Unpacked Video Series

Unpacked: ESG Investing

Climate change. Labor conditions. Boardroom decisions. As investors look to build more ethical portfolios, ESG Investing is gaining momentum. This approach examines environmental, social and governance criteria to determine a potential asset’s impact. Learn about the history of ESG Investing and how investors are putting it into practice.

Unpacked: ESG Investing

Climate change. Labor conditions. Boardroom decisions. As investors look to build more ethical portfolios, ESG Investing is gaining momentum. This approach examines environmental, social and governance criteria to determine a potential asset’s impact. Learn about the history of ESG Investing and how investors are putting it into practice.

Environmental Social Governance is growing in every geography around the globe. It’s in the headlines, high up on the agendas of corporations, and at the forefront of investor interest.

Even though it started to take shape in the 1960s, ESG has gained significant momentum in recent years, with 2020 standing out as a milestone year in this space. Adoption across the global asset management industry more than doubled, with total ESG funds growing more than 100 percent. And companies are now rally more ambitious ESG goals.

What’s driving the move from momentum to mainstream?

This is ESG Investing, Unpacked.

ESG Investing looks at an asset, like equities or bonds, through an Environmental, Social and Governance lens.

The goal is to determine whether the asset makes a positive impact. For example, fighting climate change or supporting safe working conditions. Governance is all about how a company balances stakeholder interests: How are decisions made? What processes are in place? Who benefits?

Here’s another way to think about it: The “E” and “S” are the end results. The “G” determines how these results are achieved.

This data helps investors make better-informed decisions.

The rise of ESG investing is based on a few points in history. Among them are the social movements against the Vietnam war and apartheid in South Africa, when companies faced divestments in opposition.

In 1981, the first major U.S. organization that advances responsible investing was founded: The U.S. Sustainable Investment Forum. And key events created global awareness of environmental issues.

In 2008, the Financial Crisis called into question the industry’s social license to operate: How can the financial system works for everyone and not just shareholders? In 2015, 196 countries signed the Paris Agreement to reduce carbon emissions.

Most recently, the COVID-19 pandemic demonstrated the connectivity between crises: Public health, climate change and social inequality. In response, companies prioritized even more ambitious goals around ESG.

Three main ESG Investing strategies are growing quickly. Negative Screening typically excludes investments related to weapons, tobacco and fossil fuels. While exclusions were historically based on moral or religious preferences, now it’s about the financial risk associated with the negative impact of industries, such as human health for tobacco and climate change for fossil fuels.

ESG Integration has become the leading strategy. It focuses on how companies incorporate ESG criteria into their daily activities to achieve long-term financial performance. Then, ESG considerations and timelines are factored into risk analysis and investment decisions moving forward.

Impact Investing is the newest strategy. It intentionally aims to create positive social and environmental impact that is actively measured, as well as financial return. Like investing in the private debt of a company with a business model aimed at providing access to high-quality education for students from low-income backgrounds. Impact Investing is becoming increasingly common because more people want their money to contribute to the United Nation’s Sustainable Development Goals.

The ESG lens can be applied to any asset class. While equity is the most common, representing half of total ESG assets under management, green bonds are on the rise. Typically purchased by institutional investors, they help finance a company’s specific project climate-related or environmental project.

Sustainability-linked bonds are also gaining traction. These are performance-based and tied to whether the issuer achieves pre-defined ESG objectives within a set timeline.

Many investors are now looking beyond ESG targets and are increasingly focused on measurable results with clear plans. This trend, along with wanting more of a say in a company’s ESG practices, is expected to continue for the next several years.

Heightened regulation including environmental, employment, and civil protections, is another factor driving ESG market growth. Around 90 percent of oversight was implemented in the last 20 years and 50 percent arrived after 2010.

Europe leads this effort, where public companies are required to report implemented policies and where regulations are constantly evolving to reflect broader sustainability goals. Take the EU Green Deal, a set of policies to help the EU reduce emissions 55 percent by 2030 and reach net zero by 2050.

But sustainability challenges are global and require mobilized capital to solve them, all countries are working on ESG. Asia is beginning to implement its own regulations, and the U.S. administration is currently working on its own standards as well.

For the next several years, innovation will continue to shape the ESG landscape. From advancements in clean energy, like the growing hydrogen market, to how companies will deliver on advancing racial equality, and the upcoming public investments on clean infrastructures, all eyes are on ESG.

