The Transition to a New Administration: What This Means for ESG Investing
In November, the United States came out in record turnout for our 59th presidential election, electing former Vice President Joe Biden as the 46th President of the United States. As today marks Biden’s inauguration, we reflect on what a Biden administration could mean for the future of Environmental, Social, and Governance (ESG) investing.
On the campaign trail, Joe Biden has said a lot about increasing financial regulatory oversight of “Big Business” and pushing harsher standards to address climate change. As a result, we are expecting to see potential changes to the Securities and Exchange Commission (SEC) requiring ESG disclosures and enhanced ESG reporting.
This regulatory momentum from a Biden administration could continue a shift in positive ESG sentiment that we are seeing in the United States. According to the CFA Institute, across 2020 we’ve already seen a shift among investors towards a greater focus on ESG risks and sustainability due to the COVID-19 pandemic with some even calling 2020 the “tipping point” for ESG.
A survey of CFA Institute members found that 85% of their members take ESG into account when investing, which is up from 73% in 2017. According to the report, this increase is due to the fact that the pandemic has exposed the “vulnerability and resilience of the financial system”. As a result, we can expect to see increased discussion and prioritization of sustainability moving forward, especially with further regulatory momentum from a Biden administration.
All of this could help bring ESG investing from the margins and into the spotlight as a mainstream investment feature as opposed to the niche investment strategy it is often seen as today.
Yet, these changes remain speculative given that the path forward for a Biden administration hinges on two main factors:
- How centrist or left-leaning the Biden administration plans on being to either focus on bridging the divide between party lines or embracing the more progressive side of the Democratic party.
- How much challenge a Biden administration receives from the Republican side of the Senate. However, with the Senate’s balance of power at 50-50 following Democrats Jon Ossoff and Raphael Warnock’s wins in Georgia, there will be far less resistance to his legislative agenda.
Increased regulatory oversight
A Biden administration could mean increased federal regulation of business and finance. Some of Biden’s selections for his administration could signal a harsher stance on regulatory oversight moving forward including Secretary of Treasury Janet Yellen, Attorney General Merrick Garland, and potential candidates for chairman of the SEC, including former Commodity Futures Trading Commission chair Gary Gensler.
While a Clayton-led SEC was known for a very strong enforcement program with a focus on “Main Street” fraud, a Biden administration SEC Chairman appointee could most likely take this a step further by making enforcement of financial institutions and Wall Street a bigger priority. Additionally, Biden has made promises that the Department of Justice (DOJ) would create an Environmental and Climate Justice Division to “more aggressively address climate change and other environmental issues” during his time in the presidency.
Biden has also called for “an end to the era of shareholder capitalism — the idea [that] the only responsibility a corporation has is to its shareholders.” Given his campaign promises and previous political history, we can expect Biden to align with labor unions and push for the support of middle and lower-class Americans over “Big Business”.
This means that “Big Business” should not be looking for a friend in Biden. Exactly what this means and how strong of a stance the Biden administration will take is still speculation given the factors mentioned above. However, we should expect increased regulation of the financial services sector with a Biden administration, with a special emphasis on big business’s impact on the consumer.
Climate change and climate risk in the financial sector
So how does increased federal regulation impact ESG investing? As part of the increased regulation of the financial services sector that we expect as part of a Biden administration, this means major changes for how the SEC defines ESG and enforces ESG-related risk disclosures.
Anne Sherry, a writer and analyst at Wolters Kluwer Legal & Regulatory U.S., indicates that “a Democratic-majority SEC is likely to call for specific, data-driven disclosure in the areas of climate impact, human capital, and diversity.”
This push towards ESG-related risk disclosures is very likely in a Biden administration due to Biden’s repeated calls for identifying and addressing risks associated with climate change. While the Trump administration has been known for dismissing climate change and several key federal posts in the Trump administration were led by climate change deniers, the Biden administration has promised the exact opposite.
For Biden, climate change and environmental issues are at the top of his priority list. As a result, one of Biden’s plans while in office is to set emission standards and then hold companies accountable for meeting them. Biden plans on doing this by establishing “an enforcement mechanism to achieve net-zero emissions no later than 2050.” His proposed DOJ Environmental and Climate Justice Division would most likely play a key role in enforcing these standards, as well as a financial kick start in the form of a $40 billion unused Department of Energy loan from the 2009 stimulus.
While Biden may face strong opposition to some of his more progressive climate change goals in the Senate, we believe he has a good chance of success in a Democratic-led SEC. As an independent agency with five Commissioners appointed by the President, the SEC under Biden could realistically mandate climate disclosures for public companies who aren’t currently publishing climate reports.
