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Stranded assets, stranded research?

Could the exit of Barclays' head of utilities presage a shift in research on carbon-intensive business sectors, or is it just a minor repercussion of recent changes to banking rules?
Stranded assets, stranded research?

Is the traditional model of investment bank-led research failing to prepare investors for the threat climate change poses to long-term portfolios? That question is one possible inference from the departure of Barclays’ (BARC) head of European utilities, Mark Lewis, who this week joined financial think-tank Carbon Tracker as its new head of research, in a rare move in the industry.

Carbon Tracker, which advises institutional investors on the transition to a low-carbon energy mix, has been a key figure in the debates around ‘un-burnable carbon’ and ‘stranded assets’. The group’s views gained prominence in 2015, when Bank of England governor Mark Carney highlighted the “potentially huge” losses facing investors from climate change action.

Speaking to Investors Chronicle ahead of his move, Mr Lewis said the decision to leave the banking sell-side for a non-profit group was informed by both pull and push factors. On the one hand, he believes NGOs such as Carbon Tracker can be more effective at influencing and informing investors, and has long been a fan of his new company's insights on the policy, regulatory and technology changes driving the world’s response to climate change. But the ex-Barclays managing director said recent banking reforms had created an obstacle for traditional providers of company research.

Those reforms centre on Mifid II, the European Union’s revised directive on financial instruments, which launched in January. The new rules force buyers of investment research to separate – or ‘un-bundle’ – what they pay for research from the costs of executing trades with banks and brokers. Put simply, financial institutions must now be more open about what they buy and what they charge. In theory, this should bring greater transparency and resilience to financial markets, increasing competition and protecting investors in the process.

However, sell-side analysts, who must now charge for all research provided, are a potential casualty of these reforms. Buyers of research, previously accustomed to receiving it for free as part of a package of services, are now thinking harder about what they are paying for. For Mr Lewis, the changes have enhanced the role of organisations such as Carbon Tracker “to get asset owners to think differently”, rather than competing head-on with the likes of Barclays (which declined to comment on Mr Lewis' departure) or Deutsche Bank, where he previously held the role of global head of energy research. 

During his time within the investment banking sell-side, Mr Lewis says the consensus view among equity analysts failed to anticipate the profound disruption facing his own sector, utilities. Investment banks’ scenario forecasts were too narrow to admit the threat posed by cheaper and subsidy-free renewable energy, he argues.

“Today, executives of oil and gas companies will say what happened in the utilities industry is unique, and that renewable energy electrons do not compete head to head with hydrocarbons for transportation,” says Mr Lewis. “But serious amounts of energy are going into electric vehicles...the recipe is now very similar to the global shakeout of the European utilities sector.”