Morning Update

The UK’s largest asset manager, Legal and General have emphasised that businesses are insufficiently pricing in climate change associated risks.

Nick Stansbury, head of LGIM’s Climate Solutions, maintains that he has become less convinced that companies are adequately investing into the green transition, meaning that the likelihood of the Paris climate agreement being met is far less. The report stated that “the world could easily absorb the costs associated with realising the goals of the Paris climate agreement. But the window to successfully meet a 1.5C climate outcome is closing at a worrying speed”. Under the 2015 Paris agreement, delegates from around the world agreed to take steps to limit global warming to below 2°C above pre-industrial levels while pursuing efforts to try to limit it to 1.5°C. According to LGIM’s modelling, a transition to below the 2°C would lower monthly global GDP by just 1bp over the next 25-years – though this figure is subject to differences across regions. However, if firms and policy markers fail to take the necessary steps for a gradual transition and instead are required to do a sudden transition, ensuing inflationary pressures and instability may harm investors.

This comes as EU Carbon Permits are currently trading at below €95 per tonne having fallen from around €105 per tonne, earlier this year. This marked the first time that Carbon Permit prices reached triple figures. According to the FT, here “the threshold has been seen as psychologically important, and a price at which companies may start looking more seriously at investing in expensive emerging technologies such as carbon capture and storage.”

It is thought that the carbon credit system helped reduce emissions in the EU by roughly 4% by 2020, with much of this reduction being driven by firms shifting from fossil fuel usage to renewables. Hence, as permit prices rise, it is hoped that firms will decarbonise.

Today will see the release of the Financial Policy Committee’s statement, where markets are anticipating some lines on the health of the UK economy and in light of recent events that of the UK banking sector also. Last week, the FPC stated that that “the UK banking system maintains robust capital and strong liquidity positions and is well placed to continue supporting the economy in a wide range of economic scenarios, including in a period of higher interest rates”.

PE and VC Investments into the UK Slide

According to S&P Global Market Intelligence, the transaction value for private equity and venture capital investments in the UK fell 61% over 2022 on an annualised basis, with a decline in large deals driving much of this fall. Last year there were just nine deals of this type valued at over $1bn. Given that large deals accounted for some 75% of the overall transaction value, the fact that they were at their lowest level in 5-years thus fed into the overall grey picture. S&P Global Market Intelligence wrote that “Private equity transactions in the U.K. are expected to remain slow during the first quarter due in large part to a gap in pricing. The pricing dislocation between sellers and buyers will impact the number of deals until that gap is bridged, according to Tom Whelan, partner and head of private equity in London at McDermott Will & Emery.”

As investor focus remained on the global banking environment, despite concerns assuaging, prevailing fragile sentiments meant that the S&P 500 ended yesterday 1.16% lower while the tech heavy Nasdaq also lost 0.45%. Elsewhere, the Dow Jones slipped 0.12%, while the Stoxx 600 closed flat with the ECB’s top supervisor Andrea Enria expressing concern that investors remained on an edge and could be spooked by relatively small moves in the CDS market.