Silicon Valley Bank shows why the ‘G’ in ESG matters

A Friday bank failure and a Sunday scramble at the Federal Reserve to set up an emergency lending facility before the Asian markets open — yes, a lot has happened since our Friday newsletter. And no, you have not been transported back to the weekends of 2008. The failure of Silicon Valley Bank — hardly a well-known Wall Street name — triggered a serious banking crisis in the year of ChatGPT.

Like clockwork, the haters of environmental, social and governance (ESG) investing sought to pin Silicon Valley Bank’s problems on its ESG efforts. Writing in the Wall Street Journal, Vivek Ramaswamy argued the bank’s $5bn commitment to “sustainable finance and carbon neutral operations” was a reason for its collapse.

These shallow jibes about SVB’s commitment to environmental sustainability or employee diversity obscure one ESG issue that deserves more serious discussion: its apparent governance weaknesses. Today, I take a look at a couple of red flags at the bank that seem to have gone unnoticed by its shareholders.

Below, I also have a story about cleantech, one of the hottest niches in private markets (rivalling crypto, in fact). Although the SVB collapse might change things in the months ahead, carbon software businesses have been raising eye-catching amounts of money in an already tough market environment. — Patrick Temple-West

Silicon Valley Bank governance red flags suggested a looming crisis

Since the Federal Reserve started raising interest rates last year, it has been a market guessing-game of what — if anything — would break as borrowing costs started to matter again.

On Friday, a major lending institution — with significant ties to the real economy — became the biggest victim of the Fed’s hiking cycle. Its potential for contagion quickly became apparent last night when a second bank, Signature, was closed by the New York Department of Financial Services.

The Fed and Treasury scrambled to prevent bank runs by pledging to let depositors get access to their funds. But after bank regulators seized the 40-year-old Silicon Valley Bank on Friday, dozens of companies were forced to report their cash held by the lender — including businesses in the hot, cleantech sector.

The Fed’s actions staunched the potential bleeding for SVB clients, including those in the cleantech space such as Sunnova, a solar company, and Lemonade, one of the few publicly traded B-Corps.

As investors ponder the dramas there is another lesson emerging: SVB shows why the “G” in ESG — governance — matters, given that the lack of it seems to have contributed to the failure.

Silicon Valley Bank did not seem to have had a chief risk officer for much of 2022, said Mike Puangmalai, author of the NonGaap newsletter, a tipsheet for corporate governance watchers.

The bank announced a new chief risk officer on January 3, but it quietly disclosed on March 3 that its previous chief risk officer stepped down in April 2022. This is likely to provoke scrutiny from Washington bank regulators. Additionally, chief executive Gregory Becker had a pretty well-timed stock sale last month. On February 27, Becker sold $3.6mn of the bank’s shares at $287 (its shares were halted on Friday at $106). Executives sell their company shares all the time, but Becker’s plan to sell was adopted on January 26 — just one month before the sale.

Quick stock sales are red flags that company insiders might know something that common shareholders do not. And quick sales are under scrutiny by the Securities and Exchange Commission, which last year adopted a rule to ban planned stock sales before 90 days (the rules have not gone into effect yet).

The broader consequences of Silicon Valley Bank’s failure will become clearer in the days ahead. What is clear now is that Silicon Valley has lost “a vital organ” in the fundraising ecosystem. As cleantech companies become an increasingly important part of the decarbonisation road map, we will soon see how important SVB might have been to their growth. (Patrick Temple-West)

Move over AI, carbon software dazzles investors

Artificial intelligence, thanks to the ChatGPT phenomenon, has enticed well-known investors and significant sums of cash. With markets trading sideways this year, investors have coalesced around AI as the next big generational change they are eager to throw money at.

But it AIn’t the only game in town.

Morgan Stanley, late last month, published an eye-opening report about the investment opportunities in “carbon software,” a broad collection of businesses ranging from energy efficiency to carbon offsets.

“With all eyes on generative AI, investors risk missing an equally interesting trend emerging: carbon software,” Morgan Stanley analysts said. Only two areas of the private markets continued to increase fundraising in the fourth quarter of 2022 and into 2023: generative AI and carbon software, the bank said.

In fact, carbon software is generating the kind of funding interest that crypto enjoyed before its bubble burst. Carbon, however, “has clear regulatory tailwinds” such as the Securities and Exchange Commission’s climate disclosure rule.

Crypto, for obvious reasons, is under attack from regulators.

The biggest carbon software company as ranked by Morgan Stanley is Xpansiv, a trading venue for carbon credits and renewable-energy credit. The San Francisco-based company has raised $703mn, including $400mn in funding from Blackstone last year. It wants to provide physical market infrastructure for carbon by establishing price discovery and fostering liquidity much like the infrastructure for the oil market.

Voluntary carbon offsets, such as the ones Xpansiv is listing, have been scrutinised as a “wild west” with no oversight, and they are increasingly drawing criticism for doing little to fight global warming.

Andy Bose, a senior vice-president at Xpansiv, acknowledged to me that “there will be bumps along the road as any market has”. But Xpansiv’s platform is designed to build an infrastructure for offsets that help the market, he said.

Other carbon software businesses Morgan Stanley identified include Measurabl, which provides software for tracking emissions in commercial real estate and has raised $82.6mn.

The list also includes Watershed, a carbon accounting software provider that Morgan Stanley said was valued at $1bn.

Taylor Francis, Watershed’s co-founder, told me his company was getting businesses ready for the Securities and Exchange Commission’s climate disclosure rule.

“Carbon numbers are coming out of the [corporate sustainability] report — with fancy graphic design — and coming into the hallowed ground of 10-Ks where chief financial officers and regulators expect a different level of rigour,” he said. (Patrick Temple-West)

Smart read

Beyond the SVB fiasco, global warming problems persist. Saudi Aramco on Sunday reported record profits for 2022 as the largely state-owned oil company cashed in on a tumultuous year in energy markets. The huge profits, were described by chief executive Amin Nasser as “probably the highest net income ever reported in the corporate world”.