Climate change is everything. This is the first in a planned series highlighting the pervasive impacts of climate change across all facets of our global society. Not only is climate change physically altering the planet, it is taking an increasing toll on human health, the supply chains for a host of products, and, as we discuss in this note, the financial services sector.
Climate change is now. The western U.S. is burning, hurricane-force winds have wreaked havoc in Iowa and Utah, and the Gulf Coast is still struggling to recover from several deadly hurricanes in recent years.
Consumers of financial services will bear the cost. Costs and availability of mortgages and insurance are already beginning to reflect climate change risks, depending on location, and this trend will likely grow.
Financial institutions are waking up. On September 9, 2020, the U.S. Commodities Futures Trading Commission released a landmark report that states in no uncertain terms: “Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy.” The report provides a series of concrete recommendations for financial market participants, including regulators, financial institutions and asset owners, to execute the necessary transition to a low-carbon future without destabilizing the economy. Notably, the report reflects a consensus across a range of financial markets participants.
What should investors know? In this report we provide a digestible overview of the key categories of risk and potential impacts, how financial sector participants are beginning to respond, and what questions investors should ask their advisors about how they are factoring systemic financial risk into portfolio allocations.
Continue reading for our report overview, or download our full report Climate Determinants — Financial Services.
Overview: Transformative risks in the provision of financial services
Extreme weather and disasters fueled by climate change take a major toll on society in terms of human suffering, individual losses and systemic risk. The financial services sector, which includes banks, insurers, investment service providers and asset management firms, is highly exposed to the potential costs related to climate change. The series of natural disasters in just this past year — including the coronavirus pandemic — has thrown these risks into even starker relief.
In the U.S. alone, there have been 273 weather-fueled disasters since 1980.[i] Altogether these events cost a staggering $1.79 trillion. Looking just at wildfires, the 50 years leading up to 2015 averaged approximately $1 billion per year (inflation-adjusted). That figure jumped to $10 billion in three of the past four years. While proving a direct link between the rise in weather-fueled disasters and climate change is complicated, an October 2019 scientific paper by the PNAS[ii] documented “an increasing trend in extreme damages from natural disasters, which is consistent with a climate-change signal…. with most pronounced increases in… catastrophic events. This pattern is strongest in temperate regions, suggesting that the prevalence of devastating natural disasters has broadened beyond tropical regions and that adaptation measures in the latter have had some mitigating effects on damages.”
The depth and breadth of climate risks to the financial underpinnings of our society are only beginning to be fully appreciated. While insurance companies have begun to reflect climate risks in their policies and large investment banks are beginning to consider them in valuations, the complexities are not well understood by many investors, including many professionals.
The financial services community is beginning to respond in a more concerted manner, however. Notably, the U.S. Commodities Futures Trading Commission (CFTC) has just released a very detailed assessment of the various climate-related risks — physical, transition, and liability risks — as well as their impact across sectors. The report, a collaboration among more than 30 financial markets participants, offers a comprehensive set of recommendations for regulators, financial institutions and asset owners to carefully execute the transition to a low-carbon economy. This is a significant achievement, particularly in the current political climate.
However, while investors may not fully appreciate the nuances of climate risk, the markets provide nearly instant information on how they react to an exogenous shock to the outlook for a region, sector or company. A sudden shift in investors’ perception of the future risk of climate change on asset values could precipitate their decline, destabilizing investor portfolios and financial institutions’ balance sheets.
On average, there has been only a modest stock market response to large climatic disasters. Results, however, vary widely across disasters. Hurricane Katrina, which resulted in total damage of roughly 1% of U.S. GDP, triggered only a modest stock market reaction, with no discernible drop in the U.S. stock market index. The 2011 floods in Thailand, which hit Thai GDP with a 10% decline, resulted in a drop in the Thai stock market index of over 8% soon after the disaster and a cumulative drop of about 30% after 40 trading days. 
Market impact aside, the recorded costs of damage from such disasters are estimates of the spending needed to rebuild properties and businesses. The full costs include investments not made because of the need to rebuild — investments that might have instead helped grow the economy. The true impact of more frequent destructive weather events may be immeasurable.
[ii] Proceedings of the National Academy of Sciences of the United States of America.
 International Monetary Fund – Global Financial Stability Report, April 2020 Chapter 5: Climate Change – Physical Risk and Equity Prices; May 29, 2020
 Global Financial Stability Report, April 2020 Chapter 5: Climate Change – Physical Risk and Equity Prices; May 29, 2020
Since we published the first edition of this report in 2018, there has been a widespread increase in the general public’s awareness about structural racism and the many ways people of color have been systematically denied access to social and economic opportunity since the earliest days of European arrival to what is now the United States.
