As expected under a Biden presidency, the US has re-entered the Paris Climate Accord, with President Joe Biden signing an executive order on his first day in office.
If that wasn’t enough, the administration went even further by also pledging to spend $2trn to achieve a zero-carbon power sector by 2035. So yes, the concerns surrounding ESG reporting and investing are undoubtedly back on the business agenda in the US, the world’s largest economy, and looks here to stay.
As a presidential candidate, Biden made the case for a transition strategy from fossil fuels to clean energy, with specific mention of a stepwise approach to achieve lower carbon emissions while preserving energy supply and energy jobs. Biden attempted to separate himself from the Green New Deal while also doubling down on his commitment to address climate change. The consequences will be wide-ranging and will likely include promotions of renewables and limitations on conventional sources within the oil, gas, and utility sectors, but it will also signal capital markets to do more.
An even bigger impact is likely to be felt in financial services, particularly within the asset management sector. Prior to the Biden administration taking office, ESG factors already appeared top of the agenda for most legitimate global asset managers, with many aggressively on the front foot in relation to ESG.
News of sustainable fund launches or enhanced integration of ESG factors in investment strategies including adoption of climate change risk have been commonplace over the past few years. One good indicator for the size of this trend is the overall value of assets managed against sustainable investment objectives.
Fast forward to today; legislative policy is set to play a greater role in the direction of travel of what ESG is, and how it can be effectively applied worldwide, with the Biden administration looking to lend more support through regulatory guidance changes and executive orders.
From what we know thus far, we can already ascertain that there will be a divergence, however subtle, in approaches between US and European regulators to issues like ESG.
One of these differences will be over who should set the gold-standard for ESG reporting.
In the US, there has always been a bias toward laissez-faire open markets, in contrast to regulatory rule setting. The overwhelming criticism of the original US Department of Labor (DOL) rule made this clear, with the collective industry response pushing back on the government’s ‘overreach’ in so far as appearing to try to ban “non-pecuniary” factors such as ESG and climate change risk in the investment process. The revised version pulled back from this original position but may still reveal a US bias that these non-pecuniary factors must not infringe upon a fiduciary’s responsibility.
This is not the case in the UK and the EU, where non-pecuniary factors like ESG and climate change are increasingly seen as being as important as pecuniary factors when related to potential long-term investment performance and a broader vision of an investment manager’s mandate.
The tension between these two approaches, pan-Europe versus the US, will be interesting to watch. The race between different ideologies normally results in some form of friction, with the dominant player’s ideology being most influential in the long run. One aspect to pay attention to is how the US and Europe differ in their vision of the climate change problem. To be clear, there is now a much greater acceptance in the White House and throughout the Biden administration that climate change is an existential threat. But the US view may differ over the underlying problem making it one of a lack of innovation.
In its newly rediscovered desire for global leadership, it’s likely that where the U.S. leads, others will follow given the prospect of a greater global consensus around climate change.
Restoring science to tackle climate change is a point to highlight. President Joe Biden signed a flurry of executive orders, including one titled Protecting Public Health and the Environment and Restoring Science to Tackle the Climate.
These early indications provide us with some clues to the new understanding of ESG emerging from the US – that ESG for ESG’s sake will not cut it. It’ll likely be increasingly incumbent on those integrating this approach into their investment processes to explicitly disclose and demonstrate just how their methods can lead to higher returns and greater impact toward a sustainable future.