‘A race to the top’
According to DWS’s Lewis, large US managers operating in Europe can’t afford to ignore its world-beating standards. They “will follow the highest bar that is set and they will have to follow the EU taxonomy and all the regulations that are coming out of the action plan”, he adds.
“So, there’s an issue of does the US become a rule-taker, which is a bit of an unusual phenomenon – it’s usually the other way around. It’s not just that you can raise your borders and ignore what’s going on in Europe if you are operating on a global basis, which most investors are.
“That EU standard will be the benchmark and investors and asset managers know that ESG is part of their fiduciary duty, they have reputational risk if they do not follow this, their clients are demanding it – so if you fall behind what is quite a strong push globally, then from a business point of view, your licence to operate will be questioned and you will potentially lose market share. So, what is happening in the EU does have global implications.”
Naturally, US players will seek to ensure best practice resonates globally, rather than confining it to a particular region. After all, if you believe that pursuing ESG and pursuing financial returns is the same thing, why wouldn’t this be applied across the board?
Amy O’Brien, head of responsible investments at Chicago-based Nuveen, says: “When we’ve thought about evolving our own efforts over the years, we’re always looking at that market for inspiration and much of what we’re doing at Nuveen is very much in line with the managers in Europe. That’s because it’s a race to the top – setting the leading standard and having a cascading effect.”
She adds: “As a global manager, it’s not in our best interests to have to manage things in different ways. We want to have a strong, unified way of approaching ESG and impact. We’ve been very active on the policy front and the EU consultation, and our views have been consistent no matter where we’re weighing in – on materiality, appropriateness of their inclusion in the investment process, about the need for more credibility, getting behind standardisation and harmonisation, so our voice on all these issues have been consistent globally despite the fact that we’re operating in these very different environments right now.”
However, Europe is by no means perfect. Some are concerned that the EU taxonomy is too narrow and fails to understand the wider context of sustainability – in short, that it neglects the social aspect.
“While new EU regulations most certainly have good intentions behind them, their implementation is potentially very problematic,” says RLAM’s Hamilton Claxton.
“The green taxonomy is far too narrow and doesn’t consider the reality of how most companies operate and how most green activities are financed. A company that is producing green technology that could change the world might be part of a huge conglomerate where 98% of their revenues don’t qualify as ‘green’. Companies don’t report their revenues according to ‘green’ and ‘non-green’ activities and there is a real risk that regulations will stifle innovation and create costs for end investors.”
A new dawn?
President Trump’s administration rolled back more than 80 environmental rules and regulations, with another 20 still in progress at the time of publication, according to a New York Times analysis. But with investors and millennials firmly committed to ESG, president-elect Joe Biden has struck a markedly different tone, pledging to recommit to the Paris Agreement and to ensure “the US achieves a 100% clean-energy economy and net-zero emissions no later than 2050”.
In response to this, Bill Hare – chief executive of Climate Analytics, a Climate Action Tracker (CAT) partner organisation – said: “This could be an historic tipping point: with Biden’s election, China, the US, EU, Japan, South Korea – two-thirds of the world economy and over 50% of global GHG emissions – would have net-zero greenhouse gas emissions by mid-century commitments.”
A Biden presidency also spells positive news for ESG disclosure, according to Nigel Green, chief executive of deVere Group. “It is probable that US rules surrounding ESG investing and corporate disclosures will now come into line with those of Europe – something Trump fiercely opposed,” he said in a statement.
“If the rules on ESG investing are matched and agreed upon, and an international standard and framework brought in, we can expect further institutional investment piling into the ESG sector.”
Considering millennial’s enthusiasm for sustainability, the signs for growth are encouraging.
As Green put it: “The biggest-ever generational transfer of wealth – likely to be around $60 trillion – from baby boomers to millennials (who are statistically more likely to seek responsible investment options), is to take place in the next couple of years. As such, ESG investing is set to grow exponentially in the 2020s.”
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