Unpacked: Digital Treasury

Consumers demand seamless digital transactions in their personal lives, but how does this uninterrupted experience translate to the corporate world? Learn how the transition from paper to automated cash management is driving business growth and resiliency.

Unpacked: Digital Treasury

Consumers demand seamless digital transactions in their personal lives, but how does this uninterrupted experience translate to the corporate world? Learn how the transition from paper to automated cash management is driving business growth and resiliency.

As consumers, we've become accustomed to buying and paying for just about anything through our phones. Ordering a shirt online and checking out through stored credit card details, renting a movie on your TV to watch immediately, scrolling through restaurant menus on a delivery app, and eating on your couch in minutes.

These uninterrupted experiences in our personal lives are driving the demand for the same seamlessness in business transactions, particularly when it comes to automating corporate treasury. This function manages all aspects of payments and liquidity for a company and has always involved a lot of paper, spreadsheets, and legacy systems.

So what does its digital transformation look like? This is Digital Treasury Unpacked. Digitizing cash management has become critical as businesses look to gain market advantage and hit business targets while ensuring customer expectations for a great experience, fast transactions, ease of use, and data insights.

Digital needs can vary based on the company's age and how it operates. Does it have multiple cash management platforms? Have these been modernized over time? Does the company operate internationally? A global e-commerce company could be looking for a daily view of its cash balances across international accounts, or a food delivery operator wants to pay its drivers instantly in a certain currency, or a utility company wants to offer customers an electronic option for paying their bills, like using an e-wallet rather than writing a check.

But digitization isn't just about evolving for the future. It's also about business resiliency. Historically, many of the tasks performed by a company's treasury team have been manual. They require multiple authentication devices, various spreadsheets, and excessive time spent crosschecking incoming and outgoing payments to make sure that everything matches up with account statements.

Corporate treasurers wanted better visibility to data. Many companies have various bank partners, making it harder to see a consolidated view of their accounts. Also, many have adopted multiple internal systems over the years that aren't compatible. Having automated access to information like foreign exchange rates, cash balances, and currency reserves is critical for decision making, particularly in such a fast moving market environment when data can become outdated in minutes, or even seconds, like during the COVID-19 pandemic.

For example, global companies often experience foreign exchange mismatch. Accounts are set up in one currency, but incoming payments enter the account in another currency. Different foreign exchange rates can impact the amount that settles into the account and companies used to spend time researching rate changes to correct the discrepancy. Now they can access digitized, up-to-date rates for automated corrections.

Other top requests include a digital method of reconciling payments and forecasting cash flow to help companies plan for different market scenarios. To automate any of this, access to up-to-date data is the critical first step, and Application Programming Interfaces, or APIs, are playing an increasingly bigger role in this.

In the past few years, APIs have rapidly grown as a way to speed up innovation and help digitize traditional pain points in the corporate treasury space, all through automation. We all use APIs every day, even if you don't realize it. Like a mobile savings app pulling your account balances across different banks into one view. An API makes that happen. Or a ride sharing app connecting you with a driver based on your location. That's also an API.

APIs enable two different systems to connect and communicate securely. There are two main types of APIs. Data APIs automatically retrieve information, like account balances. Process APIs trigger a service, like initiating a payment. For example, a company reaches out to their bank with a request to see a daily view of their account balance each morning.

The requester's identity is authenticated through an API and a digital token is provided to securely access the information. Through this API, the bank provides the data directly to the company's treasury management system in real time. Without an API, this would all happen manually and could take up to three days. As consumers demand easier and faster experiences, an increasing number of businesses are expected to ramp up their treasury digitization plans to quickly meet demand.

Unpacked: Middle Office

What happens after a trade takes place? Within the Securities Services business, a function called Middle Office oversees post-trade operations — and in the digital world, trades are happening at high speeds and enormous volumes. Learn about this critical role.

Unpacked: Middle Office

What happens after a trade takes place? Within the Securities Services business, a function called Middle Office oversees post-trade operations — and in the digital world, trades are happening at high speeds and enormous volumes. Learn about this critical role.

In the earliest days of the stock market a trade was an exchange between two people of physical money for physical stock certificates. Since the trade was visible, each person's assets could be easily verified.