Biden himself has spoken about his plans for risk disclosure. We likely can expect under his administration and under a Democratic-led SEC to see further movement towards diversity, human capital management, and climate change-related risk alerts, guidance, and rulemaking. This means that businesses would need to become familiar with ESG risks, rules, and regulations and would be required to disclose how these risks affect their bottom line.
The ESG data challenge
ESG and climate risk data has historically been confusing to navigate. This is a big result of the federal government’s lack of any kind of consistent or standardized framework for companies to follow, leaving the disclosure details entirely up to the companies themselves.
While many companies do voluntarily disclose information regarding ESG risks and sustainability, it is not a requirement that the federal government has ever mandated. Although we believe that ESG data is trending towards diffusion as opposed to convergence, government regulation through a Biden administration could be the first time such disclosures would be required as opposed to voluntary. This step towards regulation could help push for further accuracy in ESG data and move ESG further forward into the mainstream.
Although ESG data is subjective and we can’t rely on the government to create any kind of universal ESG framework, nor would we want it to, the Biden administration monitoring ESG risk and mandating climate disclosures is a welcome shift for ESG.
Enforcing ESG-related risk disclosures
Exactly how far a Biden administration will go when it comes to disclosures of climate risk remains to be seen for the next four years in office. Other political leaders have pushed for far greater regulation of climate risk.
For example, a 2019 Democrat-backed bill led by Rep. Sean Casten of Illinois and Sen. Elizabeth Warren of Massachusetts called the Climate Risk Disclosure Act would “require that companies report their direct and indirect greenhouse gas emissions and their fossil fuel-related assets.” This is a far bigger step than simply mandating climate risk disclosures for companies, but we can only speculate on exactly what stance Biden would take on this while in office.
While the level of regulation is to be determined, we may see changes across the next few years, whether they be at the state or federal level, regarding expectations of climate disclosures for companies.
According to experts, this move to regulate disclosure of ESG and climate risks of publicly traded companies could “help companies, investors, and regulators make better-informed decisions and pursue decarbonization targets.” This is a move in the right direction for ESG investing. For everyday investors and advisors, this allows for easier prioritization of non-financial impacts alongside financial returns.
As Steven Rothstein, Managing Director of the Ceres Accelerator for Sustainable Capital Markets, states, “Like anything in business, what gets measured gets managed. Whether it's the president of the United States or of a company, you can't set a goal if you don't have the numbers."
The push for ESG
According to PwC Luxembourg’s first European Sustainable Finance Series report, the numbers around ESG data reporting are only going to continue to grow and be measured. According to the report, ESG investing is the growth opportunity for the century. What started as a trend has moved to be one of the biggest revolutions in the European fund industry, with the U.S. behind playing catch-up.
A Biden administration will certainly move the U.S. farther forward in the world of ESG investing. As companies are mandated to provide certain levels of transparency into their business practices, the ESG space will benefit from this added layer of accountability. For companies — and investors alike — there is a lot to look forward to with an administration that increases this attention on the ESG space.
The first is the positive domino effect of companies being rewarded in the markets for their improved corporate citizenship. As other companies may likely follow suit, this could lead to a compounding effect where more and more businesses may prioritize their sustainability and Corporate Social Responsibility (CSR) efforts.
These companies are ultimately going to be much better off financially for improving these aspects of their business, so increased ESG regulations might just be the dose of good medicine that they need to succeed long-term. Some are already seeing the positive effects of a Biden administration before he even steps in office with some ESG companies soaring in the market in anticipation of a President who will prioritize green business.
Secondly, as we’ve mentioned, we know that Biden’s proposed economic plan includes massive amounts of funding for the energy transition. This will create direct financial incentives for companies and industries to transition to lower carbon emissions, and in some cases, including direct cash rebates or investment and directly sponsoring new job creation.
This can only be good news for companies who know that becoming more sustainable increases their shareholder value, but might not have had the resources, or the courage, to make such a big lift in a previous administration. As for investors, these changes are also a win for more accessible ESG data and investing that makes non-financial impacts a priority alongside financial returns.
Additionally, as public awareness of ESG investing continues to grow in the U.S. due to societal shifts and increasing climate crises, the Biden administration is certain to push ESG to the top of their priority list. While the regulatory shift in EU policymakers has been ongoing, with the Biden administration, the U.S. can join the ESG global momentum and start to embed ESG as a key part of the investment landscape, as opposed to a singular product.
While the exact landscape of a Biden administration won’t be clear until he steps into the White House, we speculate that the next four years will leave us with a stronger stance towards addressing climate change and harsher regulation on ESG climate risk disclosure. As a result, 2021 could become the year of ESG in the U.S. as the trend shifts into a lifestyle for both businesses and everyday consumers.