The COVID-19 pandemic has exposed alarming weaknesses in the systems we depend on upon in everyday life in the U.S. – healthcare, education, and economic systems, to name just a few. It has cast a harsh light on the disproportionate impacts of these weaknesses on people of color, whose health and wealth have been decimated at far greater rates than those experienced by whites.
Moreover, there has been a dramatic growth in awareness of how the financial system has functionally been closed off to people of color, starting with the largest companies, most of which pay lip-service (at best) to racial equity and many of which do not address the issue at all.
Investors can contribute to the narrowing of economic disparities by investing in communities of color. In this report, we update the findings of our original work in 2018. We also offer fresh insights into how both the #MeToo and Black Lives Matter movements have galvanized shareholder engagement initiatives, with investors increasingly pressing companies to be more transparent and accountable regarding their policies, practices and cultures. We have added a section as well regarding support for diverse asset managers with strong track records who are often overlooked. Lastly, we are pleased to note that over the past two years there has been growth in the number of investment solutions that seek to address racial and ethnic economic disparities.
Download Investing to Advance Racial Equity.
Third Quarter 2020 Executive Summary:
- With most asset classes having recovered from the intense volatility that occurred in financial markets at the onset of the COVID-19 virus, we see select opportunities in certain asset classes. We expect continued volatility and believe that active investment approaches should be able to find value.
- We have moved to a small Overweight in Equities and Fixed Income, reduced our Underweight in Alternatives, and reduced our Overweight in Cash.
- The global recovery continues to gather momentum. In most major economies, consumer traffic is now above pre COVID-19 levels. In addition, corporate sentiment is picking up globally.
- COVID-19 still remains a significant risk to investors. While the number of new deaths in the U.S. reported per day has declined from its April highs, the number of new reported cases has been rising steadily. An effective vaccine has yet to be developed, but there has been optimism lately (reflected in the markets) about the results of some clinical trials.
- The 2020 election also has the potential to create market risk. Joe Biden has pledged to reverse some of President Trump’s corporate tax cuts and President Trump is renewing antagonistic behavior towards China. The market may perceive both as risks, which can increase volatility.
Download Cornerstone’s Third Quarter 2020 Market Update and Outlook
Please join us on Tuesday August 4 at 11 am ET to join a panel discussion on our outlook in this uncertain environment. Chief Investment Officer Craig Metrick, CAIA, and Market Strategist Michael Geraghty will be joined by Larry Hatheway of Jackson Hole Economics. Larry will bring his 25+ years of experience as a strategist and economist, and now as leader of a “think/action tank”, Larry will share his insights. Register for our Market Outlook Webinar here.
- The creation of small businesses boosts economic growth by introducing new products, services, and technologies into the economy. Most importantly, it provides new job opportunities, challenges existing firms, and boosts competition and productivity.
- Over the past several decades, women have been a fast-growing segment of small business owners, with entrepreneurial women of color representing the fastest growing cohort out of all entrepreneurs. Minority and women-owned businesses were particularly big job creators and stabilizers of the economy following the 2008-2009 recession, adding 1.8 million jobs in 2007-12.
- Meanwhile, companies started or cofounded by women receive on average less than half the amount of investment capital as male-founded companies. According to one study, women founders receive only a small fraction of venture capital deals (4.4.%) and only about 2% of all capital. However, the women-founded and co-founded companies outperformed their peers, generating 10% more cumulative revenue over the study’s five-year period.
- Although businesses owned by women or people of color were more likely to shutter during the Great Recession of 2007-09, they helped stabilize the economy during the subsequent recovery, adding 1.8 million jobs in 2007-12. Meanwhile, firms owned by white males lost 800,000 jobs and firms owned equally by white men and women lost another 1.6 million jobs over this period.
- In this note we consider the role of entrepreneurship in fueling economic growth. In particular, we focus on the need for investors to deploy capital to support women-owned businesses as we emerge from the Covid-19 recession, given that women-owned businesses in a post-recession environment have been shown to create more jobs. The gap between supply and demand for capital available to women entrepreneurs must be closed.
Download a PDF version of Women Entrepreneurs.
Women Entrepreneurs: Foundational to Economic Recovery
By now it’s well understood that entrepreneurship is beneficial to economic growth and development. It has been at the core of every economic recovery in history. The creation of small businesses boosts economic growth by introducing new products, services, and technologies into the economy. Most importantly, it provides new job opportunities, challenges existing firms, and boosts competition and productivity.
In this note we consider the role of entrepreneurship in fueling economic growth. In particular, we focus on the need for investors to deploy capital to support women-owned businesses as we emerge from the Covid-19 recession, given that women-owned businesses in a post-recession environment have been shown to create more jobs. The gap between supply and demand for capital available to women entrepreneurs must be closed.
