Alpha-Centric ESG Research

Kyle Rudden

<ul>
<li>On 23 November, the International Organization of Securities Commissions (IOSCO) released a framework aimed at greater oversight and accountability of ESG ratings and data providers.</li>
<li>Generally, this is a positive for ESG investing. Implications for specific stocks, however, are still vague and depend on how regional regulators interpret and implement IOSCO's suggestions.</li>
<li>That said, one of IOSCO's concerns – conflicts of interest – could affect certain ESG ratings and data providers, especially those owned by the "Big Three" credit rating agencies.</li>
</ul>


On 23 November, the International Organization of Securities Commissions (IOSCO) released a framework aimed at greater oversight and accountability of ESG ratings and data providers.
Generally, this is a positive for ESG investing. Implications for specific stocks, however, are still vague and depend on how regional regulators interpret and implement IOSCO's suggestions.
That said, one of IOSCO's concerns – conflicts of interest – could affect certain ESG ratings and data providers, especially those owned by the "Big Three" credit rating agencies.


ESG Ratings and Data Providers Subject to Greater Oversight Under IOSCO Framework

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*Strong Revenue, Controlled Costs: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEx] reported a strong set of 3Q21 earnings at HKD 3.3 bn, improving HKD 481 mn (17.4%) linked quarter. Results were highlighted by HKEx’ marginally positive operating jaws, as recurring revenue improved HKD 550 mn (12.1%) while overall operating expenses declined nominally (under 0.1%) to HKD 1.5 mn over the period; and*A50, A New Avenue Of Growth: On October 18, 2021, HKEx successfully launched the MSCI China A50 Connect (HK A50), which is predicated on the new MSCI A50 Index. HKEx has a very broad range of liquid Hong Kong-China linked products, with the new A50 contract being linked to the northbound Stock Connect – on top of a better fee offering.

*Strong Revenue, Controlled Costs: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEx] reported a strong set of 3Q21 earnings at HKD 3.3 bn, improving HKD 481 mn (17.4%) linked quarter. Results were highlighted by HKEx’ marginally positive operating jaws, as recurring revenue improved HKD 550 mn (12.1%) while overall operating expenses declined nominally (under 0.1%) to HKD 1.5 mn over the period; and*A50, A New Avenue Of Growth: On October 18, 2021, HKEx successfully launched the MSCI China A50 Connect (HK A50), which is predicated on the new MSCI A50 Index. HKEx has a very broad range of liquid Hong Kong-China linked products, with the new A50 contract being linked to the northbound Stock Connect – on top of a better fee offering. 

Hong Kong Exchanges & Clearing – Solid Result Even Prior To A50

Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

Thematic (Sector/Industry)

