Year in numbers

Shanghai’s Nasdaq-style board for new-economy listings beat all expectations in 2020, its first full year of operation, and is poised for further growth in 2021. The Shanghai Stock Exchange Science and Technology Innovation Board, better known as the Shanghai Star board, finished 2020 with more than 200 listed companies commanding in excess of Rmb3trn (US$463bn) in market capitalisation. Talk about a good start. “The Star Market forms part of a broader strategy in the PRC to develop its equities market into one that is fitting for the second largest economy in the world,” said Terry Yang, a capital markets practice partner at international law firm Clifford Chance. The reasons to celebrate its success are many. China’s main boards of Shanghai and Shenzhen have historically subjected companies to painfully slow regulatory approval processes, leaving hundreds of companies stuck in pre-listing limbo for years. “The Star Market was launched to supplement the main boards,” said Gu Haibo, head of China equity capital markets at HSBC. “The average application review period for a Star board IPO is around seven months, which is slightly longer than in Hong Kong, but compared to the old days [in China] it is certainly an improvement. The whole process has been streamlined and expedited, which is good for issuers.” In a big departure from stringent requirements around profitability, track record, and ownership structures, the Star board introduced a more flexible, disclosure-based regime – far closer to international standards. Among other innovations, the registration-based IPO system also removes the unwritten cap on valuations at 23 times historical earnings and allows pre-profit companies, red-chips and companies with weighted voting rights to list in the A-share market for the first time. The new rules have added real variety to the Chinese equity market, which has been traditionally dominated by old industries, often at least partially state-owned. The China Securities Regulatory Commission said in January 2019 it would favour listing applications from six industries, namely IT, high-end equipment, new materials, new energy, environmental protection and healthcare. All six segments are now represented on the Star board, according to analysts at Credit Suisse. Of the stocks listed on the Star board as of end-November, IT companies took the largest share, accounting for 42% of the total, followed by healthcare with 22%. “By their nature many new and innovative companies do not yet meet those [previously stringent] standards,” said Gu. “The companies that have listed include those that are not profitable yet, or those with weighted voting rights, for example. The diversity of these companies also achieves the purpose behind the Star board.” The notable impact of the registration system has been on waiting periods. The first 197 IPOs on the Star board had an average waiting period of 228 days from application to listing, compared with 546 days for SME Board and 617 days for the Main Boards in Shanghai and Shenzhen, Credit Suisse said. The ChiNext timeframe has also shortened dramatically since it adopted a registration based-system in the second half of 2020. The average ChiNext IPO in the final quarter of 2020 was completed in just 110 days, down from 209 days in the previous six months and 322 days in 2019. Global attention The Star Market has inevitably caught the attention of global banks looking to expand their China business, which already accounts for three-quarters of investment banking fees generated in the Asia-Pacific region, according to Refinitiv data. Foreign players have yet to make their mark, though. Of the first 200 listings on the Star board, just two saw the participation of international underwriters, acting through their Chinese securities joint ventures. The struggle on the ECM front is representative of the longer-term challenges for i

The grand buildings of the Bank of Japan and Tokyo Station stand as testament to Japan’s embrace of modern ideas at the end of the 19th century. The mastermind behind both structures, Japanese architect Kingo Tatsuno, spent four years studying architectural design at the Royal Academy of Arts in London and is credited as being the first to introduce European-style brick masonry to Japan. The change in architectural style was mirrored in wider society. The turn of the 20th century marked a period of rapid economic development for Japan, when the abolition of many old-fashioned restrictions helped unlock the country’s full potential. After a miserable year in 2020, it is the architecture of Japan’s capital markets that is now in need of a similar, transformational approach. The yen has largely retained its value throughout the Covid-19 pandemic, along with its status as a safe haven G3 currency, but it has lost its appeal as a global funding currency. Indeed, cross-border yen issuance plummeted 65% in 2020 to its lowest in 36 years. International issuance in yen totalled just ¥1.164trn (US$11.26bn), according to Refinitiv data, compared with ¥3.309trn in 2019, for the worst year since 1984. Bankers in Tokyo said foreign issuers and Japanese investors were equally affected by the breakout of Covid-19 and the subsequent response from the world’s central banks, which scrambled to provide ample liquidity to help battered economies deal with the effects of the pandemic. On the supply side, easy money elsewhere led to a decline in issuance from French banks, which have been the main issuers in the cross-border yen market in recent years, while other global banks simply looked elsewhere. And with central banks in many emerging economies having adopted bond purchase programmes regular sovereign Samurai issuers from emerging economies also skipped. On the