Booming Luxury Sales to Test Fashion’s Climate Commitments
LVMH, Kering and Hermès are among the companies that have yet to set absolute targets to cut greenhouse gas emissions in their supply chains.
KEY INSIGHTS
- Big companies’ climate commitments are facing scrutiny for being less ambitious than they appear.
- A BoF analysis of 30 of the world’s biggest fashion companies found only half have set absolute targets to reduce emissions related to manufacturing supply chains.
- Some companies have set targets relative to growth, meaning their emissions could continue to increase alongside sales.
Last week, Gucci-owner Kering said its sales hit nearly €18 billion ($20 billion) in 2021, as consumer demand for high-end handbags, logo-heavy designer gear and luxe streetwear surged.
That was welcome news for the company and its investors, but big fashion brands’ rapid return to pre-pandemic sales levels poses a tricky challenge when it comes to efforts to curb the industry’s climate impact.
Kering is an industry frontrunner when it comes to sustainability; the company said it would go carbon neutral in 2019 and aims to achieve net zero emissions by 2030. By the end of the decade, its goal is to all but eliminate emissions from its own operations, and its commitments have been approved as in line with efforts to cap global warming at levels that could stave off the worst effects of climate change by the Science Based Targets initiative (SBTi), an organisation widely viewed as the gold standard for corporate target setting.
Even so, the balance between profit and purpose remains a delicate one. Like most fashion companies, Kering’s biggest environmental impact takes place in its supply chain, but the company’s target to reduce the indirect or Scope 3 emissions (which cover that part of its business) has been set relative to sales. That means if Kering keeps growing, so could its emissions.
While the company has yet to publish environmental data for the year, its Scope 3 emissions have closely tracked sales trends in the past. In 2020, a pandemic-hit Kering saw revenue fall around 20 percent; the emissions associated with its supply chain declined a similar amount. The year before, revenue jumped 16 percent; Scope 3 emissions did the same.
Sustainability advocates say this trend illustrates how cutting emissions relative to production or economic growth undermines companies’ lofty climate goals.
“What really is critical for net zero ambitions to be meaningful and effective is a clear and transparent pathway to cut absolute emissions — and the word absolute is very important here — by half by the end of the [decade],” said Muhannad Malas, senior climate campaigner at US-based advocacy organisation Stand.Earth.
While companies across industries are making increasingly ambitious pledges to tackle their climate impact, dig beneath the surface and they are often less progressive and concrete than they appear, industry watchers say.
A report published earlier this month assessing 25 of the world’s largest companies’ net zero targets concluded just that. Businesses including Unilever, Ikea and Walmart were found to have set targets with “low integrity.” (The companies said they remain committed to meeting and improving their emission reduction targets. Walmart said the report did not accurately reflect its goals.)
Many of the companies’ goals have been approved by well-respected environmental organisations, but still lack specifics that would create true accountability and demonstrate a path to change, the report by European non-governmental organisations NewClimate Institute and Carbon Market Watch found.
“Net Zero targets and carbon neutrality targets of many companies are a lot less ambitious than they seem,” said Gilles Dufrasne, policy officer at Carbon Market Watch.
It’s a similar story when it comes to fashion, a BoF analysis of 30 of the industry’s biggest players found. While the majority of fashion’s biggest companies, including LVMH, Kering, Nike and Zara-owner Inditex have committed to a “net zero” goal, only half have laid out absolute, time-bound targets to cut Scope 3 emissions. Chinese sportswear giant Anta, Urban Outfitters-owner Urbn and Abercrombie & Fitch are among the companies that have yet to set any clear Scope 3 targets at all.
When it comes to brands addressing their emissions, “if you don’t do Scope 3, you don’t do anything, basically,” said Diana Mangalagiu, professor of strategy and sustainability at France’s NEOMA School. “My view is that, altogether, the fashion industry’s still doing pretty badly.”
A&F has said it is working to better understand its Scope 3 emissions with a view to setting goals for reduction. Anta pointed to steps it is taking to reduce its carbon intensity and its goal to be carbon neutral by 2050. Urbn did not provide comment.
