption caused by the crisis. It also stands in contrast to the -13.5% decline in the bond component of the global high yield index[2] and the -4.2% fall in the global investment grade corporate bond index[3] (both in USD hedged terms).

In contrast, emerging market currencies were negatively impacted by the “virus shock” in the first quarter, compounded in some instances by the sharp decline in oil and other commodity prices. In aggregate, the currency component of the local market debt index declined by -14.3%[4] versus the USD in the first quarter.

To assess the attractiveness of the asset class today, we can look at the real yield and real exchange rate valuations on offer in absolute terms and relative to history. Combining the two provides an assessment of the current potential of the asset class.  

Colchester’s primary valuation metric for bonds is the prospective real yield (PRY), using an in-house inflation forecast rate which is discounted from that country’s nominal yield. We supplement this with an assessment of the country’s financial soundness. The virus induced adverse demand/supply shock and large decline in the price of oil (which fell two-thirds in the first quarter of 2020) and other commodities prompted us to revise our inflation forecasts lower within our emerging market universe. The large fall in the exchange rate in some countries tempered that revision, but the pass through to domestic inflation of such exchange rate depreciations has declined markedly over the past decade.

The resulting decline in our inflation forecasts and rise in nominal yields in some markets has seen an increase in the overall attractiveness of emerging market bonds on a prospective real yield which now sits around the average of the post Global Financial Crisis period.

Colchester’s primary valuation metric for currencies is an estimate of their real exchange rate – or purchasing power parity (PPP). We supplement this with an assessment of the country’s balance sheet, level of governance, social and environmental factors (ESG), and short-term real interest rate differentials (i.e. “real carry”). Emerging market currencies were already trading at attractive levels of valuation versus the US dollar according to our real exchange rate valuation estimates before the coronavirus crisis, the dislocation and uncertainty surrounding the pandemic has made them even more attractive for a USD based investor.

Combining the prospective real yield bond and the real exchange rate valuations together to produce an aggregate prospective real yield for the benchmark, suggests that we are now at levels only seen a few times historically. The value on offer in the local currency asset class today is on a par with that seen at the depths of the Global Financial Crisis in 2009 and most recently in 2015 when US dollar strength combined with some idiosyncratic country issues to produce compelling value in the space. The average benchmark total return in the two years following the three previous episodes of similar extreme valuation – June 2004, January 2009 and September 2015 – was +33.7%[5].

Valuations must be viewed within the context of the fundamentals. In other words, are the declines in currency values and increase in real yields occurring for justifiable reasons? In short, the answer would appear to be ‘no’ when looking at the emerging market universe in aggregate.

Going into the pandemic, emerging markets as a whole were arguably on a more stable footing than developed market peers on several metrics. Looking at debt-to-GDP ratios for example, shows that emerging markets had less than half as much debt as developed markets. Furthermore, the relatively lower increase in government debt in emerging markets over the last 10 years or so highlights their more cautious approach to macro-economic management and the widespread adoption of generally prudent and orthodox policies. The external position of many emerging markets also looks comparatively solid when one considers short- and long-term financing needs.

History also shows that countries with more overvalued currencies tend to be more exposed to an adjustment and reversal in capital flows. In simple terms, the greater the need for foreign capital and the more overvalued a country’s real exchange rate, the more exposed or vulnerable that country is. Most emerging markets are in the less vulnerable with undervalued exchange rates and little to no dependency on short term capital inflows.

The credit rating profile of the local currency emerging market debt asset class has remained at a healthy average of BBB+ for the past several years[6]. However, given the emergency Covid-19 fiscal packages and the associated growth slowdown, several rating agencies have recently acted quickly to downgrade several issuers in the universe such as Mexico, Colombia and South Africa. In contrast, countries in the developed world like the United States and the United Kingdom have not yet had their credit ratings altered[7] despite spending and pledging upwards of 11% and 19% of GDP respectively (to date, and counting) to help their economies weather the pandemic. In comparison, the Mexican and the South African government spending and support packages have amounted to a paltry 1.1% and 0.6% of GDP (to date).

From a purely ‘quantitative’ aspect, looking at some of the various balance sheet metrics, it is difficult to understand how some emerging countries can be rated lower than some of their developed market peers. Clearly you would expect the level of a sovereign’s debt to be a key factor. While there is a relationship between debt levels and ratings, there is a clear differentiation between developed markets and emerging markets. Emerging markets are currently rated lower at the same level of debt across the board, all else being the same.

One explanation for the difference lies amongst ‘qualitative’ factors. This encompasses things like a country’s historical precedent, the consistency of policy, the social-political willingness to undertake necessary adjustments and the level of governance, which includes things such as the control of corruption and rule of law. This traditionally is seen as a weakness by the rating agencies.

Overall however, despite the virus induced deterioration in the fiscal metrics, we believe that the balance sheets of most countries within the emerging market universe remain sound. Rating agencies may continue to downgrade across the sector, but the fundamentals are not pointing towards a meaningful increase in the risk of default. On the contrary, the benchmark is solidly “investment grade” and is likely to remain so in the absence of a further global melt-down.

 While the real yields of emerging market bonds have returned to near their long-term average historical valuations, emerging market currencies are currently extremely undervalued in USD terms. This gives the asset class an added source of potential return. Historically this level of valuation has proved to be extremely attractive.

There remain some good reasons for the difference in credit ratings between the developed and emerging world. However, the differences may not be as large as some perceive and on balance, most countries within the emerging market universe should weather the Covid storm.  

[1] JPM GBI-EM Global Diversified USD Unhedged Index

[2] ICE BofA Global High Yield USD Hedged Index

[3] ICE BofA Global Corporate Bond USD Hedged Index

[4] JPM GBI-EM Global Diversified FX Return in USD Index

[5] The total return on the JP Morgan GBI-EM Global Diversified Index (unhedged USD) between June 2004 and June 2006 was 27.7%, between January 2009 and January 2011 was 47.7% and between September 2015 and September 2017 was 25.6%.

[6] The BBB+ rating referred to here is the Standard & Poor’s Local Currency Rating weighted average of those counties in the JP Morgan GBI-EM Global Diversified Index (USD Unhedged) as calculated by Colchester.

[7] As per Standard & Poor’s as at end April 2020.

Column by Colchester Global Investors