DOES BIDEN SIGNAL A GREEN LIGHT FOR GREEN FINANCE?

Investors with an interest in climate change and responsible investing were used to keeping their expectations low during Donald Trump’s presidency.

His tenure in the White House saw the US pull back on a number of fronts in the fight against climate change. Withdrawal from the Paris Agreement, the promotion of fossil-fuel expansion, the relaxation of emissions standards and proposed financial regulations discouraging investments based on environmental, social and governance (ESG) criteria were just some of the measures to cause despondency amongst investors.

So when Joe Biden took office in January, there were high hopes that the US would return to the climate-change trenches. The handover came as the amount of money invested in sustainable funds reached new highs, with 2020 flows more than double the previous year’s record (1).

The initial signs were positive. Biden wasted little time in reinstating the US to the Paris Agreement, while he also moved to halt construction of the controversial US-Canada Keystone XL pipeline and suspended new oil and gas permits on public land. The new president is also expected to attend the pivotal COP26 climate-change conference in Glasgow in late 2021, and there are plans for a US-hosted precursor summit in April. So, will the change of leadership prove a catalyst for a boom in sustainable investing?

Everything’s gone green?

Measures such as the return to the Paris accord were immediate and popular. They were also among the more straightforward actions that Biden could take in his early days as president.

There are myriad other steps that the US seems poised to take in boosting sustainable investing. For example, the Trump administration last year finalised its ‘Financial Factors in Selecting Plan Investments’ proposals, which would require retirement plan managers to put economic interests ahead of other goals including sustainability criteria, despite massive opposition from investors and asset managers (2).

Biden signed an executive order in his first week in office for a review on the ruling, raising hopes that it will be overturned.

The new administration has also set out plans to require greater boardroom transparency on environmental risks.

Efforts to boost green initiatives and sustainable investing face obstacles, however. With a wafer-thin majority, there will be opposition to climate-change measures from Republicans (and some Democrats) who represent states in which fossil-fuel industries are still prevalent and powerful. There is also a degree of climate-change scepticism within the Senate, which contributed to President Obama’s failure to pass climate-change legislation during his eight-year tenure (3).

Soft focus

For sustainable investors, the impact of the new administration may come from less direct measures. For example, a US government more relaxed about cross-border movement of both capital and personnel makes it easier for regulatory barriers to be overcome and for different jurisdictions to work together in tackling environmental problems that transcend geographies. Biden’s government also has a greater focus on social justice and addressing the problem of wealth inequality.

As it stands, sustainability standards, data and knowledge are fragmented, with different interpretations and rules around the world helping to hinder investor awareness of ESG - just 15% of participants in a recent study by The Wisdom Council said they had heard of ESG (4).

The research also found that the vast majority of investors expect the investment industry to behave and invest responsibly and do what it can to address environmental challenges, as well as delivering returns.

The broader impact of US ‘soft power’ under Biden should help ensure that those expectations are met. With moves afoot to make retirement plans more ESG-friendly – including the reversal of the proposals that would have skewed retirement plans against sustainable investing – asset managers are likely to pressure their investments in other countries to fall into line, too.

While that won’t apply so much in the UK and Europe, where ESG legislation is already advanced, there is a hope that the new US government could be the catalyst for a much-needed framework of international standards and an acceleration of 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.

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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