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United Nations Framework Convention on Climate Change

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/United_Nations_Framework_Convention_on_Climate_Change

UNFCCC
United Nations Framework Convention on Climate Change

Type	Multilateral environmental agreement
Context	Environmentalism
Drafted	9 May 1992
Signed	4–14 June 1992 20 June 1992 – 19 June 1993
Location	Rio de Janeiro, Brazil New York, United States
Effective	21 March 1994
Condition	Ratification by 50 states
Signatories	165
Parties	198
Depositary	Secretary-General of the United Nations
Languages	Arabic Chinese English French Russian Spanish

The United Nations Framework Convention on Climate Change (UNFCCC) established an international environmental treaty to combat "dangerous human interference with the climate system", in part by stabilizing greenhouse gas concentrations in the atmosphere. It was signed by 154 states at the United Nations Conference on Environment and Development (UNCED), informally known as the Earth Summit, held in Rio de Janeiro from 3 to 14 June 1992. Its original secretariat was in Geneva but relocated to Bonn in 1996. It entered into force on 21 March 1994.

The treaty called for ongoing scientific research and regular meetings, negotiations, and future policy agreements designed to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner.

The Kyoto Protocol, which was signed in 1997 and ran from 2005 to 2020, was the first implementation of measures under the UNFCCC. The Kyoto Protocol was superseded by the Paris Agreement, which entered into force in 2016. By 2022, the UNFCCC had 198 parties. Its supreme decision-making body, the Conference of the Parties (COP), meets annually to assess progress in dealing with climate change. Because key signatory states are not adhering to their individual commitments, the UNFCCC has been criticized as being unsuccessful in reducing the emission of carbon dioxide since its adoption.

The treaty established different responsibilities for three categories of signatory states. These categories are developed countries, developed countries with special financial responsibilities, and developing countries. The developed countries, also called Annex 1 countries, originally consisted of 38 states, 13 of which were Eastern European states in transition to democracy and market economies, and the European Union. All belong to the Organisation for Economic Co-operation and Development (OECD).

Annex 1 countries are called upon to adopt national policies and take corresponding measures on the mitigation of climate change by limiting their anthropogenic emissions of greenhouse gases as well as to report on steps adopted with the aim of returning individually or jointly to their 1990 emissions levels. The developed countries with special financial responsibilities are also called Annex II countries. They include all of the Annex I countries with the exception of those in transition to democracy and market economies. Annex II countries are called upon to provide new and additional financial resources to meet the costs incurred by developing countries in complying with their obligation to produce national inventories of their emissions by sources and their removals by sinks for all greenhouse gases not controlled by the Montreal Protocol. The developing countries are then required to submit their inventories to the UNFCCC Secretariat.

Treaties

Convention Agreement in 1992

The text of the Framework Convention was produced during the meeting of an Intergovernmental Negotiating Committee in New York from 30 April to 9 May 1992. The Convention was adopted on 9 May 1992 and opened for signature on 4 June 1992 at the United Nations Conference on Environment and Development (UNCED) in Rio de Janeiro (known by its popular title, the Earth Summit). On 12 June 1992, 154 nations signed the UNFCCC, which upon ratification committed signatories' governments to reduce atmospheric concentrations of greenhouse gases with the goal of "preventing dangerous anthropogenic interference with Earth's climate system". This commitment would require substantial reductions in greenhouse gas emissions (see the later section, "Stabilization of greenhouse gas concentrations"). The parties to the convention have met annually from 1995 in Conferences of the Parties (COP) to assess progress in dealing with climate change.

Article 3(1) of the Convention states that Parties should act to protect the climate system on the basis of "common but differentiated responsibilities and respective capabilities", and that developed country Parties should "take the lead" in addressing climate change. Under Article 4, all Parties make general commitments to address climate change through, for example, climate change mitigation and adapting to the eventual impacts of climate change. Article 4(7) states:

The extent to which developing country Parties will effectively implement their commitments under the Convention will depend on the effective implementation by developed country Parties of their commitments under the Convention related to financial resources and transfer of technology and will take fully into account that economic and social development and poverty eradication are the first and overriding priorities of the developing country Parties.

The Framework Convention specifies the aim of Annex I Parties was stabilizing their greenhouse gas emissions (carbon dioxide and other anthropogenic greenhouse gases not regulated under the Montreal Protocol) at 1990 levels, by 2000.

"UNFCCC" is also the name of the United Nations Secretariat charged with supporting the operation of the convention, with offices in Haus Carstanjen, and the UN Campus (known as Langer Eugen) in Bonn, Germany. From 2010 to 2016 the head of the secretariat was Christiana Figueres. In July 2016, Patricia Espinosa succeeded Figueres. The Secretariat, augmented through the parallel efforts of the Intergovernmental Panel on Climate Change (IPCC), aims to gain consensus through meetings and the discussion of various strategies. Since the signing of the UNFCCC treaty, Conferences of the Parties (COPs) have discussed how to achieve the treaty's aims.

Action for Climate Empowerment (ACE)

Action for Climate Empowerment (ACE) is a term adopted by the UNFCCC in 2015 to have a better name for this topic than "Article 6". It refers to Article 6 of the convention's original text (1992), focusing on six priority areas: education, training, public awareness, public participation, public access to information, and international cooperation on these issues. The implementation of all six areas has been identified as the pivotal factor for everyone to understand and participate in solving the challenges presented by climate change. ACE calls on governments to develop and implement educational and public awareness programmes, train scientific, technical and managerial personnel, foster access to information, and promote public participation in addressing climate change and its effects. It also urges countries to cooperate in this process, by exchanging good practices and lessons learned, and strengthening national institutions. This wide scope of activities is guided by specific objectives that, together, are seen as crucial for effectively implementing climate adaptation and mitigation actions, and for achieving the ultimate objective of the UNFCCC.

Kyoto Protocol

The 1st Conference of the Parties (COP1) decided that the aim of Annex I Parties stabilizing their emissions at 1990 levels by 2000 was "not adequate", and further discussions at later conferences led to the Kyoto Protocol in 1997. The Kyoto Protocol was concluded and established legally binding obligations under international law, for developed countries to reduce their greenhouse gas emissions in the period 2008–2012. The 2010 United Nations Climate Change Conference produced an agreement stating that future global warming should be limited to below 2 °C (3.6 °F) relative to the pre-industrial level. The Kyoto Protocol had two commitment periods, the first of which lasted from 2008 to 2012. The Protocol was amended in 2012 to encompass the second one for the period 2013–2020 in the Doha Amendment.

One of the first tasks set by the UNFCCC was for signatory nations to establish national greenhouse gas inventories of greenhouse gas (GHG) emissions and removals, which were used to create the 1990 benchmark levels for accession of Annex I countries to the Kyoto Protocol and for the commitment of those countries to GHG reductions. Updated inventories must be submitted annually by Annex I countries.

The US did not ratify the Kyoto Protocol, while Canada denounced it in 2012. The Kyoto Protocol was ratified by all the other Annex I Parties.

All Annex I Parties, excluding the US, participated in the 1st Kyoto commitment period. Thirty-seven Annex I countries and the EU agreed to second-round Kyoto targets. These countries are Australia, all members of the European Union, Belarus, Iceland, Kazakhstan, Norway, Switzerland, and Ukraine. Belarus, Kazakhstan and Ukraine stated that they might withdraw from the Protocol or not put into legal force the Amendment with second round targets. Japan, New Zealand, and Russia participated in Kyoto's first round but did not take on new targets in the second commitment period. Other developed countries without second-round targets were Canada (which withdrew from the Kyoto Protocol in 2012) and the United States.

All countries that remained parties to the Kyoto Protocol met their first commitment period targets.

National communication

A "National Communication" is a type of report submitted by the countries that have ratified the United Nations Framework Convention on Climate Change (UNFCCC). Developed countries are required to submit National Communications every four years and developing countries should do so.Some Least Developed Countries have not submitted National Communications in the past 5–15 years, largely due to capacity constraints.

