ESG and the Biden Administration

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.

Conclusion

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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The material contained herein is intended as a general market commentary. Opinions expressed herein are solely those of O’Shaughnessy Asset Management, LLC and may differ from those of your broker or investment firm. 

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by O’Shaughnessy Asset Management, LLC), or any non-investment related content, made reference to directly or indirectly in this piece will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this piece serves as the receipt of, or as a substitute for, personalized investment advice from O’Shaughnessy Asset Management, LLC. Any individual account performance information reflects the reinvestment of dividends (to the extent applicable), and is net of applicable transaction fees, O’Shaughnessy Asset Management, LLC’s investment management fee (if debited directly from the account), and any other related account expenses. Account information has been compiled solely by O’Shaughnessy Asset Management, LLC, has not been independently verified, and does not reflect the impact of taxes on non-qualified accounts. In preparing this report, O’Shaughnessy Asset Management, LLC has relied upon information provided by the account custodian. Please defer to formal tax documents received from the account custodian for cost basis and tax reporting purposes. Please remember to contact O’Shaughnessy Asset Management, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, or modify any reasonable restrictions to our investment advisory services. Please Note: Unless you advise, in writing, to the contrary, we will assume that there are no restrictions on our services, other than to manage the account in accordance with your designated investment objective. Please Also Note: Please compare this statement with account statements received from the account custodian. The account custodian does not verify the accuracy of the advisory fee calculation. Please advise us if you have not been receiving monthly statements from the account custodian. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings correspond directly to any comparative indices. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. O’Shaughnessy Asset Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the O’Shaughnessy Asset Management, LLC’s current written disclosure statement discussing our advisory services and fees is available upon request

The risk-free rate used in the calculation of Sortino, Sharpe, and Treynor ratios is 5%, consistently applied across time

The universe of All Stocks consists of all securities in the Chicago Research in Security Prices (CRSP) dataset or S&P Compustat Database (or other, as noted) with inflation-adjusted market capitalization greater than $200 million as of most recent year-end. The universe of Large Stocks consists of all securities in the Chicago Research in Security Prices (CRSP) dataset or S&P Compustat Database (or other, as noted) with inflation-adjusted market capitalization greater than the universe average as of most recent year-end. The stocks are equally weighted and generally rebalanced annually

Hypothetical performance results shown on the preceding pages are backtested and do not represent the performance of any account managed by OSAM, but were achieved by means of the retroactive application of each of the previously referenced models, certain aspects of which may have been designed with the benefit of hindsight

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• Although OSAM may consider from time to time one or more of the factors noted herein in managing any account, it may not consider all or any of such factors. OSAM may (and will) from time to time consider factors in addition to those noted herein in managing any account.
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• The hypothetical backtested performance results assume full investment, whereas an account managed by OSAM may have a positive cash position upon rebalance. Had the hypothetical backtested performance results included a positive cash position, the results would have been different and generally would have been lower.
• The hypothetical backtested performance results for each factor do not reflect any transaction costs of buying and selling securities, investment management fees (including without limitation management fees and performance fees), custody and other costs, or taxes – all of which would be incurred by an investor in any account managed by OSAM. If such costs and fees were reflected, the hypothetical backtested performance results would be lower.
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• Accounts managed by OSAM are subject to additions and redemptions of assets under management, which may positively or negatively affect performance depending generally upon the timing of such events in relation to the market’s direction.
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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.