Washington, D.C. (January 19, 2021) - President-Elect Biden is expected to shift executive branch climate policy dramatically, assigning priorities to incentives for renewable energy, support for carbon pricing, and other aggressive measures aimed at reducing greenhouse gas emissions. The new Administration's goals include increased attention to sustainable investing, standardization of corporate disclosures, and environmental, social and governance (ESG) criteria. These changes create opportunities, but also challenges, for businesses open to the potential for competitive advantage.

Some organizations have already begun to revise their positions to align with these anticipated policy changes. The U.S. Chamber of Commerce recently solicited opinions from some members about carbon pricing. General Motors Co. withdrew its support of the Trump Administration's rollback on clean car standards in favor of President-Elect Biden's emphasis on electric vehicles. Various utilities, banks, auto manufacturers, and technology companies have signed onto a statement urging the Biden Administration to cooperate with Congress to find "durable, bipartisan climate solutions."

While sustainable investing is not new, and reportedly ESG funds and investment strategies have done well under the Trump Administration, these initiatives have in large part been driven by shareholder activism and supply chain sustainability pressures. The expected policy changes are sure to add momentum to the already-growing ESG investment phenomenon that will be increasingly important to business transactions. During the past several years, investment trends have shown that asset owners and managers responded to these forces by turning away from investment opportunities that are perceived as high-risk due to potential changes in regulation or operational impacts caused by climate change. In 2019, the global issuance of debt meeting sustainability criteria reached $145 billion, and for this year, Skandinaviska Enskilda Banken AB (SEB AB) — a leading North European banking group — has predicted that global issuance of ESG debt will reach at least $1 trillion.

This important new trend carries with it issues investors need to consider carefully, enlisting expertise as needed. One such issue is the lack of an agreed-upon set of metrics for ESG factors, which complicates businesses' abilities to quantify their efforts and accomplishments. Historically, the data set that has been available to investors is information that is easily measured, but it is not necessarily conducive to accurate risk assessment. To obtain an accurate picture of a company's ESG standing in order to assess risks adequately, investors need to be aware of the type of data available to them, and businesses must ensure that they are placing the correct types of data into the public domain to attract these investors.

Another important factor is potential Securities and Exchange Commission (SEC) involvement. Many commentators have predicted that the Biden Administration will require the SEC and possibly banking regulators to implement mandatory ESG reporting since it can be implemented relatively expeditiously under existing statutory authority. Regulators have additional reasons for imposing these requirements, to support broader substantive climate change regulations. These reporting requirements would more closely resemble those of the Obama Administration than the "principles-based" reporting from the Trump Administration. Despite the existence of voluntary ESG reporting protocols that industry is currently using — like the Carbon Disclosure Project, ASTM guidelines, and Governmental Accounting Standards Board — none of the existing guidelines are ready to be picked off the shelf and implemented as is, as part of a climate change regulatory reporting program, and all of these programs differ to some degree from one another. In addition, regulatory ESGs are likely to differ from the existing voluntary ESG, and companies that have already adopted voluntary ESG will need time to transition to new requirements.

Further, the implications of this shift in policy may not be as obvious as assumed. A significant increase in federal regulatory presence mean businesses, particularly those in "disfavored" industries such as fossil fuels, utilities, large farming operations, and certain types of manufacturing, will need to engage with the new Administration to ensure that reasonable approaches prevail. Relatedly, the new Administration will have to address certain economic realities, such as the nation's continuing need for reliable baseload energy sources, including fossil fuels. President-Elect Biden's incoming director of the National Economic Council, Brian Deese, seems to recognize this fact, and has suggested that sustainable investment can include investing in fossil fuel companies that are better situated to prepare for the transition to low-carbon emissions. According to Deese, this includes companies that are already actively implementing sustainable practices to reduce their carbon emissions, as well as businesses with management that is sensitive to other contemporary workplace issues such as cybersecurity and water use reduction. Whether a company has already adopted voluntary carbon-reduction measures or is seeking to anticipate regulatory obligations, it is prudent to track these ongoing developments closely..

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