Today trading is done electronically, with enormous volumes moving through the global markets every day. So how do financial institutions keep track of all those transactions? That's where the middle office comes in. While it may sound like somewhere you go, it isn't a physical location. Instead, it represents what happens behind the scenes after a trade is made. Let's take a closer look.

This is middle office unpacked. As financial markets developed and became safer for investors through regulation, trading volumes reached levels that made it hard to support physical exchanges. In 1971, NASDAQ launched as a fully electronic stock exchange. For the first time, confirming a trade, transferring money from buyer to seller, and recording stock ownership all happened electronically.

This new digital market also meant that investors, brokers, and investment managers had to find a new way to verify transactions. Their answer? It would be up to each participant to keep their own record of what was bought, sold, and owned. Then they would compare to make sure things matched.

This oversight was the beginning of what would become the middle office, which today has five main responsibilities. After a trade takes place, middle office confirms the details with all participants, things like the kind of asset bought or sold, its price, when and where it will be settled, and any fees to be paid. Next, it oversees trade settlement when the asset is electronically transferred to the buyer's account. Then the asset is closely tracked to ensure it's properly processed and reflected in the accounts record.

The middle office monitors cash flows like dividends and interest payments. It also manages tasks like adjusting records after a stock split or replying to a corporate action notification. The process of verifying assets in person now happens through reconciliation. This is regularly comparing digital records, correcting differences, and ensuring all activity is represented accurately across everyone who supports an investment portfolio.

Lastly, investment data management, the single most important middle office function. All the transaction and position details, client data, and analytics like risk, performance, and profit and loss must be up to date because this information is used to inform investment decisions and create risk, compliance, and regulatory reports.

Let's look at an example with the most common asset class, equities. When trading equities, there aren't many data points to manage, but the overall volume can be a challenge for the middle office. There are 60 stock exchanges around the globe. Across the five US-based stock exchanges, more than 50 million equity trades happen every day, and each firm's trades go through their own middle office.

Volatile markets drive greater volumes of trading, placing even more demand on the middle office. Transactions involving other kinds of assets like futures, foreign exchange, loans, and OTC derivatives can be even more complicated. There are often more participants, greater amounts of data, physical paperwork, and non-standard settlement practices.

Today, almost all asset classes are traded electronically, driving investor demand for immediate data and insights. In the last five years, the investment management industry has changed dramatically. Investing in complex assets is more common. Market and regulatory changes have challenged operations, and the competition for investor assets and greater returns has intensified, along with the technology and staffing required for an efficient middle office, while the speed, complexity, and data necessary to support their business and their investors is becoming harder to manage.

All of these changes are making it more risky and costly to keep middle office operations in-house. So investment managers are now at a crossroads. Many are considering outsourcing their middle office to a service provider with large-scale technology and operational capabilities.

So what's next for the middle office? Just like the transition from physical to electronic trading, technology will play a crucial role in helping the functions support growing complexity and volume and provide the insights that help investment decision making. With distributed ledger technology providing the potential solution that offers capabilities like instant verified trade confirmation and settlement to simplify things for the middle office, the question is, how far will technology take this evolution?

Unpacked: Private Capital Markets

When a company goes public, it often makes headlines. But recently, more private fast-growing businesses are turning to Private Capital Markets to raise capital. In 2020, there were nearly 2.5 times more investments in the private market than the public market – why?

Unpacked: Private Capital Markets

When a company goes public, it often makes headlines. But recently, more private fast-growing businesses are turning to Private Capital Markets to raise capital. In 2020, there were nearly 2.5 times more investments in the private market than the public market – why?

When a company decides to go public, it often makes headlines. But recently, more privately owned, fast growing, typically tech enabled businesses are turning to private capital markets, or PCM, to raise capital in order to keep growing. Take a look at this graph which shows the exponential growth in PCM over the past 10 years.

What is PCM? And why has this strategy become so popular? Simply put, private placements are a way for a private company to raise capital from investors without having to go public. It's becoming more common with businesses that are scaling fast, both small and global.

Let's say your family invests in your e-commerce startup in exchange for a small stake in the business. That's a PCM transaction. Within investment banking, think of PCM as another product, just like mergers and acquisitions. Here's how it works.

Your e-commerce business is becoming popular and growing fast. You open pop-up shops around the country. You have a loyal customer base, and you want to expand, move into a new region, control the supply chain, and even sell your shoes in national department stores. But to make all this happen, you need more capital.

