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Week 44: How will the U.S. election affect ESG investing?
In this issue: ▸ The ESG honeymoon is over ▸ The biggest reality show in the world ▸ How will the election affect ESG investing? ▸ ESG hurts in the Arctic ▸ Are Nordic companies climate leaders?
I hope everyone is well and ready for a new edition of ‘ESG on a Sunday’.
This week is mostly about the biggest reality show in the world. The U.S. election.
But first, let’s focus a bit on the status and future of ESG investing.
The ESG honeymoon is over
As the honeymoon phase of ESG investing ends, harder questions will be asked regarding firms’ attempts to cloak themselves in virtue to score PR points.
Firms and funds will have to, sooner or later, provide evidence related to the key question in this area: Can we improve outcomes for stakeholders without destroying shareholder value?
The ESG industry is already facing increased scrutiny on delivering tangible results to clients that buy ESG products and solutions. That pressure will increase in the years to come.
Read more in this article from Forbes.
The biggest reality show in the world
The U.S. election is probably the biggest reality show in the world. It has been broadcasted, discussed and talked about for the last couple of months, if not the last year.
The result of the U.S. election tends to have dire consequences for countries and people around the world – not just those living in the U.S. – and as such attract the attention of the world.
This year, I would say that the outcome of the election is less important from a political angle than it is from a voters angle. Populist rhetoric over the past 10 years in the world have polarised societies and voters.
The U.S. election may change the political power. But the real question is: Will it manage to bring together a deeply divided society?
How will the election affect ESG investing?
ESG investing has been booming in the U.S. during the pandemic, yet the outcome of the U.S. election is set to affect trillions of sustainable investments. What happens on Election Day comes at an inflection point for ESG investing as the current reality show administration is not exactly ESG happy.
In this article you can see potential implications on ESG investing related to the U.S. election. The Trump administration certainly means “business” regarding ESG and is speeding ahead with a proposal to make it more difficult for fiduciaries of retirement plans to direct money to ESG-focused funds.
Essentially, Trump does not want to accept that ESG is a core driver of financial performance. The administration is once again ignoring the experts who have stressed that sustainable investing helps improve long-term portfolio performance. Experts have made it clear that ESG funds not only thrive in bull markets; they help investors weather precipitous financial downturns.
And Biden? Well, according to rumours as well as this piece, BlackRock CEO Larry Fink will likely join Biden’s administration as Treasury Secretary.
So, in this case, it’s very black and white. Trump for coal and oil. Biden for ESG.
If you want to read about the broader context of drama in the sphere of finance related to the elections you can find a very good overview in this piece.
What will the election mean for climate change?
Now, let’s zoom in on the ‘E’ of ESG. What will the result mean for climate change? In this piece from BBC we get a good view of the likely environmental consequences of the U.S. election.
In short, scientists studying climate change say that the re-election of Donald Trump could make it impossible to keep global temperatures in check.
They're worried another four years of Trump would “lock in” the use of fossil fuels for decades to come – securing and enhancing the infrastructure for oil and gas production rather than phasing them out as environmentalists want.
In other words, four more years with Trump will likely – once and for all – destroy our chances of reaching the targets set in the Paris Agreement. “If Trump is re-elected, I think it goes into the realm of physical impossibility,” said Prof Michael Gerrard from Columbia University.
Joe Biden's climate plan, on the other hand, would give the world a fighting chance.
ESG investing hurts in the Arctic
Does ESG investing always brings positive change? Per definition it should. But it’s not always the case, and sometimes we need to consider if it’s the right thing to do.
Here’s a telling story from the Arctic. It’s a story of how we sometimes miss what ESG is really about: By putting the Arctic in a snow globe, institutional investors are contributing to the ongoing cyclical poverty found in many Arctic Indigenous communities, not least in the North American Arctic.
The social impacts of these decisions are concrete. With the front lines of climate change found anywhere from Los Angeles, to Australia, to Greece and the Sub-Saharan Africa, its biggest victims are the world’s poorest communities who lack the economic resources and critical infrastructure to be resilient.
Many North American Arctic Indigenous communities, therefore, continue to remain disproportionately affected by climate change as they are undermined by the legacies of decades long colonisation, persisting economic and social neglect, a lack of basic critical infrastructure – all of which results in some of the highest rates of poverty in the OECD.
Are Nordic companies climate leaders?
Now onto the Nordics, a region regarded by many as having the most advanced sustainable economies in the world. This is supposedly where you find the green leadership.
But is it really so? In a new assessment – made using our new tool – of all the listed companies in the region, we came to a very different conclusion. The Nordic companies are very far from the climate targets from the Paris Agreement. As it is, they are on a 3.5°C climate path. Here’s the graph:
Notes and observations
And finally, a few points I’ve noted down in my notebook the past week – and would like to share with you:
Greenwashing is growing. Everything is green these days. I really dislike this trend, but we must also accept that greenwashing is inevitable. If you say something is important and you win over the market and it becomes mainstream, then products will be marketed to fit this new agenda. Sad but true.
ESG is not outcome investing. While there will be specific impacts, we must not expect clear outcomes. This is not to say that there will not be changes. But these will mostly be driven by a profit motive and less by public capital.
We need to see the whole picture. In ESG investing, we are naturally focused on public companies, but two thirds of the economy consist of governments and private companies. The ESG movement harps on the public companies – and misses the other two thirds of production/consumption.
That’s it for now. Have a great week and a good U.S. Election Day and Night.
Best regards, Sasja