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.

Democracy Dodges a Bullet

2022 Midterm Elections — What Do They Mean for ESG?

The November 2022 elections may in fact be remembered in part for our country’s repudiation of right-wing extremism and crackpot candidates. After the votes were counted, what was thought to be a red wave crashing on our shores never materialized and voters seemingly cast ballots not so much around party lines, but around the character of the candidates and the issues that they support. The defeat of many election deniers is a sign that our political system is still working. 

But as a group of changemakers here at Newday that are committed to creating a new storyline for our future, there was more at play and certainly more at risk that what may have been apparent.

Undoubtedly, the election outcome was a vote in favor of our democracy. It may have also been a vote for forward progress associated with an agenda that takes us forward to a more sustainable future. However, our world needs urgent help. Here are the facts. California and the American West continue to suffer from a 20-year drought that is the worst in 1200 years. For Midwesterners, the Mississippi River is at its lowest levels since 2012. For those in the Southwest, the critical reservoirs of Lake Mead and Lake Powell have dropped more than 150 feet, are less than 30% of capacity, and have fallen to levels that soon may not be able to generate critical hydro-electric power for the multiple states that the reservoirs support. And for those that reside in the southeast and east, the strength of hurricanes is intensifying creating catastrophic damage as they come ashore. Not to mention the hundreds of millions of people around the world that suffer from food and water scarcity, political unrest and war, and the ill effects of a changing planet.

The earth has entered a new geological epoch, characterized by the significance of changes to the earth’s bio-systems, such as global warming, and resource depletion. This is the only epoch in history to have been directly caused by human activity. The changes in the earth’s systems, as driven by human activities including mass production, energy, and water use, were primarily accomplished post 1950 representing a great acceleration of bio-systematic and sociological changes.

The planet’s bio systems and human beings are becoming increasingly interconnected as a result of those bio systemic changes and if current unsustainable production and consumption patterns continue, planetary resources will become increasingly strained, resulting in greater social and environmental instability. Humanity’s growing appetite is fueling an impending natural-resource catastrophe. 

So, retention of democratic control of the United States Senate, and the slim majority of congressional seats that the Republicans control, perhaps ensures that environmental and social advancements made over the past two years won’t move backwards. While rejoining the Paris Agreement, and billions of dollars committed to a more energy efficient and renewable energy future are meaningful steps, it’s still not enough. Disappointingly, there were few new commitments that came out of COP 27 (the United Nations global convening to strengthen action to combat climate change.) 

Complicating a myriad of environmental challenges are a long list of social ills made worse by income equality and societal fracture. The midterm results must also be examined through a social justice lens. With the relatively recent Supreme Court decision that eliminated the reproductive rights for women under Roe vs Wade, concerns that a Republican controlled house could allow for a federal ban on abortion and the continued means at the State level attacking voting rights even through simple measures like making it illegal to give water to a person waiting in a long line to vote on a hot day.

While the midterm elections were not a “red wave”, Federal, State, and Local referendums may have an impact on more complex Environmental Social and Governance (ESG) policy going forward.  We must examine the effects on a Federal, and State and Local level but equally review the State Referendums that passed to fully understand what the future looks like in the US and under the new Congress. 

Federal: Even before the reelection of Georgian Senator Raphael Warnock, the Senate remained in Democratic control. However, this critical win neuters in part the power of Senator Manchin. In the other chamber, the House of Representatives, the Republicans now have control with a similar majority as the Democrats previously held. Because of split control of the Congress (different parties control the two chambers), the larger climate or environmental agendas of both parties will be stymied. Democrats, who showed strong leadership under the President, will need to implement the various measures within the climate bill that is within the Inflation Reduction Act. Republicans will undoubtedly look to affect their agenda through non legislative means such as disbanding any Committees formed by the Democrats to investigate Climate Change and examining all policies or regulations the EPA has implemented around air quality, pesticides, and other areas of environmental importance to name a few. On the social front, the highest profile issue regarding ESG in the pre-midterm rhetoric was Republicans characterizing the use through capital investments or policies to better areas of racial, gender or other inequality as “WOKE” capitalism. They will look to “investigate” and publicly condemn the use of any such metrics and those firms that do so or investment firms that invest with these inputs. Here at Newday, beyond our obvious belief in the value of these metrics as one of the means for evaluating the long run value of a corporation, we find the Republican’s stance “surprising”. They cast themselves as champions of free markets and now question the choice of business leaders and a huge sector of the private economy for delivering policies and products they feel make their companies stronger and meet the needs of their clients. 

