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Feb 03, 2023

The rise in the adoption of digital technologies and big data is drawing the marketplace’s attention toward a new buzzword – Datafication. Data is growing fast; by the end of 2022, 97 zettabytes of data are expected to exist worldwide, as cited by Bernard Marr & Co. The big data available at businesses’ disposal compels them to try to make sense of the asset in their hands, paving the way for ideas like datafication, dataism, and dataveillance to come to the fore. 
With datafication aiming to quantify life aspects previously experienced qualitatively, businesses can draw the right inferences by contextualizing data. Resultantly, companies can improve their productivity by ensuring daily task completion at the micro-level, thereby streamlining strategies and attaining competitiveness at the macro-level. 

Future of Datafication

Datafication cannot be viewed in isolation; rather, its utility can be heightened by teaming it up with other tech concepts and trends, viz., virtualization, Artificial Intelligence (AI), Machine Learning (ML), the Internet of Things (IoT), 5G, and Everything-as-a-Service (XaaS), etc. 
As datafication quantifies daily experiences in the physical world, it is applied in emerging trends like the Metaverse, a virtual parallel world. Forbes cites that by building immersive simulations of the real world with devices that offer extensive tactile feedback, and the Internet of Senses (Ericsson’s advanced technology), the goal of achieving virtual experiences that accurately mimic reality will be a possibility by 2030.
With Statista citing that the total installed base of IoT-connected devices is expected to touch 30.9 billion units by 2025, the imperativeness of datafication to make sense of volumes of data will be evident. Furthermore, datafication has found its way into all facets of human life. From sports teams leveraging analytics to better their game to Europe’s Smart Water Network is a testament to real-time data being leveraged via sensor deployment to track/modify water and electricity distribution in smart cities.
Datafication is at the helm of the tech/data revolution driving disruptive technologies that challenge existing systems and normalize advanced solutions/ideologies. It is certainly a trend to watch out for in 2023!

Aug 18, 2022

The private debt market experienced exponential growth over the last decade. The market expanded from less than $400bn worth of assets at the end of 2008 to $1.2tn at the end of 2021, albeit one-fifth of the private equity market. Private lending has been evolving rapidly, especially post the financial crisis of 2008 and the ensuing low-interest rate environment. The stringent regulations marginalise traditional lenders from engaging in riskier loan businesses, thereby allowing private lenders to fulfil the liquidity needs of small- and mid-sized companies. As private loans bear relatively higher interest rates, they become attractive for yield-craving investors in an otherwise ultra-low interest rate environment, which makes traditional fixed-income instruments less compelling. Private debt lenders also provide amendments and capital infusions that help borrowers to avoid bankruptcy, often in exchange for equity in times of distress, making the market even more lucrative for credit investors. On top of it, private debt has the highest number of ESG commitments of any asset class, with 49% of its asset under management committed to ESG. 

With looming recessionary pressure, banks might again become hesitant to deal with small companies. This may further provide opportunities for direct or private debt lenders because they can quickly execute the deals considering the bilateral relationship between the borrower and the lender as compared to the syndicated loan market. Moreover, given the steady track record of private credit performance over the last decade with annual returns averaging around 10% since 2008, this asset class could look compelling amongst investors even during the potential economic slowdown ahead. Private credits have ideally a shorter duration and remain favourable in a rising interest rate environment and falling private equity valuations. Furthermore, capital commitments in the private debt market have reached new levels, with an unallocated capital (dry powder) standing at $405.4bn as of March 2022, setting the stage for the market to expand further. However, investors should note that the private debt market is characterised by the presence of highly leveraged borrowers, illiquidity and less transparency. 

Aug 01, 2022

Are default rates set to rise ahead of the potential recessionary pressure?