Roughly a fifth of the companies analysed by BoF, including LVMH, Hermès and Kering have set intensity-based Scope 3 targets, meaning their emissions could continue to grow alongside sales. Kering noted the ambition of its climate targets has been recognised by environmental disclosure nonprofit CDP and SBTi. LVMH said its target is linked to revenue rather than production volume and it is taking steps to bring down the impact of the items it sells. Hermès did not respond to requests for comment. All three companies’ targets have been approved by SBTi as in-line with the most ambitious goals to limit global warming.
Such limitations in accepted global climate standards are coming under increased scrutiny as the time left to avert catastrophic levels of climate change contracts; climate scientists have warned that global emissions must come down by 45 percent by 2030 to stay on track with efforts to limit global warming to no more than 1.5 °C, an internationally agreed cap intended to stave off the worst effects of climate change.
SBTi says it takes a “flexible” approach to Scope 3 target-setting, while still requiring a commitment to deep decarbonisation, to take into account the fact that measuring and managing indirect emissions remains challenging. The organisation is currently reviewing its methods and aims to continuously strengthen its framework, it said in a post responding to the NewClimate Institute and Carbon Market Watch report.
Pinning down, let alone reducing, a company’s Scope 3 emissions remains difficult, said sustainable strategy consultant Michael Sadowski, who helped develop apparel and footwear sector guidance for SBTi-approved targets. “If you’re a brand, your Scope 3 emissions are really the emissions of every supplier that is behind you in the supply chain,” he said. “It’s a shared area to address.”
There are signs brands and suppliers are beginning to work together to tackle this disconnect, but companies still need to do more to demonstrate they are moving beyond target-setting to drive real reductions: Though many brands do outline broad strategies to achieve their targets, few provide information on how they plan to fund these efforts, or publish data that show manufacturing emissions are coming down, BoF’s analysis found. “We need to go much bigger and much faster,” Sadowski said.
As many as two thirds of brands and retailers that have announced Scope 3 goals are not on track to achieve absolute cuts, according to a report from Textile Exchange and consultancy The Climate Board published in October.
Without concrete action, high-profile commitments risk becoming “just another form of greenwashing,” said Stand.Earth’s Malas. “How brands plan to become net zero is, at the end of the day, what we need to be paying very close attention to.”
German utility Uniper slashes its dividend to lowest legal level
Company seeks to preserve cash amid uncertainty over Ukraine and energy prices
Uniper has all but scrapped its dividend as the German utility looks to preserve cash in the face of wild price swings in energy markets and rising geopolitical tensions.
The Düsseldorf-based company said on Monday it would declare a payment of just €0.07 per share for 2021, down from €1.37 in 2020, citing high gas prices and uncertainty over Ukraine.
The proposed dividend amounts to just €26mn, against €501mn the year before, and is the lowest possible amount the company can pay under German law. The move had been backed by its majority shareholder.
“Given the continued high volatility on the energy markets, the geopolitical situation and the increasing momentum of the European energy transition, Uniper is placing a stronger focus on liquidity and investment capacity, which is reflected in the dividend proposal,” it said in a statement.
Uniper, which is majority owned by Finnish power company Fortum, was forced to seek €10bn of additional financing earlier this year to avoid a cash crunch after slowing gas supplies from Russia to Europe caused prices to surge.
The company is dependent on Russian gas to generate electricity and also supply a large customer base with the fossil fuel. Like its competitors, Uniper uses derivatives to hedge future power and gas sales.
As prices have soared over the past year to record levels, the losses on these hedges have increased, requiring Uniper to make margin payments to brokers, exchanges and other counterparties.
Analysts at Barclays said the proposed dividend for 2021 was almost 95 per cent below market expectations of €1.381 per share but that the company had softened the blow by signalling better than expected earnings guidance for 2022.
Uniper expects to report adjusted earnings before interest for 2022 of €1bn to €1.3bn because of a strong performance from its midstream gas business and gains in power generation. Analysts had been expecting earnings of €1bn for the year.
