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.
CEO COMMENTARY
Newday’s Holistic Approach to Driving Impact
Six years ago, Newday Impact’s team set out on a mission to bring impact and responsible investment solutions to individual and institutional investors that wanted to align their values with those issues they care most about. Our work has been focused on creating investment vehicles for those critical impact issues where we want to see change in the world
Our focus has adapted over the past several years to more competitively address the rapidly changing landscape of impact investing. We have fought hard to bring a higher level of authenticity to our work through the partnerships that we’ve developed with some of the world’s leading nonprofits and NGOs. This strategy has been successful and we remain committed to deepening our partnerships and building new ones.
Our partners today include the Jane Goodall Institute, EarthEcho International, the Georgie Badiel Foundation, Generation Unlimited at UNICEF, and Outright International. We are in the process of expanding our partnership relationships most notably with organizations that are fighting to protect biodiversity and ocean health and to build resilience and restore our coastal habitats. We are proud of the work that these organizations pursue and our role in helping amplify their impact. This year we will begin deepening our impact work in order to deliver stronger outcomes that truly drive meaningful and long-lasting change.
Delivering stronger impact outcomes is paramount to Newday’s success. Clients are now more than ever seeking investment alternatives that demonstrate measurable and authentic impact results. Organizations that are not delivering on this promise are facing significant headwinds and many that have exclusively focused on public ESG investing have been heavily scrutinized for failure to deliver tangible impact outcomes. In our opinion, these circumstances will continue to affect investor behavior and how asset management companies position themselves and their products and solutions.
A New Architecture for Impact Measurement and Reporting
Consequently, we have been exploring alternative approaches to impact measurement and reporting that are more reliable and consistent than what’s commonly offered by the largest data providers. Part of this investigation has been to fully understand the contributing factors that have led to environmental and social degradation. Carbon is a big piece, but not the only piece. Nature is a system. Carbon is a part of that system, but there are other parts. Six equally important elements, in fact: air, water, soil, biodiversity, equity … and carbon.
We have now integrated a new data architecture into our investment process, the Ecological Benefits Framework (EBF).
EBF is …
- Stakeholder driven, guided by domain experts in climate change mitigation, regenerative finance, carbon markets, and ESG reporting
- Supported by a Knowledge To Action platform that features tools to mobilize, align, and activate ongoing collaboration and implementation
- Backed by mission-driven, strategically aligned foundations and corporate funders
- Supported by a pipeline of high quality supply adapted to this new framework and data standard
- Aligned with large amounts of pooled capital for advanced market commitments
- A shared market architecture that increases transparency, trust, quality, and equity in global carbon and ecological benefits markets, designed by Douglas Gayeton, Founder of the Lexicon for Sustainability
We have aligned our work with the six primary pillars of the EBF architecture; air, water, soil, biodiversity, carbon, and equity. Nature doesn’t parse these out, nor will we. An outline of these foundational pillars is below.
Market-based Solutions Deliver Stronger Impact Outcomes
The integration of EBF into our work as an impact measurement and storytelling mechanism allows us to take a more holistic approach to driving stronger impact outcomes. The foundational elements of Newday’s market-based solutions approach are grant capital, investment capital, and consumer and institutional behavior. Maximum impact is delivered when these three elements align.
More than $500B of capital is contributed each year to nonprofits and NGOs that are doing the on-the-ground work that they and only they can do. We work with many of them like EarthEcho Intl, Jane Goodall Institute, and Georgie Badiel Foundation. Grant capital is an essential component in supporting smaller, localized organizations that are helping our communities.
The public investment market now surpasses $124 trillion in size, and the private market is about $10 trillion in size. We have to get this capital moving in the right direction. There’s biblical amounts of capital that’s flowing into the climate space and sometimes in areas that are not always delivering significant impact.
But capital alone is not enough to change our world. Human beings, companies, and the leaders that run them have to become more aware, and make better and more responsible decisions. Many companies, who have in large part been the chief contributors to environmental degradation, have adopted a philosophy of doing things “less badly”, as opposed to taking the approach to fixing the problems that they created.
The paradox is that individuals who are at the forefront of climate impact, at least in their own minds, are rarely the people who have contributed much to climate change through their small carbon footprints. Climate change has become the defining symbol of humans’ collective relationship with the environment and is one that every one of us has a responsibility to address and now incorporate into our daily lives.
