Storms await companies that err on climate

Markets are increasingly willing to punish businesses that mismanage global warming risks

Rana Foroohar

      © Matt Kenyon

The Atlantic hurricane season, which begins in June and lasts throughout November, is upon us. 

Coastal homeowners have reason to be worried. 

So do shareholders.

Until recently, reinsurers and banks have borne most of the market risk of climate change. 

Now things are changing. 

Individual companies are being held explicitly responsible for the risks of global warming. 

A court in The Hague has ordered Royal Dutch Shell to cut its emissions. 

The International Energy Agency says energy groups must stop new oil and gas projects in order to reach net zero emissions by 2050.

Indeed, market penalties for companies that make bad risk decisions around climate are broader than we might think. 

A report from Pentland Analytics, “Risk, Reputation and Accountability”, looked at several episodes of extreme disaster, including the 2017 hurricane season, which was the most expensive in US history.

Deborah Pretty, the author, examined US-listed companies with annual revenues exceeding $5bn that disclosed financial damage from Hurricanes Harvey, Irma and Maria. 

Modelling their share price reaction across the year, she found an average 5 per cent discount to the S&P 500 index — the equivalent of $18bn in lost shareholder value.

Pretty also drilled down into companies that had more than 10 per cent of their global insured property values in an affected area, to see what precautions such as flood or wind protection they had taken. 

Among companies that reported financial damage, fewer than half of recommended measures had been completed. 

On the other hand, among those that reported no material financial damage, almost two-thirds of the recommendations were completed.

Bottom line? 

Market perceptions of adverse outcomes from such natural disasters have “changed from bad luck to bad management”, says Pretty. 

Share prices now reflect whether or not the C-suite is taking the risk from climate change seriously. 

Indeed, Pretty’s research shows that the top performing companies are those that consider resilience more important than a balance sheet bargain. 

In other words, they take every possible action to mitigate such risk, even if the models show that the risk is slight.

This might baffle economists, but as one engineer interviewed in the study put it, “Look, if you have four holes in your boat, and you plug three of them, you’re still gonna sink!” 

It’s part of the argument for resilience over economic “efficiency”, which is influencing not only preparations for climate related disasters but also supply chains (companies are starting to make them shorter) and cyber risk. 

Pretty notes that between 2010 and 2020, poorly prepared companies that came under cyber attack underperformed the market by 20 per cent in the year following the attack.

If regulators have their way, these risks will become more explicit, particularly with regard to climate. 

G7 leaders last week announced their commitment to mandatory climate-related financial disclosures, modelled on those recommended by the G20’sTask Force on Climate-Related Financial Disclosures. 

This provides a road map for how to integrate climate risk metrics in corporate governance and strategy.

Europe has made more progress than the US in forcing companies to disclose such risk. 

In Washington, the body best placed to create and enforce such regulation would be the Securities and Exchange Commission. 

But under President Donald Trump, the SEC loosened regulation generally and failed to mention climate at all. 

The US government is still subsidising coastal flood insurance, even as cities like Miami explore building multibillion-dollar walls to hold back rising tides.

If the Biden administration has its way, that will change. 

The SEC, now headed by the ambitious regulator Gary Gensler, just finished gathering public comments on ESG reporting rules. 

Gensler says he wants to bring “consistency and comparability” to what companies report. 

That could mean sector specific standards for emissions reporting as well as information on the amount of waterfront property that a company holds, or prevention measures they’ve taken around flood zones.

Some activists are pushing for extremely granular disclosures around water insecurity, heat stress and the extent to which businesses could be affected by disease, political unrest and migration. 

A Center for American Progress report from February, co-authored by Andy Green (now the US Department of Agriculture’s senior adviser for fair and competitive markets) lays out the potential range of future reporting requirements.

Should companies be forced to quantify their ESG footprint in ways that make it easy to compare sectors and individual firms’ efforts, it’s hard to overstate what the market impact could be. 

The exposure of, say, an apparel maker to agricultural production (and the subsequent potential for crop damage via drought, heat or pestilence) could dramatically affect shareholder value. 

A price on carbon could change the calculus for some exporters, making activities such as long-distance shipping of heavy machinery much more costly. 

Asset managers holding too many investments in high-carbon sectors could find themselves in breach of their fiduciary duties.

As hurricane season begins, we might be in for a sea change in markets as well as the weather.

Storms await companies that err on climate | Financial Times (

U.S. Firms Are Investing Heavily in Innovation, Yet Economic Productivity Has Slowed. Why?