The backdrop: statistics on women entrepreneurs
Over the past several decades, women have been a fast-growing segment of small business owners, with entrepreneurial women of color representing the fastest-growing cohort of all entrepreneurs. Women-owned businesses were particularly big job creators and stabilizers of the economy following the 2008-09 Great Recession. Nationally, minority- and women-owned business enterprises (MWBEs) added 1.8 million jobs from 2007 to 2012, while firms owned by white males lost 800,000 jobs, and firms equally owned by white men and women lost another 1.6 million jobs. Further, many women-owned businesses focus on sectors such as health care and education, qualifying for consideration as social enterprises, designed for both profit and positive social or environmental impact.
Small businesses currently suffering
Many small businesses are being challenged or even decimated by the coronavirus crisis. A March 2020 survey by the National Federation of Independent Business (NFIB) indicated that over 90% of small business owners had been negatively impacted by this crisis.[i] About half of small businesses said they could survive two months at best, and about one-third believed they could hang on for three to six months.[ii] In a U.S. Chamber of Commerce Survey conducted April 21-27, 2020, roughly one in three small businesses reported temporarily shutting down in the prior two weeks, up 5% vs. a similar survey in March.[iii]
WEConnect International, a global network that connects women-owned businesses to global market opportunities, conducted a survey in April 2020 of nearly 600 women-owned businesses regarding the impact of Covid-19. More than 85% of those surveyed have been negatively impacted, with 90% experiencing a decrease in sales. Many are adjusting their products or services to changing economic climate and are trying to secure financing so that they can stay in business. On a positive note, women business owners are taking steps to adapt: 54% cut unnecessary expenses; 42% shifted to a digital model; and 37% are growing in response to local or global needs.[iv] [v]
There are reasons for optimism, especially in the medium to long term. According to the Census Bureau, 79% of small businesses that have laid off or furloughed employees anticipate bringing back most of their employees once the U.S. small business climate returns to normal.[vi] Further, more than 500,000 applications for an employer identification number have been submitted since mid-March, an indication of entrepreneurs’ intent to start new businesses soon.[vii]
Crisis fueling innovation
Crises often fuel economic and technological innovation. For example, the 2008-2009 financial crisis led to the development of new business models such as Uber, a ride-sharing platform, and Rent the Runway, an online clothing and accessory rental service. [viii]
Entrepreneurs are already rising to the challenges posed by the coronavirus crisis. For example, liquor distillers are pivoting to make hand sanitizer needed to deter the spread of the virus. Some small companies are seeing soaring demand for innovative products or services. One such example is Farmbox Direct, a subscription service that delivers boxes of fresh produce directly to customers. Ashley Tyrner, Farmbox’s founder, saw a massive increase in orders as the nationwide lockdown took hold. New customers are coming from areas where grocery shelves sit empty, or are setting up deliveries for older relatives who don’t want to risk infection by shopping outside their homes.[ix] Another example is MD Ally, which allows 911 dispatchers and other responders to route nonemergency 911 calls and patients to virtual doctors to help improve the efficiency of emergency response systems. Founded by Shanel Fields in March 2020 just as the US economy was shutting down from the coronavirus crisis, MD Ally is currently hiring while many companies have furloughed or laid off workers. [x]
Innovative new business models will probably lead to sales and employment growth as a route to rebound from the Covid-19 recession. While it may be too early to tell, business models that have gained traction during the era of social distancing, such as telemedicine and remote learning, may flourish longer term as demand for these services grows. The convenience of avoiding a doctor’s waiting room or being able to learn a skill from one’s home on demand may prove to be long-term winning business models.
A compelling analogy: small company performance during the Great Recession
Although businesses owned by women or people of color were more likely to shutter during the Great Recession of 2007-09, they helped stabilize the economy during the subsequent recovery, adding 1.8 million jobs in 2007-12. Meanwhile, firms owned by white males lost 800,000 jobs and firms owned equally by white men and women lost another 1.6 million jobs over this period.[xi]
Some of disparity of experience might be explained by the industries affected. Manufacturing and construction were hit particularly hard during this time — two sectors with a high concentration of white male owners. [xii] Meanwhile, the recovery was largely fueled by growth in industries such as health care and food services, which tend to have more minority and women ownership.[xiii]
The numbers are compelling: Businesses owned by women or people of color were foundational to economic recovery.
Women-owned businesses’ role in recovery
The growth trajectory of women-owned businesses, especially those owned by women of color, suggests that investors who want to 1) support economic recovery overall; 2) support entrepreneurs; 3) support women and people of color; or 4) support social enterprises – or any combination of the above – should consider investment in these businesses as they may offer the potential for both impact and solid investment returns.
