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With ESG and climate-focused investing becoming ever more prominent, increased SEC regulations around climate disclosures will hopefully help to increase corporate transparency and separate the legitimate from the greenwashed. Jeff recently attended the CERES Banking for Net-Zero Alliance Conference in NYC, where he had the opportunity to sit down with Tom Steyer, former Democratic Presidential Candidate and Co-Executive Chair of Galvanize Climate Solutions, to talk about the proposed SEC regulations, transition finance, and the Inflation Reduction Act. Mr. Steyer is a huge supporter of transparency, data, and information, seeing them as the 21st Century ways to solve 21st Century problems. And while he understands that the transition to a green economy needs to happen fast, he also realizes that it needs to be practical. Hear more of what he has to say in this concise 5-minute interview with Jeff.

“Let me say this. It is very premature to be thinking about pausing. So people, when they hear lags, they think about a pause. It is very premature, in my view, to be thinking about or talking about pausing rate hikes. We have a ways to go.” ~Fed Chairman Jay Powell, FOMC Press Conference, 11/2/2022 “Restoring price stability is of paramount importance because it is the foundation of sustained economic and financial stability. Price stability is not an either/or, it’s a must-have.” ~NY Fed President John Williams, 11/16/2022 “Pausing is off the table right now, it’s not even part of the discussion. Right now the discussion is, rightly, in slowing the pace.” ~SF Fed President Mary Daly, 11/16/2022 _______________________________________ Markets and Macro Update After a difficult September that saw the S&P 500 Index fall over 9%, the S&P rallied over 8% [1] in October on still-unrealized hopes for a monetary policy pivot from the Federal Reserve. On November 2nd, the Fed decided to hike the Fed Funds rate by another 75 bp. In the press conference that followed, Fed Chair Powell reiterated that controlling inflation is their top priority as long as the labor market remains strong and that they are nowhere near the long-anticipated “pivot.” Though Powell indicated the pace may slow down in coming months, as 75 bp per meeting is a very aggressive pace, the Committee gave little guidance on the terminal level of rates where they would feel comfortable pausing. They instead will monitor the inflation and labor market data to drive their decisions. Following the Fed meeting, on November 10th, both core and headline CPI surprised the market, coming in lower than expected. Headline CPI rose 7.7% year-over-year (compared to a forecast of 7.9%) and Core CPI, which excludes food and energy, rose 6.3% vs an expected 6.5%. [2] This inflation release sparked a massive stock rally. The S&P rose 5.5% in one day, its biggest one-day gain in years. The 2-Year US Treasury yield dropped more than 20 bp in a single day as the market quickly started pricing in a more dovish Fed that will bring inflation under control sometime in the first half of next year and perhaps begin cutting rates back to “normal” before 2023 is over. Sounds fantastic right? Unfortunately, we don’t expect that it will play out quite so simply. Despite the “will-they-or-won’t-they-pivot” roller coaster of the past several months, our view has remained largely unchanged through the Fed meeting and the CPI print. Powell’s press conference comments, and more recent comments by other Fed presidents including the two above, indicate that not much in the Fed’s thinking has changed either. While CPI was lower than expected, the underlying constituents paint a less optimistic picture. More than half of the downside surprise resulted from the health insurance index, which plummeted for technical reasons that don’t reflect real world price declines and dragged CPI down by 0.11%. Importantly, this health insurance adjustment is not used in calculated Core PCE, the Fed’s preferred measure of inflation. Services CPI is stickier than goods CPI, which makes it more of a concern to the Fed. It was up by 7.2% in October, slightly less than September’s 7.4%, remaining near the worst level since August 1982. It is possible, though far from certain, that CPI has peaked for the cycle but there is still a long way to go until the Fed’s 2% target is reached. Meanwhile, the labor market remains very strong. JOLTS job openings were at 10.7 million in September, higher than the 9.8 million expected. [3] More jobs were added to the economy than expected, according to both the ADP Employment Change [4] report and the Non-Farm Payroll [5] report for October [6]. The unemployment rate rose slightly from 3.5% to 3.7%, still near historic lows. While reports of layoffs have increased in recent weeks, particularly within the tech sector, we don’t expect that to materially impact the broader labor market enough to change the Fed’s course in the near term. Not all of the layoffs will affect US-based workers and there remains significant unmet demand for labor from other sectors of the economy. Our base case scenario continues to be that the Fed does what it is telling us it is going to do, namely, to continue to raise rates (and hold them at higher levels) until inflation is under control, at least as long as the labor market remains tight. We also realize that the breakneck pace of rate hikes in an overleveraged and geopolitically treacherous world can (and likely will) result in “something breaking” that could force the Fed to loosen policy in response. Neither the base case nor the “pivoting in response to crisis” case is positive for risk assets like stocks, so we are remaining underweight to equities until our outlook meaningfully changes. COP27 COP27 kicked off last week on November 6th in Sharm El-Sheikh Egypt marking 30 years since the United Nations Framework Convention on Climate Change (UNFCCC) was adopted and seven years since the Paris Agreement was signed at COP21. The “Conference of the Parties” or “COP” brings together the governments that have signed the UNFCCC, the Kyoto Protocol, or the Paris Agreement in order to jointly address climate change and its impacts. Since 2015, under the legally binding Paris Agreement treaty, most countries have committed to undertaking three tasks: 1) Keeping the rise in global average temperature to below 2°C, but ideally 1.5°C 2) Strengthen the ability to adapt to climate change and build resilience. 3) Align investment flows towards lower greenhouse gas emissions. To get all 194 countries to sign onto the legally binding Paris Agreement, it was written in a way that allowed for a “bottom-up” approach where individual countries decide what actions they will take. For example, on the topic of climate mitigation each country set its own emissions reduction targets and timeline, to be revised and raised every five years. Member counties have had to submit and periodically update a National Adaptation Plan, detailing approaches to reduce physical vulnerability and to add durability and resilience to critical and public infrastructure. Now that the groundwork of setting goals and a system to measure our progress has been achieved, COP27 has the task of focusing largely on compliance and enforcement of what has already been established and trying to bring global focus to climate issues at a time when inflation, recession, an energy crisis, and war are all vying for resources and solutions. COP27 Goals and challenges [6] COP26 was the first test of the Paris ratchet mechanism, which was designed to increase the level of emission reduction for every country, every five years. Because emissions cuts promised ahead of COP26 remained insufficient to limit global warming to the agreed upon levels, the summit ended with “The Glasgow Climate Pact” calling for countries to put forward strengthened targets this year. While COP27 was not originally a major milestone on the Paris Agreement calendar, the unfinished business of Glasgow means it will now be a critical test of whether the international process can respond to the increasing urgency of the situation. Another major challenge that will be faced by COP27 is the issue of COP26’s failure to deliver on promises of regular climate finance. Developing countries are hoping developed countries will honor their commitments to provide $100 billion in climate finance annually from 2020 to 2025. So far, they have not. Grading COP Progress The Global Stocktake (GST) is the mechanism to assess the world’s collective progress towards fulfilling the Paris Agreement, happening in a five-year cycle. COP27 will host one of three Technical Dialogues as part of the 2021-23 GST.[6] The outcomes of the GST are intended to inform member countries, negotiations, and enhance international cooperation for climate action with the aim of increasing ambition. Unfortunately, as it stands the expectation of the results for COP27 are not expected to be favorable.