The answer may lie in how pharmaceutical companies are targeting their R&D spending.

BASED ON THE RESEARCH OF Efraim Benmelech, Janice C. Eberly, Joshua Krieger, Dimitris Papanikolaou

          Lisa Röper

For the past 30 years, economists have faced a stubborn puzzle. Firms have increasingly invested in innovation—in the form of research and development, software, and patents—but those investments have not produced a corresponding rise in overall economic productivity. In fact, by some estimates, productivity growth since 2006 has been slower than any in decade of recorded American history.

This mismatch “doesn’t accord with intuition,” says Kellogg finance professor Janice Eberly. 

Historically, major innovations have accelerated productivity growth. 

The mass adoption of electric power, for example, made machines and the workers who operated them more efficient, and the widespread availability of antibiotics improved the quality and size of the labor force. 

“When we look at past productivity booms, they can often be traced to fundamental innovations,” Eberly says.

So why isn’t this the case with the present economy?

“We know there’s a lot of software being written. 

There are patents being granted and implemented. 

There was an increase in productivity in the late 1990s, and then productivity growth has been weak ever since,” Eberly says.

Eberly and her Kellogg School colleagues Efraim Benmelech and Dimitris Papanikolaou, along with Joshua Krieger of Harvard Business School, wondered if a parallel trend might be related. 

Namely, during those same decades, Americans were living longer, and the share of older Americans in the population has risen, as the baby boomers age. 

Average male life expectancy increased from 70 to 76.3 between 1980 and 2018. 

Yet men were still retiring from the workforce at roughly the same age (66) as they had been for decades.

How might living longer and having more seniors in the economy relate to the puzzle of declining productivity growth in the U.S.? 

Perhaps, the researchers posited, the benefits of firms’ increased investment in innovation were somehow transferring to aging Americans. 

Their quality of life might have improved, but since they are retired, that wouldn’t translate into productivity growth in the economy at large.

What kind of firms invest heavily in patents, software, and R&D—but also target older customers? 

Pharmaceutical companies. 

The researchers hypothesized that a significant portion of these companies’ innovation-driven investments over the past two decades was directed at developing treatments for diseases common in people aged 65 or older.

After examining data on pharma firms’ drug-development efforts and comparing them to overall spending on R&D, the researchers found that this was exactly the case. Pharmaceutical companies were focusing a third of their innovation investments on people who were no longer in the workforce.

“It might be very good for those patients’ welfare,” Eberly explains. 

“But it’s not going to help productivity.”

To Eberly, the productivity-growth puzzle is more than academic. 

“When economies grow, they can usually achieve improvements in standards of living,” she says. 

But if productivity growth continues to lag, those standards of living could lag, too—which will affect everyone, not just longer-living retirees. 

What’s especially compelling is this connection between two very large trends that will have a profound impact on our future.”

Innovating for the Elderly

The researchers began by establishing that senior citizens do, in fact, consume more prescription pharmaceuticals than other age groups.

After analyzing a survey of medical expenditures for tens of thousands of patients between 1996 and 2015, the researchers found that patients over the age of 65 spend the most per capita on prescription drugs: $2,531 in 2015, compared with $1,758 spent by the 45–64 age group. 

That consumption has steadily grown over time, too.

Next, the researchers wanted to see if pharmaceutical companies were increasing their R&D investments during the same period that overall productivity growth was declining. 

Again, the data bore out the researchers’ hunch. 

In 1970, pharma firms represented less than 10 percent of total R&D spending among publicly traded companies. 

But by 2018, that share had jumped to 24 percent. 

In other words, nearly one out of every four dollars spent on research and development was coming from a pharmaceutical company.

The researchers’ last step was to find evidence tying these two trends together. 

If senior citizens were consuming more drugs, and pharma firms were putting more effort into innovation, how much of that effort was actually directed at producing drugs for seniors?

They analyzed the development histories of over 50,000 drugs—including clinical-trial dates and which diseases the drugs were designed to treat. 

They cross-referenced this information against data describing the specific drugs that different age groups were buying over time. 

The result was an evolving portrait of pharma firms’ drug portfolios: which medications, developed with specific amounts of R&D, were designed to combat diseases that disproportionately affected certain age groups.

“Our main finding was that new drug candidates were increasingly targeting older people,” Eberly says. 

Indeed, between 1995 and 2013, more than half of new drug development was dedicated to producing what the researchers dubbed “elderly drugs.” 

During that time, the share of firms’ total R&D spent on these elderly drugs increased by 15 percent.

Figuring out how to get more work years out of aging citizens isn’t the point of solving the productivity puzzle.