Half of women-owned businesses are concentrated in three industries: professional/ scientific/technical services (lawyers, scientific, architects, consultants); health care and social assistance (child day care and home healthcare services), and other services (such as hair/nail salons and pet care)[xiv] Some or all these industries will rebound once the crisis recedes. An opening up of the economy, an aging population and a return to work should revive demand for these types of services and the emerging companies could represent good investment opportunities. Clearly there will be pent up demand for personal services such as hair and nail care. As people go back to work away from home, the need for childcare and other services will rise. Elective surgeries and other non-essential health care services will be in demand again. Finally, as the economy returns to growth, the need for professional services such as legal or consultant expertise will increase.
Across the board, people are increasingly looking at social enterprises, i.e. businesses that are designed to have both a positive purpose and profit, as vehicles for providing solutions to the major social and economic challenges facing communities. By providing social benefits as well as well-paying jobs, social enterprises offer the potential for rebuilding communities that are stronger than they were before the recession. Social enterprises run by women and entrepreneurs of color, who are hardest hit by the economic downturn, understand their target markets especially well and are well positioned to build successful social enterprises while the economy recovers.
The challenge for women entrepreneurs
BCG, a management consulting firm, partnered with MassChallenge, a US-based global network of accelerators, to review five years of investment and revenue data through a gender focused lens. They found that companies started or cofounded by women received on average less than half the amount of investment capital as male founded companies. Typically, women founders receive only a small fraction of venture capital deals (4.4.%) and only about 2% of all capital invested according to pitchbook data in 2016 through early 2018. However, the women-founded and co-founded companies outperformed their peers, generating 10% more cumulative revenue over the five-year period. According to the study, this might be attributable to women operating businesses that they have experience with, such as childcare or personal care (e.g. hair salons). [xv]
Michele Bongiovanni is an entrepreneur and CEO/Founder of HealRWorld LLC, a database platform that measures sustainability and creditworthiness of small and mid-sized enterprises (SMEs) for investors and funders. When asked why she believes women entrepreneurs tend to perform better than men, she opined that women business owners tend to be more collaborative in their management approach and make better financial decisions. This combination, in her opinion, often leads to success for startups. [xvi]
There is some data to back up Ms. Bongiovanni’s statements regarding women as better business owners and managers. FitSmallBusiness.com compiled data from the U.S. Census Bureau, Dow Jones, the Harvard Business Review, and others to compare female entrepreneurs to their male counterparts. The analysis combined 10 private and public studies and determined from the statistics that women business owners outperformed their male counterparts, generating higher revenue, creating more jobs. They also tend to significantly improve startup company performance and have a larger appetite for growth.[xvii] [xviii]
Ms. Bongiovanni notes that funding for SMEs was sorely lacking during the Great Recession. This appears to be the case during the current crisis, as evidenced by the first round of the Paycheck Protection Program (PPP) administered by the Small Business Association (SBA) and facilitated by banks. According to a recent study from ColorofChange, UnidosUS, and Global Strategy Group, close to half of Black and Latinx-owned small businesses expect to close their doors within six months, and may not be able to reopen. A majority (51%) of Black and Latinx small business owners who sought PPP loans asked for under $20,000 in temporary funding from the federal government. Only about 12% received the requested loans. Nearly two-thirds said they either received no funding (41%) or are still waiting to hear whether they will receive any federal help (21%).[xix] [xx] If these businesses can receive funding to get through the recession, they would help the economy pull out of the recession by providing needed jobs and services in local communities, particularly underserved communities.
As the coronavirus continues to wreak havoc on communities and the economy sputters back into gear, it is clear that small businesses, particularly those founded and run by women entrepreneurs, can help pull the economy out of a recession by providing needed products, services, and jobs. Such enterprises may also help communities emerge by filling in gaps in social services no longer provided as effectively by underfunded local governments. Investors can step up and provide needed capital and reap positive returns by supporting these women entrepreneurs.
[xvi] Interview with Michele Bongiovanni, CEO of HealRWorld, LLC
The future is specialized. The rise of artificial intelligence (AI) is affecting the professional job market in much the same way automation and robotics impacted production and service jobs over the past decade. The current turmoil in the global economy may temporarily slow the pace of change, but could trigger accelerated adoption of AI as economies recover and companies seek to reduce reliance on personnel. The question remains: As technology advances and the required workforce skills change, will there be enough skilled workers to fill those future jobs? How can workers acquire the skills needed in the new paradigm?
Rethinking education and training. The U.S. employment market pre-pandemic was characterized by millions of unfilled jobs along with a pool of underemployed or “discouraged unemployed” who had given up seeking work. When economic activity resumes, this dynamic will still exist and may in fact be exacerbated by ongoing social distancing and companies’ ramping up focus on technological solutions to business challenges.
What can investors do to help close the growing skills gap? Reskilling and upskilling may provide the answer to the current and future employment skills gap. We have identified a series of funds that invest in practical solutions to help train, reskill and upskill the workforce of today and the future. Some of the funds focus on improving the skills of young people just entering the workforce, and some provide lifelong learning needed to adapt to the rapidly changing economy.