“We see a very favourable investment case for the European utility sector,” the Barclays analysts said. “One of the key arguments of our recent reports is that . . . consensus [forecasts] still do not reflect the power price rally.”
German baseload power prices surged last year, rising from about €50 per megawatt hour in January 2021 to a record €438 in December, before retreating this year to less than €200/MWh
Uniper is among Europe’s largest electricity generators with 34 gigawatts of capacity and is also a big gas supplier. It has about 600 clients in Germany and neighbouring countries, ranging from industrial customers and municipalities to regional distributors.
It was one of five companies to back Nord Stream 2, the $11bn pipeline across the Baltic Sea that will allow Russia’s Gazprom to send up to 55bn cubic metres of gas to Europe a year, bypassing Ukraine.
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It's Another Housing Bubble And The Fed Is Holding The Pin
Are we heading toward housing crisis 2.0?
That remains to be seen.
Two things are for certain. The is a massive housing bubble. And the Fed is holding the pin.
The bubble in the housing market today is bigger than it was before 2008. And there is a bubble for the same reason. The central bank has held interest rates artificially low for nearly two years. On top of that, it stuck its big fat thumb on the mortgage market with its purchase of mortgage-backed securities. With those loans off their books, banks could lend more.
The result — skyrocketing home prices.
In the same way, quantitative easing creates artificial demand for Treasuries, thereby keeping rates low and facilitating more federal government borrowing and spending, it also keeps mortgage rates artificially low and juices the housing market.
As economist Alex Pollock put it in an article published by the Mises Wire earlier this year, the Fed “continues to be the price-setting marginal buyer or Big Bid in the mortgage market, expanding its mortgage portfolio with one hand, and printing money with the other.”
In 2006, the Fed owned zero mortgages. Today, The central bank holds about $2.6 trillion in mortgage-backed securities on its balance sheet. According to Pollock, about 24% of all outstanding residential mortgages in the US reside in the central bank. That makes the Fed, by far, the largest savings and loan institution in the world.
The result was entirely predictable.
According to Fed data, the average sales price of a home in the fourth quarter of 2021 was $477,900. That compares to $403,900 in Q4 2020 and $384,600 in the fourth quarter of 2019. In other words, the average sale price increased by $93,300 in just two years. That is by far the biggest increase ever recorded in a 24-month period.
Here’s a little more data to chew on.
The 12-month home sales price increases in the first three quarters of 2021 were all above 17%. That’s the biggest increase ever recorded over any three-quarter period since at least 1963. That’s the earliest data available.
Justin Haskins summed up the situation in an article published by The Federalist.
Put simply, Americans have literally never seen housing prices skyrocket like they are now for this long of a period. And every time they have approached the numbers we are seeing today in the past — in the 1970s, late-1980s, and early to mid-2000s — there was a massive real estate or stock market crash that soon followed (or both). There appear to be no exceptions, other than a few rare cases where housing prices increased quickly immediately after a crash had occurred.”
So, we have a massive housing bubble — even bigger than the one that popped in 2007 and led to the 2008 financial crisis.
And what always happens to bubbles?
They pop.
And the Fed has the pin in its hand. It’s about to raise interest rates. Mortgage rates will go up right along with them. And it’s already tapering its purchase of mortgage-backed securities.
Haskins provides a comparison between the runup to 2008 and today.
The bubble that developed from 2002 to 2007 peaked at around a 47 percent price increase, before plummeting by 20 percent from 2007 to the first quarter of 2009. If we see a similar pattern emerge for the bubble that has been developing since roughly 2012, then we could see housing prices drop by 30 to 40 percent over a two-year period. Whatever the final numbers end up being, the evidence is clear: based on data reported over the past six decades, America appears to be on the verge of an epic real estate crash.”
That’s not to say it will precipitate another 2008-style crisis. The dynamics in the subprime market are different this time around. But a collapsing housing market will ripple through the economy and it’s hard to say exactly how it will play out.
