Monday Musings: June 21, 2021

Jun 21, 2021

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Public Trust Credit Team
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Climate change-related risk disclosures may soon be mandated by the SEC

According to a recent article in the Wall Street Journal and data provided by S&P Global Sustainable1, approximately 90% of S&P 500 companies voluntarily publish reports detailing climate-related statistics such as carbon emission and the amount of renewable energy consumed, but less than 20% of these companies report on similar metrics in regulatory filings. A new undertaking by the Securities and Exchange Commission (SEC) may dramatically change this, with the SEC and President Biden meeting today to discuss the matter. The SEC now wants to require public companies to report more transparent metrics to address threats related to climate change. In February of 2010, the SEC released its Commission Guidance Regarding Disclosure Related to Climate Change; the guidance notes companies might be required (depending on the circumstances) to disclose climate change-related risks in a registrant’s disclosures about its business, legal proceedings, and risk factors as well as management’s discussion and analysis of financial condition and results of operations. 

Over the past decade, public sentiment and investor demand for improved transparency and disclosures related to climate change risks have grown considerably. Many activists that support the mandate believe firms need to do more to report climate-related threats to the public. In contrast, those opposing an order cite challenges that include how climate change risks should be reported or discussed, stating that investors may focus only on one specific factor: greenhouse gas emissions. With the U.S. formally rejoining the Paris Agreement earlier this year and climate activist investor Engine No.1 recently gaining three Exxon Mobil board seats (12-member board), the enhanced focus on climate change and environmental, social, and governance (ESG) factors as they relate to investing is not anticipated to fade away anytime soon.

Foreign investment starkly declined in 2020 but looks poised for liftoff in 2021

Foreign investment into the U.S. declined 40% in 2020 due to the COVID-19 pandemic, one of the largest drops on record. However, research from the U.N. Conference on Trade and Development suggests that foreign investment is set to grow 10-15% in 2021 and 20-30% in 2022. The U.S. is expected to remain the top destination for foreign flows with China still taking the number two spot. China is also expected to remain the world’s largest foreign investor through the continued expansion of its Belt and Road initiative. Booming foreign investment likely will translate to a faster recovery for the U.S. economy and strong demand for the U.S. dollar, a potential negative for large U.S. multinationals. We expect foreign inflows will also depress credit spreads as U.S. investment-grade debt recorded new record tights last week.

Investors still digesting Fed’s hawkish action

Last week’s Fed meeting signaled a changed stance among the Federal Reserve Governors. Following the meeting, 13 of 18 Governors indicated that they expect at least one rate increase before the end of 2023, nearly double the number from March of those who said rates would rise. In the recent meeting, 11 of the Governors also projected that rates could rise another time before the end of 2023 (two increases). The hawkish turn is due to the improving labor market and elevated inflation concerns, following two consecutive months of the largest increase in personal consumption expenditures (PCE) since 2009; PCE is the Fed’s preferred measure of inflation. For market participants, the discussion of inflation is largely related to the causes and duration, meaning a temporary bottleneck in supply chains and/or labor shortages could be responsible for upward pricing pressures and alleviation of the bottleneck could reduce inflation pressure. While uncertainty certainly remains, the equity market weakness indicates there is a growing consensus recognizing the probability of rate increases as well as less support for the bond markets through Fed purchases.

Workers in the driver’s seat as unusual labor market dynamic pressures employers

Numerous articles have been written about the trend of workers deciding to quit their jobs to explore new opportunities. Frequently cited motivations include higher wages, more appealing roles, and greater flexibility to work remotely. Quantifying the trend, the Wall Street Journal recently reported more “U.S. workers are quitting their jobs than at any time in at least two decades … In April, the share of U.S. workers leaving jobs was 2.7%, according to the Labor Department, a jump from 1.6% a year earlier to the highest level since at least 2000.” The dynamic could drive wages higher in sectors that are losing employees, mostly the service sector, and this trend will pressure inflation even more.

All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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