Assessing deeper into the corporate sector’s financial health, both positives and negatives appear to be playing a balancing act for the credits. On a positive note, it would be safe to assume that several vulnerable and inefficient sub-investment corporate firms were washed out during the uncertain covid times while only the stronger firms have weathered the storm. The debt maturity walls, generally a harbinger for default rates, may not prove to be a useful predictor as several corporate firms have piled up massive debt taking the near-zero interest rate to their advantage. Several firms were seen elongating their maturity profile through refinancing and more so in the sub-investment grade segment. Consequently, the default rates have remained at historically low levels. Looking ahead, with prospects of a slowdown and a potential recession the defaults are set to rise but should remain limited compared to previous recessions at least through 2024.

Notably, the investment grade corporate balance sheets now look healthy as net leverage has already peaked and the current elevated cash flows, albeit declining lately, offer a significant cushion. That said, in the current scenario, defensive positioning would be the theme amidst slowing economic growth. Investors should focus on Utilities, Telecommunication, and Consumer Staples businesses and avoid sectors that are highly sensitive to interest rates such as Real Estate and Technologies as the companies from these sectors are highly likely to witness earnings downgrades.

Jul 20, 2022

As per International Energy Agency’s (IEA) report on India’s Energy Outlook, India is the world’s third-largest energy-consuming country and will soon become the world’s most populous country in coming years, thereby increasing its energy demand further. Energy use in India has already doubled since 2000, and ~75-80% of estimated energy demand is still fulfilled from Coal, Oil and Natural gas. India would like to increase the share of renewable energy going ahead to reduce its carbon footprints and move towards sustainable energy solutions especially as its energy demand is expected to increase due to the growing population and its increasing needs. 
Based on the Stated Policies Scenario (STEPS) provided by IEA which assumes current policy settings and constraints and the assumption that the spread of Covid-19 is majorly brought under control in 2021, we believe that primary energy demand would increase from an estimated 950 Mtoe in 2020 to 1,235 Mtoe in 2030 and eventually 1,573 Mtoe in 2040 (chief drivers being urbanisation and industrialization). But the demand will still be met majorly by coal and oil, although their share is expected to reduce from an estimated ~70% in 2020 to 60% in 2040. Below is the summary of the expected progression of the primary energy demand in India over the decades. 

Incremental demand to be met from renewable energy:
In the last decade (2010-20), the incremental energy demand of 250 Mtoe was primarily met by coal and oil. Over the next decade (2020-30), although the majority of the incremental energy demand would still be met by coal, oil and natural gas, we expect that there would be a gradual and evident shift towards renewable energy sources in that decade. We expect the major shift towards reliance on renewable energy to happen in the 2030-40 decade when renewable energy would be the primary source through which the incremental energy demands in the decade are met. Below is the estimated summary of incremental energy demand in India:

Jun 27, 2022

Climate change is defined as the long-term variation of temperature or climate patterns in a particular region (increase in average temperature, torrential rain, and severe droughts). While natural causes of climate change include variations in the Earth's orbit, changes in the sun and volcanic emissions, the causative agent of climate change is the concentration of carbon dioxide (CO2) emissions in the atmosphere as a result of anthropogenic actions. The increasing capacity of the atmosphere to absorb heat, known as the "greenhouse effect," causes global warming. 

Effects of climate change in the UK 

Climate change has become a reality in the UK, and a number of research reports predict that until we take collaborative action to prevent it, things will only get nastier. According to the UK State of the Climate report (out in July 2021), 2020 was the third hottest summer year in the UK since 1884. Moreover, all of the years in the top ten have occurred since 2002. 2020 was also the fifth wettest year on record in the UK, and six out of the top 10 wettest years have occurred since 1998. Furthermore, the UK has warmed by 0.9°C and gotten 6% wetter in the last 30 years. 

The UK climate in 2050 

It is predicted that if no action is taken to combat climate change, all areas of the UK will experience drastic changes in climate and weather trends. The third Climate Change Risk Assessment (CCRA3) Technical Report identifies 61 climate risks that affect multiple sectors of society. The report recognises an eclectic range of unaffordable climate change impacts, including those on health and productivity, which will affect many of our families, businesses, and public services. The report cited that, unless we take further action, annual flooding damages for non-residential properties in the UK are expected to rise by 27% by 2050 and 40% by 2080 under a 2°C by 2100 warming scenario. Considering 4°C change, this rise is expected to be 44% and 75%, respectively. 

