Which sectors of the market would flourish under a Biden presidency? That is a big question for investors right now, as Democrat Joe Biden rides high in the US polls — and his party makes bold statements about fiscal policy, unions and fossil fuels.
But here is one sector that could benefit to a significant degree from a Biden victory: environmental, social and governance investing. That is not just because of the obvious point that a Biden-led administration is likely to take a tough stance on the use of fossil fuel. The other issue is that such an administration might usher in changes in the rules around ESG investing and corporate disclosures.
While that second sphere is less thrilling for politicians than, say, a discussion about fracking, it matters deeply. If those ESG investing and disclosure rules change, it could accelerate capital flows into the sector, pushing up prices for assets — or delivering what Larry Fink, head of BlackRock, has described as an ESG “momentum” trade.
The reason is that a transatlantic split in investing has opened up under the administration of US president Donald Trump. In Europe, regulators and officials have been racing to embrace ESG-friendly standards, particularly for the “E” — environment. The European Central Bank, for example, is setting capital markets benchmarks by getting involved with green bonds. Regulators are moving to embrace the Task Force for Climate-Related Financial Disclosure system, championed by Mark Carney, former governor of the Bank of England. Last week, Mr Carney even called for this to become mandatory in a couple of years.
Most significantly, the European Commission is finalising a taxonomy to define green assets, thus creating “the world’s first classification system . . . to boost sustainable investments and reporting,” as Olof Skoog, EU ambassador to the UN, declared this week.
Many financiers have reservations about this. One problem is that the EU taxonomy is trying to impose crude binary definitions of “green” and “brown” investments on a corporate world that is more of a moving spectrum of brown turning green. Another is that financial history shows that whenever bureaucrats devise top-down rules, financiers tend to arbitrage them, with unintended consequences. This occurred with the Basel banking capital rules and may be repeated here.
Yet, imperfect or not, the key point about these new rules is that no European finance group can ignore them. Nor can a global group with European exposures. This is “pushing financial companies around the world to consider ESG factors”, says José Viñals, chairman of Standard Chartered. Hence the American behemoth JPMorgan unveiling plans to align its portfolio with the Paris climate accord.
Even as Europe has rushed ahead with green investment rules, the Trump administration has dug in its heels. The US Securities and Exchange Commission has shunned calls to create an ESG investing framework. And Hester Peirce, an influential Republican commissioner, has been outspoken, criticising what she considers to be the excessive slipperiness of the ESG concept. American regulators seem uninterested in imposing TCFD. The Department of Labor recently embarked on a reform to pension fund rules that would make it harder for asset managers to embrace ESG principles as an end in themselves, under its definition of fiduciary duty.
That has dismayed some large US investment groups. “This is an area which should be driven by facts and not ideology and emotion. There is ample evidence ESG enhances performance,” points out Roger Ferguson, head of financial services firm TIAA, which has expressed criticism of the DoL rule.
Since the Trump administration seems unbowed, this split has had two consequences. First, it is making the European Commission the de facto global standard setter for big finance groups (echoing the situation for tech privacy rules after Europe’s GDPR framework). Second, it has made domestic American players more wary of ESG than Europeans.
A survey by RBC Global Asset Management shows that just 74 per cent of American financial groups think that ESG boosts performance, down from 78 per cent last year. In Europe and Asia, the ratio rose to 96 and 93 per cent respectively. “In ESG, Europe is way ahead of the US,” says Carmine di Sibio, head of professional services group EY. “The sustainability issue became a very political issue starting 10 years ago in the US — views are different depending on what party is in office.”
Hence the significance of the US election. If Mr Biden wins, it is unclear how quickly or radically his administration might change the DoL or SEC rules, or embrace TCFD. But the mere prospect is likely to spark a portfolio shift — particularly as more US investors are forced to contemplate the degree to which tough climate change regulation could reduce the value of assets like fossil fuel stocks.
This is probably not all priced into markets, according to Janet Yellen, former head of the US Federal Reserve. Or, to put it another way, whatever happens to markets if Mr Biden wins, ESG stocks may follow a track of their own. Fiduciary duty rules have rarely been so exciting, even though the presidential candidates never mention them at all.