What does Joe Biden’s election mean for ESG?

By: Andreas Andrews, Sara Crovitz, Matthew DiClemente, George Gerstein, Andrew Levine and Brian Seaman

In recent years, Congress and U.S. regulators have fallen behind globally on efforts related to ESG, despite the exponential growth in and demand for ESG investing. With the election of Joe Biden, this will change. The 2020 Democratic party platform explicitly recognized that “climate change poses serious risks to the economy and the financial system,” and President-elect Joe Biden has stated that climate change will be a top priority for his administration. Social and governance issues, including addressing racial justice, also feature prominently in Biden’s plans. If the Democrats were to win the Senate, it would increase the speed and impact of this shift. Here are several changes to watch for under the new administration:

  • Biden’s climate plan includes a commitment to require public issuers to disclose climate risks and emissions data. Biden could issue an executive order directing the Securities and Exchange Commission (SEC) to engage in rulemaking to require more standardized and uniform disclosure relating to climate change. The SEC also could incorporate more standardization and uniformity with regard to other ESG factors, such as governance and diversity and inclusion.
  • The SEC also could impose additional regulation on asset managers regarding their use of and disclosure around ESG strategies to address concerns of greenwashing.
  • Recent SEC rulemaking and guidance relating to proxy voting and proxy advisory firms may be rolled back. Engagement is a key prong of an ESG strategy, and much of the recent rulemaking was seen as thwarting efforts by shareholders, including institutional investors and asset managers, to engage public issuers.
  • Legislative efforts to address systemic racism through, for example, increased training and education on diversity and inclusion topics and/or mandatory disclosure of diversity metrics and policies likely will gain steam (e.g. to increase diversity in the asset management industry). It appears certain that Trump’s executive order banning certain types of diversity and inclusion training in the federal government on what the order deemed “divisive concepts” will be rescinded.
  • The Department of Labor (DOL) recently proposed changes to the proxy voting duties imposed on ERISA fiduciaries. The DOL has yet to advance that rule. However, the DOL recently finalized a new regulation that directly affects ESG investing, which could be subject to rescission by Congress or changes by a new DOL, though neither scenario is inevitable or necessarily probable.
  • The election results may promote a shift in domestic innovation.  Biden aims to construct policies that will ensure the United States is carbon-emission free by 2035.  An implementation of renewable energy tax incentives to further such goal is part of the plan and may inspire more U.S. innovation, depending on the type of incentive (i.e., a tax credit or tax deduction) and the relative industry (e.g., real estate or power) that is the focus of the incentive. Legislative policies focused on tax incentives directed at investment in renewable energy resources face an uphill battle given the current composition of Congress, but Biden could, early in his term, issue executive orders to set aside funds for renewable energies to be built on federal lands and could prohibit oil and gas (fossil fuel) companies from renewing leases on federal land.