Russian Oil Prices & ESG Transparency

Oct 4, 2022 1:32:00 PM / by Ashutosh Singh


Russian Oil Price Cap …

The US Treasury estimates that if G7’s plan to cap the price of Russian crude goes through then it would help the emerging markets to the tune of $160bn in energy costs. The countries are contemplating a price level that would be above the Russian cost of production so as to not dissuade producers there from cutting output but low enough to hurt Putin.

The cap, “... means that countries have a significant incentive to benefit from a price cap, including purchasers like China and India, and that all net oil importing EMs would benefit from lower oil prices,” said a Treasury official. The study could make China and India rethink their opposition to a cap.

Real Yields …

The real yields are returns one earns after accounting for inflation. These yields have been rising. If you are a bond investor, you will get paid more if you take the risk of owning debt. What about equity investors? The reason one owns equities (the lowest rung on the capital structure which means it is most risky) is ‘equity risk premium’ which is calculated as the difference between expected return on stocks and the 10-year real yield.

If 10pyear real yield rises, the ERP declines. That lowers the proclivity of owning stocks. It is partially the reason why we are seeing stocks going down. Just to be clear, yesterday’s rally in the stocks is partially explained by the short covering by traders who fear that ructions in the market could lead the Fed to pivot. A recent survey by KPMG of 1,300 CEOs of global firms found that 80% expect a recession and 71% see up to 10%, and 76% have already taken precautionary steps ahead of the looming recession.

Impact of Transparency and Clarity in ESG on Sustainable Funds …

Skeptics of ESG and sustainable investing have complained for years of greenwashing and unscrupulous operators who are selling ‘snake oil’ as another ESG fund. The EU and the US are looking to tighten this space with new rules on disclosures and audit-ability of these data. WSJ says that the ‘proposed regulations from the SEC would establish a common benchmark for how sustainable products are labeled, marketed and reported. That could lead to investors pulling cash from funds that don’t appear to be taking standards seriously.’ Mindy Lubber, CEO of Ceres, a sustainability advocacy group says, “In the short term, these rules, if adopted, may result in a decrease in total assets invested in funds that purport to be sustainable.” This could be positive. “We believe that ultimately, they would bolster confidence in climate and other ESG investment products,” she adds. The regulators are seeking a shortcut.

They wanted to hold financiers responsible for pushing better behavior of investee firms as opposed to implementing (higher) carbon price that would convert externalities (like polluting and over consumption of public goods like water) into intrinsic risks. This is not sitting well with asset managers and firms. BlackRock and its ilk are nudging the SEC to change important parts of the rules that would require asset managers and firms to disclose how ESG factors influence investing decisions as per WSJ.

In Europe, some ESG data providers including MSCI “rejected calls for regulatory intervention meant to monitor the transparency and comparability of environmental ratings,” says WSJ. Neil Acres, MSCI’s global head of government and regulatory affairs told the European Commission that “attempts to standardize ESG scores between data providers would have negative impact on the market and lower the quality of ESG ratings”.  MSCI is not alone.

Unlike factor models used in equity and fixed income investing have clear methodologies that can be replicated by clients. ESG data from these same firms is created using obscure rules that are tweaked on a firm by firm basis and cannot be replicated. Paul Molchanov of Raymond James is optimistic that in the long-term (after the Ukraine invasion is related to the pages of history) sustainability will endure.

Corporate Corner:

Rivian (+9.3%) reported that production rose by 67% in Q3 compared to Q2 and it is on course to meet the annual target

Poshmark (+12.1%) rallied after South Korean internet firm is buying the company for $1.2B in all cash deal

Domino’s (+3.3%) was upgraded by UBS to “buy”

Credit Suisse (+4%) as it remains in the news for all the wrong reasons

Gilead Sciences (+3.1%) was upgraded by JPM to overweight

Rocket Pharma (-3.7%) announced a $100M stock offering

Tesla (+3%) reversed a decline of 8% yesterday


Data Check:

JOLTS job openings at 10 AM

Factor orders at 10 AM as well.


Trading Desk:

Equities: The stock futures are up sharply as the rally continues - Dow +390, S&P +58, Nas +213, and VIX -0.82 (29.28). The European shares are up as well. FTSE +2.09%, DAX +2.87%, CAC +3.45%, AEX +2.58%, and STOXX 2.33%. Asian stocks ended mixed. HK -83%, Nikkei +2.96%, ASX +3.75%, Mumbai +1.9% and Shanghai -55bps.

Commodities: The WTI +1.53%, Brent +1.7%, gold +0.9%, and copper +40bps.

Currencies: The DXY Index -66bps, euro +82bps, yen down 17bps, pound +32bps, and AUD -91bps. Bitcoin +2.1% ($20k).

Bonds: The US10y yields -4.6bps (3.605%), gilts -12.3bps (3.824%), and bunds -4.1bps (1.854%).


Tags: sustainability, oil and gas, ESG, impact

Ashutosh Singh

Written by Ashutosh Singh

Ashu Singh is the head of Financial Products and Risk. Prior to YvesBlue, he was the Head of Alternatives Business for the Americas at MSCI for a decade. He specializes in quantitative investment strategies and risk management. He has a MS in financial engineering, MBA from the Wharton School, MS in Computer Science form the Courant School of Mathematical Sciences, NYU. He is a CFA Charterholder.