TheChek News Flow

Carbon allowance prices have been on record breaking rally

A sharp rise in the cost of polluting in Europe risks undermining airlines’ efforts to repair their balance sheets following the damage caused by Covid-19.

The cost of purchasing carbon allowances under the EU’s emissions trading system, ETS, has been on a record breaking rally, with prices more than doubling to above €50 a tonne compared with pre-pandemic levels.

That presents a problem for airlines in the region, which like other carbon intensive sectors must buy the tradable credits to cover the amount they pollute under parallel emissions systems in both the UK and the EU.

The nascent UK system, which launched this month, started trading at higher prices, of above £50 a tonne.

Low-cost carriers including Ryanair, easyJet and Wizz Air have been hit particularly hard as the schemes only cover emissions on flights in Europe and the UK where they do nearly all their flying.

“There’s no getting away from the fact that the carbon price is going through the roof and these guys are exposed to that,” said Deutsche Bank analyst Jaime Rowbotham.

Disclosure around emissions trading and hedging strategies are patchy, but Rowbotham estimates Ryanair, easyJet and Wizz will between them pay more than €600m in carbon costs in their 2023 financial years, up from about €330m before the crisis hit. 

Airlines are given an annual set of free credits, and must purchase the remainder to cover the rest of their emissions. Airlines have carried so few passengers during the pandemic that some free credits remain unused. 

They receive free credits to cover around half of their emissions at pre-pandemic levels.

The problem is likely to persist as traders and market participants expect the price of carbon to keep rising as net zero pledges of governments and corporates become more ambitious and high profile. 

It has prompted several airlines to begin hedging credits in the same way as they do jet fuel in an effort to lock in lower prices. 

Ryanair has disclosed it has locked in credits at €25 a tonne, which it will use through to its 2023 financial year, although it expects costs to rise after that date. 

The carrier’s director of sustainability Thomas Fowler said the cost is a “tax on EU traffic”, adding that flights operating outside of Europe should also be included.

“Our view on it is that aviation as a whole has to do its job to reduce its carbon footprint, not intra-EU traffic,” he said.

Proceeds should also be reinvested into the industry to fund sustainable fuels to help airlines cut their environmental footprint, he said. 

Both the EU and UK are planning to reduce the total number of allowances in their trading schemes as well as the number given out for free over the next decade, which is expected to push up the price of the credits further.

“On carbon prices, it’s clear that ETS compliance is making its way into the top three categories of airline costs, depending on how operators hedge,” said Laurent Donceel, senior policy director at lobby group Airlines for Europe.

Airlines will eventually want to pass these rising costs on to passengers, but this will be hard as they aim to stimulate demand by lowering prices as they emerge from the pandemic, said Alexander Paterson, an analyst at Peel Hunt.

“They are selling ahead at prices that may not reflect the actual costs they incur if they use the credits they have and need to buy more at €50 plus. This is a problem really for faster growing airlines,” he said. 

Until recently, the cost of EU credits “never really got high enough to change behaviour,” said Matt Finch, UK policy manager at campaign group Transport & Environment.

But some airlines will now consider whether the more recent €50 threshold “is the bottom of the future price,” he said.

>>> Consensus New Buys

- Altimeter Growth Corp 2 (AGCB): This particular vehicle is the second SPAC raised by Brad Gerstner’s

Altimeter Capital, a big player in venture capital and noted tech investor. Altimeter’s first SPAC (AGC)

recently announced a merger with Grab of Southeast Asia, a ridehailing and food delivery company that also

has expanded into payments and aims to become a ‘superapp’ of the region. Funds that acquired shares of the

second SPAC AGCB are essentially betting on the jockey here and think Altimeter will find another solid

company to bring public. Altimeter is building its Altimeter Capital Markets Platform using SPAC vehicles as

a means for world-class technology companies to go public instead of via IPO or direct listing. Funds that

acquired shares of AGCB include Baupost Group, Tiger Global, Appaloosa, Maverick Capital, Third Point,

Pennant Investors, and Greenlight Capital.

- Thoma Bravo Advantage (TBA): This particular SPAC has already announced its acquisition: ironSource.

The company is a platform for the app economy and enables developers to monetize and analyze their apps.

Funds that built stakes in TBA include Glenview Capital, Farallon Capital, Baupost Group, Tiger Global, and

Maverick Capital. At the recent virtual Sohn Conference, Larry Robbins of Glenview pitched the company as

one of his favorite SPACs.

- Reinvent Technology Partners Y (RTPY): This is the third SPAC from partners Reid Hoffman (co-founder

of LinkedIn) and Mark Pincus (founder of Zynga (ZNGA)), and Michael Thompson of BHR Capital. While

this entity has not announced an acquisition yet, two of their other vehicles already have. Their first SPAC

(RTP) has an agreement with electric aircraft developer Joby Aviation and their second (RTPZ) has an

agreement with home insurance provider Hippo. Hedge funds that have acquired shares of the third SPAC

include Hound Partners, Greenlight Capital, Third Point, and Baupost Group.

