The growth in dollars invested in ESG continues to accelerate unabated. Inflows into ESG ETFs jumped to $24 billion in 2020 YTD (through October), which is 3x the 2019 level. The future of ESG looks strong under any administration, but the path certainly looks smoother under a Joe Biden/Kamala Harris Presidency.
The roots of ESG have had very little political influence to date. President Barack Obama prioritized socially responsible businesses through an executive Office of Social Innovation and Civic Participation. The Trump administration closed the office. Further, this year the Trump Administration attempted to limit the use of ESG funds in retirement plans and shareholder democracy. Yet ESG awareness and participation surged under Donald Trump’s Presidency, perhaps as a result of limited government intervention.
We won’t have a clear picture of the Senate before the January 5 run-offs in Georgia are completed. Regardless, with a divided government we can still expect to see more attention and funding on Social and Environmental matters over the next four years. Joe Biden and Kamala Harris campaigned on issues that included climate change, social injustice, human rights and corporate transparency and accountability.
President-elect Biden has pledged to rejoin the Paris Climate Accord which the U.S. officially withdrew from shortly after the elections. His plan to deal with climate change calls for an aggressive shift to clean energy, carbon neutrality by the middle of the century, and importantly, federal investment for both. There is considerable debate on the latter point as a divided government will undoubtedly make that more difficult, but President-elect Biden will have the power to reverse executive orders/actions implemented under the Trump administration, as well as implement his own.
EU vs. US
European funds hold 82% of ESG assets while U.S funds hold 14%. The European Union, which has been years ahead of the United States in ESG, recently mandated ESG disclosure for investment advisors and portfolio managers which will take effect on March 10, 2021. This includes portfolio managers without an ESG mandate.
Currently, in the United States there are no disclosure requirements for ESG funds and all disclosure at the company level is completely voluntary and limited to larger companies. We can reasonably expect that the new Administration will mandate some form of increased disclosure.
It is likewise reasonable to assume that such a mandate will lead to standardization in reporting. The absence of standardization has been one of the most significant roadblocks to more widespread ESG adoption.
When asked, most investors find ESG reporting to be incomplete, inconsistent and too generic to make informed conclusions. Further, companies disclose through a variety of mediums including annual reports, proxy statements, sustainability reports, single issue reports, websites, investor presentations, and earnings releases/calls. Clear reporting requirements will help to streamline the process and help to strengthen legitimacy of ESG investing.
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