Going through an initial public offering isn't an option right now, because you would prefer to stay private for another few years. This way, you can spend more time growing your business without the same level of scrutiny a public company receives. It could also mean more value for early investors.

So it's been catching on. In 2020, there were more than two times the investments in the private market than the public market. Although the technology and health care sectors represent about 2/3 of companies that are funded in the private market, PCM is an option for any industry. It's also an option for companies of all sizes, whether small or global.

The strategy has become popular for a few reasons. First, there is a lot more capital available. Historically, large private investments in new companies mostly took place through venture capital firms, which primarily focused on startups and small businesses with long term potential.

Secondly, a number of top internet companies were able to successfully scale their business in the private domain before going public. Today, there are many more types of private investors, like family offices, private equity firms, mutual funds, hedge funds, sovereign wealth funds, and pension funds. This means there is an abundance of capital now accessible to fast growing companies.

From a private investor's perspective, the earlier they can own equity in a company, the more capital appreciation or value their share could earn. This will hopefully pay off when the private company goes public one day. But back to your business.

Many companies will work with an investment bank to tap into a global network of private investors. Depending on the amount a client needs, it could require a few rounds of funding and more than one investor. While you focus on the business, the team will reach out to private investors who could potentially be a good match. They'll share your success to date, your vision, where you want to go, and your innovative customer service plans.

Some important factors that make a good match include, does your idea resonate? Is your business model future proof? If you plan to take your company public one day, does your time frame align with an investor's?

Interested investors will perform their own due diligence. Things like visiting your offices to get a feel for how things run day to day, conversations with company leadership, and a closer look at your financials and contracts. Interested investors will submit their terms, and the PCM team will help to evaluate the proposals. After that, legal, accounting, and other teams get more involved to complete the transaction.

PCM has seen an incredible amount of momentum and it's expected to continue. What will the next 10 years bring?

Unpacked: Volatility

Dramatic spikes. Wild swings. Extreme uncertainty. These words are often used to describe a heightened state of volatility, like the trading environments in 1987, 2008 and 2020. But what does volatility really mean?

Unpacked: Volatility

Dramatic spikes. Wild swings. Extreme uncertainty. These words are often used to describe a heightened state of volatility, like the trading environments in 1987, 2008 and 2020. But what does volatility really mean?

Dramatic spikes. Wild swings. Extreme uncertainty. We hear phrases like these whenever the stock market is in a heightened state of volatility. But what does that mean, and how does it impact the market?

This is volatility, unpacked.

In March of 2020, the coronavirus pandemic contributed to spikes in market volatility similar to the 2008 Global Financial Crisis. U.S. equity markets saw the largest single-day drop since 1987’s Black Monday – and global indices entered bear market territory, which is when the market falls more than 20% from its recent peak.

Volatility is a measurement of price movement, and it’s fundamental to how the stock market works. The price of a single asset – like a stock, option, or bond – can change millions of times a day. This perpetual fluctuation describes normal stock market conditions, and it’s driven by supply and demand. When demand to buy shares is high, the price goes up. And vice versa. Investors’ desire to buy or sell a company’s shares is typically influenced by things like earnings reports, perceived growth potential, economic trends and company news.

Volatility describes an asset’s potential to rise or fall from its current price. It is expressed as a percentage and measures the variability of returns – money made or lost – over a period of time. Assets with higher volatility are generally considered riskier. The more uncertainty about an asset’s value, the more its price fluctuates.

A state of heightened market volatility results from two key drivers. The first, anything that causes macro uncertainty, which makes it difficult for the market to value assets. And the second, a lack of liquidity. “Liquidity” refers to how easy it is to buy or sell an asset without affecting its market price. Not enough buyers means you have to sell at a lower price, and vice versa. There are two types of volatility: Realized and Implied. Realized volatility is how much an asset’s price has moved over a historical timeframe. Implied volatility is how much an asset’s price is expected to move in the future. Implied volatility is related to options, which give holders the right to buy or sell an asset for a certain price in the future.

Just like interest rates, volatility is quoted on an annualized basis, which means it’s converted into a yearly rate. This helps investors by making the volatility comparable over different time periods. To assess the level of risk and uncertainty in the market, investors commonly use a market-wide volatility gauge called the VIX. It indicates expectations of volatility over the next month – based on the prices of options on the S&P 500 Index.

