ESG Criteria and the Election: Emissions, Diversity and More

MARKETS AND INVESTING

September 16, 2020

What do President Trump and Democratic nominee Joe Biden’s election platforms include in relation to environmental, social and governance (ESG) issues?

Below, Washington Policy Analyst Ed Mills and Institutional Equity Strategist Tavis McCourt, CFA, discuss what the 2020 U.S. election results could mean for ESG-related policies and company ratings. To learn more about sustainable investing and how a customized strategy can fit your financial and personal goals, reach out to your financial advisor.

Carbon emissions standards

The net-zero carbon goals set forth in the Green New Deal and modified for Biden’s platform (goal deadline of 2030 in the Green New Deal, 2050 under Biden platform) would make it easier to track and compare CO₂ emissions. Such regulations could impact some companies’ ESG ratings. While many ESG investors may currently focus on companies’ level-one carbon footprint, carbon reduction regulations could call for specific disclosures around three levels of carbon output: product, manufacturing and supply chain. Companies with large manufacturing footprints or outsourced supply chains would likely see the most impact to their ESG scores or profiles.

The implementation of these net-zero policies would likely require a Democrat sweep and a vote to eliminate the Senate filibuster.

COVID-19 response

Recent ESG ratings have been materially adjusted due to companies’ perceived responses to COVID, which may have included expanding health benefits and days off, allowing work from home where applicable, providing personal protective equipment to essential employees, and balancing return-to-work plans with employees’ childcare needs. If a Biden administration and Congress addressed these issues in an infrastructure bill, it could remove the negative pressure on ESG ratings for companies that have not responded as well or adequately disclosed what their response entailed.

Manufacturing

The Biden platform includes several policy proposals titled “Made In All Of America By All Of America's Workers” that are aimed at fueling an economic recovery for working families. These policies would likely be included in any economic recovery bills passed early next year in the event of a Democratic sweep. Overseas supply chains in areas of cheap labor or weak labor laws hurt ESG scores, so for companies forced to bring some of their manufacturing footprint – or at least part of their supply chains – back to the U.S., their ESG scores could improve even if margins are lower. Republican initiatives to bring manufacturing back to the U.S. could have the same effect.

Racial and gender equality

Any pay gap legislation or programs around childcare, education or fair housing that would improve diversity in the workforce would benefit companies that have been negatively impacted by ESG investors or ratings firms for poor support of those programs. The government taking over some of those initiatives would level the playing field a bit across corporations. These proposals are tenets of several policy ideas from the Biden platform, woven throughout the Build Back Better campaign.

Sustainable energy and clean tech investments

These policies seem clear, and the involved companies should see increased revenue from the projects as well as improved ESG profiles themselves, even if already viewed positively.

Healthcare public option

Given the proposal from the Biden campaign, a public option on the healthcare exchanges may be a policy focus if Democrats control the House, Senate and White House and if the Senate filibuster is eliminated. It may not become law as proposed, however. If passed, the public option could materially impact healthcare companies if corporations are legally permitted to and decide to transition their employees to the public option rather than provide it themselves. Right now, strong benefits packages – especially insurance coverage – positively boost ESG profiles and attract employees, but the public option could be established in a way to allow corporations to not offer coverage, and therefore not be subjected to the same ESG hit or negative press they would otherwise take.

Pharmaceutical policy

Stricter regulations around drug pricing and the over-prescription or over-marketing of opioids could impact ESG investors. Some proposals to increase transparency could provide ratings agencies a better view of the poor performers in that area.

Policies are being proposed by both parties, but the Trump administration has yet to implement substantive changes. The Biden administration may result in more concrete progress forward. Major action requires legislative changes, and Congressional action is more likely in the event of a Democratic sweep and elimination of the filibuster. It remain questionable whether a Republican-controlled Senate would support bipartisan action, especially if the pharmaceutical industry invests heavily to help Republicans maintain their majority.

Corporate taxes

Known as the fair minimum tax rate, the U.N. Principles for Responsible Investment view paying “fair tax rates” as a top tenet of their ESG guidelines. If U.S. companies suddenly have to pay increased taxes to at least the 15% minimum tax rate, companies that have managed their taxes below that rate may see a benefit to their ESG scores. The Biden platform is calling for some corporate tax rates to revert to a middle ground between where they are now and pre-Trump tax cut levels (the average being mentioned is 28%). Raising taxes is always difficult without a single party sweep, and even a Democrat sweep may need the filibuster eliminated to pass a minimum corporate tax rate.

China trade policy

There is a push from the Republicans to de-list Chinese equities due to human rights issues, support Hong Kong/Taiwan independence and, generally, pursue more direct action around the relationship with China. Regardless of the results of the November election, trade policy with China will likely be renegotiated – it’s a very bipartisan issue – but the Trump administration seems to be more focused on de-listing Chinese companies from U.S. exchanges.

Department of Labor

The U.S. Department of Labor (DOL) is proposing a rule that would make it more difficult for ESG funds to be used in retirement plans. The DOL is also working on a rule that would make proxy access for investors more difficult. As both of these rules are being proposed under the current Trump administration, they may be more likely to come into fruition under another Trump victory. A change in proxy access for investors could dramatically impact the influence that activist investors, such as the Climate Action 100+, have on companies in terms of ESG propositions.

Universal broadband and net neutrality

One of the tenets of Biden’s Build Back Better campaign is universal broadband in the U.S. While this issue has been brought up in past administrations, the COVID pandemic and resulting work- and school-from-home situation has brought this issue to the forefront. While the Trump administration has not outright opposed universal broadband, we believe it would not be a policy they’d push if reelected.

A Biden administration would likely fold this into an infrastructure spending bill for the economic recovery, and we’d also expect them to push to restore net neutrality. For the last few years, even before COVID, telecom companies that came out in favor of or that were working to build universal broadband and net neutrality saw benefits to their ESG profiles. However, if these issues were to be federally instituted, that ESG boost for vocal supporters would likely dwindle. On the other hand, companies that were actively involved in building the new universal broadband network would likely see a strong boost in ESG ratings/profiles.

Utilizing an ESG investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Sustainable/Socially Responsible Investing (SRI) considers qualitative environmental, social and corporate governance, also known as ESG criteria, which may be subjective in nature. There are additional risks associated with Sustainable/Socially Responsible Investing (SRI), including limited diversification and the potential for increased volatility. There is no guarantee that SRI products or strategies will produce returns similar to traditional investments. Because SRI criteria exclude certain securities/products for non-financial reasons, investors may forego some market opportunities available to those who do not use these criteria. Investors should consult their investment professional prior to making an investment decision. All expressions of opinion reflect the judgment of the author, and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results.