In this report, we address the widening workforce skills gap and identify the socio-demographic groups that may be most exposed to changing technology such as automation and robotics. We identify specific investments which may help close the widening skills gap. We also share case studies of innovative training and skill-building programs.
Download Investing in the Future of Work
We are pleased to invite you to a webinar to discuss the Future of Work with experts in the field on Tuesday, June 9, at 2 pm ET. The discussion will focus on investment opportunities that promote practical solutions to help train, reskill and upskill the workforce of today and the future. Register here.
The COVID-19 pandemic and the corresponding uncertainty in the financial markets necessitate a different approach to our Quarterly Market Update and Outlook. Importantly, COVID-19 is a health issue first and an economic issue second. In this report we highlight:
- Financial markets dislike uncertainty. We believe volatility will persist until the virus is contained globally or a medical solution (e.g., a vaccine) is developed.
- We recommend investors take a long-term view of the markets, and not focus on day-to-day volatility. This is a short-term shock to the system, not a structural issue as occurred in 2008. With a long-term view in mind, we are not changing our recommended asset allocation.
- The COVID-19 crisis and its disruption to our society and our prevailing modes of individual behaviors help to underscore the core tenets of impact investing:
- A consideration of our collective environmental and social well-being;
- a deep understanding of an investment’s positive or negative impacts;
- and sound corporate governance and transparency.
In Cornerstone’s view, following these principles will reward the long-term investor.
While we expect more evidence to emerge, we cite a few examples here that underscore the importance of investing with an impact lens:
- Governance in the public arena and private sector — in the form of leadership, planning, disciplined execution and adherence to safety protocols — is on full display as a differentiator in the consequences of the health crisis and its economic fallout.
- The underperformance of the fossil fuel sector, which predated this crisis, will likely continue. We can expect more investors will seek to reduce risk in their portfolios by implementing carbon-free investment strategies.
- People of color are being disproportionately impacted, both physically and economically, by the pandemic. Disproportionate impacts have also been recorded among poor and/or rural populations regardless of ethnicity. Demand for investments to promote greater social justice and reliable access to basic health care, nutrition and other basic services have already been heightened at the national and local levels.
The combination of (i) a phase one trade agreement with China, (ii) the enactment of the USMCA trade agreement, (iii) an accommodative Fed, and (iv) possible fiscal stimulus ahead of the 2020 election has the potential to boost U.S. growth.
Has global economic growth troughed? Signs of a possible rebound in global economic activity include improvements in global Purchasing Managers Indices, as well as increases in the prices of copper and oil. Around half the earnings of the S&P 500 companies come from overseas.
Have net earnings estimate revisions troughed? There has been a sharp improvement in net earnings estimate revisions by analysts for the S&P 500 companies.
Although stocks will likely provide more muted gains in 2020, equities will probably offer the best returns among major asset classes. That said, a real shooting war with Iran would drastically change the outlook.
Read our full report: First Quarter 2020 Market Update and Outlook.
Human activities are causing a climate crisis, which is increasingly responsible for pushing various species of animals and plants closer to the edge of global extinction. These include “keystone species” that have disproportionately large impacts on their natural environment.
To understand the complexities, we conducted extensive readings of scientific journals and spoke with a wide range of experts, including apiarists (bees), botanists (plant science), herpetologists (amphibians and reptiles), and ornithologists (birds).
Modern extinction has been occurring at an accelerating rate. It’s estimated that, compared to pre human levels, modern extinction rates for all species have been 100 to 1,000 times greater. We highlight ten keystone species, two of which are plants, that are being pushed closer to the edge of global extinction by climate change.
Some investment management firms understand the need to focus on conservation and animal welfare, which, in turn, will contribute to the preservation of various keystone species. We highlight targeted thematic funds as well as ways to promote animal welfare indirectly through a focus on aligning investments to the UN Sustainable Development Goals.
Download the full report Fighting the Sixth Mass Extinction.
The economic model of our current era is linear. We take resources from nature, make them into a product and then throw the item away when we’re done with it. The result? Overflowing landfills, trash-filled waterways and, too often, toxic waste. This rampant waste of resources poses an existential threat to the world as we know it.
What is the way forward? The circular economy. A circular economy uses as few resources as possible in product creation; keeps resources in circulation for as long as possible, extracting the maximum value from them while in use; then recovers and regenerates products and their components at the end of their service life. Embracing circular economy principles is perhaps the most essential initiative we can undertake as a global society.
In our report Intentional Design: Embracing the Circular Economy, we look across a range of sectors to identify critical resource issues and identify examples of companies that are adopting circular economy practices into their supply chain management. In many cases, companies are increasing their efficiency, reducing waste, and saving money through their investments in the relevant processes and technologies. The transition to a circular economy is also spurring new business models and collaboration across supply chains.