National Communication reports are often several hundred pages long and cover a country's measures to mitigate greenhouse gas emissions as well as a description of its vulnerabilities and impacts from climate change. National Communications are prepared according to guidelines that have been agreed by the Conference of the Parties to the UNFCCC. The (Intended) Nationally Determined Contributions (NDCs) that form the basis of the Paris Agreement are shorter and less detailed but also follow a standardized structure and are subject to technical review by experts.

Paris Agreement

Global carbon dioxide emissions by jurisdiction (as of 2015)

The parties met in Durban, South Africa in 2011 and expressed "grave concern" that efforts to limit global warming to less than 2 or 1.5 °C, relative to the pre-industrial level, appeared inadequate. They committed to develop an "agreed outcome with legal force under the Convention applicable to all Parties".

At the 2015 UN Climate Change Conference in Paris the then-196 parties agreed to aim to limit global warming to less than 2 °C, and try to limit the increase to 1.5 °C. The Paris Agreement entered into force on 4 November 2016 in those countries that had ratified the Agreement, and other countries had ratified the Agreement since.

Intended Nationally Determined Contributions

At the 19th session of the Conference of the Parties in Warsaw in 2013, the UNFCCC created a mechanism for Intended Nationally Determined Contributions (INDCs) to be submitted in the run up to the 21st session of the Conference of the Parties in Paris (COP21) in 2015. Countries were given freedom and flexibility to ensure that these climate change mitigation and adaptation plans were nationally appropriate. This flexibility, especially regarding the types of actions to be undertaken, allowed for developing countries to tailor their plans to their specific adaptation and mitigation needs, as well as towards other needs.

A "family photo" organized by Greenpeace, at the entrance to the United Nations, with a banner reading "We Will Move Ahead"

In the aftermath of COP21, these INDCs became Nationally Determined Contributions (NDCs) as each country ratified the Paris Agreement, unless a new NDC was submitted to the UNFCCC at the same time. The 22nd session of the Conference of the Parties (COP22) in Marrakesh focused on these Nationally Determined Contributions and their implementation, after the Paris Agreement entered into force on 4 November 2016.

The Climate and Development Knowledge Network (CDKN) created a guide for NDC implementation, for the use of decision makers in Less Developed Countries. In this guide, CDKN identified a series of common challenges countries face in NDC implementation, including how to:

build awareness of the need for, and benefits of, action among stakeholders, including key government ministries;
mainstream and integrate climate change into national planning and development processes;
strengthen the links between subnational and national government plans on climate change;
build capacity to analyse, develop and implement climate policy;
establish a mandate for coordinating actions around NDCs and driving their implementation; and
address resource constraints for developing and implementing climate change policy.

Further commitments

In addition to the Kyoto Protocol (and its amendment) and the Paris Agreement, parties to the Convention have agreed to further commitments during UNFCCC Conferences of the Parties. These include the Bali Action Plan (2007), the Copenhagen Accord (2009), the Cancún agreements (2010), and the Durban Platform for Enhanced Action (2012).

Bali Action Plan

As part of the Bali Action Plan, adopted in 2007, all developed country Parties have agreed to "quantified emission limitation and reduction objectives, while ensuring the comparability of efforts among them, taking into account differences in their national circumstances." Developing country Parties agreed to "[nationally] appropriate mitigation actions context of sustainable development, supported and enabled by technology, financing and capacity-building, in a measurable, reportable and verifiable manner." 42 developed countries have submitted mitigation targets to the UNFCCC secretariat, as have 57 developing countries and the African Group (a group of countries within the UN).

Copenhagen Accord and Cancún agreements

As part of the 2009 Copenhagen negotiations, a number of countries produced the Copenhagen Accord. The Accord states that global warming should be limited to below 2.0 °C (3.6 °F). The Accord does not specify what the baseline is for these temperature targets (e.g., relative to pre-industrial or 1990 temperatures). According to the UNFCCC, these targets are relative to pre-industrial temperatures.

114 countries agreed to the Accord. The UNFCCC secretariat notes that "Some Parties ... stated in their communications to the secretariat specific understandings on the nature of the Accord and related matters, based on which they have agreed to [the Accord]." The Accord was not formally adopted by the Conference of the Parties. Instead, the COP "took note of the Copenhagen Accord."

As part of the Accord, 17 developed country Parties and the EU-27 submitted mitigation targets, as did 45 developing country Parties. Some developing country Parties noted the need for international support in their plans.

As part of the Cancún agreements, developed and developing countries submitted mitigation plans to the UNFCCC. These plans were compiled with those made as part of the Bali Action Plan.

UN Race-to-Zero Emissions Breakthroughs

At the 2021 annual meeting UNFCCC launched the 'UN Race-to-Zero Emissions Breakthroughs'. The aim of the campaign is to transform 20 sectors of the economy in order to achieve zero greenhouse gas emissions. At least 20% of each sector should take specific measures, and 10 sectors should be transformed before COP 26 in Glasgow. According to the organizers, 20% is a tipping point, after which the whole sector begins to irreversibly change.

Developing countries

At Berlin, Cancún, and Durban, the development needs of developing country parties were reiterated. For example, the Durban Platform reaffirms that:

[...] social and economic development and poverty eradication are the first and overriding priorities of developing country Parties, and that a low-emission development strategy is central to sustainable development, and that the share of global emissions originating in developing countries will grow to meet their social and development needs.

Parties

Parties to the UNFCCC

Annex I and II parties

Annex I parties

Non-annex parties

Observer states

As of 2022, the UNFCCC has 198 parties including all United Nations member states, United Nations General Assembly observers the State of Palestine and the Holy See, UN non-member states Niue and the Cook Islands, and the supranational union European Union.

Classification of Parties and their commitments

Parties to the UNFCCC are classified as:

Annex I: There are 43 Parties to the UNFCCC listed in Annex I of the convention, including the European Union. These Parties are classified as industrialized (developed) countries and "economies in transition" (EITs). The 14 EITs are the former centrally-planned (Soviet) economies of Russia and Eastern Europe.
Annex II: Of the Parties listed in Annex I of the convention, 24 are also listed in Annex II of the convention, including the European Union. These Parties are made up of members of the Organisation for Economic Co-operation and Development (OECD): these Parties consist of the members of the OECD in 1992, minus Turkey, plus the EU. Annex II Parties are required to provide financial and technical support to the EITs and developing countries to assist them in reducing their greenhouse gas emissions (climate change mitigation) and manage the impacts of climate change (climate change adaptation).
Least-developed countries (LDCs): 49 Parties are LDCs, and are given special status under the treaty in view of their limited capacity to adapt to the effects of climate change.
Non-Annex I: Parties to the UNFCCC not listed in Annex I of the convention are mostly low-income developing countries. Developing countries may volunteer to become Annex I countries when they are sufficiently developed.

List of parties

Annex I countries

There are 43 Annex I Parties including the European Union. These countries are classified as industrialized countries and economies in transition. Of these, 24 are Annex II Parties, including the European Union, and 14 are Economies in Transition.

Parties: Annexes, EU, OECD, EITs

Notes

Annex II Party

Economy in Transition

Conferences of the Parties (CoP)

The United Nations Climate Change Conference are yearly conferences held in the framework of the UNFCCC. They serve as the formal meeting of the UNFCCC Parties (Conferences of the Parties) (COP) to assess progress in dealing with climate change, and beginning in the mid-1990s, to negotiate the Kyoto Protocol to establish legally binding obligations for developed countries to reduce their greenhouse gas emissions. Since 2005 the Conferences also served as the Meetings of Parties of the Kyoto Protocol (CMP) and since 2016 the Conferences also serve as Meeting of the Parties to the Paris Agreement (CMA).

The first conference (COP1) was held in 1995 in Berlin. The 3rd conference (COP3) was held in Kyoto and resulted in the Kyoto protocol, which was amended during the 2012 Doha Conference (COP18, CMP 8). The COP21 (CMP11) conference was held in Paris and resulted in adoption of the Paris Agreement. The COP26 (CMA3) was held in Glasgow, Scotland, United Kingdom. COP28 is taking place at the United Arab Emirates and Sultan al-Jaber has been nominated by the ruler to lead the same.