Following a series of climate change protests in the UK, the government introduced the Climate Change Act to formalise the country's approach to addressing the issue. For many years, the UK has also had the Climate Change Levy (CCL), a government-imposed tax to encourage the reduction of greenhouse gases and higher efficiency of energy used for business or non-domestic purposes. 

Jun 13, 2022

Every nation in the world is experiencing an increase in the size and proportion of older people in the population as people are living longer. Population ageing began in high-income countries due to high standards of living. It is now shifting to low- and middle-income countries. The UK is no exception, as people are living longer than ever before. In 2019, one in every five people in the UK was 65 or older, accounting for ~19% of the population of 12.3mn people. Between 2009 and 2019, the population of this age group increased by 23%, compared to a 7% increase in the overall population.

According to Office for National Statistics, the number of people aged 85 and over is expected to nearly double to 3.1mn by 2045 (4.3% of the UK population), from an estimated population of 1.7mn in 2020 (2.5% of the UK population). There are expected to be many more people in their later years by 2045, owing in part to the fact that the baby boomers of the 1960s are now approaching the age of 80, as well as an overall rise in life expectancy.

All English residents have access to free public health care through the National Health Service (NHS). This includes hospitalisation, physician care, and mental health treatment. The National Health Service budget is supported by general taxation. The number of working-age people and children is projected to remain around mid-2030 levels by mid-2045. During the same time period, the number of people of pensionable age will rise to 15.2mn (28% jump compared to the 2020 level). This increase in the ageing population can put pressure on the NHS’s spending as they are likely to avail of the benefit and not contribute much through tax. However, the ageing population can continue to make an increasing contribution to society if they remain healthy, mould themselves to changing working conditions in the workplace, and access the training to adapt to evolving labour market. Nevertheless, employers must also step up and adapt to an ageing workforce.

What do you think? Are you ready to recruit ageing employees?

Apr 18, 2022

Starting April 6th, it has become mandatory by law for 1300 of the largest UK-registered companies and financial institutions to disclose climate-related financial information, making the UK the first G20 country to enact ESG disclosure laws aligned with the TCFD (Taskforce on Climate-Related Financial Disclosures). The TCFD, launched in 2015 at the Paris COP21 by the Financial Stability Board (FSB) can be used by companies, banks, and insurers to provide consistent and transparent climate-related risk disclosures to relevant stakeholders.

The law came into effect for UK’s largest traded companies, banks, insurers, and private companies with at least £500 million in turnover and over 500 employees, thereby enabling investors and businesses to align their long-term strategies with UK’s net-zero commitments. Companies will have to start collecting ESG data beginning April 6th and disclose them in annual reports.

The UK Energy and Climate Change Minister Greg Hands said that if the UK was to meet its ambitious net-zero commitments by 2050, the financial system including the largest businesses and investors will have to put climate change at the heart of their activities and decision making.

The companies will have to disclose four key areas: Governance, Plans & Strategies, Risk Management, and Metrics & Targets. Companies will also have to provide data on their Scope 1, 2, and 3 GHG emissions with targets and plans to reduce these GHG emissions.

Is your country next?

Apr 11, 2022

The latest Assessment Report (AR6) by the United Nations’ Intergovernmental Panel on Climate Change (IPCC) makes it clear that it is “now or never” for the planet. The report warns that the global emissions are going to peak by 2025 unless there is a decline of 50% on a global scale to limit global warming to 1.5 °C by 2100. Based on the current trends, the global temperature is estimated to increase by 3 °C. To prevent climate devastation, drastic steps will have to be taken to reduce emissions. To limit global warming to 1.5 °C, GHG emissions will have to be reduced by 43% by 2030, and methane emissions will have to be reduced by 34% by 2030. To limit global warming to 2 °C, GHG emissions will have to be reduced by 27% by 2030.