- Dragoneer Growth Opps III (DGNU): This is the third SPAC vehicle from Dragoneer Investment Group.

Shares were bought by the likes of Farallon, Hound, Third Point, Baupost, and Maverick.

>>> Consensus Increased Positions :

- Microsoft (MSFT): This is the fourth consecutive quarter that hedge funds were adding to their existing

MSFT stakes. Funds that increased their exposure include Pennant Investors, Glenview, Tiger Management,

Third Point, Farallon, Lone Pine Capital, and Tiger Global. While institutional investors have seemingly

moved away from big tech recently per prime broker statistics, many funds in this issue have done the opposite

as you’ll see throughout the issue.

- Facebook (FB): Shares of the social media giant were bought by Hound, Glenview, Baupost, Farallon,

Viking, Tiger, Sequoia Fund, and Lone Pine. While the company has been caught in the crosshairs of an

antitrust lawsuit, Facebook has been on a bit of a PR blitz recently regarding their virtual reality (VR) and

augmented reality (AR) research and development. Their Oculus Quest 2 device is viewed as a big

improvement over previous iterations and they also revealed their neural bracelet development, which allows a

user to control gestures in AR/VR. The company has also been building out its ‘shops’ platform on Instagram

to enable more e-commerce.

- Unitedhealth Group (UNH): Shares of the largest health insurer in the US were acquired by Brave Warrior

Advisors, Appaloosa, Third Point, Sequoia Fund, and Viking during the first quarter. Over time, more

investors have seemingly come to appreciate the company’s moat. After all, the healthcare system is a

massive, complex beast. One example bulls point to is the fact that the Haven joint venture between JPMorgan

Chase, Berkshire Hathaway, and Amazon recently disbanded. The group was initially formed to try and use

their combined scale to reduce healthcare costs for employees. So the argument is that if all that scale, money,

and brainpower couldn’t come up with a viable collective solution, what’s going to impede UNH?

>>> Consensus Sold Positions :

- Walt Disney (DIS): This quarter, shares of DIS land on both the consensus sell and consensus decrease list.

So needless to say, funds were reducing exposure in a sizable manner. While the company suffered from

having its theme parks closed for long periods during COVID, they also saw a surge of subscribers for their

Disney+ streaming service as more people looked for entertainment at home. Funds that exited shares in Q1

include Duquesne Family Office, Tiger Management, and Viking Global.

- Expedia (EXPE): This online travel agency has been a way for funds to get more cyclical recovery exposure.

Obviously, the travel sector was one of the hardest hit during COVID. And in times of crisis, stocks in

embattled industries often sell-off the most at the onset and then rebound furiously at any sign of recovery as

the situation eases from ‘really bad’ to simply ‘less bad’ and so on. Coatue Management, Glenview, and Third

Point all sold out of their positions in the first quarter.

- Canadian Natural Resources (CNQ): Shares of the resource giant were dumped by Duquesne, Fairholme,

and Maverick in Q1.

- Workday (WDAY): Shares of the HR platform company saw notable volatility in the first quarter as they

started out around $220, surged to a high of $282, only to round-trip back down to $222. Hedge funds that no

longer show stakes include Duquesne, Maverick, and Viking.

>>> Consensus Decreased Positions :

- Amazon (AMZN): This is the fourth quarter in a row that hedge funds have trimmed AMZN exposure. And,

like previous quarters, it might simply be a case of taking some profits and reducing position sizes that have

swelled after shares of the e-commerce giant were up over 70% last year. The company obviously has benefited

from the pandemic as more people stayed home more and shopped online rather than in-person. Not to

mention, the company’s cloud computing division (AWS) benefited from the work-from-home trend and online

business shift. Some other recent company news could have also weighed on funds’ decisions to reduce

exposure: founder Jeff Bezos recently stepped down from the CEO role and transitioned to Chairman and

previous AWS head Andy Jassy took the helm. Hedge funds that reduced AMZN exposure include Appaloosa,

Viking, Third Point, Duquesne, Omega Advisors, and Sequoia.

- Walt Disney (DIS): This quarter, shares of DIS land on both the consensus sell and consensus decrease list.

So needless to say, funds were reducing exposure in a sizable manner. While the company suffered from

having its theme parks closed for long periods during COVID, they also saw a surge of subscribers for their

Disney+ streaming service as more people looked for entertainment at home. Funds that trimmed their stakes

include Pennant, Appaloosa, Sequoia Fund, Third Point, and Coatue.