Subsidiary bodies

A subsidiary body is a committee that assists the Conference of the Parties. Subsidiary bodies include:

Permanents:
- The Subsidiary Body of Scientific and Technological Advice (SBSTA) is established by Article 9 of the convention to provide the Conference of the Parties and, as appropriate, its other subsidiary bodies with timely information and advice on scientific and technological matters relating to the convention. It serves as a link between information and assessments provided by expert sources (such as the IPCC) and the COP, which focuses on setting policy.
- The Subsidiary Body of Implementation (SBI) is established by Article 10 of the convention to assist the Conference of the Parties in the assessment and review of the effective implementation of the convention. It makes recommendations on policy and implementation issues to the COP and, if requested, to other bodies.
Temporary:
- Ad hoc Group on Article 13 (AG13), active from 1995 to 1998;
- Ad hoc Group on the Berlin Mandate (AGBM), active from 1995 to 1997;
- Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol (AWG-KP), established in 2005 by the Parties to the Kyoto Protocol to consider further commitments of industrialized countries under the Kyoto Protocol for the period beyond 2012; it concluded its work in 2012 when the CMP adopted the Doha Amendment;
- Ad Hoc Working Group on Long-term Cooperative Action (AWG-LCA), established in Bali in 2007 to conduct negotiations on a strengthened international deal on climate change;
- Ad Hoc Working Group on the Durban Platform for Enhanced Action (ADP), established at COP 17 in Durban in 2011 "to develop a protocol, another legal instrument or an agreed outcome with legal force under the Convention applicable to all Parties." The ADP concluded its work in Paris on 5 December 2015.

Secretariat

UN Campus, Bonn, seat of the secretariat

The work under the UNFCCC is facilitated by a secretariat in Bonn, Germany. The secretariat is established under Article 8 of the convention and headed by the Executive Secretary. Patricia Espinosa was appointed Executive Secretary on 18 May 2016 by United Nations Secretary-General Ban Ki-moon and took office on 18 July 2016. Espinosa retired on 16 July 2022. UN Under Secretary General Ibrahim Thiaw acts as the acting Executive Secretary in the interim. On 15 August 2022, Secretary-General António Guterres appointed former Grenadian climate minister Simon Stiell as Executive Secretary, replacing Espinosa.

Commentaries and analysis

Interpreting article 2

The ultimate objective of the Framework Convention is "stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic [i.e., human-caused] interference with the climate system". Article 2 of the convention says this "should be achieved within a time-frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner".

Climate change mitigation scenarios: projected global greenhouse gas emissions, years 2000 to 2100
Climate change mitigation scenarios: projected changes in atmospheric greenhouse gas concentrations, years 2000 to 2100
Climate change mitigation scenarios: projected global mean temperature, years 2000 to 2100

To stabilize atmospheric GHG concentrations, global anthropogenic GHG emissions would need to peak then decline (see climate change mitigation). Lower stabilization levels would require emissions to peak and decline earlier compared to higher stabilization levels. The graph above shows projected changes in annual global GHG emissions (measured in CO₂-equivalents) for various stabilization scenarios. The other two graphs show the associated changes in atmospheric GHG concentrations (in CO₂-equivalents) and global mean temperature for these scenarios. Lower stabilization levels are associated with lower magnitudes of global warming compared to higher stabilization levels.

Projected global warming in 2100 for a range of emission scenarios

There is uncertainty over how GHG concentrations and global temperatures will change in response to anthropogenic emissions (see climate change feedback and climate sensitivity). The graph opposite shows global temperature changes in the year 2100 for a range of emission scenarios, including uncertainty estimates.

Dangerous anthropogenic interference

There are a range of views over what level of climate change is dangerous. Scientific analysis can provide information on the risks of climate change, but deciding which risks are dangerous requires value judgements.

The global warming that has already occurred poses a risk to some human and natural systems (e.g., coral reefs). Higher magnitudes of global warming will generally increase the risk of negative impacts. According to Field et al. (2014), climate change risks are "considerable" with 1 to 2 °C of global warming, relative to pre-industrial levels. 4 °C warming would lead to significantly increased risks, with potential impacts including widespread loss of biodiversity and reduced global and regional food security.

Climate change policies may lead to costs that are relevant to the article 2. For example, more stringent policies to control GHG emissions may reduce the risk of more severe climate change, but may also be more expensive to implement.

Projections

There is considerable uncertainty over future changes in anthropogenic GHG emissions, atmospheric GHG concentrations, and associated climate change. Without mitigation policies, increased energy demand and extensive use of fossil fuels could lead to global warming (in 2100) of 3.7 to 4.8 °C relative to pre-industrial levels (2.5 to 7.8 °C including climate uncertainty).

To have a likely chance of limiting global warming (in 2100) to below 2 °C, GHG concentrations would need to be limited to around 450 ppm CO₂-eq. The current trajectory of global emissions does not appear to be consistent with limiting global warming to below 1.5 or 2 °C.

Precautionary principle

In decision making, the precautionary principle is considered when possibly dangerous, irreversible, or catastrophic events are identified, but scientific evaluation of the potential damage is not sufficiently certain (Toth et al., 2001, pp. 655–656). The precautionary principle implies an emphasis on the need to prevent such adverse effects.

Uncertainty is associated with each link of the causal chain of climate change. For example, future GHG emissions are uncertain, as are climate change damages. However, following the precautionary principle, uncertainty is not a reason for inaction, and this is acknowledged in Article 3.3 of the UNFCCC (Toth et al., 2001, p. 656).

Criticisms of the UNFCCC process

The overall umbrella and processes of the UNFCCC and the adopted Kyoto Protocol have been criticized by some as not having achieved their stated goals of reducing the emission of carbon dioxide (the primary driver of rising global temperatures of the 21st century). At a speech given at his alma mater, Todd Stern—the US Climate Change envoy—expressed the challenges with the UNFCCC process as follows: "Climate change is not a conventional environmental issue ... It implicates virtually every aspect of a state's economy, so it makes countries nervous about growth and development. This is an economic issue every bit as it is an environmental one." He went on to explain that the United Nations Framework Convention on Climate Change is a multilateral body concerned with climate change and can be an inefficient system for enacting international policy. Because the framework system includes over 190 countries and because negotiations are governed by consensus, small groups of countries can often block progress.

The failure to achieve meaningful progress and reach effective CO₂-reducing policy treaties among the parties over the past eighteen years has driven some countries like the United States to hold back from ratifying the UNFCCC's most important agreement—the Kyoto Protocol—in large part because the treaty did not cover developing countries which now include the largest CO₂ emitters. However, this failed to take into account both the historical responsibility for climate change since industrialisation, which is a contentious issue in the talks, and also responsibility for emissions from consumption and importation of goods. It has also led Canada to withdraw from the Kyoto Protocol in 2011 out of a wish not to make its citizens pay penalties that would result in wealth transfers out of Canada. Both the US and Canada are looking at internal Voluntary Emissions Reduction schemes to curb carbon dioxide emissions outside the Kyoto Protocol.

The perceived lack of progress has also led some countries to seek and focus on alternative high-value activities like the creation of the Climate and Clean Air Coalition to Reduce Short-Lived Climate Pollutants which seeks to regulate short-lived pollutants such as methane, black carbon and hydrofluorocarbons (HFCs), which together are believed to account for up to 1/3 of current global warming but whose regulation is not as fraught with wide economic impacts and opposition.

In 2010, Japan stated that it will not sign up to a second Kyoto term, because it would impose restrictions on it not faced by its main economic competitors, China, India and Indonesia. A similar indication was given by the Prime Minister of New Zealand in November 2012. At the 2012 conference, last-minute objections at the conference by Russia, Ukraine, Belarus and Kazakhstan were ignored by the governing officials, and they have indicated that they will likely withdraw or not ratify the treaty. These defections place additional pressures on the UNFCCC process that is seen by some as cumbersome and expensive: in the UK alone, the climate change department has taken over 3,000 flights in two years at a cost of over £1,300,000 (British pounds sterling).