 

State and Local: These elections favored issues on the social justice side of ESG. There was a repudiation of election deniers and most of former President Trump’s handpicked candidates. Examples include – Dr Oz in Pennsylvania running for Senator and Doug Mastriano in Pennsylvania running for Governor, Kari Lake in Arizona running for Governor, and Tudor – Dixon in Michigan running for Governor. All of these were battleground states and ones the Republicans hoped to take and utilize control of the Governorships and statehouses to change voting districts and voting processes to ensure Republican Presidential wins into the future. This is especially important if over the coming weeks the Supreme Court utilizes a little known or cited part of the discussions during the drafting of the Constitution to ensure the State parties can determine the means of their election process as well as the electoral college without any judicial review. However, it is not clear yet the outcome, but clearly Voting Rights remain at the heart of ensuring the many social justice topics like Diversity, Equity and Inclusion are reached. In early 2023, Newday Impact will accelerate our Diversity, Equity and Inclusion efforts focused on the inequality faced by people because of gender, race, sexual orientation, and as displaced people. 

 

Referendum: The referendums were very positive for ESG initiatives relating to women’s reproductive rights. In several states like California there were affirmative amendments added to the State Constitutions providing for the guarantee of rights to an abortion. Equally, even in a conservative state like Kentucky, a conservative amendment to the State Constitution that would have said the State does not ensure the right to an abortion was struck down. These were all positive outcomes on the back of the Supreme Court decision.

 

In our opinion, the midterm elections were a far better outcome for our ESG mission than it could have been. However, it does not eliminate the political factors that are delaying, questioning and opposing the important political decisions and leadership needed to create change to solve the significant environmental and social problems we face. Polarization and politicization of ESG remains a significant impediment to forward progress and can consequently stir up the various political bases fighting against environmentalism for near-term economic benefits, and stoking fear that drives societal divisiveness. We must remember that many election deniers did not lose by much such as Mehmet Oz in Pennsylvania who lost by only 2.2%, Herschel Walker in Georgia who lost by only 2.6% and Kari Lake who lost by a mere .6% in Arizona.

 

Environmental challenges and social in-cohesion are a collective action problem, a consequence of shared behaviors that cuts to the heart of how we live, work, and play in today’s world. It demands the action of citizens, government, faith-based institutions, and corporations to solve. Capital plus Advocacy equals Impact. Newday remains committed to changing how all investors use capital as a tool for change through investment and advocacy. 

Thank you for your continued support in joining our movement of changemakers to build a more inclusive and sustainable world.

Doug Heske

CEO

Anne Popkin

President | Chief Operating Officer

IMPACT COMMENTARY

Good COP or Bad COP, That Is the Question

Just a couple of weeks ago, the Conference of the Parties on Climate (COP27), concluded its 27th United Nations Climate Summit in Sharm el-Sheikh, Egypt. World leaders, investors, corporations, scientists, and fuel industry lobbyists, along with activists, came together to discuss the need and urgency to create action plans to combat the global climate catastrophe that is unfolding. 

Despite being the second-largest attended COP, COP27 reverberated another year of climate hypocrisy, with complaints of infrastructure issues, and attendees saying it felt like being at a circus. It didn’t deliver everything needed that was set out in the Paris Agreement, and more importantly, it failed to secure a commitment to phase out fossil fuels and made no new decarbonization commitments to keep the global target at its 1.5C temperature goal. Suffice it to say, most experts felt it was a huge disappointment. In fact, much of the same rhetoric echoed many times before became the soup du jour again this year. 