<ul>
<li>Global exchanges are adapting to a more price pressured environment in trading fees, including the growth of off-exchange trading</li>
<li>The most forward looking exchanges are actively diversifying their revenue base away from trading and transaction fees, and they are focusing on post-trade services, as well as monetising their access to “big data” and data flows</li>
<li>Select exchanges have accelerated their revenue diversification strategies through M&amp;A; two high profile examples are <a href="https://www.smartkarma.com/entities/intercontinental-exchange-inc" target="_blank" data-smartkarma-citation="entities:10221:1" rel="noopener">Intercontinental Exchange (ICE US)</a> acquiring Ellie Mae and <a href="https://www.smartkarma.com/entities/london-stock-exchange-group" target="_blank" data-smartkarma-citation="entities:22034:1" rel="noopener">London Stock Exchange (LSE LN)</a> acquiring Refinitiv which, in part, reflects the attraction of the “big data” opportunity</li>
<li>The recent merger rumours within the exchanges sector between <a href="https://www.smartkarma.com/entities/cboe-global-markets-inc" target="_blank" data-smartkarma-citation="entities:20189:1" rel="noopener">Cboe Global Markets (CBOE US)</a> &amp; <a href="https://www.smartkarma.com/entities/cme-group-inc" target="_blank" data-smartkarma-citation="entities:12353:1" rel="noopener">Cme Group Inc (CME US)</a> – even though this merger did not materialise – reflect the potential for cost savings and synergies from exchange mergers</li>
<li>In emerging markets, the shift away from trading revenues is also apparent, although the pace of change seems more measured due to regulatory constraints</li>
<li>Among developed market exchanges, we believe that ICE is the “poster child” on revenue transformation, and is not overly expensive on valuations, with <a href="https://www.smartkarma.com/entities/deutsche-boerse-ag" target="_blank" data-smartkarma-citation="entities:21604:1" rel="noopener">Deutsche Boerse Ag (DB1 GR)</a> being the value pick and we also find CBOE to be attractive; we believe that LSEG is still a “show me” story on Refinitiv integration, even if valuations are undemanding</li>
<li>In emerging markets, we believe that out-of-favour <a href="https://www.smartkarma.com/entities/b3-sa-brasil-bolsa-balcao" target="_blank" data-smartkarma-citation="entities:24580:1" rel="noopener">B3 Sa - Brasil Bolsa Balcao (B3SA3 BZ)</a> shares have potential to reverse the trend and re-rate on attractive valuations, with smaller cap <a href="https://www.smartkarma.com/entities/bolsa-mexicana-de-valores-sab" target="_blank" data-smartkarma-citation="entities:24766:1" rel="noopener">Bolsa Mexicana De Valores Sab (BOLSAA MM)</a> attractive on both its broad revenue mix and valuations; we are bearish on <a href="https://www.smartkarma.com/entities/hong-kong-exchanges-clearing" target="_blank" data-smartkarma-citation="entities:490:1" rel="noopener">HKEX (388 HK)</a> shares, with the market overly positive on the exchange’s prospects, in our view</li>
<li>
<a href="https://www.smartkarma.com/entities/singapore-exchange-ltd" target="_blank" data-smartkarma-citation="entities:1047:1" rel="noopener">SGX (SGX SP)</a> is one to watch; management has more to do to diversify the revenue base, yet its valuations are undemanding and competition concerns may be overdone</li>
<li>We include the listed crypto exchange <a href="https://www.smartkarma.com/entities/coinbase-global-inc" target="_blank" data-smartkarma-citation="entities:32227:1" rel="noopener">Coinbase (COIN US)</a> in this exchanges report for the first time; with its business model very geared towards trading and transaction fees, we are cautious on Coinbase given the very high volatility in both volumes and prices inherent in the world of crypto trading, as well as the regulatory hurdles</li>
<li>Risks to our positive views on B3, BolsaMex, ICE, CBOE and Deutsche Boerse include worse than expected post-trade and data and IT revenue generation as well as a more hostile regulatory climate; risks to our bearish views on HKEX and Coinbase are better than expected revenue and EBITDA growth</li>
</ul>


Global exchanges are adapting to a more price pressured environment in trading fees, including the growth of off-exchange trading
The most forward looking exchanges are actively diversifying their revenue base away from trading and transaction fees, and they are focusing on post-trade services, as well as monetising their access to “big data” and data flows
Select exchanges have accelerated their revenue diversification strategies through M&amp;A; two high profile examples are Intercontinental Exchange (ICE US) acquiring Ellie Mae and London Stock Exchange (LSE LN) acquiring Refinitiv which, in part, reflects the attraction of the “big data” opportunity
The recent merger rumours within the exchanges sector between Cboe Global Markets (CBOE US) &amp; Cme Group Inc (CME US) – even though this merger did not materialise – reflect the potential for cost savings and synergies from exchange mergers
In emerging markets, the shift away from trading revenues is also apparent, although the pace of change seems more measured due to regulatory constraints
Among developed market exchanges, we believe that ICE is the “poster child” on revenue transformation, and is not overly expensive on valuations, with Deutsche Boerse Ag (DB1 GR) being the value pick and we also find CBOE to be attractive; we believe that LSEG is still a “show me” story on Refinitiv integration, even if valuations are undemanding
In emerging markets, we believe that out-of-favour B3 Sa - Brasil Bolsa Balcao (B3SA3 BZ) shares have potential to reverse the trend and re-rate on attractive valuations, with smaller cap Bolsa Mexicana De Valores Sab (BOLSAA MM) attractive on both its broad revenue mix and valuations; we are bearish on HKEX (388 HK) shares, with the market overly positive on the exchange’s prospects, in our view

SGX (SGX SP) is one to watch; management has more to do to diversify the revenue base, yet its valuations are undemanding and competition concerns may be overdone
We include the listed crypto exchange Coinbase (COIN US) in this exchanges report for the first time; with its business model very geared towards trading and transaction fees, we are cautious on Coinbase given the very high volatility in both volumes and prices inherent in the world of crypto trading, as well as the regulatory hurdles
Risks to our positive views on B3, BolsaMex, ICE, CBOE and Deutsche Boerse include worse than expected post-trade and data and IT revenue generation as well as a more hostile regulatory climate; risks to our bearish views on HKEX and Coinbase are better than expected revenue and EBITDA growth


Exchanges – More than Just Trading Places

*New Product Line: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] has published a consultation paper seeking feedback on offering Special Purpose Acquisition Companies (SPAC) by October 31, 2021; and    *Not A Panacea: We do not believe that SPACs are the panacea which will resolve HKEX’s weakened revenue stream. Further, the US Securities and Exchange Commission (SEC) issued accounting guidance for SPACs, calling warrant issuance by SPACs liabilities rather than equity instruments. This could disrupt new SPAC filings, and certainly throw a wrench into HKEX’s SPAC plans.