On the other hand, the report also states the positive impacts of some mitigation efforts. Renewables have taken the center stage in mitigating climate change risks. Solar and wind energy usage has significantly increased globally, having a cleansing effect on climate. Few countries have achieved a steady decrease in emissions consistent with the goal to limit global warming to 2 °C. Zero emissions targets have been adopted by at least 826 cities and 103 regions around the world.

The way forward for the entire world to reduce negative climate impacts is to curb the usage of fossil fuels. Climate models have suggested that emissions from existing and planned fossil fuel projects have already exceeded tolerable carbon emissions. The efforts put in by nations to meet committed goals and targets should not be limited only to curbing emissions but should also focus on expanding green covers such as forests and improved agricultural practices. Also, under-developed nations will require financial aid to make the transition from a fossil fuel-based economy to a greener and more sustainable economy.

Apr 08, 2022

Money has a critical role to play in our lives. It’s a common notion that money can’t buy happiness, but not having it (or enough of it) can cause many sleepless nights. A reliable and comfortable income certainly makes life easier. It is negatively correlated with emotions like stress and is rather correlated with higher self-esteem, security, and dignity. So, yes, money can indeed buy happiness. The question is, how much money is enough? In 2010, a study published by Nobel laureates Daniel Kahneman and Angus Deaton stated that the quality of one's life increases as one earns more. However, the feeling flattens around USD 75,000 (annual income). Although, eleven years later, in 2021, a study published by Matthew Killingsworth of the University of Pennsylvania found that well-being rises with income—even beyond USD 75,000.

So, how much is enough? The truth is, money itself falls short. It is not the end-all-be-all for happiness. Killingsworth's study also found that people who equated money with success reported being less happy than those who didn't. That's because high income comes with tradeoffs. High earners report a heightened sense of achievement, but they are also more stressed. And lonely. Instead, here's the secret to happiness: money, yes, but also the right mix of good social relationships, exercise, and a sense of purpose. In fact, people who have a job they love and which gives them a sense of purpose report greater happiness—regardless of the money they earn.

If you found this post interesting, do 'Like' and 'Share' it, and 'Follow' us here to access more of such exciting content. You can also write to us at beat@sganalytics.com.

Dec 17, 2021

The world is racing against time to achieve the ambitious goal of attaining carbon neutrality by 2050. While solar and wind power have emerged as solid pillars in the transition away from fossil fuels, they are far from perfect. The world is increasingly looking for more efficient and sustainable options. So, what could be the solution? The answer is Green Hydrogen, which can emerge as a quick enabler toward a greener world.

Hydrogen gas (aka Grey Hydrogen) is widely used in various industrial applications. It is primarily produced using steam methane reforming, which uses natural gas and releases carbon dioxide and carbon monoxide. That is anything but eco-friendly. On the other hand, Green Hydrogen is produced using a simple, eco-friendly electrolysis process that leaves behind oxygen as its only by-product. It enables decarbonization and can significantly reduce our dependency on fossil fuels.

It is estimated that the production process would offset c.20% of the CO2 emitted per annum in producing Grey Hydrogen. It gets better. Green Hydrogen can be used in transportation, electricity generation, heat generation, infrastructure, energy storage, and much more. Accordingly, the demand for Green Hydrogen is expected to reach 500mn tons by 2050, making up for ~20% of the global energy demand.

However, the biggest impediment in its widespread adoption is its cost (USD 3-7 per kg, vs c.USD2.0 per kg for Grey Hydrogen). But like any other innovative technology, as it scales, it will become more affordable (estimated cost USD 1.4-2.4 per kg by 2030) provided we make a collective effort and ensure financial commitments from key stakeholders.

Dec 10, 2021

Chinese property developer Kaisa Group Holdings has become another victim of China’s deleveraging campaign under the “three red lines” rule. Yes, it, too, has failed to service its bond.

