ESG and the Biden Administration
By OSAM Research Team
Every presidential transition leads to a slew of policy rollbacks and new legislation. Early signs suggest ESG related policy will be an important theme to follow. Apart from Covid-19, environmentally focused regulation and infrastructure may be President Biden’s highest priority. While campaigning he committed to a 100% clean energy economy with net-zero emissions by 2050, and in his first day in office, Biden reentered the Paris Agreement. Though only time will tell how his plans unfold, we offer some areas to keep an eye on and how they can potentially impact investors.
ESG Investing and Retirement Plans
Within the last two weeks the Department of Labor announced it would not enforce the previously drafted legislation limiting ERISA plan fiduciaries from utilizing “non-pecuniary” environment, social, and governance factors in their investment decision making and proxy voting. The commitment of asset managers, labor organizations, and consumers to question the previously drafted legislation could be a leading indicator for increased emphasis of ESG factors in future portfolio construction. Where legislation eventually nets out regarding employer-sponsored retirement plans remains unknown, but for the time being, it feels it will fully support ESG decision making.
Transparency and Data
If we are to achieve net-zero emissions by 2050, standardization in reporting and enforcement of disclosure on climate risks and the environmental impact of company operations seems necessary. It will be interesting to monitor how regulation and policy are used to hold public companies responsible for their contributions to the net-zero goal. Accordingly, mandating disclosure of key metrics (inclusive of social and governance requirements) could lead to a universal dataset and subsequently improve ESG research. Regardless of one’s interests in ESG investing, consistency in data is beneficial.
Industries to Follow
President Biden has suggested a few environmental areas of focus as part of his Clean Energy Revolution: federal infrastructure, water, power, and transportation. Changes in policy including powerful incentives could bode well for agriculture, utilities, auto/transportation, technology, and manufacturing companies focused on carbon emission reduction and “green” appliances and infrastructure. Beyond environmental, Biden has voiced commitment or signed early actions to advance racial equity, inclusivity, and labor relations with specific attention on urban development, private prison reform, and combating xenophobia. As regulation rolls-out, corporations respond, and consumer preferences adjust, it will be fascinating to see if ESG tailwinds present themselves.
ESG sentiment and demand is increasing in the United States. 2020 was the largest year of ESG flows on record and many ESG funds performed well relative to their traditional peers. Though it’s unclear how Biden will rollout his environmental and business plans, it feels safe to assume that ESG-minded companies may be in a favorable starting position. Given current trends and Biden’s suggested priorities, investors should not be surprised to see greater attention and demand on companies with more sustainable and equitable business practices.
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Please Note: Socially Responsible Investing Limitations. Socially Responsible Investing involves the incorporation of Environmental, Social and Governance considerations into the investment due diligence process (“ESG). There are potential limitations associated with allocating a portion of an investment portfolio in ESG securities (i.e., securities that have a mandate to avoid, when possible, investments in such products as alcohol, tobacco, firearms, oil drilling, gambling, etc.). The number of these securities may be limited when compared to those that do not maintain such a mandate. ESG securities could underperform broad market indices. Investors must accept these limitations, including potential for underperformance. Correspondingly, the number of ESG mutual funds and exchange traded funds are few when compared to those that do not maintain such a mandate. As with any type of investment (including any investment and/or investment strategies recommended and/or undertaken by OSAM), there can be no assurance that investment in ESG securities or funds will be profitable, or prove successful.