US elections: the implications for sustainability
August 26, 2020
Group Head of ESG,
Sustainable and Impact Investing
Chief Economist & Macro Strategist
Group Chief Investment Officer
The outcome of the US vote on November 3rd is likely to have a profound impact across environmental, social and governance issues. We explore what it all means for investors.
WHAT YOU NEED TO KNOW
- Environmental: a Trump victory would support carbon-intensive industries, particularly marginal producers. A Biden victory would trigger trillions of dollars in green investment, aiding solution-focused industrials and renewables firms.
- Social: a Democrat ‘clean sweep’ may lead to a new government-run health insurance program and / or meaningful drug price reform. Both would reduce profits for pharmaceutical companies.
- Governance: a Trump victory would lead to further deregulation, boosting short-term profits but potentially weakening corporate governance. A Biden victory would increase the quality of corporate ESG reporting, improving the quality of information for sustainable investors and hastening adoption.
In our Counterpoint Weekly dated July 20th we introduced our analysis of the November 3rd US elections. This week we dive deeper into the sustainability implications. Previously, we suggested the result of the presidential election would have a greater impact on sustainability than the Congressional elections. Therefore, we’ve considered each presidential candidate’s stated, and likely, policies across environmental, social and governance (ESG) dimensions.
The US presidential election is likely to have profound environmental consequences. Under the Trump administration the US has withdrawn from the 2015 Paris Agreement on limiting greenhouse gas emissions (GHG). However, around half of the US states have independently pledged to honour their commitments under the so-called United States Climate Alliance.
According to data from Harvard and Columbia universities, the Trump administration has reversed, revoked or is in the process of rolling back 100 significant environmental regulations. These include replacing the Obama-era emissions rules for power plants and vehicles; weakening protections for more than half of the US’s wetlands; and withdrawing the legal justification for restricting mercury emissions from power plants.
THE TRUMP ADMINSTRATION HAS ROLLED BACK ENVIRONMENTAL REGULATIONS
Sources: New York Times, Harvard Universities, and Columbia Universities
A second term for President Trump would likely see a continuation of environmental deregulation, and be positive for financial assets exposed to carbon-intensive activities. In particular, a Trump victory would support marginal producers and firms at the higher end of the cost curve. For example, the recent repeal of the 2016 legislation that required oil and gas companies to monitor and limit methane leaks from wells, compressor stations and other operations was embraced by small players but publicly opposed by oil majors, including ExxonMobil, Royal Dutch Shell and BP.
In contrast, former Vice-President Biden has co-opted the slogan “Build Back Better” and placed “modern, sustainable infrastructure and an equitable clean energy future” at the centre of his campaign. The plan (https://joebiden.com/clean-energy/) is wide-ranging and focuses on $2 trillion of investment during his prospective first term. From an environmental perspective, a Biden victory would be negative for the vast majority of the US-oil complex due to the threat of reduced subsidies, higher taxes and tighter regulation.
In contrast, renewables and certain industrial firms leveraged into green technologies and infrastructure would benefit. Notably, according to research from Yale University, backing for funding into renewable energy sources finds support from both Democrat and Republican voters. We believe this support illustrates the structural decline of fossil fuels, irrespective of 2020 electoral considerations.
RESEARCH INTO RENEWABLE ENERGY SOURCES HAS BIPARTISAN SUPPORT
Source: Yale University
In addition to the sectoral winners and losers, investors who are interested in aligning their portfolios to environmental outcomes have an increasingly rich universe of potential investment solutions to choose from – regardless of the US election outcome. These include funds where the carbon footprint is explicitly reduced through sophisticated construction techniques, to ‘dedicated assets’ such as green bond funds, where each bond’s financial proceeds are used exclusively for positive environmental purposes.
One social consequence of the US presidential election is likely to be healthcare related. However, the differences between the candidates is less stark than it would have been had Elizabeth Warren or Bernie Sanders claimed the Democratic nomination.
