Although dealing with the coronavirus pandemic and the resulting economic turmoil will most certainly be on the top of the agenda for the Biden-Harris administration, industry experts expect a more favourable mandate conducive to investment. A somewhat “greener” White House will boost sustainable and impactful investing, a sector focusing on the silos of Environmental, Social and Governance (ESG) and which is already outperforming the market this year, according to the latest independent research.

There has been a massive surge in investors seeking both performance and purpose, and for good reason too (cf.1). A Morgan Stanley survey showed that in the U.S. there is an 85% investor interest in sustainable investing, which is 10% up from 2017. Morningstar research examined the long-term performance of a sample of 745 Europe-based sustainable funds and found that the majority of strategies have done better than non-ESG funds over the course of 1, 3, 5 and 10 years. Moreover, nine of the biggest ESG mutual funds in the U.S. outperformed the Standard & Poor’s 500 Index last year, with seven of them beating their market benchmarks over the past 5 years.

Sustainable investments also have greater survivorship rates, with 77% of ESG funds that were available 10 years ago still existing, compared to the considerably lower 46% of traditional funds. What’s more, the ESG investment market size was estimated to exceed $30 trillion at the end of 2019, an increase of more than 30% since 2016.

Figure 1: The Growth of ESG 2014 to 2021 (Expected) Opimas

Biden’s Green Outlook

A Biden-led administration is likely to further accelerate the ESG investing megatrend into the 2020’s. Ironically, some believe that one of the reasons for so much investment into these sustainable strategies is due to Donald Trump’s controversial approach with regards to the environment and underserved populations. President Biden is aiming to reverse these policies established by his predecessor, particularly on matters including climate change, social justice, equality, diversity, human rights and corporate transparency and accountability. Not only can we expect a tough stance on fossil fuels by Biden and Vice-President Kamala Harris, we may also see changes in defining US rules and taxonomy around ESG investing, and witness an alignment of US corporate disclosures with Europe’s. If an agreement is made vis-à-vis International ESG investing standards and frameworks, we will no doubt see further institutional investment in the ESG sector, which is much needed if we are to fund solutions to address the world’s many contemporary issues.

Biden’s Climate Change Plan

The Biden-Harris administration’s plans to “Build Back Better” is likely to drive sustainable investments by green-linked financial stimulus, subsidies and/or regulation. The Climate Action Plan includes the following three overarching pillars:

  1. The U.S. is to have a 100% clean energy infrastructural system in order to be part of the “circular economy” that aims to reach net-zero emissions no later than 2050.
  2. Recommit the United States to the Paris Agreement on Biden’s first day in office, on January 2021.
  3. Aim to strengthen the United States’ contribution to the United Nations Sustainable Development Goals (SDG) over the next decade.

What does this mean for ESG investment?

A historic investment will be made in the clean energy revolution. A federal investment of $1.7 trillion over the next 10 years will be made, with additional channelled private sector and regional investments to total to more than $5 trillion. As many analysts predicted, the Biden win could boost US’ growth of ESG investing, which only held 14% of ESG assets in its funds, lagging far behind Europe which held 82% in the third quarter of 2020, according to Morningstar.

Rapid growth in ESG has certainly been visible; nearly matching the record first quarter, there was an estimated net flow of $10.4 billion into US sustainable funds in the second quarter. This brought the total of investment into ESG assets in the first half of 2020 to $20.9 billion, just shy of the annual record of $21.4 billion set in 2019 (cf. 2-3).

Figure 2: ESG Fund Net Flows (2009-2019)

In terms of products, large investment in sustainable infrastructure and clean energy on the back of the Biden presidency could lead to the first green US Treasury issue and further boost the global green bond market, according to Bram Bos, lead portfolio manager of the NN Green Bond fund at NN Investment Partners.

Figure 3: Amount of US Equity in ESG Assets, Q3 2020 Morningstar

Subsidies and Regulation

We are set to see the standardization of ESG investment criteria and data reporting disclosures by issuers and asset managers. This will increase availability for investment capital, which will improve the inclusion of resource-restricted companies in both passive ESG indices and actively managed funds. There will be enhanced transparency requirements for public companies regarding their environmental impacts. Moreover, the repealing of the Trump tax incentives that enrich corporations at the expense of American jobs and the planet, along with the introduction of new legislation, will be a major source of funding for such environmental justice; an example being Biden’s hopes to use tax credits to raise the use of electric vehicles in the US autos market.

Looking Forward

Interest in ESG and impact investing in both public and private markets is unlikely to slow – in fact, US ESG assets amount to approximately 7-8% of fund flows (cf.4), a figure which is set to grow over the next four years under the Biden-Harris administration’s promise to make a change in the US economy in favour of focusing on more ESG issues.

Figure 4: US Sustainable fund flows relative to overall fund flows, Q3 2020 (Morningstar)

As Nigel Green, the CEO of deVere group aptly put it, “the anticipated biggest-ever generational transfer of wealth”, around $68 trillion according to some estimates, from baby boomers to millennials is set to change the face of investment. Millennials, who are statistically more likely to seek responsible investment options are predicted to launch ESG investing, which is already a burgeoning market, into exponential growth in the 2020s. Hand in hand with the pro-green policy leadership of the Biden-Harris administration, the sustainable investment boom is going to be further bolstered and intensified for the years to come.

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