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Beyond Ratings Weekly Digest

Your briefing on augmented financial risk analysis

N°154 ▪ 19th July 2018


Only dead fish go with the flow… together with plastic

One hundred years ago, a new material was revolutionizing the design industry: plastic. The new material, an emblem of contemporary times, entered all domains of human life, from manufactories to the arts. Additionally, it entered the oceans, which is another emblem.

During the 1980s, an unexpected destination of all untreated plastic waste was discovered: 4 to 5 gigantic plastic gyres were actually floating permanently – because of their low density – on the surface of the oceans. One of the largest plastic patches, called the “Great Pacific garbage patch”, now stretches out on an area of about 1.6 million km² – Mongolia’s size roughly – a figure that is four to sixteen times higher than previous estimates. A research team from The Netherlands, UK, and USA recently published a paper where they estimate the patch weighing between 45,000 and 129,000 tons of plastic and containing about 46% of fishing nets. Microplastics only account for 8% of total mass but represent 94% of the 1.8 trillion pieces that are estimated to be floating in the area. The preponderance of microplastics is the reason patches are not visible from satellites. Similar patches are present in the different other oceans: according to Eriksen et al. (2014), there is a minimum of 5.25 trillion particles of plastic, weighing 269,000 tons, although this figure seems underestimated.

Consequences are devastating for marine ecosystems: everyone has seen images of seals strangled by fishing nets, disfigured turtles or dead marine birds with their stomachs full of plastic pieces; but the most harmful effect could be invisible and related to all toxic compounds that slowly enter the trophic chain… and eventually human bodies. Defects from plastic include cancers, birth defects, immune system problems, hormonal disruption and childhood developmental issues. Health costs from this pollution could become very high, in addition to the annual $13 billion of environmental costs it already generates (UNEP, 2014). According to the UNEP, the overall natural capital annual cost of plastic use in the consumer goods sector would reach $75 billion.

Ocean plastic patches spatial modeling (from the University of Hawaii)

Global plastic production has reached 320 million tons in 2016, a 4%-growth compared to 2015. More plastic has been produced in the last decade than ever before. About 50% is produced in Asia (29% in China), 19% in Europe and 18% within the NAFTA. (It should be noted that, as often, the geographical distribution of production varies significantly from the consumption distribution.) A limited portion is recycled (30% in Europe, but around 9% globally), but the vast majority is discarded into landfill or littered into the environment – including oceans. In coastal regions (gathering 2 billion people), it is estimated that for every 100 million tons of plastic waste that are produced yearly, 32 million tons are mismanaged. In a 2015 paper, US and Australian researchers estimated that about 8 million tons went into the ocean in one year. By 2025, with conservative hypotheses and growing population, this figure could amount to 17.5 million tons. The same researchers provided an estimate of the top 20 pollution contributors:

How could the situation evolve? Research shows that, regarding the Great Pacific garbage patch, plastic pollution is increasing exponentially. A variety of ‘ocean cleaning’ initiatives have been launched in recent years, however, even without considering blue-sky projects, there is little likelihood they could reverse the current trend. No chance to empty a flooded room with a straw – even if it’s a very innovative one – while rain is still pouring. The key is upstream: at the waste level. In some places, consciousness is spreading: there are regions or countries which have banned some plastic use such as plastic bags (like in Kenya and Rwanda). An example of imposed taxes is Norway, where plastic bottle producers are subject to a ‘no recycling’ tax while bottle buyers must pay a deposit.

The EU on its side aims at making all plastic packaging recycle or reusable by 2030, with a reduction of single-use plastics and a restriction on the use of microplastics. During the last G7 summit in Canada, five of the G7 nations (without U.S. and Japan) agreed to an ocean plastic charter. The last example is India, which plans a ban on single-use plastics by 2022. These countries are not the first contributors, however (EU collectively would appear at the 18th rank in the list above). And China?  A few months ago, the world’s largest importer of recyclable materials decided to ban plastic waste imports, which will force other countries to deal with their own waste. Regarding domestic plastic waste production, the National Development and Reform Commission is “looking at further measures”. The country hasn’t yet signed up for the UNEP “Clean Seas” campaign which came up from last December’s UNEP Assembly.

Globally, actions remain marginal, and clearly not up to the task. Increasing health and environmental damages will probably lead involved countries to act at some point. Meanwhile, plastic particles will continue to disseminate in biological cycles, replacing fish and other forms of ocean life.

Hadrien Lantremange, Natural Capital Analyst  –  Sources: Beyond Ratings, PLOS One, Science, Scientific Reports



Sovereign Risk

Did Russia dump all its U.S. Treasuries in May?

