Sustainable investing: Has Biden got the green light?

Joe Biden is keen to prioritise tackling the climate crisis as part of his presidency. Yet for financial markets, the impact could reach much further – stimulating sustainable investment both in the US and across the world.

Overview:

  • President Biden’s inauguration in January paved the way for an anticipated new era of US engagement in tackling climate change.
  • The new administration has already rolled back many of Trump’s government initiatives, including rejoining the US to the Paris Agreement.
  • With recommendations to make it harder for retirement plans to invest responsibly now being re-evaluated, it’s believed that the US can trail-blaze endeavours to form an international framework of sustainability standard.

 

Investors concerned with climate change and responsible investing were accustomed to managing their expectations when Donald Trump headed the White House.

During Trump’s one-term presidency, the US disassociated itself on many fronts in the fight against climate change, provoking despair amongst investors. Such measures included the withdrawal from the Paris Agreement, the backing of fossil-fuel expansion, the relaxation of emissions standards, and suggested financial regulations discouraging investments based on environmental, social and governance (ESG) criteria.

Once Biden was inaugurated in January, there was a surge in expectations that the US would proceed to reverse Trump’s legacy on climate change. The handover took place as the amount of money invested in sustainable funds experienced new highs, with 2020 flows more than double the previous year’s record.1

The next chapter started well – the new President swiftly reinstated the US to the Paris Agreement, moved to end construction of the contentious US–Canada Keystone XL pipeline, and shelved new oil and gas permits on public land. Biden is also set to attend the critical COP26 climate-change conference in Glasgow later on this year, plus the US hosted a virtual precursor summit with 40 world leaders in April.

That begs the question of whether the change of leadership will transpire to be a boost to sustainable investing…

Going, going, green

Reverting to the Paris accord was just one of several actions that was both instant and favourable. Biden was able to implement such straightforward measures early on in his presidency.

There are many other points that the US appears to be ready to action in order to boost sustainable investing. For instance, last year the Trump administration concluded its ‘Financial Factors in Selecting Plan Investments’ proposals, which would entail retirement plan managers prioritising economic interests over other goals, including sustainability criteria, despite massive opposition from investors and asset managers.2

In his first week in office, Biden signed an executive order to review the ruling – raising hopes that it will be revoked.

Furthermore, the new administration has proposed plans to demand increased boardroom transparency regarding environmental risks.

However, naturally there are hurdles to overcome in attempting to bolster green initiatives and sustainable investing. The wafer-thin majority means that Republicans (and some Democrats) – those who represent states in which fossil-fuel industries are commonplace and powerful – will oppose climate-change initiatives. There’s also an element of climate-change scepticism within the Senate, which contributed to President Obama’s failure to pass climate-change legislation during his eight-year term.3

Soft reigns supreme

For investors concerned with sustainability, the Biden administration may have an impact via less direct measures. For instance, a US government with a more mellow stance about cross-border movement of both capital and personnel means regulatory barriers are easier to overcome and different jurisdictions are better able to collaborate in tackling environmental problems that go beyond geography. The new government is also shining a brighter spotlight on social justice and addressing the issue of wealth inequality.

Sustainability standards, data and knowledge are currently divided, with varying interpretations and rules across the globe helping to oppose investor awareness of ESG – in a recent study by The Wisdom Council, only 15% of participants said they had heard of ESG.4

However, according to this research, the vast majority of investors expect the investment industry to do the right thing by investing responsibly and endeavouring to tackle environmental challenges, while delivering returns.

The more far-reaching effects of Biden’s ‘soft power’ in the US should help to meet those expectations for certain. Initiatives are in motion to make retirement plans more ESG-friendly – including a U-turn on the proposals that would have biased retirement plans against sustainable investing. Asset managers are therefore more likely to drive their investments in other countries to conform, too.

While ESG legislation is already advanced in the UK and Europe, it’s anticipated that Biden’s government could spur a critical framework of international standards and kick-start progress in sustainable investing.

 

This is an edited version of a Raconteur article by Alasdair Lane that appeared in a Sustainable Investing report distributed in The Sunday Times.

 

Like the environment, the climate is changing in financial markets too. Here at Wellesley, we believe that by investing responsibly, we can all play our part in working towards a more sustainable future.

 

Sources:

1 CNBC, Money invested in ESG funds more than doubles in a year, 11 February 2021
2 MarketWatch, Trump labor department’s rule discouraging ESG investing in retirement plans is finalized over swell of objections, 31 October 2020
3 CNBC, Biden’s climate change agenda will face big obstacles with evenly divided Senate, 30 January 2021
4 “Responsible Investment – pushing on an open door”, The Wisdom Council, Jan 2021, 2,067 UK consumers

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