Several years ago, following the release of the film Planetary, we embarked upon a journey to understand both how climate change impacts the capital markets and how the latter can also be a solution. At the time, not as many people were focused on this intersection even though numerous groups including scientists, NGOs, and activists had been engaged in the issues of climate change for decades. While many people say the situation has deteriorated over this period, the previously stated worst case scenario in IPCC reports may now be avoidable given energy innovations to date.1 It’s also worth pointing out just how many more people, both here and globally, are now engaged in the bigger conversations and in executing on-the-ground solutions. This is evident in many developments including government policy, climate-focused media and events, and more philanthropic and venture capital being deployed in this area. Through our events at the United Nations, the NYSE, and our partnership with FINTECH.TV, we have convened and interviewed hundreds of people including representatives of the world’s largest asset managers. In these discussions we seek to determine how to drive capital towards solutions. Sometimes we need to hold difficult conversations to identify the reality from the hyperbole. None of us have the benefit of historical records or tried-and-tested methods to rely on as we are living in a new paradigm. We won’t always have the time to test out theories well enough before they are made manifest in new technologies and datasets, but we need to be continually reviewing and learning because new solutions can also bring new problems. However, with more of us stepping up to the challenges and more of us willing to question ideas and engage with people from diverse backgrounds with varied perspectives, we can continue to innovate while broadening and deepening our knowledge. We are grateful to all of you who are committing your energy, passion, and resources to this important work, so that we can leave a healthy, vibrant world for generations to come. We will never pretend that it will be easy, but as the adage goes, nothing worth doing arguably ever is. Happy Thanksgiving from all of us at Gitterman Asset Management.

