Note: The views and opinions expressed in this newsletter are those of the authors and do not necessarily reflect the official policy or position of Newday Impact. Any content provided by our authors is of their opinion and is not intended to malign any religion, ethnic group, club, organization, company, individual, or anyone or anything.
Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Past performance does not guarantee future performance.
IMPACT COMMENTARY
Climate Action – The need for the U.S. to tackle the problem today
Over the last few years, there has been an increased emphasis on climate initiatives globally. However, the U.S. continues to lag behind the EU, with some still questioning the gravity and need for climate action, despite many peer-reviewed scientific studies showing an overwhelming consensus that climate change is a reality and primarily a human-caused problem. Because of this, there is a lack of political will and action in the U.S., which is reflected in our current energy policy.
According to the National Center for Environmental Information, the U.S. has sustained 332 weather and climate disasters since 1980, where overall damages and costs have reached or exceeded $1 billion (including CPI adjustment to 2022). The total cost of these 332 events exceeds $2.275 trillion. The White House Office of Management and Budget (OMB) predicted that climate change could reduce the country’s Gross Domestic Product (GDP) by as much as 10% by the end of this century. That translates into a 7.1% loss in annual revenues (or approximately $2 trillion in today’s dollars). This compares to the country’s proposed budget for FY23 of $5.8 trillion. Extreme weather events, which include significant storms, hurricanes, floods, and wildfires, already cause around $120 billion a year in damages in the U.S. Some are carried by our government in the form of insurance programs and post-disaster aid, according to the OMB.
However, the tides are changing as 2022 marks a year of sweeping political and regulatory proposals highlighting the significant financial risks and opportunities of climate change. In March, the Securities and Exchange Commission (SEC) announced regulatory reforms that would require public companies to disclose climate-related risks and mitigation strategies that have a material impact on financial statements and their business in an effort to formalize and standardize environmental-related reporting. Firms would also be required to calculate their greenhouse gas emissions (GHG) with auditor verification in order to reveal a company’s carbon footprint that would provide “decision-useful” information so investors could make more informed investment decisions.
On June 30th, the Supreme Court’s 6-3 decision in West Virginia v. Environmental Protection Agency (EPA) was a significant environmental decision that, unfortunately, now somewhat limits our nation’s fight against climate change. It held that the EPA did not have authority from Congress to issue its Clean Power Plan that forced power plants to set limits on emissions and help cut pollution. Chief Justice Roberts wrote that federal agencies need to clearly state and gain explicit Congressional approval to adopt regulations that could have broad social and economic consequences. While some believe this will limit the scope of the agency’s regulatory powers and put a damper on our country’s clean energy transition efforts, under this precept, it does not strip down the EPA’s authority to regulate GHG emissions but will only strike down regulations if agencies make an “unprecedented” departure from past interpretations of legal authority or “assert highly consequential power beyond what Congress could reasonably be understood to have granted.”
Nevertheless, as stated in our comments last month regarding the Supreme Court’s Dodd decision, more important questions are at stake. The EPA decision raises the question of how the country’s model of governance is changing and how that will affect the running of not only vital agencies but corporations. The Supreme Court’s recent decision(s) very much calls this into question causing many in the investment community to discuss the process by which regulations will be implemented before they can be put into place. Some fear these recent events may also prevent the SEC’s ability to pass its new Climate Disclosure Proposal. Yet, we believe that since the SEC does not require issuers to reduce GHG emissions but rather report on climate-related risks that provide the public with information needed to make informed investment decisions, the rule would fulfill its congressional mandate, thereby clearing its passage.
While this is debatable and might be wishful thinking on our part, there should be no argument that we need greater ESG disclosures and greater action related to climate change. This may be the reason why in a surprise announcement just a few days ago, Senators Joe Machin and Chuck Schumer struck a landmark deal that will not only fight inflation, something the former has been very vocal about confronting when voting against the Build Back Better Deal (BBB) thereby killing the deal, but will also secure domestic energy sources and meet the country’s climate and environmental goals. The Inflation Reduction Act of 2022, if passed by Congress, will pave the way for the largest investment in building a competitive, affordable, clean energy economy ever to be seen in the U.S.
The near-term impact of all these events will no doubt change the regulatory landscape. Still, it also fosters conversations and helps grow awareness of the environmental influence and effect climate has on our economy and world. We are moving from just companies and people trying to do their part to our nation finally creating public policy and securities regulations to combat this crisis. Our environment and economics are inextricably linked. As corporations respond to climate change by reducing their own GHG emissions, as Impact Asset Managers at Newday, we believe we are playing a key role in combatting climate change by directing capital towards sustainable investment solutions. This is why we encourage you to look at our Climate Action portfolio. In collaboration with Etho Capital, we’ve created a Climate Action portfolio that invests in companies that exceed leading climate investment standards and is net climate positive (have negative net GHG emissions) on the Etho Global Climate Positive Index.
With the hopeful passage of upcoming legislative proposals, we hope that those in our political frameworks will start trusting science and recognize the business impact of climate change that can no longer be ignored so that we can move ahead in helping combat the effects of climate change. As Stephen Covey said, “Change moves at the speed of trust.” Please visit Climate Action Portfolio | Newday (newdayimpact.com) for more information.
