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What is ESG investing and why are some Republicans criticizing it?

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The culture wars, fought nationwide in school board meetings and college classrooms, have entered a new arena: Wall Street.

A sharp political divide has emerged over environmental, social and governance investing, or ESG, a type of investing that takes into account non-financial information about a company, such as its climate impact and staff diversity.

Prominent Republican politicians, such as Florida Gov. Ron DeSantis, have assailed ESG as “woke” capitalism that prioritizes liberal goals over investor returns, harming U.S. companies deemed insufficiently progressive and in turn hindering the wider economy.

Supporters of ESG, including financial firms that manage trillions in assets, have said considerations beyond the bottom line deliver the best financial gains. In weighing the economic threat posed by climate change, for instance, investors ensure the long-term health of their portfolio.

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“There’s some risk that we could have red and blue banks, red and blue supermarkets,” Witold Henisz, faculty director of the ESG Initiative at The Wharton School of Business at the University of Pennsylvania, told ABC News. “America is more and more polarized.”

Here’s what to know about ESG and the political backlash against it:

What is ESG investing?

For decades, prevailing corporate wisdom held that companies face a choice between actions that are socially beneficial and ones that maximize shareholder value, said Alison Taylor, a professor of business at New York University who focuses on corporate responsibility and ethics.

ESG, by contrast, is an approach to investing that examines a company’s social or environmental impact precisely because it considers non-financial information useful for determining whether the company would deliver strong investor returns.

“The business would do good for the world and make more money,” Taylor told ABC News.

Depending on a given investor or policy, ESG takes into account a range of business practices, such as the release of carbon emissions or pollution, the treatment of employees and the presence of minorities within a company’s leadership.

Sustainable investment based on ESG criteria has grown to a $35.5 trillion industry, according to a study from the Global Sustainable Investment Alliance in 2020.

How has ESG risen to prominence on Wall Street?

Over roughly the past 15 years, ESG has shifted from an upstart financial trend to a mainstream strategy touted by industry titans, experts said.

The rise of ESG has been propelled by growing awareness about the negative effects of some corporate practices, in part due to the rise of social media, said Taylor of New York University. She also credited a young generation of investors, which has brought a focus especially on the role that companies play in exacerbating climate change.

Financial leaders have also taken up the cause. One major promoter of ESG, Larry Fink, the CEO of BlackRock, the world’s largest asset manager, has highlighted for years the importance of non-financial information in assessing investment opportunities.

“Stakeholder capitalism is not about politics,” Fink said last year in a letter to CEOs. “It is not a social or ideological agenda. It is not ‘woke.’ It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper.”

The surge of ESG adoption has also coincided with a slew of studies that demonstrate its effectiveness in yielding stronger returns than traditional investing, as well as a host of findings that question its comparative benefit, Taylor said.

“There have been thousands of studies,” she said. “The jury is out on whether ESG delivers higher returns.”

Why have some Republican officials criticized ESG investing?

Republican politicians have criticized ESG because they say they consider it an effort to use financial tools for the purpose of advancing liberal political goals.

In some cases, Republicans have condemned the investing approach as a departure from free market capitalism, since it takes into account non-financial factors.

In a Wall Street Journal op-ed last year, former Vice President Mike Pence said, “The woke left is poised to conquer corporate America and has set in motion a strategy to enforce their radical environmental and social agenda on publicly traded corporations.”

“For the free market to thrive, it must be truly free,” he added.

In response to such attacks, proponents of ESG reject the notion that they’re deviating from investment fundamentals, since looming threats like climate change will have a profound impact on how the economy operates, Taylor said.

“Whether you’re on the left or right, you’re currently making the argument that you’re the rational capitalist and your opponent is the partisan hack,” she said.

Florida Governor Ron DeSantis speaks during a rally in Hialeah, Fl., Nov. 7, 2022.

Marco Bello/Reuters, FILE

Criticism leveled at ESG has not only come from the right, however. Progressives have criticized the practice for imposing vague or weak standards on companies, offering the imprimatur of virtue without the requirement of substantive action.

“Everybody hates ESG,” Taylor said. “The left hates ESG because they say we should not just think about issues when they have an impact on a company’s bottom line. There’s an imperative to address racism and climate change.

In response to criticism of ESG, BlackRock told ABC News in a statement: “Over the past year, BlackRock has been subject to campaigns suggesting we are either ‘too progressive’ or ‘too conservative’ in how we manage our clients’ money. We are neither. We are a fiduciary.”

“We put our clients’ interests first and deliver the investment choices and performance they need. We will not let these campaigns sway us from delivering for our clients,” the statement added.

What have Republican officials done to oppose ESG?

So far, attacks on ESG have primarily arisen at the state level, where some Republican-led states have divested their pension funds from firms that engage in ESG investing, while others have put forward legislation that would ban any public entity from carrying out financial business with such firms, including routine local policy decisions like raising money through selling bonds.