Biden has proposed lowering the Medicare eligibility age from 65 to 60, which would be slightly negative for med-tech producers. It is likely that Biden would require a unified Democratic Congress in order to implement more far-reaching change, such as the initiation of government-run health insurance and / or meaningful drug price reform. Such a scenario may benefit managed care companies but would be negative for pharmaceuticals. Over the long run, such policies would have positive social and economic benefits related to worker health and productivity.
President Trump’s administration has taken steps, sometimes challenged in court, to dismantle aspects of the Affordable Care Act (also called Obamacare) and repeatedly previewed his own wide-ranging healthcare plan that is yet to be finalized.
Sources: Quintet, KHN.org, multiple underlying news sources
Biden’s ‘pro-worker’ platform supports an increase in the Federal minimum wage from $7.25 to $15. This policy may improve consumer purchasing power and support US retail sales. However, the increase would have profoundly negative commercial implications for businesses that employ a large proportion of blue collar labour – from e-commerce fulfilment to travel and leisure. Yet there may be longer-term, structural benefits for the wider economy. An increase in the minimum wage may spur further investment in automation and capital spending, in turn boosting the US’s productivity and overall long-term economic potential.
The divide between Trump’s deregulatory stance and Biden’s bias toward tighter regulation has both near- and long-term consequences for US investments. Typically, deregulation increases profits but can weaken corporate governance, which can impair the long-term value of companies. One example is the 1999 repeal of the Glass-Steagall act, which previously constrained financial firms’ ability to operate in both commercial and investment banking. Some commentators, such as the Economic Nobel laureate Joseph Stiglitz, linked the repeal to the exceptional banking profits of the early 2000s and the Great Financial Crisis that followed thereafter.
In our analysis from the Counterpoint Weekly dated July 20th we noted that a Democratic sweep, through increased regulation and governance requirements, would weigh on the profits of major US sectors such as technology, financials, and pharmaceuticals.
Sometimes elections and policy can produce counterintuitive outcomes. For example, Trump’s withdrawal from the 2015 Paris Agreement galvanized state-level commitments from both Democratic and Republican governors, installing a zealous commitment that otherwise might not have materialized. In a similar vein, this summer the Department of Labor proposed a rule which seeks to limit the ability of retirement plans to include investment funds that integrate ESG factors into their investment process. The proposal requires plan fiduciaries to prove that an ESG fund be substantially similar to other possible investments in terms of risk-adjusted return and fees. Many commentators believe the proposal is intended to make it more difficult for plan fiduciaries to choose ESG funds, and seeks to support the fossil fuel industry, which is often underrepresented in ESG funds.
However, we believe the policy would increase the popularity of ESG funds. By raising the diligence standards related to ESG funds, the policy would increase transparency and comparability. This would raise investor confidence in ESG funds and remove impediments to investor adoption.
A Biden victory would produce a more straightforward outcome. US corporates have already embraced the concept of annual sustainability reports, but the information they contain varies significantly. A Biden victory would likely accelerate adoption of common standards such as the Sustainable Accounting Standards Board (SASB) – a framework favoured by leading investors, including Quintet. SASB-adoption would improve corporate disclosure and governance, while enhancing the information available to sustainable investors.
S&P 500 COMPANIES HAVE EMBRACED SUSTAINABILITY REPORTING
Source: Governance and Accountability Institute
The US election will have profound implications for sustainability, in particular on environmental topics. More broadly, sustainability issues that attract a degree of bipartisan support are more likely to be enacted, as legislative proposals require 60% support in the Senate to overcome filibustering. Regardless of the US election, we expect the financial industry to continue to innovate, in particular in areas with significant public interest – such as mitigating climate change.
QUINTET’S SUSTAINABLE INVESTMENT TOOLBOX
When constructing sustainable portfolios that can deliver attractive returns throughout the economic cycle, we combine four approaches. They provide exposure to different risks and potential returns:
Companies that are already performing strongly on various environmental, social and governance (ESG) measures.
