Election Day 2020 is this week. The election results will impact every aspect of our lives, including our investments. What could the world of environmental, social, and governance (ESG) investing look like under Biden?
Taxonomy
The US has no clear definitions about what ESG investing is. The Investment Company Institute, a trade association for U.S. mutual fund companies, has attempted to provide definitions. The European Union (EU) has approved a sustainable finance taxonomy. BlackRock, the world’s largest asset manager, published a paper calling for a globally recognized approach to ESG reporting. Five major sustainability framework and standard-setting institutions issued a statement of intent to collaborate on comprehensive corporate reporting.
It is time for the US government to create and approve clear definitions. The US taxonomy should be aligned with the EU’s taxonomy to facilitate global financial markets. Once ESG taxonomy is clearly defined, the Securities Exchange Commission (SEC) should ensure that funds are properly named.
Disclosure
The US Commodity Futures Trading Commission (CFTC) released a 2020 report entitled “Managing Climate Risk in the US Financial System.” This report lays out a framework for climate risk disclosure by banks, nonbank financial companies, and publicly traded corporations. A similar framework could be applied to wider ESG risk-related factors.
Retirement Plans
In 2020, two Trump agencies provided very different viewpoints about if ESG factors should be considered when making retirement fund investment decisions. The Biden Administration should clarify that not only can ESG factors be considered, they SHOULD be considered as a risk mitigation strategy.
Education
The number of states that require high school students to take a financial literacy course has risen to twenty-one. Forty-five states now include personal finance education in their curriculum standards for kindergarten through 12 grades. Curriculums are determined at a state level. However, the Department of Education provides financial literacy curricula and resources. ESG investing should be incorporated into these resources.
Donor Advised Funds
A donor advised funds (DAF) is like a charitable investment account. When a donor puts assets into a DAF, a tax deduction is received for the amount that is contributed. The assets in the DAF can then be invested and donated at the time of the investor’s choice. The donation time may occur years from the initial contribution. Currently, assets held in the DAF do not have to be charitable (e.g. you can move your Exxon Mobil Corp. stock into a DAF). There is no annual minimum required to be donated or invested for charitable purposes. The Biden administration should require an annual minimum investment/donation – like The 5% Minimum Distribution Rule for foundations. The Biden administration should also require DAF providers to report on the charitable impact and ESG metrics of all DAF assets.
