skip navigation
Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

MARKETS
15 January 2021

“Build Back Better” to Boost ESG

By Bonnie M. Wongtrakool

Stay up to date on timely topics and market events. Subscribe to our Blog now.

In our analysis of potential election outcomes last fall, we outlined how a second Trump term would continue to challenge ESG-oriented investors and companies, and how a Biden victory would result in a more supportive environment, subject to the ideological balance within Congress. While few could have predicted the gut-wrenching events of last week, it is now clear that the Democrats will take razor-thin control of the Senate as President-elect Biden moves into the Oval Office on January 20. Ahead of these changes, we share our views on how the ESG movement could accelerate under the new political regime.

In his “Build Back Better” plan, Biden outlined four key priorities: combating COVID-19; building back the US economy; advancing racial equity; and tackling the climate crisis. Though articulated separately in Biden’s platform, these priorities are deeply connected. Reaching “net zero” for greenhouse gas emissions will not only require significant spending and investment, but will also force us to confront a number of systemic challenges—whether from climate change, uneven economic opportunity, or lack of access to affordable health care—that disproportionately impact minority communities.

To be sure, Biden’s immediate energies will be consumed by accelerating Covid vaccinations and providing income relief. Yet Biden has also assembled a team that “will be ready on day one to confront the existential threat of climate change with a unified national response rooted in science and equity.”1 This group includes a diverse set of experienced and environmentally minded Cabinet nominees whose confirmations (with the new Democratic Senate majority) now seem reasonably assured. In addition, Biden has created two new high-level positions: a National Climate Adviser who will head up the first White House Office of Domestic Climate Policy, and an international climate envoy who will also sit on the National Security Council.

In his climate platform, Biden pledged to decarbonize the power generation sector by 2035 and achieve net zero emissions by 2050. Aside from rejoining the Paris Agreement on January 20, the Biden administration is likely to pull on three levers to advance these ambitions.

First, the federal government is expected to use its vast regulatory powers to improve corporate and investor behavior. The EPA and Department of Energy, for example, could raise standards for auto vehicles and appliances, power plants, air and water pollution, and methane emissions by oil and gas companies. The SEC could standardize and mandate issuer disclosures around environmental risks and board and management diversity, and could require asset managers to provide transparency around their approaches to ESG and the climate concerns in their portfolios. Banking regulators could include climate scenarios in their resilience tests to drive more efficient pricing of environmental risks across the economy. Note that the Federal Reserve, whose responsibilities include supervising financial institutions, recently joined the Network for Greening the Financial System, a consortium of central banks working to develop climate risk management best practices in the financial sector and support the low-carbon transition across capital markets.

Second, the administration and legislature will attempt to pass an infrastructure stimulus package that includes funding for clean energy investments and research. As envisioned in Biden’s campaign proposal, this package would include research funding for battery, carbon capture and green hydrogen technologies, the addition of 500,000 additional electric vehicle charging stations (which currently number 50,000), and upgrades to 4 million commercial buildings and 2 million homes. The $900 billion December stimulus bill, which received bipartisan support, included extensions for a number of investment and production tax credits for alternative energy. But, we believe that a more comprehensive set of provisions, with an expected price above $2 trillion, could be passed through the reconciliation process.

Third, the administration may implement carbon pricing across the US. A carbon tax or cap-and-trade emissions scheme would be most impactful if introduced at a national level, but could also be administered at a state or regional level. Even absent Congressional support for a carbon tax, the Federal Energy Regulatory Commission (FERC) could apply carbon pricing in electricity markets to help push the country toward the 2035 decarbonization goal. Such actions may be needed to remain competitive with efforts in other countries. Carbon border adjustments, which would place levies on imports of emissions-intensive goods from countries with more lenient standards, are on the EU docket for 2021, and are being considered by other US trading partners as well. Treasury Secretary-nominee Janet Yellen has been a vocal proponent of carbon taxes and carbon border adjustments, and will likely be advocating for carbon pricing within the new Administration.

As a UNPRI signatory, Western Asset is aligned with efforts to achieve a lower-carbon future. Reaching net zero will be a win not only for ESG investors, but for us all.

1https://www.bloomberg.com/news/articles/2020-12-17/biden-s-latest-climate-nominees-have-fought-fossil-fuel-projects?sref=y2G81i2m.

© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.