ING Q&A: Subtle wording changes to ESG strategies could avoid political heat

Political twists and turns around ESG investing are creating uncertainty for ESG-orientated financial advisers in the US, Coco Zhang, vice-president, ESG research at ING says.

Here, Zhang tells ESG Clarity US about playing catch up with EU regulation, decarbonization opportunities and how advisers can navigate political uncertainty.

Where does US stand when it comes to ESG regulations? 

The US is behind Europe in a few areas. The first is disclosure. The EU’s Corporate Sustainability Reporting Directive focuses on all three aspects of ESG whereas the US Securities and Exchange Commission (SEC) has only proposed climate-related data disclosure. The SEC is looking to propose disclosure requirements later this year that are more related to the ‘S’ and the ‘G’ in ESG. 

The EU requires Scope 1, 2 and 3 emissions disclosure whereas the SEC, while it has not released a final rule yet, is more likely than not to drop Scope 3 emissions requirements.

The second is standards. The EU taxonomy and Green Bond Standard together form a system of ESG regulation. The closest thing in the US is the Inflation Reduction Act (IRA), which says you need to get your emissions or carbon intensity below certain levels to get tax credits.

Third, the Fed is falling behind. It asked the six largest US banks to conduct a pilot test of climate risks, but is likely to keep a fairly limited role when it comes to climate risk regulation. The European Central Bank has taken a much more active role in requiring banks to conduct stress tests for climate change. 

US president Biden vetoed Congress’ anti-ESG bill on March 20. What does this mean for the Department of Labour’s ESG rule for retirement plans and for US financial advisers?

It legitimises the role of ESG factors in investment decisions for pension funds and financial institutions. Although this rule is for private sector pension plans, it could very well indirectly affect public sector pension plans because it serves as a benchmark for best practice in meeting some of the common fiduciary duty standards in the US. 

The ESG rule is safe for now, but remains vulnerable from legal action. Last year, there was a Supreme Court decision that the Environmental Protection Agency didn’t have the authority to regulate greenhouse gas emissions. That set a precedent for future rules to be overturned. 

We could also potentially see a reversal of this rule by a Republican administration. It was established by Obama, overturned by Trump and re-established by Biden. There is a good chance that it gets reversed again. 

Some US investors are concerned about facing political/legal pressure on an anti-ESG basis if they implement ESG investing. What are the implications for US financial advisers? 

Higher uncertainty. It will be harder for them to implement a unified strategy and prepare for policy changes. If an investor has one strategy, it’s really hard to satisfy everyone since the audience is so divided. There is also the risk of managed assets being pulled by asset owners. That is already happening in states that have passed anti-ESG laws like Texas, which put 10 large financial institutions and 348 investment funds on its ESG boycott list. 

There is a much harder balancing act for ESG-oriented investors. They can do two things. One is to change their strategy, but I’m not sure a very ESG-oriented investor will do that.

The second, which is more likely, is a remarketing and more careful wording of their investment strategies. Saying “risk avoidance” or “long-term growth” could help them get out of the most heated ESG discussions, but still implement their strategies. Investors can argue that the strategy is to avoid risks that could hurt financial returns – it could be a more subtle way of not saying the word ESG. 

Has the $370bn IRA translated into more investment opportunities for financial advisers?

Definitely. There has been a $45bn investment targeted at the electric vehicle industry and the whole supply chain, including batteries, critical minerals, recycling etc…We see continued investment and growth in clean energy and low-carbon technologies, plus potentially more socially related areas. The IRA puts a lot of attention on a just energy transition and the re-skilling of workers alongside the decarbonization process.

Leave a Comment