April 8, 2022

Thought of the Week:

Today’s ‘thought of the week’ is not so much a thought but a question, or more accurately, a series of questions. There’s no doubt that economic and geopolitical issues will be top of mind for voters in the coming mid-term elections, but cultural questions, both new and old, are sure to garner attention as well. With an eye to energizing their bases, conservatives and progressives see little downside to fanning polarizing issues. What’s more, the Supreme Court is set to stir things up further with upcoming decisions on a range of controversial issues. Among the cultural flashpoints that are expected to fight for voters’ attention are: abortion, critical race theory, Covid mandates, January 6, concealed carry weapons, and ‘don’t say gay’ bills. Maybe even more interesting than the political debates over these and other cultural issues, is the question of whether companies’ have any responsibilities in the face of such debates within liberal society. Do corporations have any responsibility to uphold the democracies they exist within, and if so, what is the best way for them to do so?  In recent years, liberal democracy has been shaken to its core: Russia’s invasion of Ukraine; the January 6th attack; and an ever widening partisan divide. In addition to the political reactions to these events, corporations took their own actions—brands from BP to Nike have pulled out of Russia; in the wake of the U.S. Capitol attack, Twitter banned President Trump; and many companies suspended corporate political donations to politicians who voted not to certify the 2020 election. There is no arguing the fact that the world’s largest companies are in a position to influence individuals, groups, and nations. Consider that Apple’s market capitalization is greater than 96% of country GDPs and Microsoft’s capitalization exceeds the GDP of such nations as Brazil, Canada, and South Korea. Similar comparisons could be made about many of the world’s biggest companies. A debate is emerging about whether unelected corporations should use their influence to sway cultural, political, and geopolitical issues. Beyond the philosophical question, there is a recognition that economic benefits can be had by taking a stand on select issues; consider that recent polls suggest that more than 70% of young consumers are willing to pay more for brands they feel align with their values. As democratic, cultural, and geopolitical issues become more central to people’s lives, corporate leaders may be forced to struggle with questions such as:

  • Should business leaders take collective action in defending democratic principles and institutions?
  • Do companies and corporate leaders need to prepare to be more proactive on democracy?
  • How should corporate political responsibility be defined?
  • What impediments will business face in taking on a greater role in supporting democracy and how can these be addressed?
  • Should tech companies do more to ensure they do not become platforms for extremism?
  • Is it democratic for corporate organizations to act without direction from elected government officials?

Thought Leadership—from our Associations, Think Tanks, and Consultants:

Climate Change Creates Financial Risks; Brookings Says Investors Need to Know What They Are. The U.S. Securities and Exchange Commission (SEC) voted to move forward with a proposal that would require publicly traded companies to disclose the financial risks they face from climate change. The rules would aim to bring corporate obligations for the disclosure of climate risk level with the requirements for disclosure of other forms of financial risk. According to the SEC, doing so is a critical step to ensuring investors have access to information about the investment risks faced from climate. Such financial harms may include “transition risks” stemming from shifts in innovation, technology, and competitive landscape as well as “physical risks,” such as more severe wildfires to more frequent flooding. The SEC believes that the consequences of climate change are creating new and growing forms of financial risk that investors need to consider when choosing how to allocate capital. In the last two years, the U.S. suffered more than 40 weather disasters that inflicted at least $1 billion in economic damage each, and a recent study found that 215 of the world’s largest companies face almost $1 trillion in climate-related risk. The thinking goes that disclosure is necessary because climate risk is investment risk, and market participants have a significant interest in understanding the size and scope of that risk. Other countries—the U.K., New Zealand,  Japan—have taken concrete steps to require that the potential harms from climate change are proactively identified and understood by their financial systems. In fact, the investment community has been among the most vocal in calling for the SEC to act. 93% of institutional investors believe that climate-related financial risk has yet to be priced in by all key financial markets globally, and many of the world’s largest asset managers have called for mandatory climate disclosure rules to improve their ability to manage investments. Publicly-traded businesses that would be subject to these rules have also expressed support for mandatory SEC climate disclosure rules.  