The much-criticized policy has shaken the foundation of the Chinese real estate sector, which, along with related industries, contributes c.30% to China’s GDP. After 20 years of rapid growth, the Chinese real estate sector is worth more than $50tn, or ~2x the US property market. In a previous SGA Beat, Will the New Chinese Real Estate Policy Backfire?, we highlighted the policy's possible implications on China’s real estate sector. Subsequently, we covered Evergrande's crisis in a much-shared blog. https://us.sganalytics.com/blog/chinas-perfect-storm-will-evergrande-swim-or-sink

China's Evergrande averted technical default by paying the interest at the fag-end of the grace period till last month. However, the tightening of the financial condition following the Evergrande crisis has led to several developers such as China Fortune Land Development (CFLD), Sunshine 100, Sichuan Languang, Sinic Holdings, and Fantasia Holdings Group, etc., failing to service debt, and leading to a default scenario. Now the likes of Kaisa, having a cash-to-short-term debt ratio of more than 1.5x, have come under pressure. Falling property prices and sales amid a sector rout have deteriorated liquidity and pushed the cash-to-short-term debt ratio lower. As more developers come under stress, the government looks prepared to support the sector rather than allowing more players to default. That said, a few companies still look vulnerable.

Nov 26, 2021

"The Great Resignation" has caught the imagination of many, and indeed for a reason. In September, a record 3% of the US workforce voluntarily left their jobs, taking the cumulative figure to over 20 million this year. Other regions are not far behind, with nearly 14 million quitting from the OECD region.

So, what’s driving the exodus? People are re-evaluating what they want to do with their lives and what work means to them. Some are resigning lest they catch the virus, while some have made a killing from the stock market and crypto boom. But the vast majority, largely mid-level employees in their mid-30s and early 40s, are quitting due to burnout, low pay, or they're just looking to explore other opportunities. Hospitality & Leisure and the Education industries are worst hit. Still, the Professional and Business services are also not far behind.

The ongoing saga may paint a gloomy picture, but it is indeed not. The hiring in September was at 6.5 million, which is over 2 million more than the quit rate indicating the job market looks strong in the US. Yet, employers have a lot at stake, with some estimates suggesting the cost of replacing employees is ~1.2x more than that of finding and training new ones. Companies need to adapt quickly and offer solutions that make employees feel valued and cared for to avoid situations going out of hand.

While it can be debated whether the ongoing trend is transient or permanent, one thing is sure: the pandemic has changed the way we think. As they say, our experiences shape our choices, and the pandemic has changed how we look at our lives

Nov 22, 2021

The word 'Metaverse' caught people’s imagination after Facebook changed its corporate identity to Meta Platforms. However, the term Metaverse isn’t that new and dates back to 1992, when it was coined by author Neal Stephenson in his Sci-fi novel “Snow Crash.” So, what exactly is Metaverse? To begin with, it means a seamless shared virtual reality, offering experiences identical to those we find in the real world. Metaverse is the next generation of the internet powered by augmented and virtual reality. And we may see a fully formed one in a decade.

The key features of such a space are real-time persistency (to continue functioning even when the user has left), economies (users can earn and spend in digital and fiat currencies), and communities. But also, digital avatars, immersion (engaging user’s all senses), multi-device compatibility, inter-operability (open architecture instead of closed ones), and the existence of multiple metaverses at the same time. That may seem quite futuristic. However, some early forms of Metaverse already exist in today’s world in the form of social media, NFTs, blockchain technology, and online gaming platforms like Roblox, etc.

Metaverse is often seen as a big tech revolution that could reach approximately a trillion-dollar opportunity by 2024 from USD 500bn in 2020. However, it also comes with its own set of concerns such as data privacy, separation of human beings from the real world, societal changes, etc. In the end, its impact depends on how we put it to use, just like other technological innovations.

Nov 12, 2021

Crypto mining is highly energy-intensive and generates a lot of heat. That's because it involves solving complex algorithms with accuracy, high speed, and efficiency using specialized high-performance machines housed in big data centers. To run the machines efficiently, the data centers are required to have an effective cooling mechanism. Air and water cooling are common, but they are far from ideal. According to estimates, data centers consumed over 660 billion liters of water in 2020 alone. That, along with high energy intensity, makes it far from sustainable, despite the crypto-mining industry using more renewable energy to run operations (from 3% in 2Q21 to c.58 in 3Q21).

