How we got here.
For years, the investment community has been increasingly focused on the impact that Environmental, Social and Governance (ESG) issues, like environmental stewardship, labor practices and anti-corruption can have on a company’s ability to generate long-term value.
In 2016, the United Nations introduced its Sustainable Development Goals (SDGs)—goals for the long-term interest of society, guiding both mandatory and voluntary disclosure requirements for business leaders and corporate reporting.
In 2019, the Business Roundtable made waves by declaring that the era of shareholder primacy is over—meaning that CEOs must lead their companies for the benefit of all stakeholders, including customers, employees, suppliers and communities.
The BRT’s statement, along with the Covid-19 pandemic and increased social momentum on climate and racial justice issues, has driven public attention to a historically investor-focused consideration.
Still, investors express concern that the lack of a standardized ESG disclosure framework in the U.S. makes it difficult for investors to meaningfully evaluate and compare companies’ ESG practices and risks, reducing the value of disclosures.
A number of global reporting standards have been developed, and some have been made mandatory (for example, in the EU); however, any implementation by a U.S. company of an ESG disclosure framework remains voluntary. A lack of regulation has left institutional investors, like Vanguard and Blackrock, to choose their preferred standards and create proprietary tools for assessing ESG performance.
Edelman’s take: Regardless of who wins on November 3rd, public interest in ESG issues will remain strong. But given the major differences between Trump’s and Biden’s policy leanings, the election results could have a significant impact on how ESG expectations and disclosure requirements develop.
Public interest in ESG won’t wane if Trump gains another term.
The current administration’s attitude toward ESG is perhaps best defined as skepticism, with limited support of the UN’s Sustainable Development Goals and an ongoing push for deregulation, particularly on climate considerations.
Still, Donald Trump’s presidency has coincided with an increase in ESG assets under management and a shift in the cultural conversation, motivated but not confined to the BRT’s statement.
- This year, the Covid-19 pandemic has led to a rapid intensification in the conversation about the role of the corporation, with many taking proactive action to mitigate worker hazards, offer dependent care and paid sick leave, and provide community relief.
- The increased business risks emerging from COVID and the public outcry over racial and social injustice have intensified investor focus on management and oversight of ESG by executives and boards, with the expectation that companies will make good on their promises to protect their employees and advance diversity and inclusion.
- Despite calls for new disclosure requirements from experts on ESG and corporate governance, including the SEC’s Investor Advisory Committee, we’re unlikely to see new pro-ESG policies under a second-term Trump administration. In fact, the administration may create new regulations that discourage fund managers from investing in ESG products, including adoption of the U.S. Department of Labor’s proposed rule that would make it harder for ESG funds to be included in 401k and pension plans.
Still, pressure from asset owners concerned about the long-term impact of issues like climate change and economic inequality will result in continued demand for ESG investment products. And managers will continue to prepare for the upcoming $30 trillion asset transfer from baby boomers to millennials, who say that they want to invest in accordance with ESG mandates.
A Biden presidency will put the already-strong ESG movement into overdrive.
Under a Biden administration, the evolution of the ESG investing market will accelerate. The former vice president embraces new corporate governance standards and the creation of mandatory disclosure requirements.
First, we can expect to see increased pressure to standardize issuer and asset manager disclosures. Standardization of ESG investment criteria and data reported by issuers would enable investors to compare companies’ ESG performance more fairly and has the potential to level the playing field for capital formation, giving resource-strapped companies a better chance of inclusion in both passive ESG indices and actively managed funds.
Second, we can expect enhanced transparency requirements regarding public companies’ environmental impacts. Biden has introduced a $2 trillion plan to tackle climate change and a pledge to achieve net-zero emissions through the “greening” of energy, infrastructure, transportation, agriculture and more.
Finally, we can expect a Biden administration to strengthen the country’s contributions to the SDGs over the next decade, re-asserting U.S. leadership on a global stage. Biden is likely to re-enter the Paris Accords on climate and strengthen adherence to the UN’s guiding principles on business and human rights.
What boards and executives should do.
One thing is clear: regardless of the outcome of the election, the evolution of ESG will continue—driven by investor requirements in the case of a Trump administration, and accelerated by new regulation in the case of a Biden administration.
The cost of not taking ESG seriously has become too high. Companies should:
- Set out a clear corporate purpose and ESG goals, backed by defined KPIs
- Be aligned to the most relevant and globally supported frameworks and standards
- Provide consistent and transparent communications regarding their ESG performance to internal and external stakeholders
- Coordinate ESG-related initiatives with brand narrative, especially on news-worthy issues like racial justice and Covid-19
- Demonstrate an oversight and accountability at the executive and Board level
The Covid-19 pandemic and the ongoing fight for racial equity and justice have been cast as true tests of stakeholder capitalism. For corporations, it bears remembering that this is not simply a question of regulation or social responsibility—ESG pressure from investors comes from concerns about long-term business value. It’s imperative that corporate leaders act accordingly.