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WWith Covid-19 cases on the rise across much of the developed world, it’s a bold plea to say the worst of the pandemic is over. This, however, is the view of HSBC, Europe’s largest bank, which has cut its bad loan provisions and said it is considering resuming dividend payments to shareholders.
There’s a good reason HSBC is relatively optimistic about the outlook. It has a large presence in the part of the world – Asia – that has done better to control the virus and limit its impact on the economy.
There was much talk in the early stages of the crisis about how the global economy would experience a V-shaped recession – sharply declining and then a rapid recovery – but only in China of the world’s leading economies did this scenario unfold.
Additionally, HSBC has many shareholders in Hong Kong who rely on a smooth flow of income from the bank. They weren’t too happy when, under pressure from the Bank of England, HSBC scrapped its dividend for the first time in nearly three quarters of a century.
With the squeeze on profit margins caused by extremely low interest rates not helping, HSBC’s share price nearly halved this year, although it received a boost from news that the bank would like to resume dividend payments. – even if launched at a “conservative” level to begin with.
The question is whether the Bank of England will give the green light to such a move, and the answer is probably no, at least for the moment.
Consider it from the perspective of Threadneedle Street. A large and growing portion of the UK is facing increased restrictions on activity. The European Central Bank reports that eurozone banks are tightening credit conditions for lenders because they fear a rise in bad loans. For the world outside of East Asia, there is a risk of a W-shaped recession, with a second blow to growth and a delayed full recovery.
Despite pressure from HSBC and others to give the green light, the Bank of England is likely to take a conservative approach to resuming bank dividends, and rightfully so.
Environmental impact bonds could help BP rid itself of fossils
BP has set ambitious goals to get out of fossil fuels and become a clean energy company. By the end of the decade, it plans to cut oil and gas production by 40% and to increase spending on wind and solar tenfold.
Making that transition is going to be tough, not least because BP is still perceived by investors as a fossil fuel company, and its revenue (and share price) goes up and down with the cost of crude oil.
BP is not alone in having to find ways to reduce its carbon footprint, but only the most striking example of the challenge ahead. But, according to the OMFIF thinktank, there are financial instruments – known as environmental impact bonds – that can speed up the process.
ESG (environmental, social and corporate governance) bonds come in a number of forms, but the ones that would really make a difference are policy performance bonds, where interest rates paid to investors are tied to success. In the case of a company like BP, its bonds would be tied to the progress it has made in switching its portfolio from fossil fuels.
Governments can also implement it. Imagine that the UK government has issued a bond linked to its goal of making the country carbon neutral by 2050. The mid-century target implies a 3.3% annual reduction in carbon emissions over the next 30 years. If, by 2025, issues were still at today’s levels rather than the 83.5% implied by the target, a political performance bond would yield an interest of 16.5%. If emissions were below 83.5% by 2025, the government would get an interest-free loan. This is a real incentive for ministers to act now rather than leave it for the next batch.
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