However, it did see some progress as an agreement to address climate justice was made by creating a “Loss and Damage Fund.” While the language in the agreement around “lower emissions and renewable energy” alarmed some in that it left the door open for use of fossil fuels, the agreement created a transitional committee of 24 country representatives that will establish the financial mechanisms of the fund, along with who should be funding it and who will be receiving that funding. Recommendations will be presented at next year’s COP28 in Dubai, UAE, with the hopes that wealthier nations compensate poorer developing countries that are disproportionally affected by the physical impacts of climate change. This issue has been addressed over the years but has largely been resisted, so the willingness and reversal by the EU and particularly the US, which has long been opposed to this fund while being one of the largest GHG emitters behind China, was seen as a major breakthrough. Important to note, that while China is classified by the U.N. as a developing country, in reality, it has the world’s second-largest economy and has not committed to any payment despite being the largest emitter of GHG emissions. 

On the heels of COP27’s 2-week climate discussions, we have now moved on to Montreal, Canada, for another two weeks of international discourse focused on biodiversity loss. Representatives from nearly 200 countries, along with a wide range of stakeholders, will meet for the 15th time at the United Nations Convention on Biological Diversity (COP15). Here global targets will be made, deals will be contracted to cease further losses and reverse existing damage to the world’s natural capital and ecosystems, with the goal to conserve 30% of the world’s land and sea habitats by 2030.  

The World Wildlife Fund warned that “over the past 50 years, populations of birds, mammals, reptiles, fish, and amphibians they’ve been monitoring have seen an average decline of 69%.” In 2019, the United Nations warned that “one-quarter of every animal and plant species assessed, is at risk of extinction before the end of this century and that three-quarters of land-based ecosystems and two-thirds of marine environments have been significantly changed by human actions.” 

While Climate Change and biodiversity go hand-in-hand, oftentimes, the latter is discounted and even forgotten in conversation. Studies show that climate change not only contributes to biodiversity loss, it exacerbates it. In fact, S&P Global recently did a study stating that the result of climate change impacting rising sea levels, causing increased regular heat waves, droughts, and storms could see “4% of global annual economic output lost by 2050”, hitting poorer parts of the world disproportionately harder. The World Economic Forum estimates that more than half of the world’s GDP, or $44 trillion, depends on nature alone, a staggering statistic. 

 As we move from COP27 to COP15 this week, let’s hope the outrage of climate change continues and the world’s biodiversity crisis gets on an equal footing where leaders have the inclination and impetus to fulfill promises made and act on those that still need to be made to fully combat all the threats to our planet. So, here’s to securing ambitious goals and policies at COP15, and a COP28 where real transformative action and change will occur. Because as Benjamin Franklin once said, “When the well is dry, we know the worth of water.” Let’s hope we never get to that point.

GLOBAL EQUITY COMMENTARY

Written by: Newday Investment Team

November brought a shift in tone to global markets as inflation data showed a more definitive downward trend and Fed speakers indicated they expect to slow the pace of rate hikes. China announced plans for an easing of COVID restrictions. Leading indicators in Europe showed stabilization as exemplified by the latest S&P Global Eurozone composite PMI reading, which rose to 47.8 from 47.3 in October, driven by improvements in both manufacturing and services. According to U.S. Bureau of Labor Statistics data released in November, headline CPI declined to 7.7% YoY from 8.2% YoY the prior month (the fourth consecutive decline from the peak in June) and core CPI declined to 6.3% from 6.5% the previous month. Bonds resumed a positive correlation with stocks as both credit and equities rallied while Treasury yields dropped during the month. The dollar started to show a broader and more definitive weakening trend as Fed speakers indicated a pivot to more gradual rate hikes [1] and global growth expectations improved. International stocks and emerging markets outpaced US equity markets and cyclical sectors led. [2] Likewise, the VIX fell sharply indicating implied volatility declined as risk assets moved up.  

Front-end rates showed signs of stabilization with the Fed Funds rate now expected to peak in the 4.75-5% range in early Q2 2023 [3], little changed from last month. The Fed raised rates by 75bps in early November to the 3.75-4% range and most strategists expect a 50bps hike at the December meeting. The futures market shows only modest further rate hikes are currently priced for next year. We think uncertainty in markets will continue to fall if the disinflation trend persists and central banks are less aggressive. The latest U.S. Bureau of Labor Statistics data showed hiring and wage growth have decelerated but remain relatively robust while job openings declined and unemployment claims rose along with layoff announcements. It is still not clear whether the labor market has weakened enough to continue to bring down wage inflation materially.

