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The transition of power from one presidential administration to another typically involves bold agenda-setting changes, as the incoming president looks to set the tone for the term ahead. The Biden administration is no different in this regard and, to the relief of many, has made clear that climate change is high on the agenda. Within the first couple of days of assuming office, the new president signed various executive orders that, among other things, brought the United States back into the Paris Climate Accord and revoked a permit for development of the controversial Keystone XL oil pipeline.
For sustainable investors, this clear prioritization of environmental issues represents a welcome change from the previous administration. The COVID-19 pandemic, combined with a spate of devastating climate-related events and high-profile injustices, has only underscored the importance of corporate behaviors around deforestation, supply chain management, worker treatment, health and wellness, diversity and inclusion, and more. Accordingly, the asset management industry saw record inflows to environmental, social and governance (ESG) strategies in 2020, with financial advisors and their clients increasingly recognizing the potential for their investments to drive meaningful impact and generate returns.
The Biden administration’s efforts to tackle the COVID-19 pandemic, promote racial equity, and address climate change may well continue this momentum, creating powerful incentives for companies to do the right thing by the environment and their stakeholders – all while boosting the prospects of those that are already prioritizing these concerns.
Here are a few ways in which the new presidency stands to bolster the adoption of sustainable investing:
Climate risk disclosures
Under the Biden administration, the Securities and Exchange Commission (SEC) will likely mandate that publicly traded companies disclose climate risks, as well as emissions originating both from their own operations and supply chains. Climate risk describes the financial vulnerabilities associated with a changing climate – whether in the form of increasingly severe and frequent natural disasters that stand to disrupt business operations, the introduction of regulation aimed at tackling global warming, or greener innovations that disrupt traditional business models. Each one of these possibilities could pose a material threat to a company’s outlook, and investors deserve access to a broader, more standardized body of data that enables them to understand how corporate leadership is managing these risks.
Reregulation
The outgoing administration’s term marked an aggressive level of deregulation across multiple industries, dismantling or rolling back more than 100 policies pertaining to clean air, water, wildlife, and toxic chemicals. The Biden team has immediately set about reinstating various environmental protections, in part by imposing a moratorium on oil leasing in the ecologically important Arctic National Wildlife Refuge and directing government agencies to revisit fuel economy standards. It has also signaled its intent to revisit a Trump-era Department of Labor rule, instated last month, that makes it more difficult for retirement plan fiduciaries to steer clients’ funds toward ESG-focused strategies.
Regulation plays a critical role in sustainable finance, serving as a key catalyst for responsible investment. The Biden administration is keen to confront the long-term challenges of climate change and its associated inequities, so it is a good time for interested advisors and their clients to embrace sustainable investing. Over the coming weeks and months, we can expect to see a flurry of executive orders aimed at treating the climate crisis with the type of urgency it warrants.
Cleantech
As it happens, the Department of Energy still has access to $40 billion in unused loan authority left over from the 2009 stimulus package, and these funds could help jumpstart Biden’s broader plans for developing and rolling out clean energy infrastructure. Among the green initiatives that the new administration has touted are plans to replace the entire government fleet of vehicles with electric alternatives, and the proposed establishment of a new research agency focused on accelerating climate technologies.
Investors are recognizing that cleantech is not a passing fad: As the visible effects of climate change before more prominent, and as corporations and countries commit to going carbon neutral, investment in renewable energy solutions has surged. In fact, according to research analysts at BloombergNEF, companies, governments, and households worldwide last year invested an unprecedented $500 billion in low-carbon assets, “From renewables to cleaner transport, energy storage to electric heat.” The Biden administration’s efforts to curb greenhouse gas emissions and invest in cleantech are only set to accelerate this trend.
What now?
As I’ve opined before, companies that proactively prioritize their environmental and societal impact are better equipped to navigate future business challenges than peers that primarily focus on short-term profits. In turn, investors in these responsible companies are shielded from the headwinds associated with reputational issues, legal challenges, and business disruptions. The numbers support this hypothesis, too: According to one S&P Global Market Intelligence analysis, amid the chaos of 2020, funds with minimized exposures to ESG risks outperformed the broader market.
As trusted fiduciaries, advisors are uniquely positioned to educate their clients about the financial risks associated with inaction on key ESG issues. Not only that, but clients will appreciate the guidance – the cataclysmic events of 2020 have only galvanized many investors’ focus on the type of legacy they want to leave for future generations. Now is the perfect time to deepen your relationship with clients by uncovering their motivations and impact goals. It all starts with a conversation.
Jay Lipman is cofounder and president of Ethic. Wondering how best to approach the conversation around sustainable investing? We’re here to help. Feel free to reach out to [email protected].
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