For investors, forward-thinking asset managers are increasingly incorporating circular economy considerations into their investment processes; “pure play” circular economy investment vehicles, though rare, do exist. The report highlights several existing investments that we consider under the circular economy umbrella. In our view, investing in the circular economy is poised to become a central theme in sustainable and impact investing.
Download Intentional Design.
Global GDP growth continues to slow, with trade and tariff issues being a major contributory factor. The deteriorating macroeconomic outlook has been impacting investors’ decisions. The prices of perceived “safe haven” assets, such as gold and government-issued securities, have soared in recent months. The dollar, which is often perceived as a “global fear index,” has also been strong.
Stock prices have remained resilient. Even in an environment of falling earnings estimates (which are declining at a much faster rate than the historical average), equities remain close to record highs.
There are many moving parts in the fixed income outlook. The yield curve is still inverted. Inflation remains stubbornly low. The Fed’s policy course is not entirely clear.
For investors, the current environment presents challenges. A large over- or underweight in equities or fixed income seems risky.
Download our Quarterly Market Update and Outlook for Q4 2019.
Much has been written about the physical impacts of climate change on the planet: heatwaves, droughts, rising sea levels, etc. There is less mainstream discussion of the potential impacts of climate change on global financial assets.
We dug deep into the academic literature to understand the estimated impacts and underlying assumptions. We found that $3-24 trillion, or 2-17%, of global financial assets are at risk of loss from climate change. Agriculture and Transportation (air, road, rail, sea) face the highest risk, with more than 60% of the financial value of these sectors vulnerable to climate change.
“Feedback loops” between the financial system and the macroeconomy could further exacerbate these impacts and risks. For example, climate-related damage to assets serving as collateral for loans could create write-offs that prompt banks to restrict their lending in certain regions, which could weaken household spending.
Asset managers cannot simply avoid climate risks by moving out of vulnerable asset classes if climate affects their entire portfolio of assets. In other words — unless investment dollars are deployed at scale to limit further warming — there’s no place to hide.
This report focuses on the issues raised by climate change from the financial asset value perspective. In our companion report, Scaling Climate Action: Aligning Investments to Sustainable Development Goal 13, we address how investors can factor climate change into their investment choices. While we are already seeing the impacts of climate change, we have not yet passed the point of no return from the more extreme scenarios of physical damage and value destruction highlighted in this analysis. There may be no place to hide, but there are plenty of ways to fight.
Download No Place to Hide?
A growing global population and economy leads to more demand for food, water, transportation, housing and the fuel to supply these essentials to the world’s populace. Growing food, providing transportation and supplying the energy to foster global commerce all lead to greenhouse gas (GHG) emissions. Rising GHG emissions are the root cause of climate change.
Warming temperatures put our agriculture, health and water supply at risk. Warmer oceans and higher seas lead to stronger hurricanes and storm activity, causing flooding, coastal erosion and crop damage.
As outlined in our report No Place to Hide? Climate Change and Systemic Financial Risk, without urgent investment to scale climate solutions, global financial assets face value destruction of 2-17% depending on the pace and intensity of further global warming. If the more extreme scenarios come to pass, entire portfolios would be affected as key sectors of the economy face severe losses.
In this report, we propose ways for investors seeking to fight climate change to deploy capital in support of SDG 13: Climate Action. To do so, we use Cornerstone’s Access Impact FrameworkTM, which identifies relevant “access themes” that offer tangible investment ideas and helps to measure the impact of those investments.
Investment opportunities include funds that support new clean, alternative energy technologies, better farming methods, electric vehicle transportation and other growth industries which can help curb greenhouse gas emissions and slow the pace of warming. These investments target market rate or better returns while offering solutions to restrain global warming and its negative global impacts.
Download Scaling Climate Action.
Despite decades of competitive returns, a “myth” persists that sustainable and impact investment strategies financially underperform conventional strategies. The myth should be dead.
We recently conducted a fresh review of the academic and practitioner literature on this topic. Sampling from 2,200 reports published over the past few decades, our review provides assurance that applying an ESG lens is consistent with fiduciary duty. (We would argue that it is essential to fiduciary duty.)
Our review also highlights that the effect of sustainable and impact strategies on a portfolio will depend upon the asset class, investment style, and especially the skill and expertise of the manager.
In this note, we seek to describe the consensus view among all studies identified in the bibliography at the end of the report, and where possible we provide some insight into the relevance of specific research for investment decisions. We organize the results according to asset class, and where relevant (i.e., for public equities and fixed income), we look at different applications of ESG analysis. We also highlight the discipline we at Cornerstone take in evaluating the ESG approach of the investment managers we recommend.
Download our full report Sacrifice Nothing.
Gender lens investment approaches have expanded in recent years. All asset classes have seen a tremendous increase in the number of funds and assets under management since 2014. Fund strategies range from empowering women and funding women-run businesses to reducing gender violence and poverty for women and children.