- HCA (HCA): Position sizes in the for-profit hospital operator were reduced by hedge funds including

Maverick, Hound, Appaloosa, Glenview, Brave Warrior, and Viking. Of these, Glenview is the longest tenured

shareholder, as they originally got involved back in 2011. During the quarter they trimmed their stake by 17%

but it’s still their 8th largest holding.

After Nasdaq and bitcoin rallies, young investors weigh options for what to do with their money

Soaring assets and stocks in the past year have in some cases handed midlevel workers huge windfalls.

Those who have benefited from the market surge typically fall into one of three categories, said Sahil Vakil, founder of personal-finance tech company MYRA: They were given company shares as compensation and those same shares recently boomed; they caught last year’s retail investing frenzy and rode the market to new highs; or they invested early on in cryptocurrency, to great success.

The Nasdaq Composite rose nearly 47% over the past 12 months, and even after a recent pullback, a crypto investor who put $10,000 in bitcoin at the end of 2019 could have netted more than $50,000 in gains after bitcoin’s 2020-21 surge.

In the past year, more than half of Mr. Vakil’s clients have experienced a market windfall. On the East Coast, Mr. Vakil says his clients typically work in the finance and consulting sectors; on the West Coast, most are working in the tech industry. The average household he works with holds $250,000 in assets and falls between the ages of 25 and 45.

Many of these workers may have struggled with stagnating wages and huge student loan debts earlier in their careers. Some worry they’ll mismanage this boon and forever ruin their chance at financial stability.

“These individuals completely feel and understand and recognize the pain of the last year, but now they’re being given an opportunity to come out of that,” Mr. Vakil said. “They’re saying, ‘This is my one chance.’ They’re taking it with both hands. They don’t want to mess it up.”

Here are some tips to manage a sudden windfall.

First, put long-term goals in focus

Arun Gupta, a 36-year-old tech executive based in New York City, began investing in cryptocurrency, mostly bitcoin and recently ethereum, in late 2019. By the end of 2020, that original investment more than quintupled.

”I want to have enough money where if my family wants to splurge on a vacation, there isn’t anything holding us back,” he said. “I don’t want [student debt] to be an issue for my kids or for anyone in my family.”

He chats about his crypto investments in a group message with other friends interested in bitcoin. To shore up his funds for those future goals, Mr. Gupta is planning to hold on to his bitcoin investments in hope they continue to grow.

”I just know having money sitting in a bank account—that’s not my nature,” he said. “I like to take risks with my money.”

A sudden market windfall in these times can lead to decision paralysis, said Meg Bartelt, certified financial planner and founder of Flow Financial Planning. She has seen clients wrestle with feelings of elation, fear, guilt and stress.

“From a mathematical perspective, they can now easily buy a home for $2 million, but psychologically, that’s unsettling,” she said. “They can’t wrap their heads around it.”

Ms. Bartelt’s first plan of action: Don’t buy the new vacation home or launch the new business, yet.

“Good financial decisions are rarely made in the middle of an emotional maelstrom,” she said.

“The piece of advice I find myself giving over and over again is actually a best practice in the world of what’s called ‘sudden money’: Don’t do anything that’s not necessary. I think it’s very worthwhile to not do anything big or irrevocable until your emotions have settled down around this huge wealth event.”

Mr. Vakil said all his clients bring one big question: Will I be in trouble come tax time?

“The first concern all these people have, unanimously, is not ‘What do I do with this money?’” he said. “It’s ‘What do I do with my taxes?’”

For clients who have only recently begun trading, he said, coping with capital-gains taxes may be a new and confusing experience. For example, the profits on assets held a year or less are taxed at much higher rates than the profits on assets held longer than a year.

Those trading cryptocurrency must keep in mind that a sale or exchange from one cryptocurrency to another will count as a taxable event (this can also include events known as forks and airdrops in the crypto world). Keeping careful records of all transactions can help at tax time, as current law doesn’t yet mandate brokers to report crypto sales.

To help clients minimize their coming tax bills, Mr. Vakil often recommends tax-loss harvesting, which means selling losers strategically to reap losses that can offset the taxable profits from winners. For crypto investors, this may be difficult to untangle if they haven’t kept records on their own.

While brokerage firms must keep records about stock trades and send the information to the Internal Revenue Service, crypto exchanges don’t have to do this under current law.

Mr. Vakil also advises his clients who trade frequently that they may need to pay estimated taxes quarterly to Uncle Sam to avoid penalties at tax-filing time.

Sarah Behr, a financial planner and founder of Simplify Financial in San Francisco, often recommends moving money for taxes at the time of a sale into a separate account so it isn’t in danger of being spent or mismanaged. Large taxable gains are also an opportunity for investors who are charitably minded, says Ms. Behr.

Under current law, donors who make gifts of appreciated assets to charities often don’t owe capital-gains tax on the appreciation. Instead, they get a charitable deduction for the asset’s full market value.

