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Decoding the Ballot - how the 2024 US election will change ESG investing
7/19/2023 ~ 10:19:17 AM

๐—ง๐—ต๐—ถ๐˜€ ๐—ฎ๐—ฟ๐˜๐—ถ๐—ฐ๐—น๐—ฒ ๐˜„๐—ฎ๐˜€ ๐˜„๐—ฟ๐—ถ๐˜๐˜๐—ฒ๐—ป ๐—ฏ๐˜† ๐—œ๐—ป๐˜๐—ฒ๐—ด๐—ฟ๐˜‚๐—บ ๐—˜๐—ฆ๐—š ๐—ฎ๐—ป๐—ฎ๐—น๐˜†๐˜€๐˜ ๐—ž๐—ถ๐˜ ๐— ๐—ฎ๐—ฟ๐—ธ๐˜€.

Although not the first topic that springs to mind, ESG is a significantly polarising topic between Democrats and Republicans.

This year it adopted a new symbol of partisanship: Bidenโ€™s rejection of a Republican proposal in March, which prevented pension fund managers from basing investment decisions on factors like climate change, was the first veto of his presidency.

The US Department of Labor ruling would make it easier for fund managers to consider ESG issues in investments and shareholders in decision making. Republicans believe ESG politicises investing by allowing managers to pursue โ€˜liberalโ€™ causes, which would hurt financial performance.

The Dems have expanded the scope of ESG through large investment in green infrastructure from the Inflation Reduction Act, as well as the aforementioned DoL rule on pension plans (and other legislation).

However, across the House, the two front-runners for the 2024 Republican nomination, Trump and DeSantis, both vehemently oppose ESG; the former in a 2024 campaign video blasted ESG as Wall Street โ€œradical-left garbage.โ€

In March, DeSantis formed an alliance with 18 US states to pushback against the DoLโ€™s new rule allowing ESG-aligned funds in 401(k) plans. Floridaโ€™s Senate also approved a bill banning state and local governments from using ESG criteria when selling debt or investing public money in April. It also prohibits Florida municipalities from selling bonds related to ESG projects and bans seeking ESG ratings.

A Republican victory, even if the potency of any future legislation is diluted by Democrat defiance, would be a far cry for ESG compared to the Biden administration.

According to Morningstar, anti-ESG sentiment, coupled with rising interest rates, have resulted in a pullback of $US5.2bn from sustainable funds in Q1 of 2023, making it the third quarter of continuous withdrawal in a year.

ESG debt, according to Bloomberg, made up only 2.5% of US$248bn of bonds issued by US companies in Q1 of 2023, as opposed to 6.08% of US$209bn of bonds issued in Q1 2022.

Owing partly to this backlash, itโ€™s likely that greeniums could diminish on US ESG debt, as demand for ESG bonds may decrease significantly.

๐—ช๐—ต๐—ฎ๐˜ ๐—ฑ๐—ผ๐—ฒ๐˜€ ๐˜๐—ต๐—ถ๐˜€ ๐—บ๐—ฒ๐—ฎ๐—ป ๐—ณ๐—ผ๐—ฟ ๐—˜๐—ฆ๐—š ๐—ถ๐—ป ๐Ÿฎ๐Ÿฌ๐Ÿฎ๐Ÿฐ?ย 

In 2024, the House and one-third of the 100-seat Senate will be up for election.

Currently, Republicans have a slim majority in the House, while the Democrats have a slim majority in the Senate. A clear majority in both the houses after the elections will give greater clarity on the future of ESG in the US.

However, if the narrow majority margins in the two houses persist after the elections, ESG will continue to be the centre of a big political divide.

๐—ช๐—ต๐—ฎ๐˜ ๐—ฑ๐—ผ ๐˜†๐—ผ๐˜‚ ๐˜๐—ต๐—ถ๐—ป๐—ธ?

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