Further, the UNFCCC (mainly during the Kyoto protocol) failed to facilitate the transfer of environmentally sound technologies (SETs) which are mechanisms used to decrease the vulnerability of the human race against the unfavourable effects of climate change. One of the more widely used of these being renewable energy sources. The UNFCCC created the body "technology mechanism" who would distribute these resources to developing countries; however this distribution was too moderate and, coupled with the failings of the first commitment period of the Kyoto protocol, led to low ratification numbers for the second commitment (resulting in it not going ahead).

Before the 2015 United Nations Climate Change Conference, National Geographic magazine added to the criticism, writing: "Since 1992, when the world's nations agreed at Rio de Janeiro to avoid 'dangerous anthropogenic interference with the climate system,' they've met 20 times without moving the needle on carbon emissions. In that interval we've added almost as much carbon to the atmosphere as we did in the previous century."

Benchmarking

Benchmarking is the setting of a policy target based on some frame of reference. An example of benchmarking is the UNFCCC's original target of Annex I Parties limiting their greenhouse gas emissions at 1990 levels by 2000. Goldemberg et al. (1996) commented on the economic implications of this target. Although the target applies equally to all Annex I Parties, the economic costs of meeting the target would likely vary between Parties. For example, countries with initially high levels of energy efficiency might find it more costly to meet the target than countries with lower levels of energy efficiency. From this perspective, the UNFCCC target could be viewed as inequitable, i.e., unfair.

Benchmarking has also been discussed in relation to the first-round emissions targets specified in the Kyoto Protocol (see views on the Kyoto Protocol and Kyoto Protocol and government action).

International trade

Academics and environmentalists criticize article 3(5) of the convention, which states that any climate measures that would restrict international trade should be avoided.

Engagement of civil society

In 2014, The UN with Peru and France created the Global Climate Action Portal NAZCA for writing and checking all the climate commitments.

Civil Society Observers under the UNFCCC have organized themselves in loose groups, covering about 90% of all admitted organisations. Some groups remain outside these broad groupings, such as faith groups or national parliamentarians.

An overview is given in the table below:

Name	Abbreviation	Admitted since
Business and industry NGOs	BINGO	1992
Environmental NGOs	ENGO	1992
Local government and municipal authorities	LGMA	COP1 (1995)
Indigenous peoples organizations	IPO	COP7 (2001)
Research and independent NGOs	RINGO	COP9 (2003)
Trade union NGOs	TUNGO	Before COP 14 (2008)
Women and gender	WGC	Shortly before COP17 (2011)
Youth NGOs	YOUNGO Archived 19 September 2020 at the Wayback Machine	Shortly before COP17 (2011)
Farmers	Farmers	(2014)

UNFCCC secretariat also recognizes the following groups as informal NGO groups (2016):

Name	Abbreviation
Faith Based Organizations	FBOs
Education and Capacity Building and Outreach NGOs	ECONG
Parliamentarians

Market sentiment

From Wikipedia, the free encyclopedia

An investor is bullish when they see upward stock trends and bearish when the market is going down. A bull uses its horns in an upward motion to attack and a bear uses its claws in a downward motion to attack.

Market sentiment, also known as investor attention, is the general prevailing attitude of investors as to anticipated price development in a market. This attitude is the accumulation of a variety of fundamental and technical factors, including price history, economic reports, seasonal factors, and national and world events. If investors expect upward price movement in the stock market, the sentiment is said to be bullish. On the contrary, if the market sentiment is bearish, most investors expect downward price movement. Market participants who maintain a static sentiment, regardless of market conditions, are described as permabulls and permabears respectively. Market sentiment is usually considered as a contrarian indicator: what most people expect is a good thing to bet against. Market sentiment is used because it is believed to be a good predictor of market moves, especially when it is more extreme. Very bearish sentiment is usually followed by the market going up more than normal, and vice versa. A bull market refers to a sustained period of either realized or expected price rises, whereas a bear market is used to describe when an index or stock has fallen 20% or more from a recent high for a sustained length of time.

Market sentiment is monitored with a variety of technical and statistical methods such as the number of advancing versus declining stocks and new highs versus new lows comparisons. A large share of the overall movement of an individual stock has been attributed to market sentiment. The stock market's demonstration of the situation is often described as all boats float or sink with the tide, in the popular Wall Street phrase "the trend is your friend". In the last decade, investors are also known to measure market sentiment through the use of news analytics, which include sentiment analysis on textual stories about companies and sectors.

Theory of investor attention

A particular thread of scientific literature connects results from behavioural finance, changes of investor attention on financial markets, and fundamental principles of asset pricing: Barberis et al. (1998), Barberis & Thaler (2003), and Baker & Wurgler (2007). The authors argue that behavioural patterns of retail investors have a significant impact on market returns. At least five main approaches to measuring investor attention are known today in scientific literature: financial market-based measures, survey-based sentiment indexes, textual sentiment data from specialized on-line resources, Internet search behavior, and non-economic factors.

First approach

According to the first approach, investor attention can be approximated with particular financial market-based measures. According to Gervais et al. (2001) and Hou et al. (2009), trading volume is a good proxy for investor sentiment. High (low) trading volume on a particular stock leads to appreciating (depreciating) of its price. Extreme one-day returns are also reported to draw investors’ attention (Barber & Odean (2008)). Noise traders tend to buy (sell) stocks with high (low) returns. Whaley (2001) and Baker & Wurgler (2007) suggest Chicago Board Options Exchange (CBOE) Volatility Index (VIX) as an alternative market sentiment measure. Credit Suisse Fear Barometer (CSFB) is based on prices of zero-premium collars that expire in three months. This index is sometimes used as an alternative to VIX index. The Acertus Market Sentiment Indicator (AMSI) incorporates five variables (in descending order of weight in the indicator): Price/Earnings Ratio (a measure of stock market valuations); price momentum (a measure of market psychology); Realized Volatility (a measure of recent historical risk); High Yield Bond Returns (a measure of credit risk); and the TED spread (a measure of systemic financial risk). Each of these factors provides a measure of market sentiment through a unique lens, and together they may offer a more robust indicator of market sentiment. Closed-end fund discount (the case when net asset value of a mutual fund does not equal to its market price) reported to be possible measure of investor attention (Zweig (1973) and Lee et al. (1991)).

The studies suggest that changes in discounts of closed-end funds are highly correlated with fluctuations in investor sentiment. Brown et al. (2003) investigate daily mutual fund flow as possible measure of investor attention. According to Da et al. (2014), "...individual investors switch from equity funds to bond funds when negative sentiment is high." Dividend premium (the difference between the average book-to-market ratios of dividend paying and not paying stocks) potentially can be a good predictor for investor sentiment (Baker & Wurgler (2004) and Vieira (2011)). Retail investor trades data is also reported to be able to represent investor attention (Kumar & Lee (2006)). The study shows that retail investor transactions "...are systematically correlated — that is, individuals buy (or sell) stocks in concert". Initial public offering (IPO) of a company generates a big amount of information that can potentially be used to proxy investor sentiment. Ljungqvist et al. (2006) and Baker & Wurgler (2007) report IPO first-day returns and IPO volume the most promising candidates for predicting investor attention to a particular stock. It is not surprising that high investments in advertisement of a particular company results in a higher investor attention to corresponding stock (Grullon et al. (2004)). The authors in Chemmanur & Yan (2009) provide an evidence that "...a greater amount of advertising is associated with a larger stock return in the advertising year but a smaller stock return in the year subsequent to the advertising year". Equity issues over total new issues ratio, insider trading data, and other financial indicators are reported in Baker & Wurgler (2007) to be useful in investor attention measurement procedure.

The aforementioned market-based measures have one important drawback. In particular, according to Da et al. (2014): "Although market-based measures have the advantage of being readily available at a relatively high frequency, they have the disadvantage of being the equilibrium outcome of many economic forces other than investor sentiment." In other words, one can never be sure that a particular market-based indicator was driven due to investor attention. Moreover, some indicators can work pro-cyclical. For example, a high trading volume can draw an investor attention. As a result, the trading volume grows even higher. This, in turn, leads to even bigger investor attention. Overall, market-based indicators are playing a very important role in measuring investor attention. However, an investor should always try to make sure that no other variables can drive the result.