“That allows you to get some of this stock off your plate that maybe allows you to have high gains,” said Ms. Behr. “And then you’re rewarding that charity with a larger gift than you would if you just gave cash.”

For those unsure about what step to take next, Mr. Vakil recommends handling immediate concerns to buy yourself some more time.

That could be paying off your mortgage or car, or wiping out any other debts. With these monthly bills out of the way, the client has more brain space to consider what they want to do with this new, slightly smaller, pile of money.

One of the other initial steps on Ms. Behr’s list for clients: diversify their portfolios. Because many of these clients will have benefited from a company liquidity event, their portfolios may be heavily weighted toward one stock, which can be risky.

”Every time someone has a windfall, there should be a plan,” she said. “I’m trying to move them to action.”

Mr. Vakil and Ms. Behr say most of their clients don’t kick up their heels and sail off on a yacht.

”I don’t have clients who are like ‘I’m going to go off and buy a Lamborghini’ or ‘I’m going to Tahiti,’ although I’m sure those people are out there,” Ms. Behr said. “I get people asking ‘’How do I live now? Do I just live off my salary like I was before?’ And I say, ‘Look, the sky’s the limit.”

Planning how your sudden windfall could open a new chapter may feel intimidating to some, but to others, it is exciting.

Lalit Kalani, a 37-year-old trader now based in Mumbai, India, hasn’t made a million yet, but he says he’s closing in. He hopes the money he has made could become seed money for a new business or fund an early retirement.

“There were times last year I thought, ‘Why am I working? I should just be trading,’” Mr. Kalani said. “I have a runway now.”

Seeking advice from family or friends on what to do immediately can also lead to complicated feelings of competition and decision fatigue, said Ms. Behr.

“A lot of them get overwhelmed,” she said. “Every one of these companies going public has some Slack channel talking personal finance, and it can get heated.”

Ms. Behr’s clients say the most common concerns in these Slack groups are tax-related (“Will I need to completely overhaul how I file?”) and future-obsessed (“Where should I put this money until I determine how I’ll manage it going forward?”).

Going from “I don’t feel financially stable” to “I finally have options” can feel shocking or even intimidating, Ms. Behr said. Rather than relying on virtual water-cooler tips, she urges making a realistic financial plan and seeking the help of advisers they feel will understand their values.

U.S. central bank looking for substantial progress on hiring, labor force growth

WASHINGTON—Friday’s jobs report is shaping up to be a pivotal data release for the Federal Reserve as it charts a plan for ending the easy-money policies that have propped up the economy and markets for more than a year.

The May report will help central bankers understand two key questions that now dominate their attention. First, how quickly is the labor market recovering jobs shed during the Covid-19 pandemic? Second, do the supply bottlenecks fueling a recent inflation upswing show any sign of diminishing?

The answers will help determine when the Fed begins scaling back its large bond-buying programs and how it thinks about future interest-rate increases.

Policy makers project a rapid recovery in the labor market this spring and summer, accompanied by moderate inflation. Such a scenario would allow the Fed to tighten monetary policy gradually and predictably, officials hope. But the path is treacherous. The mere discussion of pulling back easy money in 2013 led to turbulence in bond markets known as the “taper tantrum.”

Recent data have complicated matters for the central bank. The Labor Department reported this month that hiring slowed unexpectedly in April. Meanwhile consumer prices rose at a rate that was nearly twice the Fed’s target. Policy makers believe that supply bottlenecks— including challenges bringing people back into the workforce after months of being locked down in a pandemic—may have contributed.

The employment report the Labor Department is set to release Friday will provide the first indication of whether the hiring slowdown in April was a fluke, as some economists suspect. It will also provide evidence of whether workers are streaming back into the labor force, which would alleviate central-bank concerns about labor shortages driving up inflation.

Economists surveyed by The Wall Street Journal estimate the economy added 674,000 nonfarm payrolls in May, up from 266,000 in April. While an improvement, it would take the labor market roughly a year to return to its February 2020 level of employment at that pace.

If hiring bounced back strongly in May, that would move the Fed closer to signaling reductions in its bond purchases. Since December, the Fed has said it wants the labor market to make “substantial further progress” before it begins scaling back the $120 billion of Treasury and mortgage bonds that it has been buying each month since last June.

“If my expectations about economic growth, employment, and inflation over the coming months are borne out...it will become important for the (Fed) to begin discussing our plans to adjust the pace of asset purchases at coming meetings,” Randal Quarles, the Fed’s vice chair for supervision, said Wednesday.

So far this year, employers have added 1.8 million jobs. Payrolls remain 8.2 million below their pre-pandemic peak, though the Dallas Fed notes that some 2.6 million of those workers have retired since then and may never return to the labor force.