The marriage of EBF and our focus on delivering market-based solutions provides Newday an architecture from which we can more effectively attract and deploy capital, influence behavior for substantive systems change, and report impact outcomes in a way that people understand the role that they may play in helping our world.
Market-based Solution for Oceans
Newday is working with a range of conservation organizations to develop and introduce market-based structures to mobilize and deploy capital to protect and restore the crucial ecosystems in our world beginning with ocean health and clean water. Newday’s Market-Based Solutions Ocean Program will create a virtuous circle of impact in which capital invested is endlessly recycled to ensure the program is fully sustainable. The focus of the oceans program is to protect and restore the health of our Southern Ocean by reducing demand for krill oil and fish oil from the omega-3 nutraceuticals industry and support the creation of several new Marine Protected Areas (MPAs), which will help prevent further damage to the crucially important Antarctic ecosystem and put it on a path to recovery.
Antarctica is referred to as the heart of the ocean and the foundation of the ocean food chain. The Southern ocean is home to a wide variety of marine animals including Krill, a tiny little crustacean that serves as a foundational food source.
That’s not all. This army of 700 trillion Krill does wonderful things for our planet serving as one of the most important carbon sinks sequestering approximately 23 million tons of carbon each year. To put that into perspective, that’s equivalent to the carbon stored in 100M acres worth of US forests each year.
But Krill is not only feeding animals in the Southern Ocean, they are satisfying a voracious appetite for Super Omega 3 nutrients that are consumed by humans in the form of nutraceuticals, and used in the production of aquaculture feed, livestock feed, and pet food. Demand for Krill to satisfy human usage and consumption is expected to grow 8X over the next decade. The combination of human consumption and climate change is having a disastrous impact on the Krill population.
We believe with our partner EarthEcho International that if the demand for krill oil is drastically reduced and replaced with algae-based omega-3 alternatives, the Antarctic ecosystem would be healthier, with greater ability to support carbon storage. Our mission of this new initiative is to significantly reduce the harvesting of Krill by engaging with consumers and retailers of krill-based products, with krill fishery policymakers, and by investing in alternative algae-based products in support of nutraceuticals, pet food, and aquaculture feed.
Success of a program such as this is not unprecedented and humans have succeeded in missions like this before. In the 19th Century, demand for felt brought Antarctic fur seals almost to extinction until we found alternative ways to source felt. In the 20th Century, we hunted Antarctic whales to near-extinction for lamp oil and lubricants until we discovered petroleum. In the 21st Century, we hunt the Antarctic krill, but now we know there is a viable alternative to krill, it’s time to switch.
The ecological circumstances in the Southern Ocean are critical to immediately address. It is one of the most significant environmental crises that no one is talking about. But we have an opportunity to quickly reverse that damage that’s been done.
- The omega-3 market is estimated at $5.6 Billion in 2020, with expected compound annual growth from 2020-2028 of nearly 8%, according to Grand View Research and Polaris Market Research
- The annual value of the Antarctic krill fishery is a fraction of that, at between $200 million and $435 million, according to a report from CCAMLR, the body that regulates the sector
- As the omega-3 market grows, investments in algae-based omega-3s can lead to gains in market share that will reduce both krill demand and krill fishing
- The krill fishery exists to supply krill oil to the omega-3 nutraceutical industry, as well as krill meal for the pet food industry and the salmon aquaculture industry, but…
- Krill oil is difficult and expensive to extract out of krill meal, resulting in krill oil selling for ~$100/kg, 40x greater value than krill meal at $2.5/kg
- The krill meal market (pet food, aquaculture feed, etc.) depends on the krill oil market (e.g., nutraceuticals). If demand for krill oil disappears, harvesting krill only for krill meal will be untenable and too expensive for fishing companies.
Why Now?
Given rising demand for krill oil driven by nutraceutical consumption, aquaculture feed, livestock feed, and pet food, and climate change, it’s expected that the Antarctic krill population will collapse by 2030. But alternative solutions to meet the market demands exist through the production of alternative algae-based products. Companies such as Iwi Life and SeaVoir have the capability to produce algae-based omega-3s to meet this market demand. Additionally, aquaculture and livestock feed products that deliver similar benefits are also produced using algae-based alternatives. Recent technological advances mean producing omega-3s from algae is far more efficient—and vastly better for the planet—than extracting it from krill.
