Despite weathering Covid, HSBC shouldn't be paying dividends now | Larry Elliott

With Covid-19 cases surging across much of the developed world, it is a brave call to say that the worst of the pandemic is over. That, though, is the view of HSBC, Europe’s biggest bank, which has cut its provisions for bad loans and said it is considering the resumption of dividend payments to shareholders.

There is a good reason why HSBC is relatively upbeat about the outlook. It has a big presence in the part of the world – Asia – that has done best in controlling the virus and limiting its impact on the economy.

There was much talk in the early stages of the crisis of how the global economy would experience a V-shaped recession – sharply down and then a rapid recovery – but only in China of the world’s major economies has that scenario played out.

What’s more, HSBC has lots of shareholders in Hong Kong who have come to rely on a regular stream of income from the bank. They were not best pleased when, under pressure from the Bank of England, HSBC scrapped its dividend for the first time in almost three-quarters of a century.

With the squeeze on profit margins caused by ultra-low interest rates not helping, HSBC’s share price has almost halved this year, although it did get a boost from the news that the bank would like to resume dividend payments – albeit pitched at a “conservative” level to begin with.

The question is whether the Bank of England will give the go-ahead to such a move, and the answer to that is probably no, at least for the time being.

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Consider it from Threadneedle Street’s point of view. A large and ever-growing chunk of the UK is facing enhanced restrictions on activity. The European Central Bank is reporting that banks across the euro zone are tightening credit conditions for lenders because they fear a surge in bad loans. For the world outside of east Asia, there is a risk of a W-shaped recession, with a second hit to growth and full recovery delayed.

Despite the pressure from HSBC and others to give the go-ahead, the Bank of England is likely to take a conservative approach to bank dividends resuming, and rightly so.

Environmental impact bonds could help BP go fossil-free

BP has set ambitious targets for getting out of fossil fuels and becoming a clean energy company. By the end of the decade it plans to reduce oil and gas production by 40% and increase its spending on wind and solar tenfold.

Making that transition is going to be tough, not least because BP is still perceived by investors as a fossil fuel company, and its revenues (and share price) rise and fall with the cost of crude.

BP is not alone in needing to find ways to reduce its carbon footprint, merely the starkest example of the challenge ahead. But, according to the thinktank OMFIF, there are financial instruments – known as environmental impact bonds – that can speed up the process.

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ESG (environmental, social and corporate governance) bonds come in a number of forms but the ones that would make a real difference are policy performance bonds – where the interest rates paid to investors are linked to achievement. In the case of a company like BP, its bonds would be linked to progress in switching its portfolio away from fossil fuels.

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Governments can also get it on the act. Imagine that the UK government issued a bond tied to its target of making the country net carbon zero by 2050. The mid-century goal implies a 3.3% annual reduction in carbon emissions over the next 30 years. If by 2025 emissions were still at today’s levels rather than the 83.5% implied by the target, a policy performance bond would yield 16.5% interest. If by 2025 emissions were below 83.5%, then the government would get an interest-free loan. That’s quite an incentive for ministers to act now rather than leaving it for the next lot.



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