ESG market in America not "directly political"

With the 2020 US Presidential elections around the corner, the future of sustainable investing and environmental, social and governance (ESG) products in the world's biggest investment market is in the spotlight.

Under the Biden Plan, former Vice President Joe Biden hopes to steer America towards a 100% clean energy economy with a goal of reaching net-zero emissions by 2050. He further plans on recommitting the United States to the Paris Agreement and incorporating climate change into foreign policy and national security strategies. It would seem on the surface that as a consequence of his proposed action plan, a Biden victory would lead to an uptick in sustainable investing in the US, potentially bringing the nation level with Europe, which is leading the charge on ESG.

President Donald Trump environmental policies on the other hand centre on increasing exports of energy resources. He has approved the Keystone XL and Dakota Access pipelines to stimulate oil and gas production in the US, as well as replacing the Clean Power Plan established under the Obama administration with the Affordable Clean Energy Rule.

While a change to the administration could bolster confidence in responsible investing, experts believe that ESG as a topic is apolitical.

Adrie Heinsbroek, principle responsible investment of NN Investment Partners (NN IP), told Global Investor: "The ESG market is extremely important and is not directly political because this year has evidently shown that ESG information has market and financial value. The government has some influence on what companies feel their role and responsibility in society is, but I think the upcoming US election will not impose much change on this specific topic."

John Streur, chief executive of Calvert Research and Management, the ESG specialist subsidiary of Eaton Vance, agrees, noting that politics don't directly influence sustainable investing as it is a market driven phenomenon. Streur comments: "I don’t think politics are the driver of ESG investing because it is now a market driven solution. You have all the primary market actors participating from civil, government, corporate, NGO, academic, standard setting, and audit firms that are coming in." He adds that the powerful dynamics that overwhelm the US election cycle is the global regulatory framework that is moving ahead but the US is being dragged behind.

The regulatory framework in the US is somewhat hostile to ESG investing, with the US Department of Labour (DOL) putting forward proposals that would make it burdensome to implement certain ESG strategies. The department argues that it could impair the fiduciary duty to seek the highest return.

In a proposal on June 30, the DOL said: "Fiduciaries violate ERISA [the Employee Retirement Income Security Act of 1974] if they accept reduced expected returns or greater risks to secure social, environmental, or other policy goals" and that fiduciaries "must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision".

While the DOL acknowledged the uptick in ESG-focused investments, it highlighted concerns regarding what constitutes an ESG investment and inconsistencies surrounding ESG rating systems.

Streur does not disagree with the premise that the fiduciary duty is to seek the highest return, but Calvert disagrees with the principle that ESG somehow impairs that, as the objective is to drive long-term value creation.

With that in mind, Streur notes that the regulatory framework, rather than the overall topic, is dependent on the election. "If there's no change to the administration, it's going to stay hostile. If there is a change, it will at least go to neutral and it would make it no less burdensome for an investor to use an ESG strategy than any other strategy. There wouldn’t be a regulation that burdens investors in a putative manner for pursuing a competitive strategy with ESG; it would level out the playing field," says Streur.

Alessia Falsarone, head of sustainable investing at PineBridge Investments, adds that the DOL's position is crucial to the development of ESG in the United States. She told Global Investor: "When you're thinking about the very near term in the US, you see the position of the DOL, which inherently is directly connected to the near term development of ESG strategies in the US."

She adds that what is fundamentally important with the outcome of the election and who sits in the Oval Office, is the potential to boost accountability. "I believe that there is a geopolitical-ness to ESG because when you are talking about sustainable investing or general sustainable economic growth, you are thinking of promoting and rewarding positive management accountability practices. We need to start talking about promoting management accountability practices and desensitise any lobbying activities that go against that. That’s foundational to geopolitics; transparency is what drives markets and ESG is no different than anything else," says Falsarone. Any favourable clean energy policy therefore, or a push to renewables would have a strong signalling effect.

Falsarone notes that there is still a financial lens on the low interest rate environment that is a burden, as opposed to a change in the White House that would lead to boosting investments in clean energy. With that said, what is important in the United States is retaining or boosting the presence of international investment houses and attracting foreign capital back in dollar denominated markets through ESG vehicles, according to Falsarone. "That will bring more confidence because you find that many asset owners are starting to think whether US Treasury Bills should be in an exclusion list considering the lack of focus on environmental policy or the human rights front. That has not been stipulated or talked about in the market because US Treasuries are the bread and butter of portfolio construction."

The Presidential elections could be more relevant for selection than for direction in terms of who sits in Congress, according to ESG-market leader Robeco. Fabiana Feledi, global head of fundamental equities at the Dutch asset management firm, explains that a contested presidential vote would rattle markets in the short term, but that regardless of who wins the election, markets would breathe a sigh of relief.

She comments: "Either candidate would look to implement stimulus measures for the economy. In the event of a Biden victory, we would likely see a preference for public investment, and more concern for the environment. This would affect stock selection. A split Congress, however, would make any stimulus policy more difficult to implement and – hence – less effective. I would take a contested presidential election any time over a split Congress."

While the US is playing catch-up with Europe, which has pledged to be net-zero carbon by 2050 as well raising 30% of the €750 billion stimulus package via green bonds, experts have weighed how important the 2020 Presidential elections would be for the future of ESG in the US. A change to the administration would bolster confidence, but the consensus is that markets are driving the change.

Firms in the United States are already active in ESG and impact investing is no longer seen as a curse in the US. Heinsbroek concludes: "If the current administration remains in power, being less pro-sustainability, this may impact asset managers when their clients have some doubts. Maybe there will be a slower acceleration or adoption but the rise of ESG is unstoppable."