Looking into 2023, we see the potential for a more favorable environment for markets in the first half of the year, barring any unexpected geopolitical events. We continue to believe the primary driver is likely to be expectations around inflation and central banks. The Treasury yield curve indicates a strong likelihood of an impending recession [4] although key components of inflation are also slowing. Some recent data has shown that US rent prices are starting to fall on a month-over-month basis. [5] Shelter costs account for almost one third of the consumer price index. Moreover, on a year-over-year basis, oil and gasoline price comps may become significantly easier starting in January and throughout the first half of next year as we lap the spike in energy prices that occurred following the outbreak of war in Ukraine (see below charts for reference). Even if wage growth remains relatively robust, overall inflation could continue to move gradually lower, taking pressure off of central banks. This may create a scenario where there is less downside for markets and more upside for global growth expectations, especially if the Ukraine conflict remains more subdued and China continues along a path of reopening its economy.

Source: Trading Economics

We think that key risks to monitor next year are geopolitical events in Europe, COVID trends globally as well as specifically in China, the potential for supply chain problems to come back, as well as the outlook for monetary policy.  Higher grain and food prices could also create material instability risks in certain countries that have a significant reliance on imports.  If the winter months are colder than expected in Europe, it could lead to rationing and shutdowns in some parts of the economy.  That could also be a catalyst for Russia to become more hawkish again and raise the stakes with Ukraine.  An acceleration of COVID cases after the winter holidays and the potential for new variants could create risks, particularly in countries with lower vaccination rates.  The recent threat of a rail strike in the US is a reminder of the risks to the supply chain.  Likewise, energy shortages in Europe could have a ripple effect globally.  We believe 2023 presents less obvious political risks than 2022, with the most noteworthy general election taking place in Spain, but not until the end of the year.  Importantly, if inflation does not continue on a downward trend, this may be a negative catalyst for markets.  We think that markets could potentially face more volatility in mid-2023 after the easy oil and inflation comps have been lapped, particularly if the Fed has stopped moving rates aggressively.  If inflation slows down but then re-accelerates as it did in the early 1980s, this could be a renewed headwind for risks assets.

As previously discussed, we started taking up beta across our portfolios in November.  We expect to continue to gradually raise portfolio beta given our strategies have been positioned more defensively.  We are examining ways to address the fact that our portfolios are structurally short traditional energy given our mandates.  We are working to creatively address this challenge using a basket of stocks that are positively correlated to energy equities but that are in other sectors, look attractive using our ESG and fundamental analysis frameworks, and do not contribute to GHG emissions.  This will be important in the event that oil prices move back up again next year and the energy sector continues to perform well.  We expect to provide an update on this in future newsletters.

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.

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.

Newday Funds, Inc. is a subsidiary of Newday Financial Technologies, Inc. and is an SEC registered investment adviser.

Newday Financial Technologies, Inc. | www.newdayimpact.com

COUNTRY GOVERNANCE RESEARCH COMMENTARY

Ukraine continues its brave defense, while Western leaders target Russian oil revenue

Russia’s invasion of Ukraine enters its ninth month with winter setting in and Ukrainians preparing for a harsh season as Russia continues to target civilian infrastructure with waves of missile attacks, though Western supplied air defenses have helped to blunt their impact. There has been an expectation that the tempo of the fighting would slow during the winter, but Ukrainian officials have indicated they intend to press on with their recent counteroffensives despite the colder weather. The Ukrainians have also continued to strike deep behind the frontlines. The most recent raids hit airbases hundreds of miles inside Russia, though as with past attacks they have refrained from taking direct responsibility.   