As of mid-April, primary dealers surveyed by the New York Fed didn’t expect the Fed to begin slowing its bond purchases until early 2022. Interest rates were seen remaining near zero until the second half of 2023. Fed officials haven’t specified what they mean by “substantial further progress” in the labor market.

The Fed expects a burst of hiring this summer as the economy reopens and as states reduce unemployment benefits that were made more generous during the Covid-19 crisis. By September, as schools reopen, those enhanced benefits should be fully gone, setting up a key test for the economy and the Fed in the coming months.

Another critical question is the effect such changes have on inflation. The Fed’s preferred inflation measure, the personal-consumption expenditures price index, rose 3.6% in the 12 months through April, well above the Fed’s 2% average target.

Policy makers are inclined to look past the increase, which they view as transitory. One reason is that inflation has been running below the target for years. In their view, the economy could use a little added inflation for a short period to make up for lost ground.

Two issues could change that thinking and set the central bank on a course to a more restrictive monetary policy than planned.

The first would be if businesses, households and investors started expecting much higher inflation in the long run. Officials believe inflation is partly a game of psychology; if much higher inflation is expected, then it will happen as individuals bid up prices and wages in anticipation of it. Fed officials are watching a range of indicators of inflation expectations, including an internal central-bank index called the “Index of Common Inflation Expectations,” which showed expectations were stable near 2% as of January.

The other issue is the balance between demand and supply, including of labor. When there is ample supply of workers, machines, airplanes, hotels and other ingredients for economic activity, prices tend to rise modestly, if at all. But shortages push up prices, and consumer demand has been red-hot lately.

The Fed is now trying to figure out how much labor supply will be returning as the economy reopens. The expiration of jobless benefits should nudge some people back into the job market, officials believe. But early retirements sparked by the pandemic could hold it back. The central bank has to figure out how those forces play against each other.

“We’re getting older. People are retiring faster,” said Dallas Fed President Robert Kaplan, one of several officials who would like to begin tightening policy sooner rather than later, on a virtual panel May 21. “We think that we may well determine in hindsight that the labor market at the moment is tighter than the headline statistics would indicate.”

In addition to hiring and wages, Fed officials will be looking at measures of labor-force participation in Friday’s report for clues of whether the supply of workers is rising to meet demand. A pickup would put them at ease. Constraints could heighten worries that the inflation rise is potentially persistent and force the Fed to re-evaluate its narrative.

Frustration with Germany’s largest lender has escalated to a point that the bank could be fined, according to people familiar with the matter

The Federal Reserve told Deutsche Bank AG DB 0.40% in recent weeks that the lender is failing to address persistent shortcomings in its anti-money-laundering controls, according to people familiar with the matter.

The Fed’s frustration has escalated to a point that the bank could be fined, the people said.

Deutsche Bank has poured massive resources into addressing repeated shortcomings and penalties related to allowing suspect transactions. The Fed told Deutsche Bank that instead of making progress, the German lender with a large Wall Street presence is backsliding. The regulator has said that some of the anti-money-laundering control problems require immediate attention, according to the people.

A spokesman for Deutsche Bank said the bank doesn’t comment on dialogue with regulators. A spokesman for the Fed declined to comment.

The Fed’s harsh words contrast with the bank’s message that it has worked diligently to improve its systems and has put most of its legal troubles in the past.

The Fed’s latest warning comes four years after it classified Deutsche Bank’s U.S. operations as being in “troubled condition,” a rare rebuke for a major bank. In May 2020, it issued a fresh admonishment over the bank’s money-laundering controls.

In 2020, Deutsche Bank also settled with New York’s Department of Financial Services over the bank’s role as a correspondent bank in one of Europe’s largest money-laundering scandals and for failing to properly monitor its dealings with late financier and convicted sex offender Jeffrey Epstein.

In 2017, the Fed fined Deutsche Bank $41 million for failing to maintain an effective anti-money-laundering program.

Deutsche Bank is Germany’s largest lender and as a dollar clearing bank regulated by the Fed, is a major player in global financial transactions.

Banks are required to police how money flows through their networks to guard against proceeds from criminal activities moving around the economy. They are required to know who their customers are and to flag transactions that indicate potentially illegal activity to authorities.

Deutsche Bank’s financial situation has improved after it began an overhaul in 2019 to sharply cut costs and exit some operations, including equities trading in the U.S. This year it posted its strongest quarter in seven years.

On Thursday, Deutsche Bank officials struck a bullish tone at the bank’s annual shareholder meeting, saying the lender has found its footing and is regaining trust in the market. It also said it wants to play an active role in banking consolidation in Europe.

“There has been a fundamental change in the way people see our bank,” Chief Executive Officer Christian Sewing said in a speech.