*New Product Line: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] has published a consultation paper seeking feedback on offering Special Purpose Acquisition Companies (SPAC) by October 31, 2021; and    *Not A Panacea: We do not believe that SPACs are the panacea which will resolve HKEX’s weakened revenue stream. Further, the US Securities and Exchange Commission (SEC) issued accounting guidance for SPACs, calling warrant issuance by SPACs liabilities rather than equity instruments. This could disrupt new SPAC filings, and certainly throw a wrench into HKEX’s SPAC plans.

Hong Kong Exchanges & Clearing – SPAC Time

Two days ago the U.K. Financial Reporting Council announced 125 successful signatories (aka "not greenwashers") to the revised U.K. Stewardship Code. Signatories are integrating stewardship and ESG (Environmental, Social, Governance) factors into investment decisions, to high standards.Whilst this is ostensibly limited to U.K. pension assets, ramifications are more far-reaching than it might at first appear (one indication is the number of North American and Asia Pacific signatories, in addition to the expected European names). More specifically, the broad relevance is because it:<ul>
<li>Affects firms doing business with U.K. asset managers/owners not just the managers/owners.</li>
<li>Is a quasi-blueprint for similar anti-greenwashing initiatives taking root in the U.S. and Asia.</li>
<li>Greenwashing is having an increasing impact on stocks prices (e.g., DWS Group last month).</li>
</ul>This is one battle in an emerging global war on greenwashing. The U.S. SEC has its own agenda to fight greenwashing and Asia isn't far behind (e.g., regulators in Japan stepping up scrutiny). There is more to come, and a lot to learn from this including who is (and is not) on the signatory list.

Two days ago the U.K. Financial Reporting Council announced 125 successful signatories (aka "not greenwashers") to the revised U.K. Stewardship Code. Signatories are integrating stewardship and ESG (Environmental, Social, Governance) factors into investment decisions, to high standards.Whilst this is ostensibly limited to U.K. pension assets, ramifications are more far-reaching than it might at first appear (one indication is the number of North American and Asia Pacific signatories, in addition to the expected European names). More specifically, the broad relevance is because it:
Affects firms doing business with U.K. asset managers/owners not just the managers/owners.
Is a quasi-blueprint for similar anti-greenwashing initiatives taking root in the U.S. and Asia.
Greenwashing is having an increasing impact on stocks prices (e.g., DWS Group last month).
This is one battle in an emerging global war on greenwashing. The U.S. SEC has its own agenda to fight greenwashing and Asia isn't far behind (e.g., regulators in Japan stepping up scrutiny). There is more to come, and a lot to learn from this including who is (and is not) on the signatory list.

The War on Greenwashing: UK Stewardship Code "Successful Signatories" Has Broader Implications

Germany

Deutsche Boerse AG provides a variety of stock exchange introduction, trading, and operational services to institutions and private investors. The Company offers electronic trading systems for buying and selling of securities on stock exchanges in Europe.  Deutsche Boerse offers indices such as DAX, MDAX, SDAX, and XTF, as well as trading in options and futures.

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Deutsche Boerse (DB1 GR)

ESG Ratings and Data Providers Subject to Greater Oversight Under IOSCO Framework

ESG ratings and data are largely unregulated, despite growing relevance to capital markets. That is why IOSCO decided it is time for greater...

Kyle Rudden

Hong Kong Exchanges & Clearing – Solid Result Even Prior To A50

HKEX: HKEx reported a strong QOQ 3Q21 earnings growth of 17.4%, and highlighted by marginally positive operating jaws, as recurring revenue...

Thomas J. Monaco

Exchanges – More than Just Trading Places

We assess exchanges based on revenue mix ex-trading; the poster child is ICE, other attractive stocks are Deutsche Borse, CBOE, B3 & BolsaMex, with...

Victor Galliano

Hong Kong Exchanges & Clearing – SPAC Time

HKEX: HKEX is seeking feedback on offering SPACs. We do not believe that SPACs are the panacea which will resolve HKEX’s weakened revenue stream.

Thomas J. Monaco

The War on Greenwashing: UK Stewardship Code "Successful Signatories" Has Broader Implications

Telegraph from European front in global war on greenwashing. U.K. names stewardship victors ("not greenwashers"). Many notable casualties. Anti...

Kyle Rudden

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