In August, 19 state attorneys general sent a letter to Fink criticizing the firm’s use of ESG criteria in overseeing state pension funds. That month, DeSantis approved a resolution that eliminates the consideration of ESG from decisions used in managing Florida’s pension investments.

On Monday, DeSantis took the effort further, proposing a set of measures that prohibit the consideration of ESG criteria by financial institutions in Florida, as well as banning the use of such criteria in all investments made at the state and local level, among other provisions.

“By applying arbitrary ESG financial metrics that serve no one except the companies that created them, elites are circumventing the ballot box to implement a radical ideological agenda,” DeSantis said in a statement on Monday.

Republican states face financial consequences for such measures, Henisz said, noting the higher fees charged by smaller financial institutions that forego ESG investing. Texas cities will pay between $303 million and $532 million in additional interest on $32 billion in bonds due to the state’s ESG ban, a Wharton School of Business study found in July.

“The cost to the taxpayers in these states will limit how far they go,” Henisz said. “It’s more rhetoric than reality in terms of how divided the financial services sector gets.”

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Peter Hall: Why companies should invest now, even if a recession is coming – Financial Post

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Canada has underinvested since the financial crisis and is now over-using labour to make up for it

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The first in a three-part series on why now is the time for companies to invest.

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Investing in big, new industrial projects right now might seem asinine to business strategists. Higher interest rates have everyone fixated on recession — not whether there will be one, but when and how deep.

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The prospect of a prolonged banking crisis piles on considerable risk. History suggests that these conditions cause business investment to dry up, remaining arid until it’s clear the economy has legs. At times like these, CFOs are supposed to be closing the vault to all visionary spendthrifts, conserving cash to survive the the big bad.

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But is that really where the economy is at?

Visionaries might counter that demand is where it should be, and that our current problem sits squarely with tight supply. Ergo, we need more industrial capacity to make sure that production can meet demand.

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Even if they’re right, that’s no easy feat — getting a building up usually takes more than a year from start to finish, sometimes several. More machinery is a quicker fix, if you can find a place to put it; but it is more than likely tied up in the supply chain snarls that it would be attempting to rectify. So, how can this possibly be an ‘investment moment’?

Since business investment in physical assets shouldn’t be, and on balance rarely is, a knee-jerk reaction to an instant development, then there must be good structural or longer-term reasons for this being an “investment moment.” It turns out there are not just one or two good reasons. In fact, there are enough that airing them requires more than a stand-alone article, which is why this will be the first of three on the subject. So, where do we start?

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Let’s first consider the possibility that we have underinvested since the global financial crisis (GFC). Most would agree that the global economy has on balance spit out sub-par growth since 2008, not really generating a convincing recovery. Then consider the bubble of activity that preceded the crash back in 2008. There was arguably a lot of pre-GFC investment to support the unsustainable level of production, excess that had to be re-absorbed before a true, new investment cycle could begin. Since that pre-event bubble was so huge, investment didn’t really need to ramp up for years — in fact, long enough that business in general might misinterpret it as a structural change, to a low-investment “new normal.”

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Drag that on for long enough, and when the economy is finally ready to ramp up, business capacity is years behind. There is a good chance that our post-COVID recovery is discovering just that. Suddenly, we need the capacity, but we can’t get there right away. The result? Inflation that’s not a temporary blip, as we were promised, but a nagging problem that in the absence of a supply-side fix, has us artificially suppressing demand. If this is true, monetary policy ought to be seen as a temporary rein, buying time for business to boost capacity. If they can handle the higher borrowing costs, that is.

If that seems like a stretch, consider that in Canada, business investment as a share of gross domestic product has been well below the long-term average for years — and that at a time of suppressed global growth. More importantly for global capacity, U.S. business investment as a share of GDP took a long time to recover post-GFC, and has not yet returned to pre-GFC levels. The case seems compelling: there’s a need for a significant rise in business investment to support the global economy’s present and future demands.

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A second and related point is that we appear to be over-using labour. It makes sense — when caught short, it’s far easier to add workers than to add plants and equipment (assuming the two are reasonably substitutable). Then, when it becomes apparent that labour is getting tight, business panics, and over-hires; better to have a healthy buffer of workers than to run lean and risk losing enough head count that lines or even whole operations get shut down.

This is far more visible than the investment situation. Everyone knows we have record-low unemployment in most OECD nations. In Canada, there is a higher number of employees for each unit of GDP, a feature of the post-GFC period. Compared with the long-term trend, a crude calculation has us employing 700,000 to 800,000 excess workers. Cut that in half, and it’s still huge.

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The flip side of this is labour productivity, which has swooned in recent years. The remedy isn’t to replace all of these workers with robots. But clearly we have a critical labour shortage, and business is generally desperate for remedies. Higher business investment would relieve this pressure, and free up workers for those other parts of the economy where tight labour supply is severely constraining output.

