Advocates promising big push in Washington on all things ESG

When it comes to ESG investing in the U.S., the question of how much influence the incoming Biden administration can wield with a narrowly divided Senate may take some time to answer, but sustainability advocates are not waiting.

Instead, they vow to push harder than ever for U.S. regulators to up their game on everything from ESG disclosure by companies to ESG investing in retirement accounts.

So far, the Securities and Exchange Commission has resisted mandating specific reporting on ESG issues. But Commissioner Allison Herren Lee, a possible candidate for chairwoman under the Biden administration, expects that to change, with more reporting on climate change, diversity and worker safety likely to be required of companies.

Rep. Andy Levin, D-Mich., said to be a possible contender for SEC chairman, already staked a claim for more ESG investing disclosure by retirement plan fiduciaries by co-sponsoring two bills, the Sustainable Investment Policies Act and the Retirees Sustainable Investment Policies Act, calling for more participant input and more details of how fiduciaries consider ESG factors in investment decisions.

Groups like the Center for American Progress will also be pressing regulators at the SEC and the Department of Labor to require investment fiduciaries to adopt and publicly disclose how they address ESG-related risks, undoing some restrictions imposed by the Trump administration.

"It has been a big topic for plan sponsors, particularly the DOL guidance," said Jon Pliner, New York-based senior director, investments, U.S. head of delegated portfolio management at Willis Towers Watson PLC, whose U.S. plan sponsor clients have $55 billion in defined benefit and defined contribution assets. "We do think there are pecuniary (ESG) factors to incorporate into the process. A lot of these risks are sort of left-tail risks, like energy transition," he said. "On the flip side, we also think there are a lot of opportunities. It is not all negative."

Washington's main industry — lobbying — could also be in for an overhaul in 2021 thanks to ESG investors. Influential asset managers like BlackRock Inc. are joining the chorus of ESG advocates that want to make sure companies voicing support for sustainability measures, particularly when it comes to climate change, are not supporting lobbying efforts that support the opposite goal.

It is really a matter of risk management, said Michelle Edkins, managing director and global head of BlackRock's investment stewardship team in New York, who sees "increasing risk" from major trade associations activity that contradicts companies' official positions on things like reduced carbon emissions.

Institutional investors will be upping their own game, driving what is expected to be a surge in shareholder activism during the upcoming proxy season. A CoreData Research survey of 150 institutional investors at the end of 2020 found 91% of them expecting to participate in more activism in the next few years. They also expect more pressure on asset managers to join the fight, and some like those in the recently launched Net Zero Asset Managers initiative have heard the call. Members representing $9 trillion of assets under management are committing to support investing aligned with net-zero emissions by 2050 or sooner.

Corporate board members will also feel increasing pressure to help their companies reach the ESG goals demanded by investors, with clear demonstrations of not just the company's ESG goals but also outcomes. "It's show, not tell," BlackRock's Ms. Edkins said.

The growing list of new tools for measuring progress on ESG goals, such as Morningstar Inc.'s Developed Markets (ex-Japan) Gender Diversity index, will back up investor efforts, like recent successful campaigns by the New York City public retirement plans and Calvert Research & Investment to get large companies to share Equal Employment Opportunity Commission data on workforce diversity. Calvert is a global leader in responsible investing with $26 billion under management.

"Measuring definitely helps" spur progress on ESG issues like corporate diversity, "and helps us all be on the same foot," said Mary Jane McQuillen, managing director and head of ESG at ClearBridge Investments LLC in New York who manages an $8 billion portfolio. She praised Nasdaq's "pioneering move" on Dec. 1 asking the SEC to allow new listing rules requiring companies to publicly disclose the diversity of their boards, and eventually to have at least two diverse directors.

Increasing corporate board diversity is also being supported by business groups including the U.S. Chamber of Commerce, the Real Estate Roundtable and the National Association of Investment Companies. A House proposal to require companies to disclose the racial, ethnic and gender composition of directors and executive officers, and any plans to promote diversity, would provide a model to organically boost diversity, which "has become increasingly important to institutional investors, pension funds and other stakeholders," the business groups said in a joint statement.

An SEC asset management advisory subcommittee on diversity hopes to deliver concrete suggestions in early 2021 to help SEC officials increase diversity in the asset management industry. Those are likely to include calls for greater transparency into demographic information of regulated firms and conflicts of interest in the consultant industry. SEC officials "are really trying to do the right things as it relates to diversity inside the agency and in the industry," said subcommittee member Gilbert Garcia, founder of fixed-income manager Garcia Hamilton and Associates LP, Houston, with $15.8 billion in assets under management.

When it comes to companies making real progress on ESG issues like climate change or diversity and inclusion, "investors play a key role. If we don't engage and share our views, companies are not always aware. Disclosure is not a given and not all companies are on the same level," said Ms. McQuillen, who cautions investors not to overlook smaller companies, "so as investors put more into their stock, they grow responsibly," she said.

Linda-Eling Lee, managing director and global head of ESG research for MSCI Inc. in New York, thinks that in 2021 investors pushing for progress on climate change "are going to be hitting up against some real barriers" to achieve the goals of the Paris Agreement, even with the backing of the Biden White House. "The math is going to get hard.

Investor activism will really ramp up because they have to get companies to do things very differently," Ms. Lee said.

Investors are going to feel more pressure on ESG disclosure, too, she added. "We are starting to see that (companies) are much better prepared than investors and are starting to turn the tables, getting their ducks in a row," she said.