Immersion Cooling Technology, however, has the potential to make mining more sustainable. Immersion cooling involves submerging mining ASICs (Application-Specific Integrated Circuit) into a specialized fluid that absorbs and recycles heat from data centers. The fluid dissipates 1600x more heat than air. The technology is expected to help increase the hash rate by 25-55% and ASIC’s performance by 50%. It is estimated that the technology can help reduce heat and noise by 95%. In fact, 40% of the heat absorbed can be reclaimed to generate power. The capital intensity for the same output level can be brought down by as much as 50%.

With plenty to offer, immersion cooling technology can be a game-changer for the crypto-mining industry. It could help the industry achieve carbon neutrality by 2030.

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Following the Federal Reserve’s latest monetary policy meeting in January, the Fed is set to embark on its rate hike cycle with the first hike coming as soon as March to tame stubbornly high inflation. Concerns about an impending rate hike sparked volatility across assets classes, including US high-yield bonds. However, if history is a guide, US high yield performed well in the rising interest rate environment. The ICE BofA US high yield index outperformed with an average return of 16.2% during the Fed rate hike cycles since 1994 and delivered positive returns in 4 out of those 5 instances with the exception in 1999-2001, which coincided with the dot-com bubble burst. That said, the economic background behind the rate hike cycle this time around looks different. The US inflation rate is nearly at a 40-year high of 7%, while the unemployment rate of 3.9% is just shy of the Fed's goal of maximum employment than the previous rate-hike cycles. These factors could cause the Fed to get even more aggressive. Moreover, the Fed has doubled the pace at which it is scaling back bond purchases, putting it on track to conclude the program by March 2022. It has also hinted at shrinking its balance sheet post hiking rates, with market participants expecting it to start in June 2022. Nevertheless, the corporate balance sheets had improved substantially in 2021 to weather the aftermath of monetary tightening. Most of the companies are in the recovery or expansion phases of the credit cycle. Additionally, the high-yield index has near-zero exposure to the technology sector (highly sensitive to change in real interest rate) and short duration (around 5 years), making them stand pat against the rate hikes. If you found this post interesting, do 'Like' and 'Share' it, and 'Follow' us here to access more of such exciting content. You can also write to us at beat@sganalytics.com. Content Contributors: Rakesh Kakani Nidhi Gupta

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Last Wednesday, the European Commission proposed a highly divisive policy, calling for the energy derived from natural gas and nuclear to be labeled as “sustainable” investments if they meet certain criteria.

While admitting that the proposal was not perfect, EU Financial Services Commissioner, Mairead McGuinness, claimed it struck a balance between differing opinions. The move has subjected the European Commission to criticism, with environmental groups and climate activists accusing the EU of “greenwashing." They claim that labeling natural gas and nuclear as green energy would slow down the adoption of renewable energy. But proponents supporting the move counter that such incentives would aid underdeveloped countries to transition from coal to cleaner alternatives. The decision, however, is not final. The European Parliament and council of heads have four months to consider the proposal. Could the move hurt The Union's credibility? Was the proposal well-thought-out for an entity as influential as the EU, a beacon of climate action? Could it really accelerate the world's transition to a low-carbon future? What do you think? If you found this post interesting, do 'Like' and 'Share' it, and 'Follow' us here to access more of such exciting content. You can also write to us at beat@sganalytics.com. Content contributor: Vijay Nitin Suvarna

