Lithium prices are up 5x over the last 12 months and the auto makers are feeling it. All the electric vehicle promises come with supply changes that are forcing a slew of deal making and partnerships. While Tesla is building a Texas refinery for Lithium, GM announced a $69m investment in an Australian mine to secure raw materials.
Blackrock and Citi Bail on COP27, Other Banks ‘Quiet Quit
Conference of the Parties (COP), the source of many sustainable finance headlines over the past few years is, once again, upon us. Last year’s COP26 brought the big announcement that 500 financial sector firms representing $130 Trillion were committed to negate greenhouse gases from their balance sheets by 2050. A year later, Larry Fink (the most outspoken proponent) and Citi’s Jane Fraser won’t be attending while J.P. Morgan, Bank of America, and Morgan Stanley are contemplating leaving the commitment all together.
Talk was cheap, but the banks are finding out just how expensive it is this year. It was easy last year to make bold climate commitments and appeal to the ‘cool crowd.’ What a difference a year can make, energy prices are up and the lawyers have been activated to ensure fiduciary duties are met. Banks are now stuck in the middle of commitments and the reality that they’re in the business of making money. Lending to fossil fuel companies is up 15%, generating over $1 billion in revenue so far in 2022. Beyond the profit motive, as we discussed last week, banks are under increased scrutiny to act as a fiduciary in their climate based actions.
Chanel Sustainable Bonds Miss the Mark
Two years ago Chanel issued a Sustainable Linked Bond that associated interest cost to hitting certain milestones. When they issued the bond, they were weeks away from finalizing their climate metrics for 2-18, so they had to tie everything to 2018. Post issuance, it became clear that Chanel’s “targets” were actually already partially hit as of 2019. Chanel has successfully navigated the financial markets and climate warriors. Flash forward to 2022, when the interim targets are supposed to be met and Chanel is coming up short.
Sustainable Linked Bonds are meant to give corporations a mechanism to ‘put their money where there mouth is’ and tie commitments to financing costs. In theory, a step in the right direction, but these loans are covenant light and the penalty is often near deminimus. Further, the companies can play games like Chanel and all but guarantee hitting the milestones by using stale metrics. To investors, Chanel missing the interim target does not lead to financial penalty, but it sets the stage for a 2025 miss if they don’t course correct. As we near the deadlines on these bonds, there will be opportunities to ‘bet’ on which operators will and will not be able to hit their targets.