Research on the Antarctic ecosystem has also given us a much clearer picture of the environmental consequences of the decline in the krill population. Krill act as a carbon sink by eating phytoplankton that have absorbed carbon dioxide close to the sea surface. The krill then transfer that carbon to the ocean floor through their feces and the molting of their exoskeletons. Climate change is already diminishing the krill population, depleting the carbon-capturing capacity of the Antarctic Southern Ocean, which is responsible for nearly 50% of the total atmospheric uptake of carbon, according to scientists from NASA, the National Center for Atmospheric Research (NCAR) and ETH Zurich.
According to a 2018 peer-reviewed study from George Watters, U.S. scientist on the U.S. delegation to the Antarctic decision-making body Convention for the Conservation of Antarctic Marine Living Resources (CCAMLR), climate change could reduce krill by up to 40% in a key part of the Southern Ocean, leading to further decline in predators such as whales.
The entire Antarctic marine living ecosystem—including all the fish, penguins, seals and whales—is also at risk, as it depends on healthy populations of krill.
- According to a comprehensive study by WWF Australia, citing more than 100 scientific papers, if krill fishing didn’t exist, krill could support a healthy Antarctic food web, and it’s possible that as much as 23,000,000 tons of carbon can be sequestered annually, equivalent to a global climate regulation service to humanity valued at ~$15 billion.
- According to the U.S. Environmental Protection Agency, the carbon potentially stored in the ocean via krill would be equivalent to:
- 18,000,000 cars taken off the road every year
- 24,000 wind turbines running for a year
- 16,000,000 homes’ annual electricity usage
- 100,660,000 acres worth of U.S. forests protected and sequestering carbon in a year
We believe that a well-functioning, krill-based ecosystem in the Southern Ocean has compounding positive benefits to the planet, humanity, and business. Newday Impact, EarthEcho International, and our other important collaborators including Antarctica 2020, Pew Bertarelli Ocean Legacy Trust, the Antarctic and Southern Ocean Coalition, and the Lexicon for Sustainability are uniquely positioned to build impact due to our complementary strengths merging catalytic impact finance and the global ocean action movement. Collectively, we have more than 10 million constituents as a part of our community.
I am pleased to announce that renowned ocean organization Schmidt Marine Technology Partners is funding the Newday Impact/Earth Echo Ocean Health and Blue Carbon Program, and we anticipate that a larger group of distinguished funders will commit over the next month.
How Can You Help?
INVEST – We are raising investment capital into Newday’s Ocean Health ETF which trades on the New York Stock Exchange under the symbol AHOY. Fifteen percent of Newday revenues derived from the ETF support the oceans program.
DONATE – We are raising grant capital to support the program with a group of global NGOs to address the creation of new MPAs, consumer and institutional behavior, and engage with the distributors and manufacturers of Krill based products.
ACTIVATE – You individually have the power to make a difference. Stop buying Krill and Fish Oil based nutraceuticals. Algae-based nutraceuticals are a better alternative.
We welcome your participation in this important cause. Please contact us at doug@newdayinvesting.com to learn more about the program and how to get involved.
IMPACT COMMENTARY
The Transformation of the Inflation Reduction Act
August 16, 2023, marked the one-year anniversary of the Inflation Reduction Act (IRA) which serves as the cornerstone of the United States’ climate action legislation and the largest investment in climate action the U.S. has ever witnessed. The new law includes roughly $370 billion in diverse investments to help shift and transform the U.S. to cleaner energy infrastructure and reduce greenhouse gas emissions. The Act was designed to mitigate escalating energy costs, stimulate economic opportunity across communities, and combat the growing climate crisis.
The new law has already created more than 170,000 jobs in 44 states with it disproportionately benefiting economically disadvantaged communities, per a recent analysis by the Treasury Department. The Energy Department estimates that the IRA could reduce overall U.S. electricity costs by 2030 between $27 billion and $38 billion and cut GHG emissions by 35-41% below 2005 levels.
The IRA hasn’t just reshaped the American landscape; it has also made significant ripples on the global stage. In its first year, it triggered a competitive surge among the world’s major economies to develop their climate plans, opening up unprecedented opportunities to significantly reduce global carbon emissions. The European Union’s Green Deal Industrial Policy, Canada’s budget, France’s new climate framework, and Germany’s plans to expand its battery cell production, among others, are all inspired by the IRA.