Mr. Sewing told shareholders that the bank has “significantly strengthened our control systems,” but added that “we are also aware of the areas in which we need to improve,” including its anti-financial crime efforts.

The bank has struggled to shake off its reputation for loose controls. In April, BaFin, Germany’s financial regulator, ordered the bank to take further steps to safeguard against money laundering. BaFin said Deutsche Bank needed to comply with due diligence obligations, in particular over regular customer reviews. It expanded the role of a monitor it appointed in 2018 to look over implementation.

After the BaFin order, Deutsche Bank said it had significantly improved its controls, spending about $2.4 billion and increasing its anti-money-laundering team to more than 1,600 over the past two years. It acknowledged that it had more work to do.

Deutsche Bank also remains under the watch of outside monitors appointed in 2017 by New York’s Department of Financial Services as part of the settlement of a “mirror trades” case, in which the bank moved $10 billion of Russian client money out of the country.

The Wall Street Journal reported last November that the monitors grew alarmed at a possible expansion of the bank’s activities in Russia. In October, they told the bank that efforts to improve its operation weren’t enough to make up for the large risks of doing business with Russian clients, and that the bank should shut its business there instead.

Earlier this month, the bank appointed Joe Salama, its U.S. general counsel who was responsible for negotiating recent regulatory settlements with U.S. authorities, to head its global anti-financial-crime unit. The move was meant to improve the bank’s relationship with regulators, according to people familiar with the situation.

Unlike his predecessor, who was based in Frankfurt, Mr. Salama will split his time between Germany and the U.S.

Last week, Richemont chair Johann Rupert for the first time publicly acknowledged a proposal made by French rival Kering “more than a year ago” to join forces but said that the Swiss group he controls was not for sale, according to The Financial Times.

The logic for a Kering-Richemont merger has long made sense.

The two companies are highly complementary, Kering with its strengths in soft luxury and Richemont with its hard-luxury prowess. And though they are both successful, they remain far smaller than French sector leader LVMH, whose chairman Bernard Arnault momentarily surpassed Amazon founder Jeff Bezos to become the world’s richest person earlier this week. Their best shot at building a genuine multi-category rival to the luxury goliath is a merger.

In luxury, scale matters hugely. The heft of its portfolio gives LVMH a significant edge over competitors in distribution and media, where it enjoys leverage with multi-brand retailers, mall owners, real estate developers, magazines, influencers and other key players in the fashion ecosystem. LVMH also has an advantage in attracting and retaining top talent, who it can offer better compensation, more interesting career opportunities and larger budgets.

Scale benefits are by no means unique to luxury. Across industries, from cars to technology, the bigger you are the easier it is to stay on top. But in recent years, luxury has become a winner-takes-all business increasingly dominated by the biggest players as the landscape has become more complex, unpredictable and difficult to navigate for smaller companies.

Digital has upended once dependable distribution channels, giving rise to new competitors, but online upstarts face rising customer acquisition costs and rarely have the time and capital it takes to build luxury brands. Meanwhile, the proliferation of digital communications channels has favoured bigger players that can not only master the growing number of platforms but keep pace with consumer expectations for product innovation at the speed of social media. The rise of China, now the world’s largest fashion market, has added further complexity to the equation.

Then came the shock of Covid-19, which not only disrupted supply chains and forced store closures, but also recentred the fashion market from the United States and Europe to Asia and pushed more consumers to blue-chip brands, deepening the divide between the biggest companies and everyone else. The latest round of luxury results saw luxury megabrands like Hermès and LVMH’s Louis Vuitton and Dior far ahead of the pack, while smaller labels have struggled to bounce back from lockdown lows with anything near the same velocity.

“Performance is driven by a few elements that are typically linked to scale,” explained Bernstein analyst Luca Solca. “The need to capture consumers at the four corners of the world (as they are not travelling to Europe as much) favours the biggest brands that have both a global retail network and global digital distribution,” he said. “Then, there is the ability of brands to be compelling to Chinese consumers in terms of traction and innovation, and their ability to connect with customers by using a multitude of different communication and CRM channels.”

Today, even Kering and Richemont could benefit more than ever from greater scale.

Whether they ever tie the knot remains to be seen. Price could be one obstacle, though Rupert’s willingness to relinquish control (his family holds the majority of Richemont voting rights but only 9 percent of its capital) may be the real stumbling block. But 2021 may yet prove a catalyst for a transformative deal for Kering. If not the Richemont megamerger Pinault is said to have proposed, the group could make a move for a smaller but still significant player like Burberry.

The need for scale in a complex world is driving talk of game-changing consolidation in Italy, too. Renzo Rosso — founder and president of Diesel-owner OTB, which recently acquired Jil Sander — told La Repubblica last week that he was seeking a “significant acquisition” in “high-end prêt-à-porter” and seems to be on a mission to unite Italy’s fragmented luxury sector, which has long been populated with smaller, family-run firms and lacks a large-scale leader.