Labour constraints aren’t likely to improve. A third argument for higher investment is our structurally skinny demographic situation. Many are hailing Canada’s outsized immigration influx in 2022 as a cure to this chronic ill. Not so fast; immigration numbers were boosted last year by 607,782 non-permanent residents (we typically receive about 26,000), abetted by Ukrainians fleeing the war. We can’t (nor should we) count on similar future surges, unless we can be assured that it is possible to boost Canada’s regular immigrant intakes.

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There are plans to increase immigration to 500,000 per year; we’ve struggled in the past to get that number much above 300,000. I have argued elsewhere that as attractive as Canada is, there is increased competition from other population-constrained high-income countries; and increased competition from faster growth and the attendant opportunities in the home country.

  1. Sales of existing dwellings in Canada fell 38 per cent last year, according to the Canadian Real Estate Association.

    Housing’s hard stop spells trouble ahead for economy

  2. Canada’s unemployment rate is at a half-century low, while labour force participation is at a record high.

    This is how Canada can fix chronic labour shortages

  3. The Bank of Canada building in Ottawa.

    Bank of Canada’s awful medicine is what economy needs

A key means of securing our future is increasing capital’s contribution to output — which as a bonus, generally improves productivity. This is just a start — there are at least six more key reasons to hail this point in time as an investment moment. If the CFOs were twitchy after reading the first paragraph, they will now be in a full-blown sweat. This article’s three factors are reason enough to begin thinking about keeping the coffers open, and the dust off the blueprints. To be continued.

Peter Hall is chief executive of Econosphere Inc. and a former chief economist at Export Development Canada.

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Billionaire Barry Sternlicht Is Heavily Invested in This 15%-Yielding Dividend Stock for Steady Income Growth – Yahoo Finance

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Following multiple recent bank collapses, some on Wall Street estimated the Fed would step back from its by-now customary rate hikes when it convened to discuss its monetary policy last week. That did not happen, however, and Fed chair Jerome Powell announced another 0.25 percentage point rate increase.

One prominent investor thinks that was unnecessary and counterproductive.

“Obviously he (Fed Chair Jerome Powell) didn’t need to do what he did,” billionaire Barry Sternlicht said, likening the act to “using a steamroller to get the price of milk down two cents, to kill a small fly.”

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With regional banks already under severe pressure, Sternlicht, the co-founder and CEO of Starwood Capital, a hedge fund that oversees over $100 billion, believes the latest rate hike could potentially cause more damage to banks.

While Sternlicht is worried about the latest increase’s impact on the economy, going by one of his picks, he appears well-prepared to withstand any more rate hikes.

Sternlicht is invested heavily in MFA Financial (MFA), a dividend stock yielding a monster 15%.

MFA is structured as a REIT, a class of company’s long known for their high-yielding dividends. MFA’s portfolio is composed mainly of residential whole loans, residential and commercial real estate securities, and MSR-related assets.

As of the end of last year, MFA’s investment portfolio totaled $8 billion, although that declined from $8.3 billion at the end of 4Q21. Elsewhere in Q4, net interest income dropped by 20.7% from $70.15 million in the same period a year ago to $55.65 million. That said, at $0.48, adj. EP increased meaningfully from the $0.08 generated in 4Q21, and came in well ahead of the $0.30 forecast.

Of course, the most appealing aspect here is that sky-high yield. The quarterly dividend payout currently stands at $0.35, generating a yield of 15.3%.

That is no doubt attractive to Sternlicht, which has allocated 68% of his portfolio to his MFA holdings; he currently owns 10,638,539 shares worth $97.13 million.

Sternlicht is not the only one showing confidence in this name. Stephen Laws, an analyst at Raymond James, holds a positive outlook for MFA. His optimism is based on “selective new investments, conservative leverage, strong portfolio returns, and shares trading at ~80% of economic book value.”

“Given our outlook for attractive portfolio returns, an increased focus on business purpose loans, and the current valuation relative to our target, we believe the risk-reward is compelling,” the 5-star analyst further added.

As such, Laws rates MFA shares an Outperform (i.e. Buy) along with a $12.5 price target. This suggests the shares will climb 37% higher over the coming months. (To watch Laws’ track record, click here)

The Street’s average target is a little under Laws’ objective; at $12.33, the figure makes room for one-year returns of 35%. Rating wise, based on 2 Buys and 1 Hold, the analyst consensus rates the stock a Moderate Buy. (See MFA stock forecast)

To find good ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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First Republic Bank Stock: Why I Am Sticking To My Investment (NYSE:FRC)

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Anne Czichos

A couple of things have happened to First Republic Bank (NYSE:FRC) since I submitted a contrarian call to buy the community bank’s shares about two weeks ago. FRC stock has whiplashed ever since and the bank

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Source: JP Morgan

Source: JP Morgan

Source: First Republic Bank

Source: First Republic Bank

Source: First Republic Bank

Source: First Republic Bank

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Data by YCharts
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