The election of Joe Biden as the next president of the U.S. is expected to have wide-ranging implications for investors who care about the environment and society, even if Congress remains divided.
Ironically, President Donald Trump ’s approach to the environment and underserved populations is considered one reason why investment dollars have poured into strategies that seek to have a positive impact on environmental, social, and governance (ESG) matters over the last few years.
“People have been more engaged to a certain level because they realized the urgency,” says Yuliya Tarasava, co-founder and chief operating officer of CNote, a fintech firm channeling investments to Community Development Financial Institutions (CDFIs).
Assets in U.S. sustainable funds reached a total US$179 billion by the end of the third quarter this year, up from US$120 billion a year earlier and up from just over US$80 billion at the end of 2017, according to Morningstar’s third quarter fund flows report on global sustainable funds.
The coronavirus pandemic accelerated this trend, with inflows reaching the same level as all of 2019 by July, said Morningstar, which noted that last year’s net inflows of US$21.4 billion was four times higher than any previous year.
Whether or not runoff elections for two Senate seats in Georgia leave the Senate majority in Republican hands, interest in ESG and impact investing—in both public and private markets—is unlikely to slow.
“Those of us in impact investing just buckle our seatbelts and get that much more committed because we’re not counting on the government to step in and do this,” says Kristin Hull, CEO at Nia Impact Capital, a U.S. impact investing firm.
Nonetheless, there are a lot of changes that investors are expecting will take place under a Biden administration. What follows are just a few potential areas where policy changes and investment trends affecting ESG and impact investing are likely to evolve differently in the next four years.
Prioritizing Social Businesses
President Barack Obama’s administration made socially conscious businesses a priority through an executive Office of Social Innovation and Civic Participation. The Trump administration closed the office, but given rising interest in sustainable investing, “we anticipate that a similar initiative may arise under a Biden-Harris administration,” says Adam Bendell CEO at Toniic, a network of impact investors.
“It was quite effective, more in a leadership and inspirational way than in terms of specific policies that favor this or that—but leadership is important,” says Bendell, who is advocating for the office’s reinstatement.
For example, ESG investing may be on the rise, Bendell says. “But what do you have to do to call yourself an ESG fund?”
Even those who are not fans of ESG “could agree that greater clarity about definitions would help the market, and would fall squarely within the most baseline mission of the Securities and Exchange Commission of the U.S., which is about transparency,” Bendell adds. To create clear standards, and reliable disclosure on the part of funds, would “make markets more efficient and better,” and would not require anything from Congress.
Improving Corporate ESG Disclosure Too
A related push by impact investors is to create more transparency around corporate environmental and social practices. The Sustainable Accounting Standards Board (SASB) has been advocating for SEC-required financial accounting disclosure to include social and environmental disclosures as well.
SASB’s approach is considered fairly mainstream since the organization’s focus is on whether ESG practices are “financially material.” They are less concerned with whether a company’s ESG practices are having their intended positive impact or not. Adopting SASB’s recommendation shouldn’t be a “terribly radical position,” for either Republicans or Democrats, Bendell says.
The U.S. Impact Investing Alliance points out there is actually growing consensus among bipartisan leaders in Congress as well as the SEC’s Investor Advisory Council on the value of corporate disclosure of ESG. The group argues that comprehensive legislation managing this should be a priority, but points out, “the SEC already has the authority and mandate to take meaningful regulatory action.”
Reforming the Community Reinvestment Act and Boosting CDFIs
Efforts were underway by the Trump administration to reform the Community Reinvestment Act (CRA) of 1977, but, critics have argued, their reforms would benefit banks at the expense of the underserved communities this law is intended to support.
Currently, many banks meet their CRA requirements by channeling money to CDFIs, which in turn provide loans to individuals and businesses in low-income communities.
While any changes to the law governing the act would require Congressional action, Tarasava notes that CDFIs have garnered bipartisan support as a popular tool for driving capital to underserved communities, Tarasava says.
“The hope is that even with a divided government,” with Biden as president, “we can see more attention and funding.”
The U.S. Impact Investing Alliance is now urging the President-elect to build consensus around reforms outlined by the Federal Reserve that would “strengthen and reaffirm the CRA.”
Separately, the alliance is also urging the President-elect to work with Congress to aid businesses affected by the coronavirus pandemic by building on the success of CDFIs and minority depository institutions (MDIs) that have supported small businesses owned by Black and brown entrepreneurs and those in rural and tribal communities through the crisis.
Supporting Clean Energy and Sustainable Business Models
The U.S. withdrew officially last Wednesday from the Paris Climate Accord, the international climate change forum. Biden has pledged to rejoin it as soon as he takes office, a move that alone is expected to spur further development of the clean energy industry in the U.S.
While the solar energy industry, in particular, has done well under Trump, under Biden, the industry could thrive, especially as businesses may no longer have to deal with tariffs on solar parts made in China and Mexico.
“To have free flow again of commerce and international trade—the industry only can just pick back up,” Hull says.
She also expects companies with solid, sustainable business models to prevail under a Biden administration. Under President Trump’s federal tax cuts, companies that were awash with cash—and didn’t have strong governance—often initiated shareholder buybacks instead of funneling those dollars into researching innovative new technologies.
Airlines, for instance, could have invested in research and development into sustainable fuels or other innovations. “Instead, they did shareholder buybacks, bought their own stock, then Covid hit and that stock is worth nothing,” she says. “To me, any percentage of revenue spent on shareholder buybacks instead of R&D or a strategic merger or acquisition, just isn’t smart governance.”
Under Biden, Hull expects corporate cash flows will come from revenues instead of federal government subsidies or tax cuts. “That’s where we will see [which] are the sustainable business models, and those are the ones that are going to prevail,” she says.