Second way

The second way to proxy for investor attention can be to use survey-based sentiment indexes. Among most known indexes should be mentioned University of Michigan Consumer Sentiment Index, The Conference Board Consumer Confidence Index, and UBS/Gallup Index of Investor Optimism. The University of Michigan Consumer Sentiment Index is based on at least 500 telephone interviews. The survey contains fifty core questions. The Consumer Confidence Index has ten times more respondents (5000 households). However, the survey consists of only five main questions concerning business, employment, and income conditions. The questions can be answered with only three options: "positive", "negative" or "neutral". A sample of 1000 households with total investments equal or higher than $10,000 are interviewed to construct UBS/Gallup Index of Investor Optimism. Mentioned above survey-based sentiment indexes were reported to be good predictors for financial market indicators (Brown & Cliff (2005)). However, according to Da et al. (2014), using such sentiment indexes can have significant restrictions. First, most of the survey-based data sets are available at weekly or monthly frequency. At the same time, most of the alternative sentiment measures are available at a daily frequency. Second, there is a little incentive for respondents to answer question in such surveys carefully and truthfully (Singer (2002)). To sum up, survey-based sentiment indexes can be helpful in predicting financial indicators. However, the usage of such indexes has specific drawbacks and can be limited in some cases.

Third direction

In the 1920s, the market sentiment of railway companies was bullish as it was a new market, and investors saw long-term prospects.

Under the third direction, researchers propose to use text mining and sentiment analysis algorithms to extract information about investors’ mood from social networks, media platforms, blogs, newspaper articles, and other relevant sources of textual data (sometimes referred as news analytics). A thread of publications (Barber & Odean (2008), Dougal et al. (2012), and Ahern & Sosyura (2015)) report a significant influence of financial articles and sensational news on behavior of stock prices. It is also not surprising, that such popular sources of news as Wall Street Journal, New York Times or Financial Times have a profound influence on the market. The strength of the impact can vary between different columnists even inside a particular journal (Dougal et al. (2012)). Tetlock (2007) suggests a successful measure of investors’ mood by counting the number of "negative" words in a popular Wall Street Journal column "Abreast of the market". Zhang et al. (2011) and Bollen et al. (2011) report Twitter to be an extremely important source of sentiment data, which helps to predict stock prices and volatility. The usual way to analyze the influence of the data from micro-blogging platforms on behavior of stock prices is to construct special mood tracking indexes.

The easiest way would be to count the number of "positive" and "negative" words in each relevant tweet and construct a combined indicator based on this data. Nasseri et al. (2014) reports the predictive power of StockTwits (Twitter-like platform specialized on exchanging trading-related opinions) data with respect to behavior of stock prices. An alternative, but more demanding, way is to engage human experts to annotate a large number of tweets with the expected stock moves, and then construct a machine learning model for prediction. The application of the event study methodology to Twitter mood shows significant correlation to cumulative abnormal returns (Sprenger et al. (2014), Ranco et al. (2015), Gabrovšek et al. (2017)). Karabulut (2013) reports Facebook to be a good source of information about investors’ mood. Overall, most popular social networks, finance-related media platforms, magazines, and journals can be a valuable source of sentiment data, summarized in Peterson (2016). However, important to notice that it is relatively more difficult to collect such type of data (in most cases a researcher needs a special software). In addition, analysis of such data can also require deep machine learning and data mining knowledge (Hotho et al. (2005)).

Fourth road

Islamabad Stock Exchange Bull

The fourth road is an important source of information about investor attention is the Internet search behavior of households. This approach is supported by results from Simon (1955), who concludes that people start their decision making process by gathering relevant information. Publicly available data on search volumes for most Internet search services starts from the year 2004. Since that time many authors showed the usefulness of such data in predicting investor attention and market returns (Da et al. (2014), Preis et al. (2013), and Curme et al. (2014)). Most studies are using Google Trends (GT) service in order to extract search volume data and investigate investor attention. The usefulness of Internet search data was also proved based on Yahoo! Corporation data (Bordino et al. (2012)). The application of Internet search data gives promising results in solving different financial problems. The authors in Kristoufek (2013b) discuss the application of GT data in portfolio diversification problem. Proposed in the paper diversification procedure is based on the assumption that the popularity of a particular stock in Internet queries is correlated with the riskiness of this stock. The author reports that such diversification procedure helps significantly improve portfolio returns. Da et al. (2014) and Dimpfl & Jank (2015) investigate a predictive power of GT data for two most popular volatility measures: realized volatility (RV) and CBOE daily market volatility index (VIX). Both studies report positive and significant dependence between Internet search data and volatility measures. Bordino et al. (2012) and Preis et al. (2010) reveal the ability of Internet search data to predict trading volumes in the US stock markets. According to Bordino et al. (2012), "...query volumes anticipate in many cases peaks of trading by one day or more." Some researchers find the usefulness of GT data in predicting volatility on foreign currency market (Smith (2012)). An increasingly important role of Internet search data is admitted in cryptocurrency (e.g. Bitcoin) prices forecasting (Kristoufek (2013a)). Google Trends data is also reported to be a good predictor for daily mutual fund flows. Da et al. (2014) concludes that such type of sentiment data "...has significant incremental predictive power for future daily fund flow innovations of both equity and bond funds." One more promising source of Internet search data is the number of visits of finance-related Wikipedia pages (Wikipedia page statistics) (Moat et al. (2013) and Kristoufek (2013a)). To sum up, the Internet search behavior of households is relatively new and promising proxy for investor attention. Such type of sentiment data does not require additional information from other sources and can be used in scientific studies independently.

Fifth source

"All boats float or sink with the tide."

Finally the fifth source of investor attention can also depend on some non-economic factors. Every day many non-economic events (e.g. news, weather, health condition, etc.) influence our mood, which, in term, influence the level of our risk aversion and trading behavior. Edmans et al. (2007) discuss the influence of sport events on investors’ trading behavior. The authors report a strong evidence of abnormally negative stock returns after losses in major soccer competitions. The loss effect is also valid after international cricket, rugby, and basketball games. Kaplanski & Levy (2010) investigate the influence of bad news (aviation disasters) on stock prices. The authors conclude that a bad piece of news (e.g. about aviation disaster) can cause significant drop in stock returns (especially for small and risky stocks). The evidence that the number of sunlight minutes in a particular day influence the behavior of a trader is presented in Akhtari (2011) and Hirshleifer & Shumway (2003). The authors conclude that the "sunshine effect" is statistically significant and robust to different model specifications. The influence of temperature on stock returns is discussed in Cao & Wei (2005).

According to the results in the mentioned study, there is a negative dependence between temperature and stock returns on the whole range of temperature (i.e. the returns are higher when the weather is cold). A seasonal affective disorder (SAD) is also known to be a predictor of investors’ mood (Kamstra et al. (2003)). This is an expected result because SAD incorporates the information about weather conditions. Some researchers go even further and reveal the dependence between lunar phases and stock market returns (Yuan et al. (2006)). According to Dichev & Janes (2001): "...returns in the 15 days around new moon dates are about double the returns in the 15 days around full moon dates". Even geomagnetic activity is reported to have an influence (negatively correlated) on stock returns (C. Robotti (2003). To sum up, non-economic events have a significant influence on trader's behavior. An investor would expect high market returns on a sunny, but cool day, fifteen days around a new moon, with no significant geomagnetic activity, preferably the day after a victory on a significant sport event. In most cases such data should be treated as supplemental in measuring investor attention, but not as totally independent one.

Currency markets

Additional indicators exist to measure the sentiment specifically on Forex markets. Though the Forex market is decentralized (not traded on a central exchange), various retail Forex brokerage firms publish positioning ratios (similar to the Put/Call ratio) and other data regarding their own clients' trading behavior. Since most retail currency traders are unsuccessful, measures of Forex market sentiment are typically used as contrarian indicators. Some researchers report Internet search data (e.g. Google Trends) to be useful in predicting volatility on foreign currency markets. Internet search data and (relevant) Wikipedia page views data are reported to be useful in cryptocurrency (e.g. Bitcoin) prices forecasting.

