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Week 9: ESG in the U.S. 🇺🇸
In this issue: ▸ The land of dreams and dark forests ▸ What ails America? ▸ A polarised ESG landscape ▸ What’s holding the U.S. back? ▸ On the bright side ▸ ESG under Biden
I hope everyone is well and ready for this new edition of ‘ESG on a Sunday’!
The past number of weeks we have looked at ESG in Asia, Africa, Latin America and Europe. Now it’s time to turn our attention to the U.S., the beacon of neoliberal capitalism.
The land of dreams and dark forests
The U.S. is a country where dreams come true or are broken in minutes. A country of enormous, unprecedented wealth in the hands of the few, yet still promising you the opportunity to succeed if you work hard and dream big.
The U.S. has it all; natural resources, mature industries, a huge and world leading capital and financial sector, geopolitical influence like no other. The brightest ideas, cosmo-capitalists (Bezos and Musk), and digital supremacy over the entire world.
It is the U.S. and it sounds and feels like a lot. But as in many other fairytales there’s always a dark forest and some shadows lurking over flowery roads.
What ails America?
Income inequality in the U.S. is the highest of all the G7 nations, according to data from the OECD. To compare income inequality across countries, the OECD uses the Gini coefficient, a commonly used measure ranging from 0, or perfect equality, to 1, or complete inequality.
In 2017, the U.S. had a Gini coefficient of 0.434. In the other G7 nations, the Gini ranged from 0.326 in France to 0.392 in the UK.
The wealth gap between America’s richest and poorer families more than doubled from 1989, according to a recent analysis. In 1989, the richest 5% of families had 114 times as much wealth as families in the second quintile (one tier above the lowest), at the median USD 2.3 million compared with USD 20,300. By 2016, the top 5% held 248 times as much wealth at the median. Read more here.
Inequality is one issue, but it’s not only about the rich and the poor. The U.S. middle class is facing all kinds of challenges too. Here you can read more on the top 5 economic issues facing the U.S. middle class.
Ok, but what about natural resources then? Well, U.S. has it all, and in this document you can read about what the implications are for the U.S. economy in 2030 and beyond.
A polarised ESG landscape
Like many other things in the U.S., the ESG landscape is divided and polarised. There’s been a stand-off between progressive ESG forces is U.S. and the more conservative ones for a number of years, mostly related to G aspects of ESG.
Is ESG a concept or way of investing for or against fiduciary duty of investors? More bluntly, does is make profits or not?
The U.S. regulation on ESG has gone back and forth a few times in the last couple of decades, fluctuating between a neutral stance to actively discouraging it. The US Department of Labour gave sustainable investing the green light back in 1994. But then new guidance in 2008 made some fiduciaries nervous to pursue ESG investing.
The guidance was updated again in 2015, acknowledging ESG can be an important material factor, which helped encourage ESG investing.
In recent years, the tide has turned again and ESG investing began facing both political and regulatory hurdles. Under the Trump administration, the federal government discouraged sustainable investing and environmental protections. And, as you are no doubt aware, the previous administration pulled the U.S. out of the Paris Climate Accord while rolling back environmental regulations.
In addition to a less-than-supportive regulatory environment in America in recent years, there’s also the fear of backlash from shareholders. The risk of litigation is an ever-present threat. The way regulations are written, the onus is on trustees to prove ESG investing does indeed generate better performance.
When CalPERS, the largest retirement plan in America, tried to divest assault rifle retailers and wholesalers from its system, its board president was unseated by a California police sergeant who criticised CalPERS use of ESG as well as its mediocre returns.
Similarly, in New York, several government unions opposed the comptroller’s plan to dump fossil fuel investments from the state’s pension fund.
What’s holding the U.S. back?
Much of the objection to ESG investing stems from an outdated perception that embracing ESG comes at a cost of financial returns.
The U.S. is indeed the world’s largest and deepest market for investors, but when it comes to ESG investing it lags behind (Western) Europe.