At the same time, investors have also been seeking ways in align their activities in support of the United Nations Sustainable Development Goals (SDGs). Cornerstone Capital Group has contributed to this effort by introducing the Access Impact FrameworkTM, which illustrates the alignment of investment strategies to each of the SDGs. We identified the concept of access — the ability of individuals and societies to achieve desired social, economic and environmental outcomes — as a key common denominator of the SDGs and identified 11 “access themes” that translate the SDGs into investable opportunities.
SDG 5 is “Achieve gender equality and empower all women and girls.” For investments to have an impact related to achieving gender equality and empowering women and girls, investors do not have to invest solely in gender lens funds. Our approach to gender lens investing incorporates traditional gender lens themes with an analysis of the access themes that align most closely to SDG 5.
In this report we discuss each of the access themes that underpin SDG 5 in some depth. We also offer examples of investment vehicles that bolster access to these themes for women, their families and communities. Download the full report here.
Global central banks have been key to supporting financial markets. The stimulus has offset weak economic growth and a poor corporate earnings environment. There is no reason to believe this monetary stimulus will end any time soon.
To be sure, there are risks. U.S. equity valuations are above historical average levels. The U.S. is engaged in tense trade negotiations with several countries (China, Mexico, Canada) and with the European Union; the focus of the U.S. could extend to other countries, e.g. Vietnam. A number of geopolitical issues also have the potential to worry investors, e.g. U.S. – Iran.
It remains to be seen how much longer expanding price to earnings multiples can offset falling earnings estimates, especially with the uncertainties outlined above. Net-net, it seems that U.S. stocks could stay at current levels or move a bit higher, but risks likely remain on the downside.
Bond yields seem likely to remain low. Unexpected economic weakness could be a catalyst to drive yields lower.
Download the full report here.
In the absence of clear and consistent government regulation, corporate policies have been pivotal to the provision of legal protections for LGBTQI workers. For companies, greater inclusion is associated with improved brand reputation, reduced turnover, and increased productivity and innovation. The most progressive companies seek to integrate their values into their operations, using their financial clout to push back on harmful practices even if they risk additional costs in the near term.
To be clear, policies have not eliminated discrimination: More than half of LGBTQI employees report that discrimination negatively affects their work environment.
As bias and discrimination toward LGBTQI people are related, at least in part, to normative expectations of gender within the workplace. Recognizing the intersection between gender discrimination and LGBTQI equity results in a profound reorientation of how investors and advocates can approach companies and their attitudes toward full inclusion.
As investors continue to make the case for full inclusion of LGBTQI people, there is a practical and ethical mandate to align LGBTQI interests with those of gender lens investors and others who recognize that the establishment of corporate cultures and practices that embrace all employees, customers and stakeholders, will benefit everyone.
In this report we make the case for this thematic fusion, discuss how investors and asset managers can consider LGBTQI alongside gender equity in their investment analysis, and highlight existing investment strategies that reflect this approach.
Download the full report here.
With the U.S. yield curve not far from inversion, global GDP growth slowing, and earnings estimates continuing to decline, it seems the risks to stocks are on the downside from current levels. Progress on trade issues could give a boost to P/E multiples, although that would likely be short-lived if earnings estimates continue to fall.
In fixed income markets, a scenario where long yields move materially higher would likely involve a significant acceleration in economic growth and / or a shift to tightening by the Fed, with neither of these scenarios seeming likely any time soon.
In summary, the equity and fixed income markets are likely to be range-bound, with further data on the direction of the U.S. and global economies likely to move markets above and below current levels, although without a strong trend in either direction unless the data prove to be surprisingly weak or surprisingly strong.
Download our full report here.
Strategic Outlook …p. 2
Equity Outlook …p. 6
Fixed Income Outlook …p. 9
Alternatives/Commodities Outlook … p. 12
Tactical Asset Allocation…p. 14
Market and Global Sector Performance…p. 15
Key Economic Indicators…p. 17
Rising income and wealth inequality is a widely recognized social concern in the United States. This is a multi-faceted issue, with root causes that vary according to demographics, and one that impact investors have shown strong interest in addressing.
Since the 1990s, there has been a growing disparity in economic opportunity for rural Americans. This demographic issue has gained public awareness in mainstream social discourse in the recent past. In this report, we lay out the key challenges faced by rural America, highlight approaches to revitalization that have proven effective, and describe existing investment strategies.
The decline of manufacturing and shift to a knowledge- and service-based economy left many rural communities unable to recover adequately from the Great Recession of the late ’00s. The resulting challenges can be summarized as:
- Lack of jobs, or a mismatch in skills with available jobs.
- Poor infrastructure: Rural communities often lack high speed internet, access to quality healthcare, and local banking services.
