This article was originally published by Euromoney
Lucy Fitzgeorge-Parker, 25 January 2021.
The US president’s prompt action in rejoining the Paris Agreement has given encouragement to environmentalists at home and abroad. What should be next on his green hit list?
On his first day in office, US president Joe Biden fulfilled a key campaign promise by signing up the US once again to the Paris Agreement on climate change.
He also cancelled a permit issued by former president Donald Trump for the controversial Keystone XL pipeline and ordered a review of 100 of his predecessor’s policies on environmental issues.
As a clear signal that the new administration is committed to the environment, these moves were warmly welcomed by sustainability advocates, but what should come next?
As the new president starts his first full week in office, Euromoney asked sustainable finance experts what they would most like to see him address over the coming months.
Unsurprisingly, top of the list for many is a clear plan for carbon emissions reduction.
“The administration must pursue economic policies to address climate change,” says Fiona Reynolds, chief executive of the Principles for Responsible Investment (PRI). “It must set a pathway to achieve net-zero by 2050.”
Richard Mattison, chief executive of environmental rating specialist Trucost, now part of S&P Global, agrees that net zero should be the next target – but notes that achieving that ambition will mean building “a new energy system and infrastructure”.
“Currently, nearly 60% of the US grid is powered by coal and natural gas,” he says. “To achieve a carbon-free generation by 2035, it is estimated that 4.8 billion MWh of natural gas, coal and oil generation would theoretically need to be replaced by 2035.
“A net-zero target will require mass electrification of transportation in the coming decade alongside reducing emissions from the power sector, having significant implications for the auto and energy sectors.”
Duncan Grierson, clean-tech entrepreneur and founder of impact investment app Clim8, adds that action is needed across all sectors.
“The most impactful thing the new administration could do would be to issue an executive order that directs all US government agencies to make climate change a top priority,” he says.
More specifically, he points to the need to strengthen restrictions on air pollution – such as the standards for tailpipe emissions – that were relaxed under the previous administration.
Undoing the damage done during the four years of the Trump administration, as well as the need to take a coordinated approach to policy going forward, features prominently on the wishlists of most environmental, social and governance (ESG) professionals.
“In the US, we have seen a steadily growing patchwork of state and local policies and regulations to address climate change, [but] at the federal level, rollbacks of many environmental protections, emissions and energy efficiency standards,” says Amy O’Brien, head of responsible investing at Nuveen, the investment arm of TIAA.
She notes that this made it difficult for both investors and issuers to model risks and opportunities, and set their business strategies to be competitive in a low-carbon future.
PRI’s Reynolds agrees that the new administration must reverse the course set by US regulators during the past few years.
“Beyond reversing the tide of anti-ESG regulation from the Trump administration, US policymakers will need to advance new policies that support sustainable investing and strengthen accountability, good governance and shareholder rights,” she adds.
Mattison at Trucost notes that the Biden administration’s headline $1.9 trillion Covid-19 relief package will offer opportunities to get the ball rolling by providing “significant funding for the clean-energy sector”.
“The drive for green economy will require many significant investments and presents a huge opportunity for capital markets to play a role,” he adds. “There is a lot of government-issued debt that will be tagged to sustainability and when governments do that, they attract private markets to crowd in, so we can really expect to see a boom in sustainable debt.”
To really get sustainable investment moving in the US, though, there is general agreement that action is needed on ESG disclosure.
While many US companies are already voluntarily disclosing ESG information, Mattison notes that what is lacking is standardization.
“That would allow investors and other stakeholders to make sense of this information and compare it across companies, industries and markets,” he says. “Under the Biden administration, we can expect to see increased scrutiny on ESG disclosures.”
Nuveen’s O’Brien agrees that this is a priority. “We would like to see more clarity and consistency from the Biden administration on ESG disclosure standards and other ESG-related financial regulation across agencies,” she says.
“We’ve seen the EU make significant strides towards standardizing ESG disclosure among issuers and investors, and aiding industry clarity through a sustainable finance taxonomy. We think it’s time for the US to tackle many of the same challenges. “
At the same time, she cautions, it must be done “in a way that doesn’t stifle the growth or potential of the responsible investing industry or its continuing evolution”.
Reynolds advocates mandatory ESG disclosures for publicly traded companies, either directly via the Securities and Exchange Commission (SEC) or at the behest of Congress.
She also calls for reform to “modernize fiduciary duties” in the US. “American regulators should require pension and investment fiduciaries to integrate material ESG factors into their investment processes,” she says.
Again, that would mark a reversal of policies pursued by the Trump administration, under which the Department of Labor approved a rule limiting the ability of managers of 401(k) retirement plans in the US to incorporate ESG factors in their decision-making.
While climate has inevitably hogged the headlines, there are also hopes that the Biden administration will take up the challenge of addressing nature and biodiversity issues.
“I would like to see the Biden administration articulating the value and role that the country’s natural capital has for a vision of climate prosperity,” says Alejandro Litovsky, founder of environmental finance specialists Earth Security.
He notes that US water utilities are already turning to reforestation to preserve water supplies and cites research showing that Miami is the city in the world with the most to gain economically from restoring mangrove habitats for coastal protection.
“Biden should build on opportunities like these to create a coherent national strategy,” he says.
Litovsky also suggests that the president should take inspiration from the Great Green Wall, a $14 billion project launched in Africa – with the backing of the World Bank, the African Development Bank and the French government – to prevent the expansion of the Sahara and reverse desertification.
He contrasts it with the former US president’s much-touted plans to build a wall on the Mexican border to prevent immigration.
“The Great Green Wall creates jobs and opportunities for investment in nature,” says Litovsky. “It’s the antithesis to Trump’s border wall.
“America is a ‘nature superpower’ and should be more proactive in using its natural resources as a tool for climate prosperity. Biden has an opportunity to use nature to capture the imagination of the American public in a new way.”
Finally, market participants are keen to see the US once again re-engage with the global community on environmental issues and, ideally, take a global leadership role on climate.
O’Brien says: “We would like to see the Biden administration add cohesion and consistency to climate-related policy, ideally set with a strong understanding of how that will fit into the global climate policy landscape.”
She notes that many US-based investors – including Nuveen – have been active participants in shaping that landscape through the Task Force on Climate-related Financial Disclosures (TCFD), the EU sustainable finance consultation and the green bond standards, among others.
Grierson suggests that a positive signal of intent in this respect would be for Biden to announce an international summit on climate in the next couple of months “to show real leadership internationally and not wait for COP26 in November”.
Litovsky at Earth Security adds that the new administration’s approach to Asia will be particularly critical.
“Climate change will define the ‘Asian century’, from a Mekong river basin that is running out of water, to the collapse of fisheries and deforestation,” he says.
“The US has lost a lot of ground in Asia, on both foreign policy and trade. A key question for Biden is how he will deploy climate as a tool that re-defines America’s influence in Asia. China is ahead with its concept of an ecological civilization. America needs to catch up.”