As Democrats celebrate the historic win of the Biden-Harris ticket, investors should pay close to attention to their plans to “Build Back Better”. In a clear endorsement of ESG and impact investing, a number of the President-elect’s policies are designed to accelerate the focus on ESG issues, which will have wide-ranging implications for private equity investors, even if the US government remains divided.
Perhaps most importantly Biden – who has aptly called climate change an “existential threat to humanity” – has pledged to rejoin the Paris climate accord on his first day in office, to cut US emissions to net zero by 2050 and for all electricity to be emissions-free by 2035: a stark reversal of the formal exiting of the US from the Paris climate accord which occurred last week on the day after the election.
The Biden-Harris administration is also expected to set up the first National Climate Council, a high level group whose chair would influence and direct a mandate of climate-related policies across the US government. The implementation of these promises will be a dramatic shift from the position of President Trump, who has weakened environmental rules across the board by overturning more than 100 major environmental regulations.
Private equity funds can expect many of these regulations to be reinstated, potentially with further rules to reduce carbon emissions. Portfolio companies affected by these regulations may benefit from undertaking an analysis of the likely impact on their operations and budgets. Portfolio companies with sustainable business models will likely perform well under a Biden administration.
Green New Deal
The President-elect has promised a $2tn green stimulus package to help reduce US emissions by investing in clean energy and incentivising the development of new technologies. While the solar energy industry has grown over the past four years, there is a potential for this industry to thrive over the next four years if tariffs on solar parts made in China and Mexico are lifted.
One potential source of tension within the Democratic Party is whether these plans align with the far-reaching and ambitious Green New Deal, and how far the Biden-Harris administration could go, presumably without the control of the Senate, to adopt such an ambitious package. However, there may be common ground to be found with Republicans on this who have agreed to include clean energy in broader economic stimulus measures.
The growth of this industry will represent an opportunity for private equity funds looking to deploy large amounts of capital in ESG focused sectors. However, more detail is needed on how the stimulus will be structured.
One area where impact investing has been able to make significant progress is agriculture technology, with startups in this sector looking to bring more efficiency to farming. As part of their proposed $2tn green stimulus package, Biden-Harris have pledged to create jobs in sustainable agriculture as well as establishing an agency to research agricultural techniques.
Some private equity funds have sought to make agriculture-focused investments. We expect this trend to continue, as investors try to identify best in class or innovative assets.
Employees and unions
Biden was selected as the Democratic nominee for his ability to turn out blue collar voters in the Rust Belt. He has committed to bringing forward legislation to make it easier to unionise and to increase wages. Separately, the US Impact Investing Alliance has begun to encourage the President-elect to strengthen and reaffirm the Community Reinvestment Act of 1977, where banks are required to drive capital to underserved communities.
Many private equity funds already consider employee relations and fair pay as part of their ESG due diligence and disclosures but investors can expect more scrutiny of how their portfolio companies remunerate workers.
The US has been slower than the EU and the UK to focus on ESG factors, likely as a result of Trump’s reluctance for support of the ESG-related policies, (as outlined earlier in the article). With the change of administration, the US and the SEC may seek to catch-up with the EU and the UK’s efforts in these areas.
One potential area for reform is whether the SEC will create more transparency around corporate environmental and social practices by mandating the Taskforce on Climate-Related Financial Disclosures’ social and environmental disclosure requirements. The US Impact Investing Alliance has noted that there is a growing momentum among the SEC’s Investor Advisory Council on the value of ESG corporate disclosure.
Other examples of potential US actions include undoing reforms mandated from the Department of Labor that have made it more difficult for asset managers to integrate sustainability issues into their investment strategies and for the Federal Reserve to bring climate risk into their prudential and supervisory oversight processes.
Standardisation and a global consensus on mandatory disclosure requirements and related green taxonomies, while obligating additional disclosures from private equity funds and portfolio companies alike, may make conforming to such requirements simpler.
The next four years under a Biden-Harris administration promise to represent a change in the US economy in favour of more focus on ESG issues. There will be opportunities for ESG and impact-focused private equity funds looking to deploy capital into these growing sectors. Many of these investment trends are already underway, and time will tell if a Biden-Harris administration can accelerate these pledges into action as promised on the campaign trail.
As the new US administration seeks to catch-up with the EU and the UK’s efforts, it remains to be seen whether the US will build on and collaborate with the EU and the UK on setting ESG regulations and disclosure requirements so that the standards are aligned, or if it will deviate and establish different structures – adding to the complexities of private equity funds navigating the ESG and impact investing landscape.
David Dowling is a private equity transactions associate and Clara Melly is a finance associate at law firm Ropes & Gray.