Investment

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Investment

Investment is traditionally defined as the "commitment of resources to achieve later benefits". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broader viewpoint, an investment can be defined as "to tailor the pattern of expenditure and receipt of resources to optimise the desirable patterns of these flows". When expenditure and receipts are defined in terms of money, then the net monetary receipt in a time period is termed as cash flow, while money received in a series of several time periods is termed as cash flow stream. Investment science is the application of scientific tools (usually mathematical) for investments.

In finance, the purpose of investing is to generate a return from the invested asset. The return may consist of a gain (profit) or a loss realized from the sale of a property or an investment, unrealized capital appreciation (or depreciation), or investment income such as dividends, interest, or rental income, or a combination of capital gain and income. The return may also include currency gains or losses due to changes in the foreign currency exchange rates.

Investors generally expect higher returns from riskier investments. When a low-risk investment is made, the return is also generally low. Similarly, high risk comes with a chance of high losses.

Investors, particularly novices, are often advised to diversify their portfolio. Diversification has the statistical effect of reducing overall risk.

Investment and risk

An investor may bear a risk of loss of some or all of their capital invested. Investment differs from arbitrage, in which profit is generated without investing capital or bearing risk.

Savings bear the (normally remote) risk that the financial provider may default.

Foreign currency savings also bear foreign exchange risk: if the currency of a savings account differs from the account holder's home currency, then there is the risk that the exchange rate between the two currencies will move unfavourably so that the value of the savings account decreases, measured in the account holder's home currency.

Even investing in tangible assets like property has its risk. And similar to most risks, property buyers can seek to mitigate any potential risk by taking out mortgage and by borrowing at a lower loan to security ratio.

In contrast with savings, investments tend to carry more risk, in the form of both a wider variety of risk factors and a greater level of uncertainty.

Industry to industry volatility is more or less of a risk depending. In biotechnology, for example, investors look for big profits on companies that have small market capitalizations but can be worth hundreds of millions quite quickly. The risk is high because approximately 90% of biotechnology products researched do not make it to market due to regulations and the complex demands within pharmacology as the average prescription drug takes 10 years and US$2.5 billion worth of capital.

History

The Code of Hammurabi (developed during his reign between 1792-1750 BC) provided a legal framework for investment, establishing a means for the pledge of collateral by codifying debtor and creditor rights in regard to pledged land. Punishments for breaking financial obligations were not as severe as those for crimes involving injury or death.

In the medieval Islamic world, the qirad was a major financial instrument. This was an arrangement between one or more investors and an agent where the investors entrusted capital to an agent who then traded with it in hopes of making a profit. Both parties then received a previously settled portion of the profit, though the agent was not liable for any losses. Many will notice that the qirad is similar to the institution of the commenda later used in western Europe, though whether the qirad transformed into the commenda or the two institutions evolved independently cannot be stated with certainty.

In the early 1900s, purchasers of stocks, bonds, and other securities were described in media, academia, and commerce as speculators. Since the Wall Street crash of 1929, and particularly by the 1950s, the term investment had come to denote the more conservative end of the securities spectrum, while speculation was applied by financial brokers and their advertising agencies to higher risk securities much in vogue at that time. Since the last half of the 20th century, the terms speculation and speculator have specifically referred to higher risk ventures.

Investment strategies

Value investing

A value investor buys assets that they believe to be undervalued (and sells overvalued ones). To identify undervalued securities, a value investor uses analysis of the financial reports of the issuer to evaluate the security. Value investors employ accounting ratios, such as earnings per share and sales growth, to identify securities trading at prices below their worth.

Warren Buffett and Benjamin Graham are notable examples of value investors. Graham and Dodd's seminal work, Security Analysis, was written in the wake of the Wall Street Crash of 1929.

The price to earnings ratio (P/E), or earnings multiple, is a particularly significant and recognized fundamental ratio, with a function of dividing the share price of the stock, by its earnings per share. This will provide the value representing the sum investors are prepared to expend for each dollar of company earnings. This ratio is an important aspect, due to its capacity as measurement for the comparison of valuations of various companies. A stock with a lower P/E ratio will cost less per share than one with a higher P/E, taking into account the same level of financial performance; therefore, it essentially means a low P/E is the preferred option.

An instance in which the price to earnings ratio has a lesser significance is when companies in different industries are compared. For example, although it is reasonable for a telecommunications stock to show a P/E in the low teens, in the case of hi-tech stock, a P/E in the 40s range is not unusual. When making comparisons, the P/E ratio can give you a refined view of a particular stock valuation.

For investors paying for each dollar of a company's earnings, the P/E ratio is a significant indicator, but the price-to-book ratio (P/B) is also a reliable indication of how much investors are willing to spend on each dollar of company assets. In the process of the P/B ratio, the share price of a stock is divided by its net assets; any intangibles, such as goodwill, are not taken into account. It is a crucial factor of the price-to-book ratio, due to it indicating the actual payment for tangible assets and not the more difficult valuation of intangibles. Accordingly, the P/B could be considered a comparatively conservative metric.

Growth investing

Growth investors seek investments they believe are likely to have higher earnings or greater value in the future. To identify such stocks, growth investors often evaluate measures of current stock value as well as predictions of future financial performance. Growth investors seek profits through capital appreciation – the gains earned when a stock is sold at a higher price than what it was purchased for. The price-to-earnings (P/E) multiple is also used for this type of investment; growth stock are likely to have a P/E higher than others in its industry. According to Investopedia author Troy Segal and U.S. Department of State Fulbright fintech research awardee Julius Mansa, growth investing is best suited for investors who prefer relatively shorter investment horizons, higher risks, and are not seeking immediate cash flow through dividends.

Some investors attribute the introduction of the growth investing strategy to investment banker Thomas Rowe Price Jr., who tested and popularized the method in 1950 by introducing his mutual fund, the T. Rowe Price Growth Stock Fund. Price asserted that investors could reap high returns by "investing in companies that are well-managed in fertile fields."

A new form of investing that seems to have caught the attention of investors is Venture Capital. Venture Capital is independently managed dedicated pools of capital that focus on equity or equity-linked investments in privately held, high growth companies.

Momentum investing

Momentum investors generally seek to buy stocks that are currently experiencing a short-term uptrend, and they usually sell them once this momentum starts to decrease. Stocks or securities purchased for momentum investing are often characterized by demonstrating consistently high returns for the past three to twelve months. However, in a bear market, momentum investing also involves short-selling securities of stocks that are experiencing a downward trend, because it is believed that these stocks will continue to decrease in value. Essentially, momentum investing generally relies on the principle that a consistently up-trending stock will continue to grow, while a consistently down-trending stock will continue to fall.

Economists and financial analysts have not reached a consensus on the effectiveness of using the momentum investing strategy. Rather than evaluating a company's operational performance, momentum investors instead utilize trend lines, moving averages, and the Average Directional Index (ADX) to determine the existence and strength of trends.

Dollar cost averaging

Dollar cost averaging: If an individual invested $500 per month into the stock market for 40 years at a 10% annual return rate, they would have an ending balance of over $2.5 million.

Dollar cost averaging (DCA), also known in the UK as pound-cost averaging, is the process of consistently investing a certain amount of money across regular increments of time, and the method can be used in conjunction with value investing, growth investing, momentum investing, or other strategies. For example, an investor who practices dollar-cost averaging could choose to invest $200 a month for the next 3 years, regardless of the share price of their preferred stock(s), mutual funds, or exchange-traded funds.

Many investors believe that dollar-cost averaging helps minimize short-term volatility by spreading risk out across time intervals and avoiding market timing. Research also shows that DCA can help reduce the total average cost per share in an investment because the method enables the purchase of more shares when their price is lower, and less shares when the price is higher. However, dollar-cost averaging is also generally characterized by more brokerage fees, which could decrease an investor's overall returns.

