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BALANCING THE NEEDS OF DEVELOPING ECONOMIES

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Marc Naidoo a sustainable finance partner at international law firm, McGuireWoods

 

A child sitting with a candle in the dark learning about how hydrocarbons are destroying the atmosphere and why fossil fuels need to be phased out nigh on immediately. Perhaps that resonates with this child, or perhaps these concepts exist in the abstract, or even a combination of the two. Over 640 million Africans have no access to energy, which correlates to an electricity access rate of a mere 40%. The question this child may ask is: so where are all these hydrocarbons coming from, and who is benefitting from them?

The interplay between developed nations and developing nations is a terse one, especially in the context of sustainability. Whilst through effluxion of time the West has been through various industrial and energy booms, developing markets have not been afforded that period of sustained growth. Whether in the form of heavy handed concessional agreements with Western countries, or the challenges facing post-colonial democratic infancy, developing economies have had an almost inverted growth trajectory. Focussing on Africa, the view that its population will double by 2050, creates challenges but also opportunity. With a growing population, the need for infrastructure become paramount, and as we are all aware that is coupled with energy.

Historically developing markets were not given the chance to grow industrially / organically. However growing populations provide these economies with an opportunity to prosper in the long term. Infrastructure leads to a better quality of life, but most importantly paves the way for arguably the most important tenet of sustainability: financial inclusion. The source of all of this is energy, energy which some may argue can be in any shape or form. Developed markets are quick to assume that energy is a divine right, however the context remains different for those who are quite literally living in the dark.

The danger of the current ESG agenda is that anger and vitriol is somewhat misplaced when identifying who is responsible for hydrocarbon contribution in the global economy. Terms like “Big Banks” and “Oil Majors” are cast as if these institutions are pantomime villains trying their utmost to destroy the planet. But as with all things, there is a balance that needs to be struck in balancing the needs of the environment, with those of the people that live therein. ESG is not an acronym for: environment. Social and governance issues are just as important in assessing where we move forward as members of Earth. Even the first six United Nations Sustainable Development Goals focus exclusively on social issues that need to be addressed. The problems facing the planet go beyond climate change. Whilst it is an enormous issue, it should not detract from the fact that we want to have a planet that survives and looks after all life therein, but that is hollow if we systematically make things worse for people that live on Earth right now.

Private sector capital has always played a role in infrastructure and energy within developing economies. This is not me saying that they have done this out of the goodness of their heart, but whatever the profit margin, cash still flows through the system with the additionality of job creation and a better standard of life. If you removed this source of funding, what would happen to the developing economies who require funding for energy creation or infrastructure development? The counter position is: renewables. No, that is part of a solution but not the entire solution. Technologies are still expensive, transmission lines onto national grids (usually with one para-statal energy provider) are projects in themselves and whether these technologies can handle base load energy production for exponentially growing economies remains to be seen. Private capital should not have to operate in the shadows and conclude secret deals to provide people with basic human rights for fear of reprisal from activists and mainstream media alike. If anything, of anyone financing hydrocarbons, big banks are the most adept to do so as they have the requisite internal protocols to manage borrowers building efficient projects as well as adhere to ALL ESG standards. You cannot just cut an entire population group out because there is pressure to do so, there are other solutions which will be explored later in this article.

The same pressure faces large energy corporates directly, as well as oil companies. Forgetting the human element facing millions of workers with regard to redundancies as a result of mass, almost immediate, closures of plants and refineries. Consider the implications of what is to become of the assets in respect of which these companies are being forced to divest from. Would you rather have a large publicly accountable corporate controlling an extraction asset, or a privately owned company less susceptible to public scrutiny. By nature large energy and oil companies are required to mitigate their impact on the environment and the communities in the immediate vicinities of their operations. Removing this buffer, is tantamount to removing accountability in the sector and throwing communities in developing economies to the wolves.

So is this the article you read that denounces large banks and major oil corporates taking action against climate change? No, and far from it. There are ways in which the interests of these companies and the needs facing developing economies can be aligned, while at the same time not glossing over the issues with carbon credits and the like. Sustainability within the corporate landscape is at a point where market participants can work together to find solutions that are creative and work for both corporates and developing economies. Other metrics can be introduced to offset hydrocarbons, whilst still ensuring developing economies have the room to grow. The Central African Forest Initiative is an example of this, with Gabon pledging to protect its forests in return for financing from the Norwegian government. Countries can be asked to develop carbon absorption assets such as sea grass or forests to mitigate the damage done to the climate. These are all tools that can be easily worked into financings, especially by larger financiers. All that is required is a little creativity and a commitment to a long term view on sustainability.

Changes need to be made, but not at the sacrifice of others. We are all in this together, but most importantly each country is on their own journey, both economically and with regard to sustainability. The answer to solving the issues facing our planet is not cutting off those people that need our help the most. Perhaps we should also educate those of us who are demanding radical change, that sometimes it is not possible as there is always some form of collateral damage. Change must be managed and must happen organically. Perhaps the E, in ESG, should stand for empathy.

 

Finance

Weathering the Crypto Storm

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Crypto investors may be left reeling from losses over the last few months. But that is not to say all is lost. The good news is that a crypto bear market is unlike a traditional one, with the high volatility and wide-ranging opportunity meaning no two days, even minutes, are ever the same. Here, Kristjan Kangro, CEO and co-founder of Change, a leading Estonian investment platform, explores:

We’ve all seen the headlines. Some say that the crypto bear market could last two years and that a bitter crypto winter is here. That Bitcoin and the like will continue to slump. But that is not to say it’s time to cash in your chips. While the news reports may, by design, ignite worry or even panic, the reality is that the situation isn’t near as grave as it might appear.