When the VIX reaches high levels of uncertainty, fewer investors willing to trade. Liquidity drops, volatility rises even more, and a negative feedback loop is created, making it very hard to trade.

The VIX recorded the three biggest volatility spikes in 1987, 2008 and 2020 where the negative feedback loop and reduced investor holdings caused a bear market each time.

But heightened volatility can also hit bull markets. During the 1900s dot-com boom, volatility rose alongside stock prices. The growth expectations placed on the exciting but untested internet technology also gave rise to increased uncertainty – especially as the bubble grew unsustainably.

What goes up, eventually comes back down. After a volatility spike, at some point levels do find stability, situations resolve, market shocks subside, and people gain a better understanding of the economic environment.

Unpacked: Development Finance

Learn how development finance plays an important role in funding sustainable projects, like clean water, in emerging markets, and why there’s a push for private institutions to play a more active role in having an impact.

Unpacked: Development Finance

Learn how development finance plays an important role in funding sustainable projects, like clean water, in emerging markets, and why there’s a push for private institutions to play a more active role in having an impact.

Affordable and clean energy, widespread access to healthcare and education, quality jobs and infrastructure, safe and sustainable cities. These are pretty ambitious goals for developing countries, so how can we get there? By raising about an extra 2.5 trillion dollars of annual financing until the year 2030.

This is: Development Finance Unpacked

Back in 1944, the concept of development finance was born. Institutions like the World Bank were created to fund the rebuilding of vital infrastructure and services across efforts of war-torn European countries.

Since then, development finance has evolved into what it is today: Funding projects that improve the quality of life and well-being of people in developing countries.

In September 2000, a critical milestone took place when all United Nations members agreed on a set of development goals to achieve by 2015 called the “Millennium Development Goals.”

The idea? To rally world leaders around efforts to fight extreme poverty, expand access to quality jobs and healthcare, and more.

As 2015 approached, the United Nations formed 17 new Sustainable Development Goals to be achieved by 2030. They aimed to advance progress on things like: clean water, infrastructure, education, sustainable farming, improved mobility, and more.

Sustainability is the connecting force between them, emphasizing the necessary balance between economic growth, social inclusion, and environmental protection.

The estimated total investment needed to achieve the SDGs in emerging economies ranges between 3.3 to 4.5 trillion dollars per year.

Currently, we’re only half way there. According to the United Nations, there is a 2.5 trillion dollar gap of development finance – per year – until 2030.

Historically, the development financing has primarily come from public institutions, which are owned and operated by government shareholders.

It can also come from multilateral institutions, like the World Bank. They receive funding from multiple member governments and use it across projects in developing countries. Currently, around one hundred and forty countries are eligible to borrow from the World Bank.

However, this annual funding gap can’t be closed by public institutions alone. To do it the private sector – think multinational corporations or financial institutions – must play a leading role.

Private organizations can offer more capital, access to investors, structuring expertise and a global network.

It could be a direct investment like opening a factory, or a portfolio investment, like an asset manager buying a bond from a government to provide clean water.

Let’s look at an example of how development finance works. Let’s say a government agency in Saharan Africa, to build new infrastructure to provide clean water. While this may intuitively feel “developmental”, a development finance institution will thoroughly evaluate whether this qualifies as a development finance opportunity.

Certain questions could include: Will the infrastructure serve areas that struggle to access clean water? Will it be resilient to climate change? Does the agency provide quality jobs and training to employees?

If a project meets the necessary requirements, the development finance institution will connect this opportunity with potential investors – usually those interested in supporting development finance activities, like an impact investor or an ESG investment fund manager.

From there, projects that support the SDGs and have impact in developing countries, receive their needed funding and we move one step closer to closing that 2.5 trillion annual dollar gap.

Learn more about Development Finance:
A Debut Transaction in Georgia | J.P. Morgan Launches Development Finance Institution

Unpacked: ESG Investing

Climate change. Labor conditions. Boardroom decisions. As investors look to build more ethical portfolios, ESG Investing is gaining momentum around the world. This approach examines environmental, social and governance criteria to examine a potential asset’s impact. In this episode of Unpacked, learn about the history of ESG Investing and how investors are putting it into practice.

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