Smaller firms “won’t be able to sustain the costs of digital development, won’t get a deal with big online platforms,” Rosso told Bloomberg this month. “Some fashion companies will need to accept partnerships, and these alliances will give them the visibility they never had before.”

After years of fiercely asserting his independence, Giorgio Armani may be ready for a deal. Covid-19 “made us open our eyes a bit” the 86-year-old designer told American Vogue in an interview published in its May issue. “One could think of a liaison with an important Italian company,” he added, prompting speculation of a tie-up with Agnelli family holding Exor, which has the scale to pursue such a deal and may have a growing interest in fashion. (The company is pushing its Ferrari fashion line and recently acquired Shang Xia from Hermès).

Soon after the Armani interview was published, Dolce & Gabbana joined the chorus, quashing rumours of a deal with Kering, but leaving the door open to a “broader Italian project.”

And yet Moncler’s Remo Ruffini, who last December acquired Stone Island in a transformative move that signalled the company’s ambitions to build its own group, said Thursday he did not expect to see consolidation in Italy’s fashion sector, citing the culture of its controlling families.

“I do not see consolidation in Italy,” he said. “In Italy everyone wants to hold the majority. Most companies have a long history — four, five generations long — and it’s hard to let go,” he continued, before adding that he himself was not constrained by such thinking

Likes of Brazil and Indonesia to be paid for carbon credits linked to avoidance of tree clearance

Amazon, Boston Consulting, McKinsey, Unilever, Salesforce, Airbnb, GSK, and Nestlé in April threw their weight behind a $1bn scheme aimed at tackling deforestation that now faces the challenge of establishing which countries will receive funds.

The Lowering Emissions by Accelerating Forest Finance (Leaf) venture was launched just as new data showed greenhouse gas emissions from the loss of previously untouched tropical forests had exceeded the combined emissions from Europe’s five-largest economies. 

Under the proposed scheme, companies would in effect pay countries such as Brazil, Indonesia and the Democratic Republic of Congo for carbon credits linked to the avoidance of deforestation.

The organisations can then use those credits to compensate for their own emissions. Since trees absorb carbon, cutting them down counts as a source of emissions.

Leaf has proposed voluntary contributions of at least $10 per tonne of CO2 emissions avoided, or almost double what is presently offered in the voluntary carbon market.

“We’ve announced the call for proposals of $1bn — 100m tonnes at $10 per tonne. But that’s just the beginning. We know that that’s not enough,” said Eron Bloomgarden, executive director of Emergent, a US-based non-profit that will facilitate the transactions.

Globally, more than 4.2m hectares of humid primary tropical forest, or an area similar to the size of Switzerland, were lost in 2020, mainly to agriculture, commodity production and wildfires.

An equivalent of 2.65bn tonnes of CO2 were released into the Earth’s atmosphere as a result, according to data from the World Resources Institute’s Global Forest Watch, based on the estimates of carbon stored in the destroyed vegetation and root structures. 

Humid tropical forest loss rose 12 per cent in 2020, despite the global economic slowdown brought on by the pandemic. It also flew in the face of commitments by large multinationals to prevent deforestation in their supply chains caused by the production of soy, palm oil, timber and beef. 

Primary tropical forests are particularly important since they are not fully recoverable, and can take centuries to regenerate. Their removal results in a huge loss of biodiversity.

Elizabeth Dow Goldman, GIS research manager for Global Forest Watch, said: “We were all hoping [2020] would be the year where things turned around. Yet [primary forest loss] went up . . . it’s disappointing to see that.” 

“Across the tropics, agriculture is such a big driver of primary forest loss,” said Goldman. Being intentional about how and where agriculture expanded could have a big impact, she added. “There needs to be a focus on improving output from the land that’s already under cultivation.”

Under Leaf’s scheme, Brazil could theoretically receive about $1bn if its deforestation of primary tropical forests were reduced by just 10 per cent.

But there are many other countries seeking financial support, where the effect would also shift their economies. 

Malaysia is one of only four countries where forests emitted more carbon than was captured over the past two decades, turning them into a carbon source from a typical carbon “sink”. In the period from 2001 to 2020, close to 17 per cent of Malaysia’s tropical primary forests were lost, mainly to palm oil plantations and timber trade. 

Yet Malaysia has managed to reduce deforestation for each of the past four years after bringing in caps on palm plantation areas and harsher punishments for illegal logging. Humid primary forest loss reduced from 185,000 hectares in 2016 to 73,000 hectares in 2020, GFW figures show.

If Malaysia reduced its deforestation rate of primary tropical forests by a further 10 per cent from current rates, in theory Leaf’s voluntary carbon credit scheme, if scaled, could provide about $60m in financial support. 