For the first part, this is not the first time that crypto investors have weathered such a storm. By its decentralised nature, crypto is much more changeable than the traditional market. Assets can see huge increases or decreases in price from one day to the next.

It’s also important to note that while the current crash may have a short-term negative impact, in the long-term it could mean that the coins and crypto projects that survive rocket in value. Seen as a ‘cleansing process’ of types, this could offer a good opportunity for newbies to enter the crypto market for the first time ever at historically low prices.

With this in mind, there are several tried and tested investment strategies that can help you weather the current crypto storm and build your wealth throughout.

First up, it’s important to be patient. As with anything in life, it’s never a good idea to react out of fear and panic, but rather consider your options. Remember, this isn’t the first time cryptos have lost value, only to rebound and reach new heights. From my own personal portfolio experience, I do believe there’s a lot to be said for ‘the long-term investor always wins.’

At the same time, do your research. Look at your options, your overall portfolio and the broader financial picture to decide your best course of action. Don’t just buy because others are. Don’t short because others are either. Weigh up your options based on exactly what you have and what level of risk you can afford to take. If you don’t need the cash immediately and it feels right, sit tight and try to wait it out.

It sounds obvious too but, diversify. It’s never wise to have all your eggs in one basket, especially during a bear market. A broad selection of investments will always create a more stable portfolio and mitigate some of the risk. I, for example, always tend to mix up my portfolio with a range of established market leaders and a selection of more niche coins with interesting applications across different sectors. This has continued to serve me well and limit my exposure during any difficult period.

As seen in previous crypto winters gone by, there is also a lot to be said for investing in a downturn. Yes it might not be for the faint hearted. You might even think you’re buying at a low, only to see your assets continue to decline in value. However, it could be a risk that pays off. If your coin has a long-term potential it could be a risk which pays serious dividends.

Depending on your risk appetite, another route could be to move towards passive income opportunities such as yield products. Although the gains might be more conservative, it offers a more gradual, and less exposed way to make a profit. Better still, it involves no continuous trading effort. At Change, for example, since launching our Growth Pocket high-yield account at the end of last year, we’ve helped create 100k euros worth of passive income for our community.

Lastly, although it may be hard, it’s important to try to not buy into all the headlines and ‘expert reviews’, much of which may be designed to scaremonger and capture your attention. This is, after all, not crypto’s first crash. And just like the crypto and traditional bear markets before, it will come to an end probably sooner than you think. The likelihood too is that it will drive best practice, as consumers gravitate to those companies who are regulated and offer a certain level of protection.

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Let’s Not Talk Ourselves into a Slump!

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By Dominic Bourquin, Head of the Tax Consultancy and Corporate Finance team at Monahans

 

In the face of the latest Office for National Statistics (ONS) Quarterly Gross Domestic Product (GDP) figures, it is important for businesses in the UK to stay calm and not panic otherwise there is a real chance we could talk ourselves into a recession.

The ONS GDP figures are seen as a key barometer of the strength of our economy. On August 12, the ONS announced a 0.1% estimated decrease in GDP for the quarter ended June 2022.

In my opinion, this can be interpreted in a number of ways. Some might say this is a precursor to a recession later in the year, others might argue that such a small estimated fall in GDP might actually be a rounding and, of course, it is subject to revision later as more data becomes available.

Dominic Bourquin Monahans

There is a real mixed bag behind the figures.  The service sector, the largest sector of the UK economy, has shrunk by 0.4% in the quarter, mainly due to the fall in what is termed health and social work activities – this has been caused by a reduction in coronavirus led activities as the COVID-19 virus has become part of normal life and COVID testing, vaccinations and track and trace activities have reduced.

That said, this fall does hide some bright spots, such as the increase in the wholesale and retail of cars and increases in accommodation and food services partly due to Jubilee related activity.

Of course, all data comparisons are dependent on what is being compared, so, to be too gloomy about the shrinking of the service sector, because we are undertaking less coronavirus related health activity, seems to me like an overreaction – surely the economy recovering from coronavirus so there is less of that sort of activity is a good thing?

In the production sectors, there was an overall increase of 0.5% driven principally by increases in gas and electric power generation and transmission, although mining and quarrying activity was down, but not by much, so the part of the economy that actually produces tangible products has done pretty well, with any falls in sectors within the wider production figures being pretty negligible.

The construction sector performance is usually an early indicator of things to come in the economy and is notoriously cyclical so the rise of 2.3% does not yet signal that a recession is coming.

Expenditure and private spending showed small falls of 0.1% and 0.2%, but again, with these first figures being estimated and subject to revision, there is no reason to panic yet.

I am pretty sure that back in 2010 when George Osborne was Chancellor that we “were in recession” and yet when the figures were revised some months later as more data became available, there had not actually been a recession at all! 0.1% given the size of the UK economy is tiny!

Overall, I am sure the Government and all of us would have much rather seen an increase in GDP, but when the reasons for the fall are examined and we remind ourselves that these are early estimates subject to revision, there is no need to panic yet – they might be indicators of the start of a trend that leads us to a recession, but then again they might not!

The fall in the service sector was caused by a drop off in coronavirus related health activity, which you would expect as the virus recedes, so let’s not talk ourselves into a slump!

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