Regardless, this is a big problem for the Fed. We have been saying that the Fed can’t do what it’s saying it will do to fight inflation, and this is yet another reason. If it follows through with rate hikes, and if it stops buying mortgage-backed securities and then starts selling them into the market, mortgage rates are going to skyrocket. Unaffordable homes will become more unaffordable.
The housing bubble will pop.
Again.
It may not take much of a pinprick to pop the bubble. Even the 1 or 2% rate hike the Fed is talking about could do the trick.
This is yet another reason Peter Schiff says the Fed is “running out of minutes.”
Chinese Tech Stocks Suffer Biggest 2-Day Rout Since July Amid Fears Beijing Will Unleash More Crackdowns
While not directly impacted by the sharp crisis escalation in Ukraine or fears of multiple rate hikes by the Fed, Chinese tech shares suffered their worst two-day drop since July following renewed fears Beijing may roll out more restrictions for private enterprise.
Shares of China's tech giant, Tencent, sank 5.2% on Monday, hammered by speculation about an unspecified, impending crackdown on China’s largest social media and gaming firm that company spokesman Zhang Jun later denied. Traders pointed to everything from warnings from regulators over the weekend about scams in the metaverse to talk about yet more curbs on the gaming industry. Zhang said the online rumors were unfounded, without elaborating.
Amid the rout, Tencent’s head of public relations Zhang Jun denied online speculation that it’s facing a major regulatory crackdown, issuing an unusually aggressive public response after fears of more tech-sector restrictions tanked markets on Monday. He disputed the widely circulated post that suggested the company would weather another heavy blow from regulators in the near future. The account carrying the rumor has since been suspended, Zhang said on his semi-public WeChat feed.
“Ask me next time, at least that’s more legit. And I’m not afraid of going on record,” Zhang said, poking fun at the post citing an anonymous Tencent employee. Before its removal, the post was widely shared on Chinese social media and stock-trading forums. It hinted at another big step in China’s internet crackdown, without providing specifics.
Tencent shares have plunged 40% since a peak in January last year. The gaming giant, along with peers such as Alibaba and Meituan, were caught in Beijing’s crosshairs as China cracked down on monopolistic behaviors and tightened its grip on user data. The yearlong clampdown has wiped out more than $1.5 trillion in market value from the nation’s tech sector.
Meanwhile, as noted earlier, Chinese authorities told the nation’s biggest state-owned firms and banks to start a fresh round of checks on their financial exposure and other links to Jack Ma’s Ant Group Bloomberg reported after markets closed. Alibaba Group, which owns a third of Ant, fell 3.9% prior to the report.
As a result, Hong Kong’s Hang Seng Tech Index lost 5.9% over two sessions, the biggest 2-day drop since July. The decline started Friday when Meituan plunged as much as 18% after Beijing rolled out a new policy to curb the delivery giant’s service fees.
“There is concern about new regulatory reforms,” said Justin Tang, head of Asian research at United First Partners. “Prior to Meituan, there was a sense of ‘this is it in relation to reforms.’ Investors are now thinking that there could be more to come.”
As Bloomberg notes, on Friday the China Banking and Insurance Regulatory Commission warned against fund-raising and investment products related to the metaverse concept, citing their speculative nature. A metaverse industry body vowed on Monday that the sector should be developed to serve the real economy.
“The market is very fearful that more crackdown will come and that could leave technology companies very little room to turn around their businesses,” said Castor Pang, head of research at Core Pacific-Yamaichi. “The metaverse fears shows that the market is worried that tech firms may not be able to grow a new business rapidly, like how they did in the past in China. That’s really dampening the already-fragile sentiment.”
In coming weeks investors will find out how much Beijing's ongoing clampdown has impacted the profitability of some of the biggest tech firms as they release earnings; Alibaba will report on Thursday.
“Nerves are on edge this week as Alibaba reports earnings -- in the midst of war, additional Hong Kong curbs and regulatory oversight,” said Wai Ho Leong, strategist at Modular Asset Management.