Continued tailwinds in 2022 for ESG in the US

Last year marked a material shift in the direction of policy and regulation in the US. The new administration issued an executive order directing the federal government to treat climate change as an investment factor, and the new infrastructure bill includes strong priorities around areas like electric vehicles.

In addition, the Department of Labor (DOL) announced the non-enforcement of the 2020 rule that required managers to narrowly apply the fiduciary standard of prudence under the Employee Retirement Income Security Act (ERISA) that called into question whether managers could consider nonfinancial ESG factors, and instead proposed a new rule that would not only remove prior limitations but encourage and maybe even require asset managers to consider ESG risk factors while making investments and casting proxy votes. An idea underlying the proposal is that climate change and ESG factors can be financially material and that integrating them into the investment process would lead to better long-term risk-adjusted returns. While the new rule has not yet been finalized, the Employee Benefits Security Administration (EBSA) issued a Request for Information on February 14, 2022 in furtherance of the Executive Order on Climate-Related Financial Risk, to solicit public input on EBSA's future work relating to retirement savings and climate-related financial risk.

Finally, the Securities and Exchange Commission (SEC) too has a renewed focus on ESG standards-setting and disclosures, having announced in 2021 the creation of a Climate and ESG Task Force in the Division of Enforcement, solicited comments on climate change disclosures, and made both climate-related risks and ESG disclosures examination priorities.  

US investors continue to grow their interest in sustainability, and there is evidence that they are motivated to put more money to work in this space. Schroders commissions a retirement plan participant survey each year (the 2022 survey is in process right now) and in 2021 found that 69% of plan participants said they would or might increase their overall contribution rate if offered ESG options. This year we have added a question to the survey to ask which ESG issues participants feel most strongly about (climate change, diversity and inclusion, workers’ rights/living wages, etc.) so that we can better see what the values/priorities alignment looks like for investors in the US.

While the DOL rule is not yet final, it is likely to be supportive, which suggests that many plan sponsors who would like to begin adding ESG options for their participants but have been waiting for that finalized regulatory guidance, may soon be able to move forward and integrate sustainability into plans. In particular, there are a number of entities, such as corporates who have become more sustainability oriented in their own businesses, or universities that have done so in their endowments, that will now have an opportunity to bring their own pension plans into alignment with those same efforts and values.

We believe that such efforts can be successful, provided that sponsors focus on educating participants to gain their buy-in, connecting with them to understand the sort of options they would be interested in, and then keeping them well informed and engaged once the investments are made so that they can see the value and impact that their contribution is having. Seeking alignment with investors’ objectives and priorities can help maintain their commitment to ESG investments in the long run.

At the same time, US companies, like their global counterparts, have accelerated their net zero and other voluntary climate pledge commitments, and are now seeking guidance and support as they set their plans for meeting these objectives, including interim goals along the path. Schroders serves as a resource to clients in this regard, as we ourselves have published a climate transition action plan, with a temperature alignment target verified by the Science Based Targets Initiative (SBTI), wherein we committed to a 1.5 degree science based pathway to 2040, and NetZero by 2050 or sooner. In the plan, we assess the scale of the global challenge (using our proprietary climate alignment tool) and outline a climate engagement and escalation framework designed to encourage investee companies to decarbonize their businesses.

All in all, with a more supportive policy and regulatory tailwind, combined with an escalation in corporate and investor ESG initiatives, we believe that 2022 will see a period of strong progress on sustainability in the US.

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