Biden and EU to act as ESG ‘catalyst’ for UK schemes

Mr Biden’s climate-conscious administration, in stark contrast to his predecessor’s perceived hostility to the green movement, could see green investing boosted in spirit by the re-entry of the US into the Paris agreement, and in practice by the removal of domestic rules prohibiting ESG investments.

Meanwhile, the EU’s new Sustainable Finance Disclosure Regulations are likely to boost domestic and European sustainable and impact investing, not least by providing much-needed standardisation of metrics.

There is likely to be far greater top-down leadership in terms of shaping regulations that encourage sustainable investment

Amer Khan, Entelligent

All this will impact UK funds and asset managers despite Britain’s exit from the EU, experts say.

ESG done Biden its time

President Trump’s supposed antipathy towards environmentalists did not lead to a rise in US emissions, which continued their steady decline throughout his administration. And while his withdrawal from the Paris climate agreement grabbed the headlines, it did not prohibit state pension funds making individual agenda-setting moves.

The $226bn (£166bn) New York State Common Retirement Fund announced in December that it would divest from companies not adequately transitioning away from fossil fuels, a decision deemed likely to send ripples through the ESG market.

The Biden administration’s focus on environmentalism will serve as a “catalyst” for the development of ESG and sustainable investment products, according to Mitch Reznick, head of sustainable fixed income at Federated Hermes.

Will Martindale, group head of sustainability at Cardano, concurred, adding: “Since the election, we’ve seen the Fed join the [Network for Greening the Financial System], the appointment of John Kerry as Mr Biden’s climate czar and a commitment to rejoin the Paris climate accord on day one.

“In the near term, we can also expect the [Securities and Exchange Commission] to turn its attention to ESG disclosure requirements.”

Amer Khan, European managing director at Entelligent, told Pensions Expert that “existing legislation that discourages ESG investing is likely to be on the chopping block in the first year of Mr Biden’s presidency”.

“For example, the [US] Department of Labor last year proposed a new rule that would bar most financial advisers from offering pension funds that take into account non-financial goals in pension funds,” he explained.

“A Biden White House is likely to scrap this measure or significantly soften it as part of a shift towards more widespread adoption of ESG factors across the US asset management space.”

While ESG and impacting investing in the US has seen its popularity surge, Mr Khan said that this was largely “driven by asset owners demanding this integration”. 

Under the Biden presidency “there is likely to be far greater top-down leadership in terms of shaping regulations that encourage sustainable investment”, he said.

Rachel Basarab-Horwath, director of institutional business at Axa Investment Managers, welcomed the move, but said that its most immediate impact will not be on UK pension schemes, many of which "have already being making great strides in their approach to ESG and to integrate this as a core part of their investment strategies".

“While a Biden presidency is hopefully a positive step towards the global fight against climate change and in a global push towards more responsible investment, we would expect the immediate impact to be felt abroad rather than at home,” she said.

Here’s looking at EU, kid

Closer to home, the EU’s Sustainable Finance Disclosure Regulation is expected to come into force in March this year, with the potential to significantly impact UK funds and asset managers in spite of Brexit.

Mr Reznick cited the EU’s putative “green recovery” as a driver of the growth in green financing, highlighting its target of €225bn (£200bn) in green bonds, as well as companies increasingly committing to science-based climate targets and investors making sustainability-focused allocations in their portfolios.

“At the epicentre of the green revolution, Europe will continue to inspire green finance activities globally as sovereigns and corporates seek to benefit from the so-called ‘greenium’,” he said.

“Look no further than the number of countries outside of Europe declaring themselves to be net-zero by 2050, with the US set to be back on the list.”

Kempen director of impact and sustainable investment Narina Mnatsakanian argued that the new rules would have a significant impact, not least “by improving standardisation and reducing the opportunity for initiatives that merely serve as ‘green washing’”. 

However, she added: “The regulation leaves some aspects to the asset manager’s interpretation, meaning there is uncertainty about where classification falls. We hope for further clarity on this in March.”

In spite of the EU withdrawal agreement that was finally agreed in December, Neil Brown, chief risk officer at Earth Capital, said UK-based asset managers would probably still find themselves subject to the EU’s new rules. 

“As the future relationship between the UK and EU continues to develop, any significant divergence from SFDR within UK regulation could impact equivalence discussions with the EU,” he said.

*This article has been updated to add context to remarks by Rachel Basarab-Horwath.