The term "dollar-cost averaging" is believed to have first been coined in 1949 by economist and author Benjamin Graham in his book, The Intelligent Investor. Graham asserted that investors that use DCA are "likely to end up with a satisfactory overall price for all [their] holdings."

Micro-Investing

Micro-investing is a type of investment strategy that is designed to make investing regular, accessible and affordable, especially for those who may not have a lot of money to invest or who are new to investing.

Intermediaries and collective investments

Investments are often made indirectly through intermediary financial institutions. These intermediaries include pension funds, banks, and insurance companies. They may pool money received from a number of individual end investors into funds such as investment trusts, unit trusts, and SICAVs to make large-scale investments. Each individual investor holds an indirect or direct claim on the assets purchased, subject to charges levied by the intermediary, which may be large and varied.

Approaches to investment sometimes referred to in marketing of collective investments include dollar cost averaging and market timing.

Famous investors

Investors famous for their success include Warren Buffett, who ranked second in the Forbes 400 list of the March 2013 edition of Forbes magazine. Buffett has advised in numerous articles and interviews that a good investment strategy is long-term and due diligence is the key to investing in the right assets.

Edward O. Thorp was a highly successful hedge fund manager in the 1970s and 1980s who spoke of a similar approach.

The investment principles of both of these investors have points in common with the Kelly criterion for money management. Numerous interactive calculators which use the Kelly criterion can be found online.

Investment valuation

Free cash flow measures the cash a company generates which is available to its debt and equity investors, after allowing for reinvestment in working capital and capital expenditure. High and rising free cash flow, therefore, tend to make a company more attractive to investors.

The debt-to-equity ratio is an indicator of capital structure. A high proportion of debt, reflected in a high debt-to-equity ratio, tends to make a company's earnings, free cash flow, and ultimately the returns to its investors, riskier or volatile. Investors compare a company's debt-to-equity ratio with those of other companies in the same industry, and examine trends in debt-to-equity ratios and free cashflow.

Wednesday, June 14, 2023

Activist shareholder

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Activist_shareholder

An activist shareholder is a shareholder who uses an equity stake in a corporation to put pressure on its management. A fairly small stake (less than 10% of outstanding shares) may be enough to launch a successful campaign. In comparison, a full takeover bid is a much more costly and difficult undertaking. The goals of activist shareholders range from financial (increase of shareholder value through changes in corporate policy, cost cutting, etc.) to non-financial (disinvestment from particular countries, etc.). Shareholder activists can address self-dealing by corporate insiders, although large stockholders can also engage in self-dealing to themselves at the expense of smaller minority shareholders.

According to research firm Insightia, a total of 967 listed companies globally were publicly subjected to activist demands in 2022, up from 913 in 2021. Shareholder activism can take any of several forms: proxy battles, publicity campaigns, shareholder resolutions, litigation, and negotiations with management. Daniel Loeb, head of Third Point Management, is notable for his use of sharply written letters directed towards the CEOs of his target companies.

Activism may help to address the principal-agent problem where the management (agents) do not adequately respond to the wishes of the principals (investors) of publicly traded companies. In the 2010s, investments in the activist asset class grew, with activists receiving coverage by the media and positive attention from investors. Activists have typically engaged in adversarial campaigns, but have also in some cases been able to acquire board seats with a formal proxy context.

Shareholder activists are making their mark on mergers and acquisitions as well – a 2015 survey of corporate development leaders found that 60% of respondents saw shareholder activism affecting transaction activity in their industry. Increasingly, however, the non-financial form of shareholder activism is affecting companies in a range of sectors. Shareholders, often with a comparatively small stake in a company, are seeking to influence the company's environmental and social performance.

Some of the recent activist investment funds include: California Public Employees' Retirement System (CalPERS), Icahn Management LP, Santa Monica Partners Opportunity Fund LP, State Board of Administration of Florida (SBA), and Relational Investors, LLC.

Due to the Internet, smaller shareholders have also gained an outlet to voice their opinions. In 2005, small MCI Inc. shareholders created an online petition to protest the MCI/Verizon merger.

History

Corporations in 18th-century Europe were privileged and relatively uncommon, but in the United States became much more common, starting with 300 in the 1790s and expanding by around 26,000 between 1790 and the 1860s, resulting in about 15 times the corporations in Great Britain by 1830. These early corporations contained various provisions for corporate governance, including restricted charters, bylaws, prudent-mean voting rules, dividend payments, and press coverage.

From 1900 to 1950, about 1.22 "offensive" activist initiatives occurred per year, with more occurring in the 1940s and 1950s. Notable investors included Cyrus S. Eaton, Phoenix Securities Corporation, Benjamin Graham, J. Paul Getty, and Malcolm Chace. Activism was likely limited by the lack of ownership dispersion, meaning that many corporations had large shareholders with sizable blocks (10 to 20% of total shares) who already exerted significant control over the corporation.

Notable investors

Notable activist investors include: Isaac Le Maire (1558–1624), Carl Icahn, Nelson Peltz (Trian), Bill Ackman (Pershing Square), Daniel Loeb (Third Point), Barry Rosenstein, Larry Robbins (Glenview), David Einhorn, Gregg Hymowitz (EnTrust Global), Christer Gardell (Cevian Capital), and Ryan Cohen.

During the 1980s, activist investors such as Carl Icahn and T. Boone Pickens gained international notoriety and were often perceived as "corporate raiders" for acquiring an equity stake in publicly owned companies, like Icahn's investment in B.F. Goodrich, and then forcing companies to take action to improve value or rid themselves of rebel intruders like Icahn by buying back the raider's investment at a fat premium, often at the expense of the other shareholders. More recently, activist investor Phillip Goldstein suggested that the role of the activist investor has moved from green mail to one of being a catalyst to unlock value in an underlying security, and says that the public perception of activist investors as "corporate raiders" has dissipated.

In 2019, notable activist investors included Starboard Value, Ancora, Icahn, Elliot Management, and Third Point (Loeb). In 2019, mutual funds such as Wellington Management Company had begun to show signs of activism.

Outreach strategies

Activist investors advertise their message out in various ways including postal mail, websites, and social media.

Statistics

As of 2018, there had been an average of 272 activist campaigns per year in the United States, including 47 proxy contests. About 47% of targeted companies were outside of the United States.

Proxy advisory

As of 2020, passive investors such as index funds by Vanguard as well as non-activist but still active management investors such as mutual funds play a significant role in corporate governance. These firms use proxy advisory firms such as Institutional Shareholder Services to receive recommendations on how to vote on shareholder proposals.

Funding

Activist investors are often hedge funds funded by accredited investors and institutions. In 2019, institutions were demanding more upfront explanation of the activist ideas before funding, and in some cases requiring that the funds be placed into special purpose vehicles specifically for the project. Activist hedge funds, which are hedge funds that "take concentrated positions in the equity of public corporations and actively engage with corporate managers" can address the principal-agent problem and limit self-dealing by providing management with high-powered incentives to increase value.

Offensive versus defensive

Shareholder activism can be categorized as "offensive" or "defensive"; in the latter case, an existing shareholder attempts to correct some deficiency, while offensive activists build a position with the intention to agitate for change. Shareholders can also initiative a derivative suit to force action by the corporation. Shareholders can also engage in a securities class action but these are typically not associated with activism.

Laws

In the United States, acquisition of over 5% of beneficial ownership in a company with the intention to influence leadership must be accompanied by a Schedule 13D filing; investors who do not intend to become activists may file a Schedule 13G instead.

Proxy access

Historically, investors were required to mail separate ballots when trying to nominate someone of their own to the board, but beginning in 2015, proxy access rules began to spread driven by initiatives from major institutional investors, and as of 2018, 71% of S&P 500 companies had a proxy access rule.