Disclaimer
Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Past performance does not guarantee future results. Before investing, consider your investment objectives, financial resources, experience, risk factors, and Newday Impact fees.
COUNTRY GOVERNANCE RESEARCH COMMENTARY
Ukraine counteroffensive in the south begins to take shape
Entering into the sixth month of Russia’s invasion of Ukraine, the contours of the war have begun to shift again. With Ukraine’s armed forces having foiled Putin’s plans for a lightening takeover of the country and then forcing the withdraw of his troops from around Kyiv, Putin declared the more modest aim of taking over the parts of the eastern Donbass region he and his proxies did not already control. Russia had been having limited success in this objective with Ukrainian troops last month retreating from the entirety of the Luhansk province. However, more recently Ukraine has been effectively using Western supplied advanced long-range artillery systems to destroy ammunition depots and other high value targets far behind the front-lines. Ukraine’s defense minister has said that these strikes have led to a lessening of the intensity of Russia’s artillery assault and have allowed Ukraine to stabilize the front-lines in the east. Russia has not made any further significant territorial gains in the area for the past several weeks. The Ukrainians, in turn, have stepped up their own efforts to retake territory in the south that was seized in the early days of the invasion. Just north of Russian occupied Crimea, the city of Kherson is a prime target for Ukraine’s planned counteroffensive. It is the most western city controlled by Moscow, and Ukraine has been working to isolate the troops there by conducting precision strikes on the bridges providing the only means for supplies and heavy equipment to reach the city from the east.
Implications: Ukraine’s ability to show progress in its counteroffensive will play a large part in the war’s future trajectory. Success in pushing back Russia’s occupation would boost Ukrainian morale after setbacks in the east, and it would give Ukraine’s Western backers confidence to continue the flow of weapons. Failure would likely increase the calls by some for Ukraine to seek a ceasefire on what would inevitably be terms favorable to Moscow.
Boris Johnson ousted as prime minister after Conservative party mutiny
Boris Johnson has resigned as prime minister after a series of scandals eroded his support within the Conservative Party. He had a survived a confidence vote in June and had given every indication that he intended to stay on as prime minster. However, in a dramatic 48-hour period more than 50 government ministers and aides quit, saying they no longer trusted the veracity of their leader. Lawmakers were upset over his attendance at parties during Covid-19 lockdowns, and they believed Johnson had misled Parliament about those gatherings. Then following on the heels of the “party gate” scandal he faced backlash over his appointment of a minister who was the subject of a sexual-misconduct complaint. Despite Johnson’s denials, it emerged he had been briefed on the sexual misconduct allegations before the appointment. Johnson claimed to have forgotten about the accusations, but for members of his party it was the final straw leading them to conclude they could no longer trust him to be truthful with them or the British public. Under the British parliamentary system, the Conservatives as the majority party will choose their next party leader who will then automatically become the new prime minister without a nationwide vote. After a series of votes amongst Conservative lawmakers, two final candidates have been selected – former Chancellor of the Exchequer Rishi Sunak and Foreign Secretary Liz Truss. To choose between the remaining candidates a postal ballot of the Conservative Party’s roughly 150,000 members will be held over the summer.
Implications: Liz Truss has gained in the polls and attracted the support of significant party figures with pledges to cut taxes and government bureaucracy. Rishi Sunak, in contrast, has said he would wait for high inflation to come down before enacting any major tax cuts. Results will be announced on September 5, and the winner will take office the next day.
Italy loses a popular prime minister after collapse of unity coalition
Italy’s president has accepted Mario Draghi’s resignation and dissolved parliament. Consequently, early elections will be held on September 25, rather than June 2023 as scheduled. The president had rejected Draghi’s first attempted resignation hoping to preserve Draghi’s technocratic government, which had brought eighteen months of stability following the Covid-19 pandemic. Draghi, who is not a member of parliament, was named prime minister to lead a unity government and oversee Italy’s plans for more than €200bn of EU recovery funds. To unlock the recovery funds, Draghi’s government had agreed on a number of reforms with the European Commission in order to improve the growth prospects of Italy’s chronically underperforming economy. In the end, however, Draghi felt his coalition partners were undermining his reform efforts, and he called a confidence vote in order for them to recommit to his reform agenda. He survived the confidence vote, but three of the largest parties in his coalition abstained precipitating the government’s collapse. International concern over the loss of Draghi’s well-respected leadership has been reflected in widening spreads between yields on Italian bonds and similar German bonds.
Implications: Based on current polling, a coalition of right-wing parties looks likely to win the upcoming election, and their failure to implement the already agreed reform program could jeopardize the release of future tranches of EU recovery funds. The European Commission has said it will not entertain any significant deviation from the already agreed plans. The ECB has also said backsliding on reforms could prevent their purchase of Italian bonds, which has been critical to preventing an even greater widening of bond spreads.
Disclosure
This commentary is provided for information purposes only and is not an offer or solicitation of an offer to buy or sell any product or service. Unless otherwise stated, all information and opinion contained in this publication were produced by Newday Funds, Inc. (“Newday Impact”) and other sources believed by Newday Impact to be accurate and reliable. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions of the financial markets, general investment strategy, or particular investments are not recommendations to clients and are subject to change without notice.
Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Past performance does not guarantee future performance.