3 ways the US can finance the future
Leaders of the G-7 Summit fell short on delivering strong commitments to advancing sustainable finance. Despite this disappointing outcome, the United States still has the opportunity to be a global leader on aligning finance with sustainability goals.
Prior to the G-7 Summit, the Biden administration had taken several steps to achieve key sustainable finance policy reforms. In May, the Biden administration issued a sweeping executive order calling on the federal government to begin quantifying the financial risks climate change poses to our economy and instructing the Department of Labor to formally review two Trump-era rules that undermined investors’ ability to consider Environmental, Social and Governance (ESG) issues. In the wake of the lackluster takeaways from the G-7 Summit, building on these previous steps taken domestically will be crucial.
The sustainable finance community is increasingly looking to the Biden administration to pursue policies that advance responsible investment. If the U.S. hopes to keep pace with its economic competitors around the world, the Biden administration must prioritize sustainable finance policy at every level of government and become more of a leader on responsible investment among G-7 countries.
Investors regularly report to the Principles for Responsible Investment (PRI), which represents over 4,000 signatories managing over $100 trillion in AUM, that there are multiple policy barriers preventing them from achieving their sustainable finance goals. Based on this feedback, there are three policy steps the Biden administration should take to usher U.S. financial markets into the future.
First, the administration must ensure investors have access to substantive information about ESG factors impacting the companies they invest in. According to investors, the lack of consistent and comparable ESG data is a substantial barrier to their responsible investment practice. This information is crucial for investors to incorporate all value drivers, including ESG factors, in investment decision making. It is also necessary to understand and manage outcomes related to climate change, human rights abuses and exclusionary hiring practices.
Calling for mandatory, standardized ESG data is not an act of progressive idealism. This information is necessary for investors to get a full picture of risks that are material to the value of an investment and execute their fiduciary duty. For example, oil giant TC Energy Corporation lost significant earning potential when the Biden administration shut down the Keystone Pipeline project due to environmental risk. Advanced disclosures about the company’s plans to profit from activities that posed a risk to the environment and its exploration of renewable alternatives would have been material information for investors to consider as part of their decision making.
The SEC’s request for comment on climate disclosure is a step in the right direction, but can only lead to real change if it’s followed by rulemaking. Ensuring investors have the information they need to accurately assess ESG risk is also a multi-agency effort. The Treasury Department’s new “climate counselor” should take substantive action like re-establishing the shuttered Office of Environment and Energy and utilizing the expertise at the Office of Financial Research to conduct climate stress tests of banks and climate-exposed industries.
Second, the Biden administration should publicly acknowledge the dangers of “greenwashing” in the financial services sector and implement safeguards to protect investors.
As investors realize that ESG funds outperform their non-sustainable counterparts, demand for funds with ESG-related characteristics has grown. Fund managers have matched the demand, and there has been explosive growth in products and funds labeled with environmentally friendly buzzwords like “green” and “sustainable.” However, there are no consistent definitions of what constitutes each product type, creating significant challenges to evaluating their legitimacy.
The SEC should immediately call for fund managers to publish substantive disclosures of how fund names relate to investment practices. In the medium term, U.S. financial regulators, including the SEC, should adopt a common taxonomy and clear definitions for ESG-related investment products to ensure opportunistic funds do not take advantage of ambiguity to mislead investors.
Third, the Biden administration should re-engage with the international finance community and align domestic policy with global best practices. Global organizations are working to integrate ESG risk in every aspect of financial systems. U.S. participation in these efforts will ensure global sustainable financial markets grow concurrently, rather than evolve in different directions. A divergent global market with multiple sets of rules could increase operational and financial barriers for every American company seeking to grow overseas, and every international company seeking to invest in America.
Setting an ambitious goal to implement the Paris climate agreement and partnering with China on the G-20’s Sustainable Finance Study Group were both a good start, but more can be done. The U.S. should also join the International Platform on Sustainable Finance, and engage actively with the Organization for Economic Co-operation and Development and the G-7 and G-20, which lead the Task Force on Climate-Related Financial Disclosures. U.S. leadership in the transition to sustainable finance means continued U.S. leadership in a fast-changing global economy.
The Biden administration has many tools at its disposal to address the climate crisis and economic inequality. But one of the most powerful is encouraging and enabling responsible investing. It’s not just the right thing to do. It’s also a good long-term investment for both our economy and the U.S. position on the world stage.
Fiona Reynolds is CEO of the Principles for Responsible Investment, a global organization representing more than 3,500 signatories.
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