The Inflation Reduction Act has undoubtedly been a catalyst for change, driving massive investments in clean energy, sparking an economic transformation, and setting a new course for America’s energy landscape. As we celebrate the law’s first anniversary, it’s evident that the journey has only just begun. The road ahead is long and fraught with challenges, but with strategic planning, consistent effort, and political will, the IRA’s vision of a more resilient, sustainable, and equitable America is within reach.
For more insights on the IRA and how it’s reshaping the U.S.’s climate action trajectory, visit the U.S. Climate Policy Resource Center | World Resources Institute (wri.org)
SEPTEMBER GLOBAL EQUITY COMMENTARY
Written by: Newday Investment Team
Equity markets declined modestly and the dollar rose along with long-dated Treasury yields in August as the year-over-year US inflation rate rose to 3.2% from 3.0% in July, the first acceleration since June 2022 when inflation peaked at 9.1%.1 Energy was the only sector in the S&P 500 that posted a positive return, while the rate-sensitive utilities sector was hit the hardest. After having moved decisively lower in prior months, equity volatility rose intra-month with the VIX climbing above 18, but finished the month below 14 and roughly unchanged from the prior month.2 As is tradition, there was no FOMC meeting in August. Since hiking the Fed Funds rate to a 5.25-5.50% range at its last meeting in late July, the front end of the yield curve has been relatively well-anchored with only a small chance of one more rate hike priced in for later this year and a flattish trajectory into mid-2024 with the possibility of rate cuts into the back half of 2024.3
Most PMIs indicated global growth continued slow in August. The US composite PMI fell for a third month along with PMIs in Europe and China.4 US nonfarm payrolls growth edged up in August even as prior months’ gains were revised down and wage growth remained at the slowest pace since mid-2021.5 New unemployment claims moved lower for a fourth week.6 Notably, the labor force participation rate and the U-6 unemployment rate – which includes people who want to work but have given up searching and those people working part-time because they can’t find full-time employment – rose together, indicating that slack may be available in the labor market to keep wage pressures from re-accelerating.7
While U.S. Bureau of Labor Statistics data showed headline CPI accelerated modestly in August and remains above the Fed’s 2% target, core CPI continued to decelerate, reaching 4.7% YoY.8 Eurostat data showed that YoY core inflation in the Eurozone fell back to 5.3% from 5.5% in the prior two months.9 The US dollar rose as growth in Europe slowed, but inflation remained above the Fed’s target, dimming the likelihood for any rate cuts in the near-term.10
Despite the weaker PMI outlook, many economists have cut their recession probabilities over the next year and are expecting a soft landing.11 Nonetheless, the yield curve continues to be inverted with the spread between 2-year and 10-year Treasurys at -0.72%, likely indicating a recession farther down the road.12 We continue to believe the shape of the yield curve shows that policy rates are in restrictive territory and we are most likely near the end of the current Fed hiking cycle with the Fed likely to be in a holding pattern until something “bad” happens that drives the growth outlook materially lower necessitating rate cuts.
We continue to believe inflation is unlikely to accelerate meaningfully from here although it may be challenging for the Fed to achieve its 2% target given core inflation and wage growth both running above 4%. It would seem that further downward pressure on commodities and tradeable goods prices would be required to push inflation significantly lower from here given the underlying positive trend. With the absence of obvious macro risks and inflation in a reasonable range, we expect downside to markets could continue to be constrained absent a significant negative geopolitical event.
We implemented rebalances across our strategies in August to add to holdings where we have high conviction. As an example, Siemens (SIE: Xetra) is a company we believe is on the cutting edge of innovation impacting the measurability of carbon emissions across the corporate value chain. Their technology is helping enable a circular economy using AI-powered analytical tools that maximize both production and energy efficiency in real time.13 Likewise, we have been evaluating new portfolio candidates that work in the coastal restoration and decarbonization arenas and we look forward to sharing further details as we make portfolio updates in the coming months.