Away from the battlefield, Western countries continue to try to find a balance in their sanctions that on the one hand crimps Russia’s war fighting capacity while on the other avoids undue pain on their own economies. The fraught negotiations around implementing a price cap for Moscow’s oil exports underscores the dilemma. The price cap itself is an effort to water-down sanctions passed by the European Union in June, which as of December 5 imposed a European embargo on seaborne Russian crude and a ban on Western insurers from providing maritime insurance for those supplies. While the embargo on Russian oil coming to Europe by sea has gone into effect (piped oil was exempted at the insistence of Hungary), there was concern that the prohibition on shipping services could prove too effective in removing Russian oil from the market leading to a spike in prices. Instead of an outright ban on insuring Russian oil tankers, the price cap will allow coverage to continue if the oil is sold below the capped level of $60 a barrel. Poland had led calls for a much lower capped price, but concerns about supply disruptions won the day. As a compromise the price is to be revisited every two months so that the capped level is at least 5% below the average price for Russian crude as determined by the International Energy Agency.

Implications: How such an untested scheme will work in practice remains to be seen.  The agreed price Is close to what Russia is currently receiving, which diminishes their incentive to halt deliveries, but it also diminishes the revenue hit they are likely to suffer. From Feb. 5, the same sanctions will apply to Russian refined products, and with details on their implementation not yet agreed more difficult negotiations are to come in the months ahead.  

China begins to loosen Covid restrictions following national protests

As Xi Jinping starts his third-term as China’s leader, discontent with his harsh zero Covid policy have led to rare nationwide protests. An apartment fire in the north-western city of Urumqi galvanized public anger after it was reported that fire and rescue were hindered from responding because of the city’s strict lockdown measures causing the deaths of ten residents. For almost three years China has used lockdowns and mass testing to stamp out outbreaks, but with the emergence of more contagious but less deadly variants and growing public exhaustion with never-ending Covid restrictions there has been a recognition of the need to recalibrate. One shift has been a renewed focus on vaccinations, which has been given a lower priority in China than in other countries. A low vaccination rate among China’s elderly population could lead to a jump in Covid deaths. According to Chinese government data only just over 70% of those over 80 have had at least one Covid shot. The government aims to boost that figure to at least 90% by the end of January. Cities across China have also begun to dial back some of their strictest limits on personal movement.  

Implications:  Given the public’s lack of exposure to the virus there are fears that reopening quickly could lead to a Covid “exit wave,” which could in turn renew calls for stronger measures. Xi’s personal association with the zero Covid policy means that any change in course will have significant political implications on top of the economic and human ones.

Reformist leader Anwar Ibrahim becomes prime minister in Malaysia

The Pakatan Harapan (PH) party led by long-time opposition leader Anwar Ibrahim won the most seats in Malaysia’s recent parliamentary elections.  However, none of the major coalitions won an outright majority leading to the country’s first hung parliament.  With no party able to form a government on their own, talks were held among the top vote getters to try and find a workable majority.  When those negotiations failed the king stepped in and after consultations with lawmakers appointed Anwar to be the country’s next prime minister.  In Malaysia’s constitutional monarchy the king has a largely ceremonial role but can appoint a premier in order to break a parliamentary deadlock.  Anwar agreed to lead what he said would be a “national unity government” with the help of two other political groupings.  He has pledged to have a clean government and to represent a break from the corruption of the past.  However, reflecting the difficulty in forming a stable government, Anwar has named Ahmad Zahid to be the next deputy premier despite his being on trial over charges of corruption.  Zahid heads the once dominant United Malays National Organization (UMNO) party, whose support Anwar needs to form a government.

Implications: Anwar Ibrahim is the country’s fourth prime minister since 2018, and his supporters are hoping he can bring stability back to the government.  He has promised to focus on the economy, still struggling to recover from the Covid pandemic, as well as the cost-of-living crisis that has hit countries around the world.  

Disclosures
 
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.
 
Before investing you should carefully consider a Fund’s investment objectives, risks, charges and expenses. This and other information are in each Fund’s prospectus. A prospectus may be obtained by clicking here for AHOY and here for SDGS. Please read the prospectus carefully before you invest.
 
Environmental, Social and Governance Risk. A strategy or emphasis on environmental, social and governance factors (“ESG”) may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do not have an ESG investment focus.
 
The Funds are distributed by Foreside Fund Services, LLC.
 
[1] The Standard and Poor’s 500 (S&P 500), is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. NASDAQ stands for National Association of Securities Dealers Automated Quotations Stock Market.
 
Investing involves risk. Principal loss is possible.