- Drug addiction, specifically opioids, which compounds the effect of limited health care access.
Effective strategies for revitalization
Asset-based community development (ABCD) is a “self-help” strategy that sets the stage to attract private loans and investments by taking advantage of a community’s existing strengths. Initially a community might use government or foundation funding to develop community assets, e.g. supporting existing local entrepreneurs or developing local natural resources to offer an attractive quality of life. Once an initiative proves viable it may be possible to attract private investment.
Community Development Finance Institutions (CDFIs) and other local intermediaries can help aggregate capital to support local investment. Aggregators attract capital to an investment theme and allocate sums to projects that need funding.
Real estate development is another possible path to revitalization, with Opportunity Zones potentially attracting investment that might not otherwise be economically feasible.
We highlight several initiatives that are under way related to broadband projects in small communities that may finally begin to deploy this critical infrastructure.
Lastly, we highlight how some communities are making a concerted effort to attract a younger population and stem the “brain drain” of rural youth to urban areas.
For investors interested in promoting capital investment in infrastructure and businesses that create jobs in rural America, there are various strategies one can consider across asset classes. We describe these strategies in this report; some are general categories of investment, and in other cases we refer to specific strategies available to our clients.
Advances in agricultural technology, changes in human diet, and rising awareness of the environmental destruction caused by factory farming are accelerating the rise of sustainable protein.
Investors can target a number of outcomes — access to a sustainable food supply, lower greenhouse gas emissions, more plentiful and cleaner water, and a reduction in animal cruelty — through sustainable protein related investments. Opportunities exist in alternative proteins, organic foods, new agricultural technologies, sustainably managed farmland, and sustainable fisheries and aquaculture.
In this report we outline how a confluence of behavioral, technological, and regulatory changes have fueled the trend toward sustainable protein; identify emerging developments in the “alternative protein” space; and highlight ways to consider sustainable protein investment across asset classes.
In our last Quarterly Market Update and Outlook, we noted that “volatility in the capital markets was even more muted in the third quarter than it was in the prior quarter.” The fourth quarter turned out to be markedly different.
- In the second quarter, the closing price of the S&P 500 was more than 1% above or below the prior close on just 13 trading days, while the yield on the 10‑year U.S. Treasury bond remained in a range of 38 basis points (from 2.73% to 3.11%).
- In the third quarter the closing price of the S&P 500 was less than 1% above or below the prior close on every trading day, while the yield on the 10‑year U.S. Treasury bond remained in a range of 28 basis points (from 2.82% to 3.10%).
- In the fourth quarter, the closing price of the S&P 500 was more than 1% above or below the prior close on 28 trading days, i.e., almost half the time in the quarter (Figure 1), while the yield on the 10‑year U.S. Treasury bond plunged 60 basis points from a high of 3.25% to a low of 2.65%.
It’s likely that the extreme volatility in the fourth quarter was driven by two factors occurring at the same time:
- Falling estimates of 2019 corporate profit growth.
- Contracting Price-to-Earnings (P/E) multiples driven by broad macro uncertainty.
S&P 500 profit growth had been forecast to slow considerably in 2019, given tough comparisons (S&P 500 EPS growth increased an estimated 26% in 2018), and the benefits of the tax cuts wearing off for corporations and consumers. More recently, however, estimate downgrades by companies including Apple and Fedex have highlighted the uncertainty about the 2019 outlook reflecting, in large part, the fragile state of the global economy.
At the same time, political issues have pressured P/E multiples, with the P/E of the S&P 500 (trailing EPS) plummeting from 22x in January to 16x in December. Some of the issues likely behind that multiple contraction:
- The ongoing U.S. trade dispute with China.
- The partial U.S. government shutdown.
- Concerns about the independence of the U.S. Federal Reserve after reports that President Trump looked into firing the Chairman of the Federal Reserve.
- Concerns about the health of the banking sector after Treasury Secretary Mnuchin issued a statement in December declaring that the nation’s six largest banks had ample credit to extend, which led investors to wonder about the reason for the statement.
- Continued turmoil in the White House, with the departure recently of the White House Chief of Staff Kelly and Secretary of Defense Mattis, and a seeming inability to find permanent replacements quickly. (Currently, one quarter of cabinet positions are unfilled.)
- Investigations into President Trump by Robert Mueller and newly empowered Democrat-controlled committees.
It likely that volatility in the equity market will continue in 2019, at least until investors become more comfortable with the outlook for 2019 earnings growth, and some of the macro concerns are alleviated.
Download our full report here.
Strategy Overview…p. 2
Equities: Strong Headwinds in 2019…p. 6
Fixed Income: Yields Likely Range-Bound…p. 9
Alternative Assets: Caution Warranted… p. 11
Tactical Asset Allocation…p. 13
Market and Global Sector Performance…p. 14
Key Economic Indicators…p. 16