ESG Integral in Biden’s Plans (January 19, 2021)

Myles Udland: First, I just want to get your take on the Paris climate accords here, that's kind of been a news item that's been circulating. How do you think Biden is going to tackle this particular issue?

Bonnie Wongtrakool: Right, so the rejoining of the Paris agreement was widely expected, that was a pledge that Biden had made on the campaign trail, and it's part of this larger climate agenda that he's articulated and that voters very much bought into. And as part of that agenda, what he wants to achieve is decarbonization of the power generation sector by 2035 and net zero greenhouse gas emissions by 2050. So clearly, a lot of work cut out for him. But we do know that he's assembled a very competent and diverse team with a lot of experience. And so we do think that there will be progress on this front. In addition, there is a favorable balance within Congress, but we do know that it's a thin margin. So he can't rely just on legislative action for this. We expect that he's going to do a lot of regulatory action on this front, primarily around raising standards for emissions, for auto emissions, for example, within the power sector, also potentially requiring more disclosures around environmental metrics for companies. And all of this will be very constructive as well. We think that he will have some incorporation of climate risk in the financial sector. We know that Treasury Secretary nominee Janet Yellen, who's going through a confirmation right now, she is a proponent of greater financial regulations that incorporate climate risk and sees this as a systemic risk that needs to be recognized and more fully priced in.

Brian Cheung: Hey Bonnie, Brian Cheung here. So you mentioned Janet Yellen right there, she was also talking about kind of types of incentives that you could put in there. She was saying EVs, for example, actually we saw GM get a bid off of her remarks earlier this morning. But when we talk about on the other side of incentives, it could be disincentives like maybe carbon pricing, although the Biden administration has been a bit mum about whether or not they would pursue a carbon tax, especially given that narrow majority in the Senate. What do you expect to see on that front? What types of industries could be impacted?

Bonnie Wongtrakool: Well, certainly the debate on that will continue, as you said, there hasn't been bipartisan support on that yet. I do think that they'll try to get it through, potentially through the reconciliation process. He did mention, Biden did mention this in its platform as well. Some type of carbon pricing, whether that's a carbon tax or some type of cap and trade emissions scheme, remains to be seen. But it is, I think, a necessary component in order for them to reach these ambitious goals that they have laid out. If they can't get congressional support for this, they can do things at the regulatory level. For example, the Federal Energy Regulatory Commission can also implement some pricing of carbon across the utility network, and that will help with the 2035 power generation goal. But ideally, we do see something that is nationwide and that encompasses all the sectors. It will be phased in, I think, gradually, as it has been in other countries that have been successful with this. And that's going to be necessary to prevent massive disruption to the system. And I think the administration does recognize that and it could be done in a way that is positive over time.

Myles Udland: Bonnie, I want to get your big picture view on the ESG space, we really saw it accelerated in 2019. 2020 was its own interesting year. How do you see it evolving going forward? Because it's not just about the not oil companies and not just about EV anymore.

Bonnie Wongtrakool: Absolutely. And as you stated, it has grown exponentially over the past couple of years and that's been without any political support, really, it's been private sector led both by investors and by companies. And so when you see this changing of the guard coming in, you know that that force will continue but potentially accelerate even further as this administration will be very supportive, I think, to ESG initiatives. When you look at the priorities that Biden laid out in his Build Back Better plan they're very, very ESG oriented. He wants to address Covid, of course, first, but also the economy, racial inequality and climate, as we discussed. And all of those things are very much consistent with what ESG investors and companies are seeking. So I think we will see a more positive environment when it comes to investing, when it comes to company investments and disclosures. And all of this will help to accelerate this going forward and also provide more opportunities for ESG investors who are already in this movement.

Myles Udland: Lots more opportunities for those ESG investors out there. All right, Bonnie Wongtrakool, Portfolio Manager and Global Head of ESG at Western Asset. Thank you so much for being here.