The Impact of a Biden Administration on ESG Investing
As a new political era dawns for the United States, what impact will the new administration have on ESG investing?
Will Bryant, Head of Advisory
This week marks the inauguration of Joe Biden as the 46th President of the United States. The transition from the Trump administration to the Biden administration will no doubt have a significant impact on the progress of several social and environmental issues.
Joe Biden has publicly supported issues around diversity and climate change abatement and has set ambitious targets for the US to have a carbon-free power sector by 2035. In one of his first tweets after the election, Biden committed the US to re-join the Paris Climate Agreement, and made John Kerry, who led the US in brokering of the agreement, the US climate envoy.
With the recent Democrat victory in the Georgia senate race, democrats will hold the White House, the Senate (with two Independents caucusing with the Democrats) and the House of Representatives. This position will boost Biden’s ability to pass legislation.For the investment community, there is an expectation that Biden will push the US on to a course that will be more accommodative to the inclusion of ESG factors in the investment process. There have been several rules and guidance published in recent years that have hampered the progress of ESG investing in the US. A couple of examples are below:In October 2020 the Department of Labor (‘DoL’) finalised amendments to ERISA investment regulation, removing the ability for fiduciaries to consider ‘non-financial’ objectives within the investment decision making process, impacting the ability to incorporate ESG into the investment options of millions of American retirees. This rolled back on guidance that was provided in DoL Interpretative Bulletin 2015-01, under the Obama administration, that recognised that ESG factors should be considered by a fiduciary.In July 2020 the SEC made changes to the Exchange Act 14a-8, which will likely hamper an investor’s ability to submit shareholder proposals. Proxy advice regulation has also been changed leading to reduced independence of the proxy recommendations. Furthermore, the DoL has put in place rules around ERISA fiduciary duty and proxy voting, such that there is a greater cost-benefit analysis required for any votes not in support of management. These actions make engagement through proxy voting more burdensome for investors and potentially reduce the ability to support social, environmental or political issues.
One interesting thing off the back of the changes in rules has been the response from the investment community. Overwhelmingly both institutional investors and asset managers have reacted negatively to these amendments. Similar to the reaction by individual states and cities when President Trump took the decision to withdraw the US from the Paris Climate Agreement, which was mostly for them to continue to fight climate change and drive towards a cleaner energy solution, so individual investors have continued to further their ESG integration journeys. Focus on financially material ESG integration has been increasing significantly across a range of investor groups such as public pension plans, endowments, foundations and high net worth platforms.However, in the conversations that I have had over the years with global investors around the topic of ESG, the one group that has been absent has been the US corporate ERISA plans. Many pro-ESG-integration US investors look to the support that is offered by the regulatory framework in Europe, Australia, Canada, and elsewhere that places ESG risks within the decision-making process for fiduciaries, as something that is required in the US for further progress to be made.Within the alternatives space there has been a significant increase in awareness of the need to have in place a suitable policy that governs ESG integration within the investment process. If the ERISA investment group also came on board and asked their fund managers for greater integration of financially material ESG data in the investment process this would likely further catalyse broader integration across fund manager’s investment strategies.While many will be looking to the new administration to pivot the US in a different direction from the course that has been chartered over the last four years. Those of us in the ESG investment space will be closely looking to see how accommodative and supportive the new administration is when it comes to endorsing ESG in the investment decision making processes. Furthermore, we will be looking to see what actions the administration can take, via the appropriate agencies, to initiate guidance and regulation around definitions and disclosure requirements at the company level and subsequently at the investment portfolio level.Get in touch at info@northpeakadvisory.com if you would like discuss how you can spark lasting change within your firm.