Many Americans still think of ESG investing as a screening process, but ESG has become far more sophisticated over the last 3-4 years. An increasing number of managers now use ESG integration, in which ESG issues are systemically included in investment analysis and decisions.
The challenge in the U.S. is not from a lack of interest in ESG. A survey by asset manager Schroders shows that more than 60% of Americans agree investment funds should consider sustainability factors. Yet only 15% say they put money in sustainably themed investments.
However, the interest is strong among younger investors. According to some annual surveys of 401(k) plan participants, 70% of millennials say they would invest in plans for the first time or increase their contribution rate if they had access to sustainable investment options.
Unlike in Europe, there is currently no comprehensive regulatory framework being developed in the U.S. that imposes mandatory ESG-reporting requirements on asset managers and financial advisers, insurance companies, banks or large, publicly-listed companies.
However, in his first week in office, President Joe Biden signed an executive order that will call for a review of the Labour Department's 2020 ruling on ESG investments.
The rule makes it more difficult for 401(k) plans to include investments that consider ESG factors in their retirement plans.
On the bright side
There are bright spots on the U.S. skies as well. Investment into renewable energy technologies has grown significantly in the U.S. over the last decades.
In 2019, investments reached USD 59 billion , in comparison to USD 11.3 billion in 2005. The United States’ renewable market has benefitted from green stimulus programs and uncertainties in renewable tax credits. The United States has also been a major market in terms of venture capital and private equity funding for green technology companies.
The U.S. has also focused heavily on small-scale solar as well as utility-scale renewable technologies. Investments in clean energy totalled USD 301.7 billion worldwide in 2019.
Here’s the value of investments in renewable energy in the United States from 2004 to 2019 (in billion U.S. dollars):
The US ranks at 10th with a renewable energy proportion of less than half that of the UK and nearly three times less that of Germany at 4.32%. You can see the Top 10 here.
If we look at the entire sustainable investing market, the overall trend is also positive, of course. Here’s the graph from 1995-2020, from the US Sustainable Investment Forum (more graphs here and here):
There’s plenty more to read, along the same lines:
There’s the Sustainable Funds U.S. Landscape Report from Morningstar – read here
Sustainable investing now accounts for 33% of total U.S. assets under management - read here
This piece gives a good overview of the trends in ESG investing in the U.S. – read here
And here’s an attempt to list the best ESG stocks in the U.S. by sector – read here
The ESG Premier League in the U.S.
And now on to the ESG ‘Premier League’ in the U.S. What is the situation there?
Well, there are not very many U.S. premier league players in the market. But the ones that are there are huge, and their actions echo around the world. The largest ESG funds and AUM are in the U.S. They are on the both sides of the asset fences, and they play big and hard.
There are many opinions on how thorough and consistent they are on ESG, but one thing is for sure: Given their size and financial muscles, the impact of what they do is enormous and affects the entire ESG market globally.
ESG under Biden
As it looks now, with the new administration in the U.S., ESG is set to grow fast and consistently. And within the next 4 years, U.S. will probably have obtained an ESG dominion worth its size.
Just a few days ago, it was announced that SEC, one of the world’s most powerful regulators, is launching an “ESG Climate Enforcement Task Force” to tackle ESG-related misconduct. The SEC will identify potential ESG violations through data mining, with an initial focus on finding “material gaps or misstatements in issuers’ disclosure of climate risks under existing rules”.
In addition to companies, the task force will investigate investment advisers’ and funds’ ESG strategies.
This is one of the monumental shifts in the U.S. related to ESG under the new Biden administration, and it bodes well for the future.
However, the question is still what aspects of ESG the U.S. will focus on going forward. Well, climate will be front and center, obviously. But, sadly, what is also obvious from available statistics is that social issues have low priority in the current ESG landscape in the U.S.
That’s all for now. Have a great week!
Best regards, Sasja