Voting

Votes for the board may be "straight" or "cumulative". In straight voting (aka statutory voting), shareholders get one vote per share on all ballot questions (e.g., candidates for the board of directors or shareholder proposals). In cumulative voting, a shareholder receives a general vote for however many number of ballot questions there are. The votes can then be all cast for (or against) a single ballot question, which makes it easier for minority shareholders to elect candidates. There has also been a movement toward "majority" voting, where a candidate must receive the majority of votes. Most large corporations are incorporated in Delaware due to the well-developed Delaware General Corporation Law; in Delaware, cumulative voting is optional, but exceptions exist; for example, a California-based but Delaware-registered corporation may be "pseudo-foreign" under California law and therefore have to comply with California law.

Performance

Taking an activist approach to public investing may produce returns in excess of those likely to be achieved passively. A 2012 study by Activist Insight showed that the mean annual net return of over 40 activist-focused hedge funds had consistently outperformed the MSCI world index in the years following the global financial crisis in 2008. Activist investing was the top-performing strategy among hedge funds in 2013, with such firms returning, on average, 16.6% while other hedge funds returned 9.5%.

Research

Shareholder activism directed at both European and American companies has been surging. A 1996 study found that larger firms with higher institutional holdings made firms more likely to be targeted by activist investors. Researchers also try to understand what makes company a desirable target for an activist investor. Lately, both scholars and practitioners started using machine learning methodologies to predict both targets and activists.

Retail involvement

Any shareholder, including a non-institutional retail investors, may submit a shareholder proposal in the United States, and between 1934 and the mid-1980s these shareholders typically submitted proposals. One estimate placed institutional owners at 68% of shares and retail at 32% of shares, but 98% of institutional owners vote and only 28% of retail owners vote. Institutional shareholders, however, often vote automatically upon the advice of proxy advisory firms; allowing retail shareholders to vote based upon a guideline ("standing voting instructions") has been proposed to increase their involvement.

Various websites have been created to facilitate retail involvement, including Moxy Vote, Shareowners.org, United States Proxy Exchange and ProxyDemocracy.org, but over time these generally shut down.

Political and labor involvement

Labor unions, including through pension funds such as CalPERS coalitions such as the Change to Win Federation often engage in shareholder proposals. The Shareholder Rights Group is a coalition of shareholder proposal advocates.

Socially responsible investing

Organizations such as the Interfaith Center on Corporate Responsibility (ICCR), As You Sow and Ceres use shareholder resolutions, and other means of pressure, to address issues such as sustainability and human rights.

For an analysis of the hundreds of annual shareholder resolutions, see Proxy Preview.

Community development financial institution

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Community_development_financial_institution

A community development financial institution (US) or community development finance institution (UK) - abbreviated in both cases to CDFI - is a financial institution that provides credit and financial services to underserved markets and populations, primarily in the USA but also in the UK. A CDFI may be a community development bank, a community development credit union (CDCU), a community development loan fund (CDLF), a community development venture capital fund (CDVC), a microenterprise development loan fund, or a community development corporation.

CDFIs are certified by the Community Development Financial Institutions Fund (CDFI Fund) at the U.S. Department of the Treasury, which provides funds to CDFIs through a variety of programs. The CDFI Fund and the legal concept of CDFIs were established by the Riegle Community Development and Regulatory Improvement Act of 1994. Broadly speaking, a CDFI is defined as a financial institution that: has a primary mission of community development, serves a target market, is a financing entity, provides development services, remains accountable to its community, and is a non-governmental entity.

The Housing and Economic Recovery Act of 2008 (HERA) authorized CDFIs certified by the CDFI Fund to become members of the Federal Home Loan Banks. The Final Rule regarding the procedures and standards to be used by the Federal Home Loan Banks to evaluate applications for membership from CDFIs were published in the Federal Register Federal Housing Finance Agency in January 2010. The Final Rule is to be implemented by the 11 Federal Home Loan Banks, each of which will evaluate membership applications independently.

CDFIs are related to, but not identical with, Community Development Entities (CDEs). CDEs are also certified by the CDFI Fund at the U.S. Department of Treasury but have somewhat different qualifications. Many CDFIs have also been certified as CDEs. The primary purpose of CDEs is to utilize the New Markets Tax Credit Program (NMTCs). NMTCs were created to induce equity investments in low-income communities. Traditionally, because of the NMTCs and the structure of the industry, investments in CDFIs were typically limited to larger financial institutions. Investment access to CDFIs appears to be on the rise, as CNote, a company that lets individuals invest their savings in CDFIs, recently received qualification from the Securities and Exchange Commission to offer their CDFI-based product to non-accredited investors.

CDFIs may be subject to oversight by federal financial institution regulators (e.g., banks, credit unions) or may be "unregulated" at the federal level, and subject only to the laws of the states in which they operate. There is no mandatory rating or ranking system imposed on all CDFIs which would allow investors or others to evaluate their performance, safety, or strength. However, since 2004 approximately 100 CDFI loan funds have received voluntary ratings of their financial strength and social impact performance by Aeris, an independent rating and information service. In 2015, Standard & Poor's issued its first ratings assessments of CDFI loan funds.

Scope

In 2006, there were approximately 1,250 CDFIs, consisting of:

More than 500 community development loan funds;
More than 350 community development banks;
More than 290 community development credit unions;
More than 80 community development venture capital funds.

In May 2010, the CDFI Fund had certified 862 CDFIs, 57 Native CDFIs (serving Native Americans), and 4,230 CDEs, each of which may have multiple subsidiary investment funds.

Nationwide, over 1,000 CDFIs serve economically distressed communities by providing credit, capital, and financial services that are often unavailable from mainstream financial institutions. CDFIs have loaned and invested billions of dollars in the most distressed communities in the United States, leveraging capital from the private sector for development activities in low wealth communities across the nation.

While there are numerous organizations certified as CDFIs by the CDFI Fund, it is believed that there are thousands of financial institutions serving the needs of low-income people or communities in the United States, that either have not applied for CDFI status or have otherwise not been able to fulfill all of the requirements for formal CDFI certification.

In fiscal year 2016, CDFI program awardees originated $3.6 billion in loans and investments to finance more than 13,000 businesses and 33,000 affordable housing units.

Notable depository CDFIs

ShoreBank, headquartered in the South Shore neighborhood of Chicago, was founded in 1973. By 2007, it had over $2 billion in assets. ShoreBank had branches in Chicago’s South and West sides, Cleveland, and Detroit, but in August 2010 the bank was declared insolvent and its branches were taken over by Urban Partnership Bank. Its holding company ShoreBank Corporation, still exists and promotes its community development mission through affiliates in Oregon and Washington state, and in Michigan’s Upper Peninsula. ShoreBank’s international consulting services have offices in Chicago, Washington, D.C., and London, and projects in 30 countries around the world.

OneUnited Bank, headquartered in Boston, Massachusetts, is the largest African-American-owned CDFI in the country, with branches in Boston, Miami, Florida, and Los Angeles, California.

The Center for Community Self-Help, another leading CDFI, was founded in 1980 in Durham, North Carolina. Self-Help's home and business lending has provided low-wealth, minority, rural and female borrowers with over $5.24 billion in financing. Much of this is through Self-Help's national secondary market program, which enables conventional lenders to make more home loans to low-wealth families. Self-Help also develops commercial and residential real estate and operates retail credit unions. In response to predatory lenders increasingly targeting family wealth in poor and minority communities, Self-Help in 1999 worked with the NAACP, AARP, and other North Carolina groups to form the Coalition for Responsible Lending and help enact one of the United States' first laws to curb predatory mortgage lending. In 2002, Self-Help founded the Center for Responsible Lending, a nonprofit, nonpartisan research and policy organization that recommends solutions to predatory lending abuses.

Notable non-depository CDFIs

Other countries

While the CDFI Fund and its certifications are limited to the United States, the UK also has about 70 CDFIs and a trade association, Responsible Finance, formerly known as the Community Development Finance Association (CDFA). The UK government has provided various funding initiatives for CDFIs and credit unions, and Community Investment Tax Relief (somewhat similar to New Markets Tax Credit) is available on investments in accredited CDFIs.

Institutions similar in purpose exist around the world, such as Grameen Bank in Bangladesh and Clann Credo in Ireland, though they are not generally called CDFIs, but are described by other terms such as microfinance institutions or social banks or social investment funds.

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