Forward or Reverse?

It can be difficult to decipher the direction of travel these days when it comes to financial markets or sustainability topics. Much of the market volatility we’ve experienced of late has been driven by public policy, particularly trade and monetary policy. On the sustainability front, there have been a lot of challenges posed by public policy as well.

Turbulent quarter

As the dust settles on a volatile third quarter, a snapshot of performance reveals a range of modestly positive and negative returns for the three-month period across asset classes.

  • The S&P 500 Index rose 1.7%, while small-cap stocks as represented by the Russel 2000 Index were down -2.4%.
  • Non-U.S. Developed Market stocks as represented by the MSCI EAFE Index were down -1.1%.
  • Bonds delivered a solid 2.3% return as represented by the Bloomberg Barclays US Aggregate Index.

Equity markets were turbulent throughout the quarter culminating with a number of trend reversals in September, including a significant rotation away from momentum stocks to value stocks, which have been consistent laggards in recent years; non-U.S. stocks outperforming their U.S. counterparts; and, small-cap stocks significantly outperforming large-cap stocks.

In fixed income markets, the decline in interest rates that delivered positive bond returns for most of the quarter sharply reversed in early-September before retreating again to remain near multi-decade lows.

Market volatility likely to continue

The S&P 500 Index’s year-to-date return as of September 30 was at a lofty 20.5% following the modest third-quarter gains. We have concerns that current equity valuations do not reflect the risks of a recession, even if markets may be pricing in slower growth.

From a policy perspective, an unsuccessful resolution of the trade war with China could further dampen economic prospects. While accommodative Federal Reserve (Fed) policy is designed to combat an economic slowdown, its ultimate effectiveness is uncertain, and at least a year out. Moreover, Fed policy is contributing to a historically low interest rate environment which is arguably encouraging excessive risk taking as investors stretch for returns in a low-yield environment.

All of this suggests continued market volatility.

Summer of setbacks

The Trump Administration recently announced that it would revoke California’s authority to set stricter automobile emissions standards than national standards, and that’s just the latest in a longer list of public-policy setbacks for investors interested in sustainability.

Recently, the New York Times published a troubling list of 85 separate environmental rules being curtailed by the current administration, including 23 on air pollution and emissions, 18 on drilling and extraction, 5 on toxic substances and 7 on water pollution.

Here are just a few of the public policy setbacks that made headlines over the last three months: a repeal of clean water regulations that limited chemicals that could be used near streams; relaxing energy efficiency standards for light bulbs; and weakening implementation of America’s most successful environmental law, the Endangered Species Act.

It’s hard to imagine a worse public policy environment when it comes to transitioning to a more sustainable global economy.

Private sector is stepping up

Luckily for us, our future is not completely dependent on government action. Companies and investors have been stepping in to fill the void on a range of issues, from diversity to climate change to toxic substances to gun control.

In fact, advancing sustainability is increasingly understood as a financial and economic imperative. Sustainability is becoming a long-term value driver, whether Washington likes it or not.

In August, for instance, the Business Roundtable (BRT), which includes the chief executives of many of America’s largest corporations, published Statement on the Purpose of a Corporation, stating that the era of shareholder primacy is over, and that America’s corporations must pay more attention to serving all their stakeholders, including customers, employees, suppliers, communities and the public interest. The letter specifically mentions investing in employees, paying fair wages, providing training and education, and fostering diversity and inclusion.

In fact, advancing sustainability is increasingly understood as a financial and economic imperative.

In September, Bloomberg published an article entitled “What’s Behind the World’s Biggest Climate Victory? Capitalism,” contrasting energy forecasts nine years ago with those of today, and noting that renewables are likely to account for over half the world’s electricity by 2050. A few weeks ago, at least four automobile companies announced a new agreement with the state of California to voluntarily reduce tailpipe emissions.

The We Are Still In coalition of companies and other institutions that are committed to reducing carbon emissions and standing by the Paris Agreement numbers over 2,200 businesses and investors, along with hundreds of cities, counties, educational institutions, states, tribes, health care organizations and cultural institutions.

Climate Week, held in September in New York, saw 87 global companies committing to reduce emissions in line with the goal of limiting future warming to 1.5⁰C, and Amazon pledging to reduce its net greenhouse gas emissions to zero by 2040.

In early September, nearly 150 company CEOs signed a letter to the Senate making a forceful case for action on gun safety, including expanded background checks and stronger “red flag” laws. And you may remember that a few years back, several companies took public stands against North Carolina’s law requiring people to use bathrooms corresponding to the gender on their birth certificates.

If companies and investors continue to step up, there is reason for optimism despite the headwinds posed by public policy.

Maintain a long-term horizon

Volatility — whether in sustainability policies or financial markets — can be navigated if investors maintain a long-term horizon. It’s comforting, in times like these when each day seems to bring a new setback, to understand that secular trends and long-term value drivers will continue to advance sustainability. As investors, we can continue to profit from and hasten the transition to a more sustainable global economy.

Index Definitions

The S&P 500 Stock Index is an unmanaged index of large capitalization common stocks.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

The MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. Performance for the MSCI EAFE Index is shown “net”, which includes dividend reinvestments after deduction of foreign withholding tax.

The Bloomberg Barclays US Aggregate Bond Index is a broad base index, maintained by Bloomberg L.P. often used to represent investment grade bonds being traded in United States.

One cannot invest directly in an index.


Steve Falci, CFA®

Chief Investment Officer, Executive Vice President

Steve Falci is Chief Investment Officer at Impax Asset Management LLC and Executive Vice President of Pax World Funds. Steve oversees the investment management of Pax World Funds, the development of fund strategy and the collaboration between investment analysis and environmental, social and governance-based research to enhance the firm’s sustainable investing strategy.

Steve has 30 years of experience in investment management. Prior to joining the firm, he served as Head of Strategy Development, Sustainable Investment at Kleinwort Benson Investors, where his duties included strategic direction, product development and identifying new market opportunities in the sustainable investment business. Steve previously served as Chief Investment Officer, Equities at Calvert Group and was a Principal and Senior Portfolio Manager at Mellon Equity Associates.

Steve serves on the board of directors of the US Forum for Sustainable and Responsible Investment (US SIF). He also serves on the Investment Committee for Mercy Investment Services. Steve has a Bachelor of Science in Economics and a Master of Business Administration from the Stern School of Business at New York University and a Master of Arts from Pittsburgh Theological Seminary. Steve is a CFA® charter holder.

CFA® is a trademark owned by the CFA Institute.

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