Episode Transcript
Speaker 0 00:00:01 Welcome to the Definitive Sustainability Perspectives Podcast, where our goal is to engage and inform our audience from investors to asset managers and portfolio managers, to sustainability leaders and those involved in E S G and sustainable finance. This is Keith Shrine, and today we'll have a special episode to discuss what the US elections and their results mean for the future of E S G and sustainable finance. Here, what us today are our guest, Chuka Una, executive director and head of E S G EMEA at Edelman, and former member of the UK Parliament, and for a number of years, the Shadow Secretary of State for business. Also Heidi dubois, executive vice President and head of E s G for the US at Edelman. And former head of E s G for PepsiCo and B N Y Mellon. Thank you both for joining.
Speaker 1 00:01:05 Pleasure. Great to be with you.
Speaker 0 00:01:06 So
Speaker 2 00:01:07 Thank you for inviting me.
Speaker 0 00:01:08 Absolutely. As President elect Joe Biden enters into a transition stage. Many in the environmental industry expect significant shifts in climate change policy in the US and shifts in the E S G universe in general. For example, we know that President elect Biden intends to invest 2 trillion in creating green jobs and investing in clean technology, introduce changes in the automotive industry, and move the US back into the Paris Agreement. So Heidi, how realistic are these plans, especially since US Democrats might not get the majority in the sentence in the Senate.
Speaker 2 00:01:48 Hi, Kisa. Um, I think you're asking exactly the right question. Um, Biden's, uh, as indicated on the transition website, uh, Biden has an ambitious agenda starting with Covid, then moving to repairing the economy, racial justice, and as you mentioned, um, climate. And we just saw the Fed indicating its view that that climate risk, uh, is a stability risk for the financial system. The question is how far, um, this, uh, administration elect can get. Um, maybe a lot of that depends on the outcome of the election in Georgia. Uh, we will also need to see, um, how active the more progressive, uh, faction of the Democratic party, uh, is going to be, uh, in the coming months and, and years. I think that Biden and his administration are going to be selective about what they pursue because of the divide, um, that we see, uh, in the United States today. I think strong e s G advocates have really high hopes for a lot of change, but, um, I, I think, uh, the proof will be in the pudding there. And yes, a lot will depend on, on how the Senate ends up and who in, in whose hands the Senate ends up being. And so, Shunka to you, could you let us know your thoughts about what changes you expect to see globally and what that might mean for E S G investors and should we be more sober in terms of our expectations about climate initiatives?
Speaker 3 00:03:42 Well, I think first to pick up where, um, Heidi left off, um, there's this direct, of course, read across to the appointments that are going to be made and whether or not, uh, the Biden transition team feel they will be able to get, um, potential cabinet appointments through confirmation hearings in the Senate. I think the general consensus view, um, is that the, the person who fulfills the post of labor secretary is likely to come from the progressive wing. So I think there's a good chance that some of the, uh, most recent changes just in the last couple of weeks, we've seen the US Labor Department make, uh, in a kind of veiled attempt to make it more difficult to, um, do E S G integration in, uh, pension fund management are quite likely certainly to have a, a labor secretary seeking to reverse them. The treasury post obviously is very relevant too.
Speaker 3 00:04:38 Um, I think the, the, the, the person in the lead to take up that role is Lyle Brainard. And certainly in terms of what she said, it looks like she may be a reformer. Um, so it'll be interesting to see what changes are made by the treasury. Of course, there's a live discussion about on the e sg front, the extent to which the US should be following the, um, moves in Europe to mandatory reporting. Um, in the uk, uh, just this month, um, the chancellor, this zeca has just announced that, um, there will be mandatory reporting in line with T C F D, um, the TCFD framework by 2025. Um, the EU is moving in the direction as well. Um, uh, we may well see moves towards that. Um, but this is all depends on the appointments and whether they get confirmed. One thing that is without doubt is that, uh, the US will seek to sign up again to the Paris Climate Agreement.
Speaker 3 00:05:43 And I think one of the big questions is, um, what the implications for that will be in in, in terms of policy implementation. We know that Biden has said that he wants to spend 2 trillion over four years, but how now you would expect if, if, if the, uh, mood music, which is around infrastructure investment, uh, green technologies, that that should likely provide a further boost, um, to green bond and social bond issuances, which have already ballooned over the last two quarters. And I think that that will only further turbocharge the whole E S G space globally.