Russia has never held as many U.S. Treasuries as China and Japan, but the country was in a good position on the list of Treasury holders (Treasury International Capital list or TIC’s list), that is, until very recently. In March, Russia was in 16th place with USD 96.1 Bn in Treasury holdings. In April, it liquidated almost half of its holdings, and ended the month with USD 48.7 Bn and bought gold to diversify reserves, as the Governor of the Central Bank of Russia Elvira Nabiullina said after the sell-off of May. This knocked Russia into 22nd place behind the United Arab Emirates and Thailand. Then in May, Russia continued its U.S. Treasuries sell-off and disappeared entirely from the TIC’s list. The smallest one on the list was Chile, with USD 30.2 Bn. Russia’s holdings must have fallen below that amount, and we can imagine to zero…   

If there was a message in Russia’s liquidation of U.S. Treasuries, it was very difficult to hear clearly. Indeed, the 10-year Treasury sell-off that had started last September peaked with the 10-year yield at 3.1% on May 17th. Since then, the 10-year Treasury has rallied under heavy demand, and the yield has fallen – thus fueling fears about the inverted yield curve. Several explanations of Russia’s sell-off are possible. It could be a flight to safety (hence the gold purchases) because of the global trade posturing between the United States and the rest of the world led by China, the European Union, and Canada. It could be related to sanctions imposed by the United States on Russia in April (as the Trump administration imposed new sanctions on April 6 on seven of Russia’s richest men and 17 top government officials). Lastly, it could be a political maneuver to get rid of U.S. assets before they plunge in case of a recession (following the potential inverted yield curve).

Julien Moussavi, Head of Economic Research – Sources: Beyond Ratings, Bloomberg


The Montagne d’Or Project: a real gold mountain?

Montagne d’Or is a mining project in French Guyana, managed by the Compagnie Minière Montagne d’Or (CMMO), an outgrowth of Nordgold and Columbus Gold. The goal is to extract around 85 tons of gold from a quarry located in between the two parts that form the non-intervention forest reserves (RBI) of Lucifer Dékou-Dékou. Recently, it came under the scrutiny of the public after the publication of a WWF report criticizing the economic viability of the project. It is also condemned for the high environmental risks it poses though it is in a zone where open pit mining is allowed. CMMO is committed to creating a “responsible quarry”, but this would only curtail the environmental issues.

Survey of Guyanese Population on the Montagne d’Or Project

The project is currently still in its development phase and public acceptance will be key to its approval. Recently, a survey by IFOP for WWF found that 81% of the Guyanese people considered the project to bear a severe environmental risk and 69% were opposed to the project. A key argument of the CMMO in favor of the project is its impact on local employment. Indeed, it states that it would create 750 jobs during the operating phase, from which more than 90% could directly go to the Guyanese people. This is definitely a strong argument in this French region where unemployment was as high as 22% in 2017. However, this is a rather short-term view: the project is expected to last 12 years and one can wonder what will happen with the employees after the site closes. Moreover, it raises a more general question regarding public spending. The project could receive between 177 and 420 million euros from the French state, which could also be used to finance more long-term activities, such as investment in education or public infrastructure, badly needed in French Guyana. Finally, it shed light on an interesting feature of today’s world, where a lot of us want high-tech products- which are very demanding in gold- but nobody wants a quarry in his or her backyard.

Ruben Haalebos, Statistical Analyst  –  Sources: Beyond Rating, IFOP, INSEE

Carbon/Climate Change

E S or G: What do European investors have to say about it?

Responses of stakeholders to the question: “What are the sustainability factors that the relevant investment entities should consider?”

On the 24th of May 2018, the EU Commission published the results of the public consultation on Institutional Investors’ and Asset Managers’ Duties regarding sustainability. It was established based on the 191 responses given by a variety of stakeholders (institutional investors, industry associations, private individuals, NGOs…)  domiciled in 14 EU Member States, 3 other European countries, and 5 non-European countries.

This graph displays the 143 public responses to the question: “What are the sustainability factors that the relevant investment entities should consider?” The respondents had to give a gradual answer by ranking the importance of each factor. The result is almost unanimous: 75% of respondents marked all factors as either important or very important. This seems to indicate that ESG factors are widely regarded as a good framework to pilot decision-making. The discrepancies between each factor are marginal, however, the higher dispersion of answers makes climate the most debated factor with 10% of respondents giving it a low or very low importance.

Does this mean that all investors have embraced the ESG approach and are committed to implementation? A few observations should moderate these encouraging results. Firstly, the study aggregates answers from high-level financial institutions with the ones of private individuals or NGOs, it does not represent the financial leverage of each respondent. There may be a motivation bias as well since respondents were free to (or not to) answer knowing their answers would be made public. Answers given by members of the finance industry are slightly different: governance and climate come first while social and other environmental factors receive a lower approval. Finance industry participants also indicate further in the study that fiscal transparency and a larger range of best practice factors are also relevant in many cases. This leads the EU Commission to state that investors should be left with the discretion to choose how they apply ESG factors in their decisions, as the relevance and materiality of these factors can be dynamic and depend on each situation in terms of investment strategy or market.

Nathan Breen, Climate Analysis Team – Sources: Beyond Ratings, European Commission


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© Beyond Ratings 2018

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Photo credit via Visualhunt/CC BY-SA or other: Front page ▪ Credit 1: CECAR – Climate and Ecosystems Change Adaptation R; Credit 2: Tony Webster; Credit 3: Kiefer.; Crédit 4: NASA Goddard Photo and Video / Research notes ▪ Credit 1: DnDavis (via; Credit 2: zhu difeng (via Fotolia); Credit 3: Mny-Jhee (via Fotolia); Credit 4: xmentoys (via Fotolia)


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