The Biden/Harris Administration has a broad agenda and although it’s not likely the top priority, the new regime could benefit environmental, social and governance (ESG) and sustainable investing funds, such as the FlexShares STOXX US ESG Impact Index Fund (CBOE: ESG) and the FlexShares STOXX Global ESG Impact Index Fund (CBOE: ESGG).
The red carpet for environmental, social and governance (ESG) investing has been rolled out with the prospect of a Joe Biden presidency.
“In the final year of the Trump Administration, however, the regulatory environment has shifted from benign to negative as the Department of Labor and the Securities and Exchange Commission have taken decidedly anti-ESG stances in several rule-makings, and the SEC has not addressed requests to require corporate disclosure of climate or other financially material environmental and social risks,” writes Morningstar analyst Jon Hale.
FlexShares’ ESG seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the STOXX® USA ESG Impact Index. The underlying index is designed to reflect the performance of a selection of companies that, in aggregate, possess greater exposure to ESG characteristics relative to the STOXX® USA 900 Index, a float-adjusted market-capitalization weighted index of U.S.- incorporated companies. Under normal circumstances, the fund will invest at least 80% of its total assets in the securities of the underlying index.
Good News for ESG, ESGG
“We expect the regulatory environment for sustainable investing to improve markedly under the Biden Administration,” according to Hale. “Let’s start with the DOL, which just two weeks ago finalized a rule intended to limit the use of ESG funds in retirement plans regulated under ERISA, including 401(k) plans. While the final rule was weakened after the agency incorporated public comments, which were overwhelmingly opposed to the original proposed rule, the final rule requires plan fiduciaries to apply additional scrutiny in selecting funds that offer “non-pecuniary benefits” by requiring increased documentation of selection decisions along with a complete ban on such funds as default options in defined-contribution plans.”
However, some critics have warned that investors may be making the jump without examining their landing spots. The ESG label is not fully standardized or regulated by the United States, so no one can agree on how to precisely define ESG components. That scenario could improve under the new administration.
“We think it is also likely that a Biden DOL will promulgate new regulations for a selection of ESG funds as default options. Because that part of the recently passed regulation has a delayed effective date, the new administration has some time to put new rules in place,” writes Hale.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.