buyside, uncertainty around Covid-19 and the pandemic’s effects on credit quality of foreign issuers led Japanese investors to shift their focus to a domestic market that was easier to get a handle on. Even after market conditions improved, pension funds remained largely on the sidelines. "They shifted focus out of the cross-border yen market to the domestic market as they chose to make money steadily by doing the 'BoJ trade'," said Akihiro Igarashi, head of debt syndicate at Nomura, referring to the practice of buying domestic bonds and then selling them to the central bank, which expanded its corporate bond purchases in 2020 to help the coronavirus-hit economy. Subordinated hybrid bonds were also an attractive alternative. They had sold off badly when the market became volatile between March and May, but once things settled down, the products became very popular again. Even short-term investors started participating, motivated by the fact that subordinated bonds are more liquid in the secondary market than cross-border yen bonds and hence it is easier to sell whenever an investor wants to take profits. After the global credit markets stabilised in the middle of the year, foreign issuers were well aware of the importance of diversifying their funding channels but chose to issue in their domestic currencies or in US dollars, with funding costs declining because of easing by central banks – the US Federal Reserve in particular. "Issuers this year were in crisis mode, raising funds from wherever [cheap] funds were available," said Igarashi. "As a result, the yen market was left as an 'auxiliary' to the dollar and euro markets." Some bankers expect foreign issuers to return to Japan in 2021 to expand their investor base, but others are sceptical, expecting cross-border yen volume to remain low as long as US and European central banks continue their ultra-accommodative policies.Low risk-tolerance But it wasn’t just gaikokujin who were avoiding yen deals. The yen market became less attractive to some Japanese issuers, too. A record ¥1trn

Early last year, shortly after banks in the Asia Pacific first began telling staff to work from home, the Asia CEO of one global bank took a call from a junior banker with an unusual question around the implications of the bank’s remote working policy. The banker went on to ask whether the firm could start paying his rent since, he argued, it now qualified as his main place of work under the Hong Kong securities regulator’s rules. That request was politely declined, but the onset of the coronavirus pandemic threw up many more difficult questions as bankers swapped boardrooms for kitchen tables and business-class flights for Zoom calls. It also triggered a feast of capital markets deals that made 2020 the best year on record for investment banking fees, according to Refinitiv data. Asia, the first region to be hit by the Covid-19 pandemic, set the template for remote working and online dealmaking in 2020. It has also been more successful than other regions at containing the virus, allowing some countries to ease restrictions and give the world a glimpse at what the future might look like once the pandemic is under control. And now, after a hugely successful 12 months, bankers in the region see little reason to go back to the pre-Covid way of doing business. “The world is not going back to where it was previously. We will move towards a hybrid work model involving a mixture of working remotely and working from the office,” said Chandra Mallika, Deutsche Bank’s Asia Pacific chief operating officer. “We’re currently going through a planning exercise looking at what this will mean for each role depending on its requirements and also the local regulations but what is clear at least is that things have changed for good.”Status quo The response across Asia-Pacific’s financial centres was broadly consistent. All but the most essential staff were asked to work from home, with some critical functions moved to back-up sites on socially distanced floors. After an initial scramble for laptops and spare monitors, most bankers have been taken aback by the ease of the transition. “At one point, we had 95% of the workforce at home almost with no disruption to services for our customers,” said Farhan Faruqui, group executive for international banking at Australia and New Zealand Banking Group. “If you had asked me two years ago whether that could have been done, I would have been sceptical.” Twelve months later, many are in no rush to bring staff back to the office. In Hong Kong, where the government is chasing a target of zero infections, some are still advising staff to stay away or limiting office capacity. The success of remote working has prompted a rethink of expensive office costs. Standard Chartered has told staff across the world that they can work from home or adopt a hybrid office-and-home set-up indefinitely if their job allows it. The bank is also trialling a partnership with International Workplace to offer a third option of using serviced co-working spaces and meeting rooms in 3,500 locations. Most market participants expect that other banks will follow suit. “It partly depends on the function and I think for back office functions, it is more likely that banks will provide more flexibility than for front office sales and trading roles, where the regulatory requirements are greater,” said Mark Austen, CEO of trade body ASIFMA. “Even for sales and trading though it is likely that banks will grant some flexibility as it’s been proven that it can work.” China’s experience, however, suggests banks are likely to return to work as usual once the pandemic is no longer a threat. Offices in Beijing and Shanghai are busy again, with around 90% of staff back in their primary location.Investment banking Unlike traders and private bankers, who were not previously set up to work from home because of regulatory requirements around doc