Footnotes:
[1] See below table citing ETF performance calculations using Trading Economics data, https://tradingeconomics.com/united-states/inflation-cpi
[2] See https://tradingeconomics.com/vix:ind
[3] See https://www.cmegroup.com/markets/interest-rates/stirs/30-day-federal-fund.html
[4] ee https://tradingeconomics.com/china/nbs-general-pmi, https://tradingeconomics.com/united-states/composite-pmi, https://tradingeconomics.com/euro-area/composite-pmi, https://tradingeconomics.com/japan/composite-pmi, https://tradingeconomics.com/brazil/composite-pmi
[5] See https://tradingeconomics.com/united-states/non-farm-payrolls, https://tradingeconomics.com/united-states/average-hourly-earnings-yoy
[6] See https://tradingeconomics.com/united-states/non-farm-payrolls, https://tradingeconomics.com/united-states/average-hourly-earnings-yoy, https://tradingeconomics.com/united-states/jobless-claims-4-week-average
[7] See https://tradingeconomics.com/united-states/labor-force-participation-rate
[8] See https://tradingeconomics.com/united-states/core-inflation-rate
[9] See https://tradingeconomics.com/euro-area/inflation-cpi, https://tradingeconomics.com/euro-area/core-inflation-rate
[10] See below chart from S&P Global as well as table citing ETF performance calculations using Trading Economics data.
[11] See https://finance.yahoo.com/news/goldman-sachs-lowers-recession-chances-to-15-153737400.html
COUNTRY GOVERNANCE RESEARCH COMMENTARY
Ukraine’s counteroffensive grinds on with slow progress
Ukraine’s counteroffensive has continued through the summer and despite some criticisms of the pace of gains Ukraine has managed to make incremental progress and has reportedly overcome Russia’s first-line of defense in the southern Zaporizhzhia region. Russia has been attempting their own offensive further north, but they are not reported to have made any appreciable gains. They have, however, continued their bombing campaign at apparently civilian targets far from the front-lines including attacks on infrastructure for grain exports near the Danube, which led to debris from a drone falling on the territory of NATO member Romania. Ukraine for its part has beefed up its own ability to strike targets within Russia and occupied Crimea with domestically produced long range drones. Ukraine and Russia both also introduced changes to their teams in charge of the war. Zelensky replaced his defense minister Oleksii Reznikov with Rustem Umerov following allegations of corruption within the ministry, though none had directly implicated Reznikov. While in Russia, the mercenary leader Prigozhin, who had been sidelined following his aborted coup attempt, was permanently removed from the battlefield when his private plane blew-up in mid-air on a flight from Moscow in what was widely believed to be a Kremlin orchestrated bombing.
Implications: Ukraine is hoping that now that the initial defensive lines have been breached that their progress going forward will be quicker, though their goal of reaching the Azov Sea may not be attainable before winter slows the pace of fighting. To support Ukraine in a protracted battle the United States has announced another billion-dollar aid package. Zelensky recently expressed his belief that Russia is counting on the next election in the United States to bring to the presidency someone who will diminish US aid.
Turkey begins to reverse unorthodox economic policies
President Tayyip Erdogan recently gave his support to higher interest rates saying in a speech that “tight monetary policy” was needed to slow inflation. Given Erdogan’s long-held belief that high rates fuel inflation, the rhetorical shift was noteworthy and reflective of a policy U-turn that began in June following his re-election victory. Finance Minister Mehmet Simsek has also said that Turkey’s economic program had Erdogan’s full support. A former Merrill Lynch bond strategist, Simsek’s appointment in June as finance minister along with another former Wall Street banker, Hafize Gaye Erkan, as central bank governor, had raised expectations of a return to mainstream economic policies. With inflation having touched a 24-year high of over 85% last October and the lira having lost more than 80 percent of its value against the dollar since 2018, Turkey’s experiment with unorthodox policies had clearly run its course. Following Erkan’s appointment, the central bank raised its key policy rate by 6.5 percentage points, to 15%, in June and then by 2.5 percentage points, to 17.5%, in July. Most recently at the end of August the rate was raised again by 750 basis points to 25%, three times the size of the expected move.
Implications: With inflation expected to be around 60% at the end of the year, even with the recent hikes real interest rates remain among the most negative in the world. The new economic team will also have to manage rolling back a costly scheme that protects savers against falls in the value of the lira. An open question will be whether Erdogan maintains his support despite any short-term economic pain caused by the policy adjustment.
Newday Impact Adopts The Ecological Benefits Framework (EBF) to Enhance Impact Decisions
Newday Impact, a San Francisco-based asset management and financial technology company that brings authentic responsible investing to those seeking investments that reflect their values, today announced that it has adopted The Ecological Benefits Framework (EBF) in its investment process. EBF is a shared market architecture used to evaluate and enhance impact outcomes in the public and private sector. Newday will leverage EBF-enabled technologies as an extension of environmental, social and governance (ESG) in impact investment assessments.