Speaker 2 00:06:25 Yes, this is Heidi. I absolutely agree with Chika on the potential for investment on the infrastructure front and the, um, energy transition front if the administration is successful in pursuing its climate risk plan.
Speaker 0 00:06:46 So I'm wondering, you raised a good point and I I love the fact that you brought up Chika, the names of the, or the cabinet members government positions that will definitely have an impact here from the treasury role to the labor role. I'm wondering if there is a playbook that the US would be able to look at when it comes to making changes and the road to get there, um, based on what the EU has done. So as it relates to disclosure, for example, is there a playbook or an outline that you suspect that the US will follow to get closer based on what the EU has done so far?
Speaker 3 00:07:21 Well, let's, well, let's take the, um, the desire to prevent greenwashing, um, and to ensure that, uh, investments are what they say on the tint and that they are, you know, genuinely E S G products as opposed to rebadged existing products that don't really deliver material benefits for the environment. I don't see why that has to become a partisan issue on the hill, regardless of who is in control of the Senate. Um, in the eu, it isn't a massively party politically party political, um, uh, partisan debate. Um, that issue. And that might explain why we've got an EU taxonomy, which, um, has to be implemented, um, on or by in 2022 and affects large companies and also asset managers. I don't see any reason why party politics and partisanship should have to stand in the way of measures being implemented under a, you know, in the Biden era, um, when you're just talking about cla, you know, you're talking about classification of products and making sure that, um, citizens and consumers and investors get what they think they are buying.
Speaker 3 00:08:42 Um, and so in that sense, there's a bit of a playbook that the, the EU can offer because look, it's not as if we are not, you know, polarized in Europe. Um, you know, our politics is, is not quite as polarized as, as the politics in the us but it's nevertheless polarized. And we see that with the residue of the Brexit debate in the uk. Um, but you look, look across, um, uh, you know, many of the leading economies in the world, they have a politics which is very divided between the populist death and the populist right. Um, with the center ground being, you know, increasingly barr. But there are still issues that don't need to become subject to the kind of knock about party politics
Speaker 0 00:09:21 From talking about the polarization that exists in so many nations. Let's talk a bit about corporate governance. And we know that environmental risk and regulation is only one aspect of e sg, corporate governance is a huge piece of that. We talked about the Biden Harris White House priorities. Heidi, you mentioned them earlier, COVID, the economy, racial justice and climate. Heidi, what should corporate boards be most attuned to as it relates to these priorities in 2021?
Speaker 2 00:09:50 Sure. Um, oh, I've seen a lot of writing in the past couple of days about the relationship that the, uh, Biden Harris administration may have with Wall Street. You've probably seen mention of Gary Gensler as a potential candidate, um, for a cabinet role. I think Wall Street is probably feeling positive about that. Um, that said, um, we do have the very progressive wing of the Democratic Party and, um, on October 30th, um, Elizabeth Warren and, uh, John Warner of Virginia, along with several others, took up again their agenda and initiatives on corporate governance. Um, which include, for example, in the Accountable Capitalism Act that Warren introduced in 2018, requiring employees to elect members of the board of any corporation with over 1 billion in tax receipts, um, that 75% of shareholders and directors would have to approve any political spending, um, that there potentially be something of a federalization of corporate law through the establishment of an office of United States corporations.
Speaker 2 00:11:14 Now, while the all of enactment of this is, is very much, um, in question, uh, wall Street and the corporate sector should probably observe this carefully and perhaps accelerate responses to expectations of investors on strong corporate governance, independence of directors, a broad diversity of thought, ethnicity and gender, even age, um, on a board, board refreshment. Uh, these are not new issues, but even if some of these governance, um, concepts are not formalized through legislation, I do think that, um, if anything, these ideas may accelerate and enhance the attention, uh, that that boards, um, can and, and should be, uh, looking at as, uh, we progressed through the transition and the establishment of the cabinet. Um,
Speaker 0 00:12:24 So you talked a bit about polarization earlier. I just wanna get on that point. Mm-hmm. <affirmative>, and, and we talk about this in context of corporate governance mm-hmm. <affirmative>, um, diversity, refreshing it mm-hmm. <affirmative> refreshing the boards, et cetera. Mm-hmm. <affirmative>, what is the point of agreement on all sides that you think that we could at least start from? So if there are so many different mm-hmm. <affirmative>, um, views, is there one point that everyone could agree on and as it relates to corporate governance that we could move and take action from?