2020 was a breakout year for environmental, social and governance financings globally. Five years on from the Paris Agreement and driven by the increasingly obvious effects of climate change, demands for social justice and the misery of the coronavirus pandemic, the financial industry got serious about ESG, which moved from being a niche interest on the sidelines of the markets to front and centre. Advancement in ESG financings has been most pronounced in Europe where bottom-up development, driven by a responsibly-aware investor base, was matched by a policy-driven, top-down approach. “The gravitational centre for ESG financial markets has been Europe,” said Jacob Michaelsen, head of sustainable finance advisory at Nordea Markets. “The European Union has been leading the discussion around ESG and has been developing practical advice to support the growth of green and sustainable financing.” That kind of regulatory support has not been replicated in the US where, during former president Donald Trump’s term in office, the White House pursued an anti-ESG agenda, rolling back rules and standards introduced to reduce emissions and address environmental problems. “Over the last four years, developments in Europe and the UK have been progressing at a really fast pace,” said Heather Slavkin Corzo, head of US policy at the PRI, a UN-supported network of investors that works to promote sustainable investment. “The US needs to catch up.”President Cnut A lack of encouragement in the White House has not stemmed the tide of US interest in ESG, however, with large parts of the economy and the financial markets embracing the issue. “The US is not that far behind the curve,” said Chris Wigley, an independent ESG fixed income portfolio manager. “States and corporates have continued issuing green and social bonds and investors have been buying them.” The numbers paint a mixed picture but overall support the view that, despite the best efforts of Trump, momentum behind ESG financing remains strong. According to Refinitiv data, the US share of green bond issuance has kept pace with global issuance – it was US$22.9bn in 2019 (12.5% of the global total of US$183.6bn) and US$28.4bn in 2020 (12.6% of US$225.6bn). US social bond issuance actually fell as a share of global issuance – US$1.2bn in 2019 (8.6% of US$13.9bn) and US$9.4bn in 2020 (5.7% of US$166.1bn) – although those totals were skewed by the huge social bond issuance from the EU. US sustainable bond issuance, on the other hand, increased massively as a share of the global market – from just US$2.5bn (7.3% of US$34.2bn) in 2019 to US$72.6bn (56.3% of US$128.9bn). In the loan market, ESG loans for US borrowers grew at more or less the same rate as ESG lending globally. US ESG lending totalled US$16.3bn in 2019 (9.7% of the global total of US$167.4bn), while in 2020 US ESG loans were US$17.9bn (9.9% of US$181.7bn). “The US market is home to the world’s biggest green bond issuer, Fannie Mae, and there is an active municipal bond market,” said Matthew Kuchtyak, an AVP-analyst at Moody's who specialises in ESG issues. “The market may be more concentrated in terms of issuer type than in Europe but diversity is growing.” Deals were, on the whole, larger in the US, too. Average deal sizes for green bonds in 2020 in the US, for example, were US$568m versus the global average of US$346.5m.Renewable investors Increasing levels of ESG issuance in the US have been matched by interest in responsible investments. “US investors appreciate that ESG is financially relevant and can lead to outperformance in the long term,” said Slavkin Corzo. That appreciation is reflected in improved flows into asset managers following an ESG strategy, with numbers undoubtedly helped by the outperformance of ESG funds in 2020. According to the Forum for Sustainable and Responsible Inve

Environmental, social and governance financing became mainstream in 2020. Any attempt to parody it as a niche asset class for do-gooders and tree-huggers became even more unsustainable than it already was. But with greater awareness of ESG issues comes greater attention on the asset class’s gatekeepers: the second-party opinion providers that determine (like some kind of ESG Santa Claus) who has been naughty and who has been nice – and hand out certifications to that effect in the form of ESG ratings. It is a very young industry – just over a decade old – that is still in considerable flux and questions have understandably arisen about how providers come to the decisions they do, and, in the case of those companies that certify actual deals (as opposed to hand out general ESG scores) the moral hazard of rating a company that is paying you. The problematic example that has become a cause celebre in the sector was highlighted in a 2018 report from US think-tank the American Council for Capital Formation called “Ratings that don’t rate: the subjective world of ESG rating agencies”. Looking at the automotive sector, it pointed out that while Germany’s BMW has a positive rating – indeed it is in the 93rd percentile (where a rating closer to 100 is better) – electric car major Tesla is not only below every single European auto manufacturer, it is even ranked below Volkswagen, which became the epitome of ESG naughtiness when it was caught cheating emissions tests. “The stark contrast between Tesla’s score and the scores of European manufacturers typifies the lack of objectivity in these scores,” concluded author Tim Doyle. The second-party opinion providers are aware of what appears to be a significant disconnect. But, as ever, things aren’t as simple as they first appear. “Tesla typically gets relatively poor ESG scores,” said