The pharma firms’ investment in innovation is “tracking the change in demographics,” Eberly explains. 

“There are more older potential patients, and so more drug candidates are following that potential demand.”

Why Productivity Growth Matters

Eberly doesn’t believe that pharmaceutical companies’ innovation spending is solely responsible for the drag on productivity growth. 

She and her coauthors consider their initial findings to be a proof of concept validating further, more detailed research.

“That’s why this is a five-page paper and not a fifty-page paper,” Eberly says. 

The researchers want to also explore the effect of elderly drugs on retirement patterns.

Sitting outside of the patent office, three inventors hold similar-looking inventions, while one inventor holds a distinct-looking invention.

“If you have improved health later in life, maybe you’ll postpone retirement and stay in the labor force longer,” she says. 

“But as for the retired workers who are already benefitting from these drugs, those people are pretty unlikely to go back into the labor force.”

She adds that figuring out how to get more work years out of aging citizens isn’t the point of solving the productivity puzzle. 

What matters is understanding the fundamental connections among innovation, productivity growth, and standards of living.

“Let’s say I’m a shoemaker, and last year I produced a thousand pairs of shoes at my job. 

Then my firm upgraded its technology, so now I can produce 1,500 pairs. 

I should get paid more because I’m more productive, and my standard of living goes up,” Eberly explains. 

But if productivity growth continues to lag, the standard of living in the U.S.—measured by indicators like income disparity, housing affordability, and healthcare access—could also stagnate.

Pinpointing elderly focused pharmaceutical innovation as one potential cause of this stagnation could suggest ways to offset it, Eberly says. 

One method would be to increase medical R&D in the public sector, which has been declining for decades.

“If we’re trying to stimulate productivity, we could focus on nudging government spending toward the type of medical research that benefits a broad spectrum of ages, like antibiotics, which was a major historical breakthrough,” she says. 

“The private returns on investment in innovation will follow market demand. 

But that need not always provide the social returns we need from productivity growth.” 

Daily chart

Delta is fast becoming the world’s dominant strain of SARS-CoV-2

The coronavirus mutation has been detected in 78 countries, and is prevalent in Britain, India and Russia

AT A PRESS conference at the White House on June 22nd Anthony Fauci, the director of America’s National Institute of Allergy and Infectious Diseases, issued a warning. 

The delta variant of the SARS-CoV-2 virus, first identified in India in February, was spreading in America—and quickly. 

“The delta variant is currently the greatest threat in the US to our attempt to eliminate covid-19,” declared Dr Fauci. 

Boris Johnson, Britain’s prime minister, issued a similar warning a week earlier. 

To contain the rapid spread of the variant, European countries and Hong Kong have tightened controls on travellers from Britain.

According to GISAID, a data-sharing initiative for corona- and influenza-virus sequences, the delta variant has been identified in 78 countries (see chart). 

The mutation is thought to be perhaps two or three times more transmissible than the original virus first spotted in Wuhan in China in 2019. 

It is rapidly gaining dominance over others. According to GISAID’s latest four-week average, it represents more than 85% of sequenced viruses in Bangladesh, Britain, India, Indonesia and Russia. 

It may soon be the most prevalent strain in America, France, Germany, Italy, Mexico, South Africa, Spain and Sweden. (GISAID does not, in its summary data, distinguish between delta, B.1.617.2, and the “delta plus” mutation, AY.1, AY.2.)

These data are imperfect. 

GISAID’s samples, submitted by researchers, may over-represent those tested in cities or towns close to sequencing laboratories—people who are already more likely to catch new variants earlier, and at higher rates, than their counterparts in rural areas. 

Other discrepancies are possible. Testing, sequencing and processing takes time, and so GISAID provides a four-week average share for a given mutation. 

If the variant is spreading quickly, that may suggest the stated percentage is smaller than the reality. 

For instance, on June 14th GISAID said that the delta variant was responsible for 78.3% of sequenced viruses in Britain, whereas Public Health England (PHE), a government agency, estimated the strain already represented 90% of cases.

The pattern in countries where few or no virus samples are sequenced, and even fewer submitted to GISAID, is harder to assess. (The Economist has excluded countries from the main map which submitted fewer than 20 samples in the latest four-week period.) 

Countries with little or no data tend to be poor, and have few people vaccinated on average, which gives the mutation greater opportunity to spread.

If delta turns out to be more lethal, as well as more transmissible, keeping infections under control will become simultaneously harder and more important. 

Bangladesh, Indonesia and Russia are struggling with new waves of infections and deaths. 

