skip navigation

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

October 15, 2020

ESG and the Election—Can Red and Blue Make Green?

By Bonnie M. Wongtrakool

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

ESG assets have grown significantly (see Exhibit 1), with US sustainable investments totaling $12 trillion at the end of 2018. This acceleration in ESG investing has not gone unnoticed by federal agencies, given the intersection between ESG, investment regulations and climate policy. With Election Day quickly approaching, here we discuss the potential implications of Biden and Trump victories for ESG investors.

Exhibit 1: The Growth of ESG Assets Globally
Explore The Growth of ESG Assets Globally.
Source: Global Sustainable Investment Alliance, Western Asset. Select the image to expand the view.

Investment Regulations

In June, the Department of Labor (DOL) ignited ESG market participants when it issued a Notice of Proposed Rulemaking titled “Financial Factors in Selecting Plan Investments.” The DOL’s previous guidance had allowed 401(k) plan fiduciaries to include ESG funds as investment options if their risk-adjusted returns were expected to be similar to those of non-ESG alternatives. The rule proposed in June would constrain fiduciaries to considering “economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories” when evaluating ESG funds. Further, it would require fiduciaries to document thoroughly their rationale for selecting ESG funds, and prohibit fiduciaries from designating ESG funds as Qualified Default Investment Alternatives.

Feedback submitted during the comment period (which the DOL limited to 30 days rather than the usual 60) was overwhelmingly negative, with 95% of the 8,737 comments highlighting contradictions among the rule, standard market practices and investor preferences.1 Demand for ESG 401(k) options has exceeded supply; over two-thirds of investors surveyed by Wells Fargo expressed interest in allocating to an ESG fund,2 yet only 2.8% of plans offered an ESG option in 2018.3

The SEC has also turned its attention to ESG investing, though from a perhaps more agnostic perspective. In March, the SEC requested feedback on whether the “Names Rule” (Rule 35d-1 under the Investment Company Act of 1940) should apply to investments characterized as ESG or sustainable, ostensibly to protect investors from “greenwashing.” In May, the SEC Investor Advisory Committee recommended that the agency establish requirements for SEC-registered issuers to make standardized ESG disclosures. And in June, Regulation Best Interest, which requires broker-dealers to consider factors such as product costs and competing options when making investment recommendations to retail clients, went into effect. How this standard will apply to and affect ESG investments remains unclear.

Under a second Trump term, we expect these agencies would maintain their current negative stance on investor usage of ESG funds. A Biden administration would likely be more constructive in its treatment of ESG, particularly in light of Biden’s climate agenda, which we discuss next.

Climate Policy

While environmental considerations have long been a focus for ESG investors, interest in climate issues has become more mainstream in recent years. In his inaugural campaign, President Trump pledged to establish energy independence, deregulate oil and gas, and rejuvenate the coal industry. Once elected, Trump withdrew the US from the Paris climate accord and rolled back 100 environmentally oriented rules and regulations.4 Trump has not announced any climate-related plans for his second term, and would likely continue with his current agenda if re-elected.

In contrast, Biden has emphasized climate strategy as one of his key platforms. A Biden administration would aspire to reach net zero carbon emissions from the power sector by 2035 and to reach net greenhouse neutrality by 2050 through its $2 trillion “Clean Energy Revolution” infrastructure plan. Biden is also reported to be considering the creation of a new cabinet-level position and a White House office dedicated to climate issues.5

If Biden is elected, how he would convert these plans into reality depends on several unknowns, including the Senate-House balance. But it is reasonable to assume that the US would rejoin the Paris Agreement and that many of the Trump administration’s executive orders and regulations would be rolled back. ESG investors would likely view these developments as positive.

Regardless of the election outcome, we expect that ESG investing will continue to flourish, as many global investors have come to view ESG as the standard, not just an option. At Western Asset, we view ESG not as a political matter but as a fundamental investment tool, and will continue to integrate ESG considerations into our investment process to achieve better risk-adjusted returns for our clients.

© Western Asset Management Company, LLC 2023. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.
Past performance does not predict future returns. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
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 Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan. 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.