In our last update, we declared that the decade-long party of low rates and quantitative easing was officially over. Spooked by inflation that proved to be anything but transitory, the Federal Reserve began raising interest rates in March and began reducing its balance sheet in earnest in the late summer. Following the Fed’s lead, global central banks have scrambled to keep up the pace despite facing significant economic and geopolitical challenges, tightening global financial conditions dramatically and slowing growth with a lagged effect. The bar is closed and the hangover is just beginning. The biggest economic headache so far has been uncertainty. The impacts of exceptionally hawkish monetary policy combined with a sharp reduction in fiscal stimulus are still mostly unknown. There’s no question there will be unintended consequences given the pace of tightening and our complex and interconnected financial system, but we still don’t know what they will be, when they will appear, and how policy makers will respond. It can take months for the effect of higher rates to filter through the economy, although some cracks have started to appear. The most concerning outcome thus far has been the strength of the US dollar relative to nearly every other global currency. Through 9/30, the DXY dollar index (which tracks the value of the dollar against a basket of major currencies) has risen over 17% year-to-date and gained over 6% in the third quarter alone.[1] The resulting weakness in the yen forced the Bank of Japan to intervene in their currency markets for the first time since 1998.[2] The situation in the UK has been even more dramatic. In late September, following the Fed’s decision to hike rates by 75 basis points and the release of a mini budget in the UK deemed to be inflationary, the pound dropped over 5% against the dollar in just a few days, sparking a liquidity crisis in the UK bond market. The Bank of England has stabilized the situation for now by purchasing gilts, but it is a solution that risks worsening the problem in the long run.[3] Why is the dollar so strong? Because the dollar is the world’s global reserve currency, other countries need dollars for reserves to stabilize their own currencies, participate in global trade, and pay their USD-denominated debt. Among global central banks, the Fed was the first mover in tightening and has had the luxury of fighting inflation more aggressively since the US is more insulated from the geopolitical challenges and energy crisis faced by Europe. This has had the effect of removing more dollars from the system than other currencies, making the dollar more scarce and therefore more valuable for those who have no choice but to buy dollars. It is akin to a slow squeeze that looks likely to continue until the Fed changes course. Why is a strong dollar a bad thing? After all, a strong dollar should help us fight inflation by reducing the cost of imports. Unfortunately, the benefits of cheaper imports are outweighed by the costs. The US economy is part of the global economy and can’t be viewed in isolation. As exports become more expensive, they make American businesses less competitive globally. Slowdowns in the economies of our major trading partners caused by currency weakness and responses to it will have ripple effects that slow growth globally. In a worst-case scenario, a dollar that is too strong could trigger debt crises in both emerging and developed markets. For now, the Fed has not signaled that they will back off tightening in response to the strong dollar. But, like the drunk at the bar begging for “just one more” after last call, hope springs eternal. Equities sharply rallied over the summer on the narrative of a Fed pivot and then sold off in September when the pivot failed to materialize. We still don’t see any evidence in the labor market or inflation data to support a change in the Fed’s trajectory. Job openings fell slightly in September but there are still 1.7 jobs for every jobseeker and the unemployment rate fell to 3.5%, the lowest level since 1968.[4] We think they will keep tightening until something breaks and they are forced to switch gears and support market functioning. We are not at the “something breaks” point yet, but we are getting closer, and it is not just the dollar we need to worry about. Mortgage rates continued their relentless move upward and ended the quarter at 6.9%.[5] Housing prices have not dropped by nearly enough to offset higher rates, pushing affordability to extremely low levels. Office vacancies are high and rising as workers are rejecting demands to return to the office and companies look to pare costs ahead of a slowdown, which has the potential to ripple through the Commercial Mortgage-Backed Security (CMBS) market. The financial services sector is beginning to look vulnerable. Credit Default Swap (CDS) spreads on Credit Suisse, which measure the cost to insure their bonds against default, spiked in late September to levels worse than 2008.[6] CDS spreads also widened for other European and even US banks, implying rising default risk at many global strategically important financial institutions. Any of the above could be the catalyst for the Fed to pause or pivot, even against the backdrop of a strong labor market and high inflation, bringing back a risk-on environment. Before that happens, though, we would expect to see even more pain in markets. Our portfolios will remain positioned defensively until it becomes clear that the Fed cannot continue.

Watch the online replay of the Climate & Capital Conference, held on September 21st at the iconic New York Stock Exchange. The event brought together industry leaders in investment, business, and climate communities to discuss pertinent climate topics including strategies to align capital with climate commitments, ways to engage with corporate issuers on decarbonization strategies, solutions to measure and manage climate risk and uncover opportunities, and much more. WATCH ONLINE REPLAY Confirmed speakers include: Rostin Behnam, Chairman, Commodity Futures Trading Commission Michelle Dunstan, Chief Responsibility Officer & Portfolio Manager, Alliance Bernstein Chandler van Voorhis, Manager & Co-Founder, GreenTrees Matt Diserio, President, Water Asset Management David Sher, CEO, Greenbacker Capital Management VIEW FULL AGENDA

ESG has received a good deal of criticism as of late, accused of greenwashing by the political left and woke investing by the political right. In this episode of TheIMPACT, Jeff speaks with Judy Samuelson, Founder and Executive Director of The Aspen Institute Business and Society Program and author of The Six New Rules of Business: Creating Value in a Changing World. Judy deeply believes that we need big business at the table to solve the world’s most complex problems, such as climate and inequality. The Aspen Institute dedicates itself to creating change through dialogue, leadership, action, and by supporting and investing in change agents who working inside large enterprises.