In June 2020, under the Trump administration, the US Department of Labor (DOL) proposed a rule that would significantly curtail responsible investments made by pension funds. If passed, pension fund administrators would be required to prove that financial returns are not at risk in order to pursue ESG (environmental, social and governance)-based investments. As a result, incorporating risks such as climate change impact into investment strategies would become more difficult. Senior SEC official Elad Roisman called for better 'green' labelling and noted his reservations about requiring companies to disclose ESG information for regulators and investors.

This move by the DOL and the lack of action from US regulators - coupled with lessons learned from the pandemic – triggered many investors to become activists for climate action. A coalition of trade bodies including financial institutions such as the US’s largest pension funds wrote to the Federal Reserve, CFTC, SEC, and various government bodies urging action by integrating climate change as a systemic risk into their mandates through a series of recommendations. The signatories included investors managing nearly $1tn in assets, as well as several US senators. Investors expressed concerns that if regulators do not act immediately, climate change can have a disastrous impact on asset valuations and the macroeconomic stability of the US.

Since then, investor activism has had a real impact on policy making. On October 2021, the Biden Administration made two key proposals to remove the language from the Trump-era policy.

  1. The DOL’s new policy not only makes it easier for retirement plans to add investment options based on ESG factors, but to have such options to be the default investment settings signalling how incorporating ESG considerations should be a duty for retirement plan administrators. This is one of the many movements to account ESG investments such as those related to climate change and how it can benefit retirement portfolios by mitigating longer-term risks.
  2. Another Trump-era rule required retirement plan administrators to consider a complicated list of principles before casting proxy votes on shareholder proposals. This then discouraged casting the votes altogether. The recent Biden Administration’s proposal reverses this rule.   

Investor activism globally

From early days, investors in the UK and EU have been actively shaping policy for climate change through lobbying efforts to Parliament, joint coalitions, and open discussions with regulators. In the UK, the Bank of England announced plans in December 2019 to conduct mandatory stress tests of the resilience of major banks and insurers on a range of climate scenarios, one being rising sea levels and the European Union provided guidance on sustainable finance and clarity through a taxonomy.

Central banks of the UK, EU, and various other nations have identified the Recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD) as useful guidance. We are also seeing increasing pressure from regulators and investors to adopt TCFD and embed climate risk for all listed companies.

More recently, as the Covid-19 pandemic exposed the impact of systemic issues, international governments weaved environmental reforms into economic stimulus packages. As of May 2020, the Canadian government for example requires large businesses (revenues over $300m) requesting loans to publish annual climate disclosure reports on risks and sustainability goals. European Commission President Ursula von der Leyen announced the Green Deal strategy (which seeks net zero emissions by 2050) and includes plans that drive private investment and create jobs for environmentally friendly initiatives. Similarly, in the UK, a package of green stimulus-measures were released after business leaders called on Boris Johnson to align climate goals to economic recovery plans while rebuilding the economy.

We see the US gradually following suit when it comes to investors influencing policy. This was most clearly observed in the movements by the Biden Administration including the release of the Climate-Related Financial Risk Report in October 2021 by the Financial Stability Oversight Council. The Council, led by Treasury Secretary Janet Yellen, views climate-related financial risks as an emerging threat to the US financial system and stresses the need to incorporate such risks to supervisory and regulatory activities, enhance climate-related disclosures and to assess climate-related risks to US financial stability.  

Considerations for US businesses

Over the past years, investor activism has been a driver for climate change action around the world. Many businesses across sectors and regions have already started their journey towards reducing climate change risk and embracing opportunities through innovation and competitive advantage – even where governments and regulators have not yet taken action.

Like in international markets, US investors will likely continue to advocate for greater transparency on climate risks and impacts through disclosures and reporting. Whilst there is no US-specific regulation in place as of today, businesses should build on existing frameworks such as the TCFD. Since its inception, companies around the globe have been leveraging the TCFD’s guidance on climate change strategy and disclosures. Specifically, previously complex methods such as scenario analysis tools and data analytics have progressed to help leaders better understand the impact of climate-related risks to their business. There’s increasing pressure for investment managers and businesses to rethink their current risk management frameworks and internal operations as analysis of investment data will be critical when managing their climate change risk.

Climate action and sustainability will provide a holistic assessment of a business’s long-term prospects and ability to generate financial returns by capturing emerging risks and new opportunities – which will benefits investors, regulators, engage employees and benefit society overall. Investors are becoming increasingly aware of this and are starting to hold businesses accountable. A clear gap will emerge in the US businesses and market participants for those who take a lead on integrating climate change risk into their strategies versus those who actively choose not to.

Baringa stands ready to support financial institutions on this journey. Email Hortense Viard-Guerin or Saika Tota to understand how to get ahead.

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