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The US treasury yield curve is once again hogging the limelight as we enter the new year 2022. Of course, it makes complete sense to watch out for the curve, given its reliability in predicting recessions since the 1950s. Investors widely track the difference between the 3-month and 10-year yield (3m10s) as well as the 2-year and 10-year (2s10s) yield, also called the “spread.” Of late, the yield curve has been flattening, yet far away from getting inversion. Though, the flattening curve itself is a sign of something ominous awaiting the economy, perhaps sluggish growth but no recession. The US economic fundamentals remain strong, though inflated. Yes, it is unfortunate as even the Fed could not properly dissect inflation. The Fed initially views it as transitory, one of the worst inflation calls in its history. As it becomes clear that inflation is here to stay for long, the Fed adopts an aggressive monetary policy, causing the yield curve to flatten with short-term treasuries reacting more to the policy shift. Last time, the yield curve inversion sustained for over a quarter beginning May 2019, stoking fears that the longest economic expansion since the great recession could end soon. Surprisingly, it took an unexpected pandemic rather than the economic fundamentals to bring the economy to its knees, helping preserve the reliability of the yield curve in predicting a recession. The US economy seems to be on a reasonably solid footing. Still, the disruptions from Omicron cannot be ruled out, as cases soar every passing day. Will the new wave hold up the Fed from its aggressive stance to focus again on growth? If you found this post interesting, do 'Like' and 'Share' it, and 'Follow' us here to access more of such exciting content. You can also write to us at beat@sganalytics.com.

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Last Wednesday, the European Commission proposed a highly divisive policy, calling for the energy derived from natural gas and nuclear to be labeled as “sustainable” investments if they meet certain criteria.

While admitting that the proposal was not perfect, EU Financial Services Commissioner, Mairead McGuinness, claimed it struck a balance between differing opinions.

The move has subjected the European Commission to criticism, with environmental groups and climate activists accusing the EU of “greenwashing." They claim that labeling natural gas and nuclear as green energy would slow down the adoption of renewable energy.

But proponents supporting the move counter that such incentives would aid underdeveloped countries to transition from coal to cleaner alternatives.

The decision, however, is not final. The European Parliament and council of heads have four months to consider the proposal.

Could the move hurt The Union's credibility? Was the proposal well-thought-out for an entity as influential as the EU, a beacon of climate action? Could it really accelerate the world's transition to a low-carbon future?

What do you think?

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Following the Federal Reserve’s latest monetary policy meeting in January, the Fed is set to embark on its rate hike cycle with the first hike coming as soon as March to tame stubbornly high inflation. Concerns about an impending rate hike sparked volatility across assets classes, including US high-yield bonds. However, if history is a guide, US high yield performed well in the rising interest rate environment. The ICE BofA US high yield index outperformed with an average return of 16.2% during the Fed rate hike cycles since 1994 and delivered positive returns in 4 out of those 5 instances with the exception in 1999-2001, which coincided with the dot-com bubble burst.

That said, the economic background behind the rate hike cycle this time around looks different. The US inflation rate is nearly at a 40-year high of 7%, while the unemployment rate of 3.9% is just shy of the Fed's goal of maximum employment than the previous rate-hike cycles. These factors could cause the Fed to get even more aggressive. Moreover, the Fed has doubled the pace at which it is scaling back bond purchases, putting it on track to conclude the program by March 2022. It has also hinted at shrinking its balance sheet post hiking rates, with market participants expecting it to start in June 2022. Nevertheless, the corporate balance sheets had improved substantially in 2021 to weather the aftermath of monetary tightening.

Most of the companies are in the recovery or expansion phases of the credit cycle. Additionally, the high-yield index has near-zero exposure to the technology sector (highly sensitive to change in real interest rate) and short duration (around 5 years), making them stand pat against the rate hikes.

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The Himalayas, one of the most beautiful yet fragile ecosystems in the world, is a source of water for billions of people living in South and Southeast Asia.

China is the largest refiner of the world’s lithium and currently the biggest investor in lithium mines around the globe. Chinese scientists recently discovered ‘super-large’ deposits of lithium near Mount Everest, that could potentially produce a million tons of lithium oxide, a key element in batteries powering electric vehicles.

While this discovery could provide raw material to accelerate the fast-growing Electric Vehicles (EV) and battery storage market, prospects of mining the newly found lithium deposits would be an energy- and water-intensive operation, leading to adverse environmental impacts, and raising severe concerns over the fate of freshwater resources in the Himalayas.