Leon Saunders Calvert, head of sustainable investing and fund ratings at Refinitiv, which owns IFR. “You’ve got problems with governance because you essentially have a charismatic CEO who runs the business on Twitter,” he said, going on to cite problems with Tesla’s supply chain and those surrounding mining for the lithium in its batteries, which is quite carbon-intensive. “But at the same time, you’ve also got the organisation at the vanguard of decarbonising the automobile industry.” And it’s not just the auto industry that causes methodological confusion. In early December a report from Ping An Insurance Group of China in conjunction with the Brevan Howard Centre at Imperial College London used artificial intelligence to look at companies’ climate-risk disclosures. It concluded that opaqueness may implicitly be rewarded by unsophisticated rating tools. “This gives perverse incentives for selective non-disclosure, leading to greenwashing,” the report said, pointing at the opinion providers. Another troubling example comes from Ulf Erlandsson, founder and executive chair of the Anthropocene Fixed Income Institute, which takes a market-based approach to positive climate impact in fixed income markets. He points to research he has done into Adani Power, India’s largest publicly traded coal-fired power generator. Thanks to a recent move into a solar energy project in Gujarat, the company has, he said, achieved a 94th percentile ESG metric score from some providers and is included in an important emerging market ESG index. “With 99.7% coal-based generation capacity, we believe the company should be affected by coal-investment exclusion criteria rather than a candidate for best-in-class ESG inclusion,” Erlandsson said. Case for the defence Three perhaps isolated examples, but are they symptomatic of wider problems and do they together make a pretty damning case for the prosecution? Not according to second-party opinion providers, who say

Libor, the average rate at which banks borrow unsecured funds across a number of terms and currencies, and the reference rate against which the small matter of some US$350trn in financial contracts have been written, is on the way out. Faith in the rate as a viable benchmark has been on the wane for some time, driven by a collapse in the market for wholesale bank lending and the rates submitted for inclusion sometimes based on “expert judgement” rather than actual transactions. It is a truth universally acknowledged that Libor was no longer fit for purpose. Notice of its impending doom came in 2017 when the UK’s Financial Conduct Authority announced its intention to stop compelling banks to submit the rates needed for its calculation. Libor will be replaced with different benchmarks across different currencies with, for preference, the Sterling Overnight Index Average (Sonia) for sterling transactions and the Secured Overnight Financing Rate (SOFR) for those in US dollars. That trajectory has been known for some time – and market participants and regulators have been busy preparing the groundwork for months – but with the now tight timeframe in mind, are things on target? “I think the banks and the big corporates are on track with the timeline,” said Katie Kelly, senior director for market practice and regulatory policy at ICMA. “There’s been so much happening recently and, as we get closer to the cessation date, the more critical it becomes for everyone to prepare for the change.” For the most part, many of the deadlines within the official timeframe have been hit, with the interaction between regulators and market participants ordered and supportive, even with the drag on resources that emerged during the pandemic. “What has been impressive with this process has been the way that industry bodies have all come together to work towards transitioning Libor,” said Andrew Petersen, finance partner at Alston & Bird. “There have been some key developments in 2020 to keep the timeline in place.”Major milestones In June 2020, the Financial Services Bill was introduced to the UK Parliament, which will bring forward legislation to extend and enhance the FCA’s powers to help manage and direct an orderly wind-down of Libor and to help deal with “tough legacy” contracts (those written without envisaging an end to Libor). In October, ISDA launched the IBOR Fallbacks Supplement in the standard definitions, thereby reducing the risk associated with the disappearance of a key reference rate in the interest rate derivatives market. Changes came into effect on January 25 2021. In December, the ICE Benchmark Administration, responsible for publishing Libor rates, began consultation on its intention to cease publication of the settings. The end of the consultation period is expected to confirm December 31 2021 as the final date on which Libor will be calculated for all currencies and terms except for the most active US dollar settings. These have been given an extended lifetime of June 2023 but for legacy products only.Different paths, same journey Continued publication of US dollar Libor rates to 2023 is an indication that not all parts of the market are in the same state of readiness for the transition. The news raised concerns, in some quarters, that the whole project was at risk of being disregarded rather than it reflecting a slip down the priority scale during the pandemic. That would be a significant issue for the US dollar market. “The US dollar market is the biggest, the most important, the most pervasive market and it’s critical to get it right,” said Padhraic Garvey, regional head of research for the Americas at ING. “I don’t think the extension is a sign that the exercise is being rejected; it was just evident that stuff hadn’t been done and a realisation that forcing the transition through for