A study by PHE found that the Pfizer-BioNTech and AstraZeneca vaccines do offer protection from severe infections caused by the delta variant, but that the second dose is especially effective. 

However, mild cases of delta can occur even among those who have been fully vaccinated. 

The disease can then be transmitted to those who may have no protection.

Many rich countries are well on their way to delivering both vaccine doses to their citizens. 

The emergence of delta re-emphasises the need to press on, but also to help poor countries inoculate their populations. 

The moral case is strengthened, but so is one of self-interest: fewer infections means fewer chances for a new mutation to develop. 

As the world has seen, dangerous variants do not stay in one country for long.


Why the market for secondhand private-equity stakes is thriving

Wherever there is a primary market, a secondary one is never far behind

At midnight on August 31st 1602, the public offering of shares in a new kind of enterprise closed. 

The charter for the venture, the Dutch East India Company, granted it a monopoly on trade with Asia until 1623, at which time, it was assumed, the firm would be liquidated. 

Twenty-one years is a long wait for capital to be returned. 

Smaller maritime ventures were generally wound up and the spoils divided after three or four years, when (and if) the ships returned. 

So shareholders were given an option to cash out after ten years. 

It hardly mattered. 

A faster exit route soon opened up.

The merchants who gathered daily around Amsterdam’s New Bridge to trade spices and grain proved as willing to buy and sell shares. 

These developments are recounted in “The World’s First Stock Exchange”, by Lodewijk Petram, a historian. 

One of the book’s many lessons is that wherever there is a primary market for a new kind of asset, there will soon be a secondary market.

There is a modern-day analogue in the treatment of stakes in private-equity funds. 

The limited partners in such ventures—the pension schemes and sovereign-wealth funds that provide capital—are in principle committed for the life of the fund, which is usually ten years or longer. 

The reality is different. 

A thriving market in “secondaries”, negotiated sales of limited-partner stakes, has emerged as private equity has matured. 

Today’s private-equity investors are no more locked-in to their commitments than were the Amsterdam burghers of four centuries ago.

Secondary markets are first prompted by asset-holders who really need the cash. 

The earliest sales in Amsterdam’s stockmarket were usually by merchants who could not pay the promised subscription. 

In private equity the early secondary transactions were typically distressed sales. They were often struck at biggish discounts—25% or more—to the appraised value of the assets in the fund.

Over time the stigma to selling out has disappeared: in 2019 around $85bn worth of stakes changed hands. 

These days the reason for the sale of a stake is often strategic. 

It might be to rebalance portfolios by geography, industry or vintage for reasons of risk management, say, or to reduce the number of relationships with the general partners of private-equity firms. 

A lot of limited partners simply wish to manage their private assets as actively as their listed ones. 

Often funds will sell for more than the appraised value of the companies in the portfolio.

Over the past decade there has been a trend towards secondary transactions led by general partners, says Andrew Sealey of Campbell Lutyens, an advisory firm. 

It might be that a ten-year fund is about to expire whose general partners do not want to sell the portfolio of companies, because the time is not propitious for a good exit price. 

Some of the limited partners will need their money back, though.

The solution is a continuation fund. An example was Nordic Capital VII, a fund set up in 2008, which transferred its nine portfolio companies into a €2.5bn ($3bn) continuation fund in 2018. 

A price was set by auction. Investors had a choice of selling their stakes at a premium to appraised value or staying in for five more years. 

Most opted to stay in.

The burgeoning trade in secondaries has been underpinned by the rapid growth of specialist funds. 

Twenty years ago there were just a handful; now there are dozens. 

Five of the ten largest private pools of capital raised last year were for specialist secondary funds.

The secondary market attracts big fund managers who want to offer their clients the full range of assets, including private ones. 

For a start, it looks a lot less crowded than the primary business. 

“Anyone can set up a buyout fund,” says one fund manager. 

Funds often compete to buy the same companies. 

In a secondary fund, by contrast, there is a better chance of profiting from expertise. 

It requires knowledgeable analysts and good information-gathering to appraise a stake in a portfolio of companies when it comes up for sale. 

The general partners have the right of approval over buyers of secondhand stakes. 

These are high barriers for would-be rivals to clear.

Paradoxically, the flourishing of the shorter-term secondary market has allowed the formal time horizon of private-equity funds to extend almost to infinity. 

In this, as in other ways, private equity is following 17th-century Amsterdam. 

At its outset the Dutch East India Company was supposed to have a limited lifespan. 

It was still going almost two centuries later.