Those that are moving in the right direction and may outperform as they improve their ESG perf ormance. Often this ESG improvement can be accelerated through constructive engagement with company management.
Trends that are underappreciated by the market, which should grow rapidly and command higher valuations as the world s regulatory, investment and consumption patterns shift, such as low carbon funds, gender equality funds and water funds.
Financial instruments designed with sustainability in mind. For instance, green bonds are a dedicated asset where the capital companies raise must be used for projects that will have a positive influence on the environment.
Globally confirmed cases of Covid-19 have now exceeded 23 million, up from approximately 21.5 million seven days previously.
On multiple occasions in our Counterpoint Weekly we have stressed the importance of testing, both as a means to track and ultimately suppress Covid-19, but also as a tool for investors to ascertain the likelihood of further economic shutdowns and financial market turbulence.
This week we present a new chart that tracks testing data, although we note that reporting standards vary between countries. We believe those with a high percentage of positive results may be testing too few people and are therefore failing to adequately track, monitor and contain Covid-19. This could lead to more infections and increase public and political pressure to (re)implement lockdowns. To contextualize, guidance released on May 12th from the World Health Organization (WHO) advised governments that before reopening their economies, rates of positivity in testing should remain at 5% or lower for at least 14 days.
With over 600,000 confirmed cases South Africa has the fifth-largest number. The count has doubled over the past 40 days.
The chart shows the development of South Africa’s new daily confirmed cases, with colours indicating the prevailing positive test rate. Periods of high positive test rates are in shades of red, while periods of low positive test rates are in shades of green.
South Africa is an example of a country exhibiting a worrying progression. As new daily confirmed case figures began to increase so did the positive test rate. This pattern is indicative of a country struggling to adequately track, monitor and contain Covid-19. While new daily case figures are beginning to moderate from elevated levels, the positive test rate remains over 15%. As a result, South Africa is likely to find it difficult to reopen its economy and remains vulnerable to a second wave.
SOUTH AFRICA EXHIBITS A WORRYING PROGRESSION
Sources: Ourworldindata.org, CDC
With over 300,000 cases, the UK is one of the 20 most affected countries as measured by confirmed cases. It’s an example of a country exhibiting a reassuring progression. Earlier in the year, the positive test rate was briefly, and alarmingly, in excess of 20%. The UK was then able to stabilize new daily confirmed case figures, while simultaneously increasing testing volumes. Thereafter, new daily confirmed cases declined and so did the positive test rate. Despite a recent small increase in new daily confirmed cases, the positive test rate is less than 1%.
THE UK EXHIBITS A REASSURING PROGRESSION
Sources: Ourworldindata.org, CDC
As the world’s largest economy, and with over 5.5 million confirmed Covid-19 cases, understanding the US’s virus and economic developments is crucial for us as investors. The US is still a cause for concern with a positive test rate in excess of 5%.
Earlier in the year the US exhibited similar trends to the UK with both new daily confirmed case figures and the positive test rate simultaneously peaking. Thereafter, an increase in testing occurred and both statistics reassuringly declined. However, the US experienced geographic Covid-19 contagion. This took new daily confirmed case numbers to new highs, and with it the positive test rate increased too.
THE US IS STILL A CAUSE OF CONCERN
Sources: Ourworldindata.org, CDC
At the market focuses on the development of potential vaccines, as investors, we must remain vigilant and closely track all available data. Currently, on balance, we believe the pandemic is being adequately managed, though significant local and regional risks remain. We continue to closely monitor the development of Covid-19 cases and, where available, testing data.
This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document – based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of August 24, 2020, and are subject to change. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. This document does not provide any individual investment advice and an investment decision must not be based merely on the information and data contained in the document. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down. Copyright © Quintet Private Bank (Europe) S.A. 2020. All rights reserved.