Speaker 2 00:12:51 That is a great question, and I think one place of agreement could be, um, investor expectations. Um, like it or not, um, investors do have specific expectations of governance and they now publish those expectations regularly on their websites so that, uh, corporations are aware of them. Um, for example, state Street, uh, prominent, uh, investor, one of the top three often in many, uh, shareholder bases of corporations publicly announced its expectations of companies on diversity, equity, and inclusion, um, giving corporations the heads up on what they can and should be reporting on diversity, equity, and inclusion in their organizations. So I think there may be, in some respects, agreement by default on some of these practices through the interaction of investors and companies directly. And I would anticipate that the administration would support that interaction and there may be individuals, uh, who are appointed in the administration that would assist, uh, directly or indirectly in encouraging that conversation.
Speaker 0 00:14:20 And as you're talking about investors and really the power that they have, Heidi, what's the direction you're seeing with investor activism for E S G issues, especially as it relates to passive investors who are becoming more active?
Speaker 2 00:14:33 Yes, I refer to them in my own language as the actives. Um, we do see a rise in, um, past quote unquote passive investor activity. Um, more and more, uh, both active and passive investors are publishing stewardship reports that report out on engagements, the number of engagements that these investors have with companies, as well as the type of engagement. So you can actually track the increase for the most part of engagements on environmental, social, and governance issues. So I think that will continue. People often refer to BlackRock as being in the vanguard of a lot of this. Um, going back to climate and the agenda on managing climate risk, BlackRock announced that it had voted against 53 companies directors in last, in the last proxy season based on their perspective that companies had not made enough progress on managing climate risk.
Speaker 0 00:15:45 Great. And we're gonna give the last word here to you, Chuka, just based on everything that we've talked about as it relates to the elections here in the US as it relates to the polarization and even as it relates to corporate governance. What critical e s g trend do you think will take the market by surprise in 2021? So there are so many things that we're focusing on right now. What's the one thing that you think that we maybe aren't giving as much thought to that's really going to, um, be a huge trend in 2021?
Speaker 3 00:16:17 I think the fixed income space is going to grow and grow, and I know the Refinitiv of track and produce data showing, um, green and social bond issuance in the first half of 2020, really continuing upwards. But I think if we see all of these covid relief packages tied to, um, green growth, um, and obviously in the eu, the, you know, seven to 800 billion euro package, 30% of that is going to be driven towards green projects, then I think that is going to, depending on how the investments are targeted and what the instruments are, I think that we are going to see a, a, a real uptick in, in, uh, green and, and social bonds and, and, and a fixed income in a way that perhaps wasn't envisaged. The thing is, the problem is you get so nervous about making any prediction now because who sitting where we are now LA this time last year would've predicted we have just, we would've just gone through what we're going through. There's constant surprises. So I caveated by by saying I'm probably a poor predictor of anything at the moment.
Speaker 0 00:17:25 And to say that is a fair caveat will be an understatement <laugh>.
Speaker 2 00:17:28 So, great,
Speaker 0 00:17:30 Fantastic insight here. So the expectation is, is the Biden Harris White House will be pretty selective about what they pursue because of the division that we're experiencing. Um, in the country right now. It looks like there are many actors and players who could play a key role from the Labor Department's treasury. All those pieces are very important in terms of how e s G issues are approached. Partisanship may not play a huge role as it relates to classifying products. At the end of the day, it's important and in everyone's interest to make sure that we are getting what we think we're getting when we're buying. So that piece may not have as much of a polarizing effect. Shifting to corporate governance, you mentioned that it's clearly on the agenda for 2021 and investor expectations might be the point where everyone could agree. Corporations should be clear on what reporting expectations would be active and past investors are reporting stewardships more than ever before. We see stewardship reports around engagement on environmental, social, and governance issues. And finally, the major 2021 trend that we are predicting is fixed income. Fixed income space due to covid relief packages may see growth in the areas of green projects. Heidi Chuka a great conversation, fascinating in terms of your thoughts about direction. Thank you so much for joining us. Thank
Speaker 2 00:18:56 You. Thank you Hessa, and I hope you have a great rest of the day. And, uh, we'll be fo we'll be tracking everything as carefully as you are.
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