Trade Analyst Laura Chasen Highlights the Supreme Court’s Section 232 Decision. The Supreme Court decided not to hear an appeal filed by Transpacific Steel LLC and two other companies that asserted there are limits to a President’s Section 232 tariff authority. Last November, Transpacific, together with Jordan International Co. and Borusan Mannesmann, lost at the U.S. Court of Appeals for the Federal Circuit, in a 2-1 ruling. It appealed that decision to the Supreme Court, which resulted in this week’s denial. Of the several cases filed against the Trump administration’s unilateral tariff actions, this was the one that had made the most progress. The case challenged President Trump’s decision to double the Section 232 tariffs on imports of Turkish steel, a move that prompted Transpacific and others to file a lawsuit at the U.S. Court of International Trade. They argued the duties were illegal because they were imposed too long after the original Section 232 presidential decision that first imposed the duties.  While the companies sought a refund for duties paid, the case had broader implications beyond the specific duties in question, touching on whether a president’s authority to impose “national security” tariffs has limits. The plaintiffs won at the CIT, but the government appealed to the Court of Appeals, which reversed the victory—a reversal that has now been upheld by the Supreme Court’s decision. This leaves in place an expansive view of presidential authority over trade with national security implications.

Inside U.S. Trade Reports on President Biden’s Use of the Defense Production Act (DPA) to Secure the U.S.’s Critical Mineral Supply. President Biden invoked the Defense Production Act of 1950 to spur domestic output of critical minerals; the goal being to reduce U.S. reliance on China for key inputs for clean energy technologies. The action is part of a two-part plan to address rising energy prices amid Russia’s invasion of Ukraine while supporting the U.S.’s transition to clean energy over the long term. A White House fact sheet describes the first part of the plan as providing an immediate boost to domestic oil supplies, followed by an effort to achieve lasting American energy independence that reduces demand for oil and bolsters a clean energy economy. As part of the effort, use of the DPA will support the production and processing of strategic and critical materials used in large-capacity batteries, such as lithium, nickel, cobalt, graphite, and manganese. The DPA provides the president with the authority to support domestic industrial capabilities essential for the national defense.

Observatory Group’s Take on the Fed’s March Minutes. Although most of the content was about balance sheet reduction, observations about the Fed’s policy rate outlook underscored their urgency to raise rates more quickly compared to past policy cycles. The March minutes confirm the Fed’s willingness to move the policy rate ‘expeditiously’ and that 50 bp moves (note the plural) could be appropriate, particularly if inflation pressures do not abate. Many policymakers said they were ready to do so at the March meeting but agreed that the unsettled environment just after Russia’s invasion of Ukraine made a more cautious 25 bp move the right choice.  In other words, the case for 50 bp moves has been made and only new developments might deter 50 bp moves in the near future. This reinforces expectations for a 50 bp hike at the May meeting and another 50 bp move at either the mid-June or late July meeting, with a 25 bp increase at any meeting a 50 bp move is not chosen. What may have been the most interesting part of the comments on a tight policy stance is that it appears to refer to all policymakers, not just some.

In Other Words (Quote): 

“The press often will ask me if I think Donald Trump is crazy. And I’ll say it this way: I don’t think he’s so crazy that you could put him in a mental institution. But I think if he were in one, he ain’t getting out.” – New Hampshire Gov. Sununu (R) at this past weekend’s Gridiron Club dinner.

“There are three kinds of days here. There’s ‘West Wing’ days, when we do some really cool stuff. There’s ‘House of Cards’ days, where the place just seems like it’s falling apart. Then there are ‘Veep’ days. Today’s sort of a ‘Veep’ day. The fox bites Ami, Fred’s leaving. It just sucks.” – Rep. Kildee (D-MI) comparing Capitol Hill to famous TV shows after a fox bit Rep. Bera (D-CA) and Rep. Upton (R-MI) announced his retirement.

Did You Know:

Michigan Democrats will lobby the national party to make their state the location of the first presidential nominating contest in 2024, challenging the election-year status of Iowa, New Hampshire, Nevada, and South Carolina. The effort is the first time a new state has made a play to shake-up the early-voting order that has ruled presidential nominating contests for more than a decade.

GRAPH of the Week:

4,975 Earmarks Were Tucked into the Fiscal 2022 Government Funding Bill. For the first time in over a decade, appropriators allowed lawmakers to request official funding for specific projects in their states or districts. While Congress barred earmarks in 2011 after several scandals highlighted abuses in the process, it now appears that legislators in elections that could decide control of Congress are embracing the practice as a way to woo voters.

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