In the Democratic Republic of Congo, deforestation is mostly caused by agricultural demands as smallholder farmers clear space to grow staple foods such as cassava and maize, for an increasing population. 

A study by the University of Maryland found that more than 90 per cent of overall tree cover loss in the Democratic Republic of Congo was because of “slash and burn” agricultural techniques where forest land is burnt for cultivation and then left to regenerate. Deforestation in the DRC has resulted in about 480,000 hectares of primary humid tropical forest being lost each year, over the past five years.

If deforestation rates in DRC for humid primary tropical forests alone were reduced by just 10 per cent, its jurisdiction could receive almost $350m from Leaf’s scheme.

Credits linked to avoided deforestation are not new and have caused controversy: critics have said it is difficult to ensure that the protection of one area does not lead to deforestation in another. Also, some “avoided deforestation” credits are generated from schemes in areas of woodland that were not genuinely at risk of being cut down.

Under the Leaf plan, tropical forest countries would not receive financing until a third party had checked that deforestation was reduced across the “jurisdiction” — the nation, state or province.

Leaf advocates argue that the jurisdictional approach will avoid protecting one area while deforestation shifts next door, creating “islands of green”.

Emissions-reduction purchase agreements are expected to be signed with tropical countries by the end of the year, but countries will not start receiving financing until the projects have begun generating credits.

“These countries need to find the right equilibrium between forest protection . . . and food production,” said Emergent’s Bloomgarden.

The scheme is underwritten by the governments of the UK, US and Norway.

“Protecting tropical forests is really a global imperative,” said Ruben Lebowski, chief natural resource economist at the Environmental Defense Fund, a US non-profit environmental advocacy group. “There’s no pathway to meeting the Paris targets without rapidly reducing deforestation. It’s mission critical,” he added. 

“Right now, the economic development model only puts a value on trees when they are cut down,” Lebowski said. “Leaf aims to create durable finance for a model that is consistent with standing forests and sustainable livelihoods for indigenous and local communities.”

Data show mutual funds that backed the meal delivery app are domiciled in North America

UK and European investors have overwhelmingly shunned Deliveroo, with data showing that just four out of 18,000 mutual funds in the continent have invested in the food-delivery company since its disastrous initial public offering in March.

Deliveroo’s IPO was dubbed the worst in London’s history after its share price fell 26 per cent on its opening day. Two months on, its shares are still trading at more than a third below their 390p listing price, closing on Friday at 251p.

Investors spoke out ahead of the IPO saying they would avoid the company because of concerns over its dual-class share listing, governance and labour standards.

According to data from Morningstar, the only UK-domiciled fund to disclose it had invested in Deliveroo is managed by River and Mercantile for the wealth manager AFH Group. The other three funds to hold the stock are Spain-based Enginyers Accions Europa fund and two Europe-domiciled funds from Morgan Stanley and Franklin Templeton.

Morgan Stanley, Franklin Templeton, AFH Group, and River and Mercantile declined to comment. Caixa d’Enginyers did not respond to a request for comment.

Almost all mutual funds that backed Deliveroo are domiciled in North America, including funds from Fidelity, T Rowe Price and Federated Hermes, according to Morningstar.

Tom Powdrill, head of stewardship at Pirc, the UK proxy adviser, said it was “striking that those closer to the action — both in terms of the listing and where Deliveroo does much of its business — are far less likely to invest” in the London-based company.

“If I was a US investor I think the lack of domestic support for the stock would be something to keep an eye on,” he added.

He said that this was potentially driven by European investors’ growing interest in environmental, social and governance issues.

Colin Baines, investment engagement manager at Friends Provident Foundation, said the coronavirus pandemic had brought social issues such as work conditions to the fore. “Having Deliveroo in portfolios is a sure-fire way to flag to clients that perhaps they’re not integrating social issues [into investment decisions] that well.”

Deliveroo said that more than a third of its shareholding is from investors based in the UK, including the British arms of international asset managers. Morningstar’s data cover 40,000 open-ended funds globally, including 18,000 domiciled in the UK and Europe.

Shares in other online food delivery companies, from Ocado to Just Eat Takeaway, have also underperformed in recent weeks, as investors feared the sector would lose out now that diners are allowed to return to restaurants.

But according to a recent report from Takealytics, a research outfit that tracks food apps, delivery “seems to have stood up well”, thanks in part to promotional activity.

Large institutional investors had also expressed concerns about Deliveroo’s dual-class structure, which gives Deliveroo’s co-founder Will Shu enhanced voting power. This share structure excludes it from London’s premium listing, leaving some investors unable to buy the stock.

“We would have no power to do anything [because of the rights the chief executive will hold for three years]. The CEO could run the business however he likes for years,” said Andrew Millington, head of UK equities at Aberdeen Standard Investments, ahead of the IPO.