The election of Joe Biden as the 46th President of the US, which was confirmed over the weekend, will create a “friendlier regulatory environment” for ESG initiatives in the US with re-joining of the Paris Climate Agreement, a focus on transition from fossil fuels to renewable energy, and income inequality all on the agenda for new policies.
Labelled in the media as the “Green President”, Biden surpassed the 270 electoral votes and secured the race for the Democrats on Saturday taking over from Donald Trump who has promised to take legal action in response to the results.
“It’s hard to know exactly what changes Biden will actually implement, particularly as it is unclear who will control the senate,” noted David Harrison, manager of the Rathbone Global Sustainability Fund.
“In the lead-up to any election, politicians can be known to be liberal with their promises. But we can say that almost any green policies Biden implements will be positive compared with his predecessor.”
Biden’s administration will “usher in an unprecedented boom for ESG investments”, according to financial commentators, with Biden already confirming the US will re-join the Paris Climate deal, which Trump pulled the US out of only last Wednesday.
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Guillaume Mascotto, vice president, head of ESG and investment stewardship at American Century Investments (ACI), said observers should expect a flurry of climate change activity under Biden.
“While the US will likely remain structurally divided on constitutional issues, under president-elect Biden, ESG observers may expect the US to re-join the Paris climate deal, restore methane/fracking regulation on domestic oil and gas drilling, and re-enact federal GHG emissions-reduction initiatives such as the Clean Power Plan.
“Biden’s stance on climate change is also likely to be echoed by a Democratic-controlled Congress, resulting in a strengthening of the federal government’s role in energy and environmental policy. While the appeal of investing in intermittent renewable energy assets will continue irrespective of regulatory developments as technological learning curves improve, an abrupt switch away from fossil fuels is likely to be limited as a result of continued low natural gas prices, infrastructural obstacles and possible push-back on behalf of a Republican-controlled Senate.
“At the same time, Biden has voiced his support to promote a gradual energy transition, in which natural gas (and by extension the controversial practice of fracking) is likely to remain categorized as a “transitional fuel”. As such, we believe the focus on environmental protection and operational health and safety will continue to be material issues at the forefront of the fracking debate.”
Rathbone’s Harrison also noted Biden’s climate plan is worth around $2trn focusing on renewable infrastructure, next-generation grid technologies and electric vehicles.
“At the top level, the big change would be a more coordinated federal government approach to climate change, instead of individual states taking charge of their own plans. Biden has also said that he plans to re-join the Paris Climate Accord; a move which would likely be welcomed by the whole world. Re-joining the agreement would give the US a net-zero target which would have significant implications for the de-carbonisation of the economy. At the moment, the US is one of the only major countries not to have a net-zero target and the country’s lack of involvement in net-zero plans globally is a real concern.”
With any opportunities opening up, Nigel Green, chief executive and founder of deVere Group, said “Biden’s administration will usher in an unprecedented boom ESG investments” for two key reasons.
“First, the next US President – the CEO of the world’s largest economy – and his vice-president Kamala Harris, actively championed on the election trail and before, values that have an inherent synergy with ESG-orientated investments.
“They campaigned on issues including climate change, social justice, equality, diversity, human rights and corporate transparency and accountability.
“On many issues, particularly those relating to the environment, the Biden administration is aiming to reverse many policies established by Trump.
“For instance, Biden has promised to bring the US back into the Paris Agreement, the multi-nation pact to combat climate change, on day one of taking office, and called for a transition in America from fossil fuels to renewable energy.
“Such campaign issues will now likely become policy.”
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Disclosures
Green goes on to add: “Second, it is probable that US rules surrounding ESG investing and corporate disclosures will now come into line with those of Europe – something Trump fiercely opposed.
“If the rules on ESG investing are matched and agreed upon, and an international standard and framework brought in, we can expect further institutional investment piling into the ESG sector.”
Regulation
Rules, such as the Department of Labor’s proposed requirement on limiting ESG investment options for pension plan, are also likely to be reviewed.
“This corresponds with deep shifts in investor mindset and the growing linkage between ESG issues and their economic impacts,” said ACI’s Mascotto.
In the report Decision 2020: What the apparent Biden victory means for the markets and investors, Nuveen’s global investment committee said the Biden administration will create a “friendlier regulatory environment for investors and issuers with policies focused on climate change, carbon reduction and income inequality”.
“We are also focusing on regulatory changes by the Department of Labor that could make it more difficult to include ESG strategies in retirement accounts. We think these sorts of limitations would be a mistake and would hurt Americans’ abilities to save for their retirement. These sorts of shifts would be examined closely, and addressed to the degree possible, with a Biden-appointed Secretary of Labor taking the reins next year.”
The team pointed out investments into real assets will benefit including natural resources, including forests, infrastructure investments tied to sustainability and climate change, and industrial real estate-oriented around production on-shoring.
Circular economy
Mascotto added the top ESG issue in 2021 and beyond will be the implications of transitioning toward a circular economy.
He commented: “The key challenge for the Biden administration will be to maximize the incentives to scale advanced and knowledge-intensive renewable energy/closed-loop solutions while balancing social and economic considerations. Ultimately, adapting our system to address this issue can be achieved only through a sustained effort on the part of business leaders, policymakers, and their constituents to redefine traditional measures of productivity, wealth and well-being.”
DeVere CEO Green also noted the “biggest-ever generational transfer of wealth – likely to be around $60trn – from baby boomers to millennials, is to take place in the next couple of years.
“As such, ESG investing is set to grow exponentially in the 2020s,” he said.
“Biden has bold plans that perfectly square with ESG investments – an already burgeoning market. We can expect the boom to intensify further.”
