US Impact Alliance: what a new US administration could mean for ESG and impact policy

Alliance release a set of policy recommendations today

The US Impact Investing Alliance has today produced a wish-list for the new US Congress and White House Administration on policy to catalyse impact investing in the country. The report, Private Capital, Public Good, makes 11 policy recommendations around topics including ESG data, fiduciary duty and development finance.

It is the second time the Alliance has moved to drive policy around impact investing. In 2014, the Alliance – then called the US National Advisory Board – released Private Capital, Public Good, a 64-page report with a wide-range of recommendations including clarifications around ESG and fiduciary duty from the US Department of Labor. Around 80% of those recommendations have been implemented or advanced since then, says Executive Director Fran Seegul, pointing to 2016 clarifications for foundations on impact investment and fiduciary duty as one example.

This time round, its policy report is a slimmer document with a two-year timeframe. “The first report was a very big and totalising piece that was appropriate for a first report,” Seegul explains. “We felt this time round, given what is happening in the world right now, that we really need to be responsive to this crisis and have designed a set of recommendations for the next two years until the midterm elections [a vote on all branches of US federal and state government except the Presidential election]. We really have to remain nimble. We see this as a living document that will be responsive to context and the emerging set of challenges we face.”

The latest recommendations come not only in the midst of the Covid-19 crisis, but against a very different political landscape than the 2014 report, when the Obama Administration was in its second term. The US is fresh from its latest presidential election, with a new Administration starting in January. 

Under the current Administration, the US financial sector has faced a wave of new  regulations that many say is seeking to curtail ESG and impact investment. The Department of Labor, for example, has introduced rules that will make it harder for regulated pension funds to feel comfortable with ESG investing – despite around 95% of the market voicing opposition to the plans.

News reports and observers expect the incoming Biden Administration to be more receptive to ESG investing, which could mean a rethink of such policies. 

“There is always a rush towards regulation in the last year of a Presidential term to finalise rules that will be enforceable by the time the next President takes the role,” says Seegull. “And that is what’s happening here.”

In its new report, the Alliance says regulators should provide clarity to investors – including retirement plans and charitable endowments – around their duties as fiduciaries and their ability to consider the long-term materiality of impact factors.

Commenting on this in the context of the recent rule changes, Seegull says the Department of Labor could issue an “interpretive bulletin” around ESG and fiduciary duty that could give regulated pension funds more comfort on the issue. “We’re worried about a chilling effect on ESG investing,” she admits, despite clear private sector traction on the issue. 

Litigation is also a possibility, though this would be a lengthy process, “Investors could file suit challenging the rule on procedural grounds with an ultimate goal of overturning the regulation”, she suggests. A new process to overturn the rule, officially called Financial Factors in Selecting Plan Investments (1210-AB95), could also be used, but again, this wouldn’t offer a quick fix, taking many months to complete.  

Another recent Department of Labor rule that many feel suppresses ESG proxy voting was finalised last Friday, meaning that it could go into effect just days before President-elect Biden takes office, Seegull says.

Along with this wave of regulations around ESG, she says the Department of Labor has started to send “onerous requests for information to various plan sponsors or fund providers”.

“We certainly hope that is not continued under the Biden Administration.” 

Private Capital, Public Good also makes recommendations on ESG data and disclosure, one of the most-talked about subjects globally in the sustainability sector and an area in which the SEC faces growing pressure from investors and financial players, as well as campaigners. 

It comes as Europe, Canada, the UK, China, New Zealand and many other countries progress on regulating ESG data disclosure, through initiatives like taxonomies and mandatory TCFD disclosure.

Seegull says that even if big players like the EU and China continue to try and set global standards on ESG, “the US may decide to chart its own path forward” under the new Administration, adding that despite some pushback, there are elements of ESG reporting with bi-partisan appeal, such as diversity reporting. 

Other recommendations in the report include leveraging the group’s development finance expertise to reinvest in American infrastructure (the Alliance worked closely with the Trump Administration to help set up the US International Development Finance Corporation). There are also calls for community development finance institutions to support local impact investing, and moves to address explicitly racist banking practices and historical disinvestment in communities.