Since President-elect Biden won the election at the start of this month, many have been left wondering about the consequences this will have for the environment. The US has by no means a good reputation in this sector, especially after four years of the Trump administration who were actively hostile to any forms of “green” policies or regulation, leading to Europe taking the global lead in this area. Biden, however, was far from the most radical Democratic nominee. So as we approach this critical juncture for global action on climate change, we will see how many of the proposed policies will reshape corporate culture to focus significantly more on ESG measures and take responsibility for the outcomes, and whether this will be enough.
Many of Biden’s immediate policies are centered around undoing the environmental “America first” changes that Trump brought in, one of the most significant being to re-join the Paris Climate Agreement. This is an essential move to strengthen international cooperation and help foster a global culture which is committed to cut down emissions, even if there are very short-term economic consequences. Additionally, his plans include $2trn to be invested over the next four years in renewable energy, green public transport and other infrastructure projects, which ties into the idea that we can tailor the economic recovery from the COVID-19 pandemic to save both the environment and jobs simultaneously, rather than viewing the two as mutually exclusive as Trump often did. These ideas are extremely popular with the electorate: two thirds believe that their government is doing too little to tackle the issue.
Under these plans, it is estimated the US will reach zero net carbon emissions by 2050, the same time as the UK. Other democratic nominees had proposed more radical environmental reforms, often centered around the “green new deal” to signify the fundamental reforms that would be made. Elizabeth Warren, for example, had a much more ambitious target of reaching zero net emissions by 2030. This would carry with it a much greater need for companies to adapt to regulations in a shorter period of time, which is possibly why Biden’s more centrist position of gradual change appealed more to the party.
The energy sector
Coal has been the dominant means of powering production for the past five years in the US, partly due to the domestic industry across the country that Trump promised to revive. Under Biden, renewables could overtake coal as the biggest source of electricity generation by 2022, with solar and wind capacity possibly doubling in the next five years if Biden sticks to his campaign promises. This provides an excellent opportunity for significantly cutting emissions, as power generation is currently the second biggest source of energy-related emissions. It is also an opportunity for innovative companies to find solutions, creating something of a venture capital market. In this process, it is clear that those working in the fossil fuel industry will take an economic hit, which means that to smooth the transition for such workers, government intervention in helping transfer jobs in the sector could ease the negative effects of such a process.
One of the most significant environmental-related finance changes Trump made was a 2019 executive order that made the Department of Labour (DoL) introduce rules to make it harder for fiduciary funds (such as pension funds) to invest in companies based on ESG factors. Instead, the legislature tailored these funds more towards American oil and gas companies, which adds an unnecessary hurdle for investors to feel like they are making a change. These funds have an enormous influence on markets due to their size, so by even encouraging them to hold companies accountable for their ESG influence it is clear that we would be much more likely to create a culture whereby firms became part of the solution. In addition, rules were introduced by the SEC which have made it harder for investors to proxy vote and thereby influence decisions taken by these companies, which if revoked, would add even more pressure to these companies. Finally, Biden has the chance to establish mandatory ESG disclosures for publicly traded companies, which would make it much harder for investors to turn a blind eye. This in turn would strengthen this culture and oblige companies to change their business models to have everyone’s interests at heart.
Green bonds and institutional change
We could well see a bigger focus upon the issuance of green bonds, which are fixed income instruments that help raise finance specifically for environmental and green projects. Many states, such as New York and California, have already been issuing green bonds, raising billions of dollars. This could be taken a step further to the Treasury issuing bonds, which would be a highly symbolic move in terms of exhibiting how the financial system will now put the environment first, while also being highly pragmatic in terms of raising funds on such a large scale. Of course, the government would have to be very careful to sustain investor confidence for these instruments, unlike previous attempts where the government had to prevent default around 2008. The appetite for green finance is clearly growing upon both the demand and supply side, as the issuance in both France and Germany has illustrated, so to take back the global stage the US must do the same.
These reforms will not come to fruition without their challenges, especially from the Republican party who want to prioritise the short-term economy. One Republican senator, Mark Kelly, has estimated some of this legislation will kill over 600,000 jobs within the fracking industry in his state. Though this may well be the case, Biden can gain support from the opposition by clearly setting out how unemployment will not be adversely created and ensuring there is a concrete plan to integrate workers into the new green economy, rather than leaving them to fend for themselves. By doing this, it will also ease the challenge of a likely Republican senate obstructing this legislature, making it more likely that the President-elect will fill his campaign promises.
Overall, Biden’s presidency is sure to create an atmosphere where companies and financial institutions will be incentivised to go green and take responsibility for playing their part in cutting emissions. As climate change becomes an issue that we can no longer get away with ignoring, it is clear that the general population wants the government to take an active role in tackling this issue. This is a huge opportunity for companies to adapt and become industry leaders and examples, especially with the US’s huge international influence. If Biden can overcome the challenges put forward and continue to commit to his campaign promises, we will have made a significant first step in tackling this monumental issue, setting us up for the further change that is necessary to solve this issue.