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On Sunday, #Mumbai, India’s financial center, announced the Mumbai Climate Action Plan (MCAP) to achieve net-zero by 2050, becoming South Asia’s first city to do so. The detailed plan puts Mumbai two decades ahead of India’s national goal commitment of achieving net-zero by 2070 made at COP26 in Glasgow.

A coastal city, Mumbai is at a high risk of major flooding from rising sea levels. Mumbai’s plan is even more pressing considering that Indian cities will have to brace for a massive influx of migrants from rural areas. Rising temperatures are expected to increase crop failures and major water scarcity over the next few decades.

The plan was finalized with support from World Resources Institute, India, and C40 cities network after conducting a vulnerability assessment and a GHG & natural green inventory over the past six months.

The plan focuses on six key sectors – energy & buildings, #sustainable mobility, urban greening and #biodiversity, air quality, and urban flooding & water resource management. The largest investments will have to be made in the #energy sector which accounts for approximately 72% of the 23.42 million tons of the city’s total #GHG emissions in 2019. BMC (Brihanmumbai Municipal Corporation) commissioner, IS Chahal said that the civic body is currently working on infrastructure projects worth INR 40,000 crores to mitigate the potential effects of climate change on Mumbai and make the city more climate-resilient for its 19 million residents.

Is your city next?

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On Monday, the Securities and Exchange Commission (SEC), U.S.’s financial regulator, for the first-time proposed a climate disclosure rule that would require U.S. public companies to report on climate-related risks and impacts from their business activities in their annual reports and stock registration statements. The proposal aims to improve environmental public disclosures of corporate America, increasing transparency and holding companies accountable for their business’ climate impact. SEC chair, Gary Gensler said that the proposal was drafted in response to increasing investor demand for information on climate change factors that could affect the financial performance of the investee companies. Mr. Gensler said, “Investors with $130 trillion in assets under management have requested that companies disclose their climate risks.”

According to Morningstar, 2021 saw a record US$71 billion flow into U.S. ESG focused funds. While companies will have to disclose Scope 1 and Scope 2 greenhouse gas (GHG) emissions, it is still unclear which companies will have to disclose the more extensive and complicated Scope 3 GHG emissions. According to S&P Global, 35% of North American companies have already set GHG targets, but Scope 3 emissions are not included in these targets. Legal challenges are anticipated to the proposed rule, with concerns being raised about SEC’s authority, being a financial regulator to require disclosure of corporate emissions data. The public including companies, investors, and the legal community, will have up to 60 days to give their feedback on the plan, which is likely to be finalized later this year.

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India has forayed into the green bond space amid the global boom in sustainable investments, as committed by the Indian Finance Minister, Ms. Nirmala Sitaraman in the Union budget for FY2022-23. The green bond market has been growing steadfastly since its inception in 2007. This is in line with India’s commitment to achieving net-zero by 2070, as pledged by India in the Conference of Parties (COP 26) at Glasgow.

As part of the Indian government’s borrowing program in FY2022-23, the country plans to issue sovereign green bonds worth at least USD 3.3 Billion (~INR 25,000 Crores). Although the government has historically seen lower yields on green bonds, which closed at 6.85% on Monday (14 March 2022), it could prove attractive to foreign investors. The initial issuance will start in the first half of FY2022-23 and may increase green debt depending on the stakeholders’ response to the debut sale of the bonds.

India, being one of the world’s largest emitters of greenhouse gases (GHG), is looking forward to funding renewable energy projects with the money raised, thereby helping reduce its carbon intensity and having a positive environmental impact.

India is making aggressive strides towards a low-carbon economy, setting ambitious targets of achieving 175 GW of renewable energy capacity by the end of 2022, and quadrupling its current renewable power generation capacity by 2030. Indian companies in the renewable energy sector have raised debt worth INR 1,760 Crores in February this year.

Will Indian sovereign green bonds help mitigate its climate risks?