ESG Policy Infuses Democratic Plans for Financials, Housing

THE COWEN INSIGHT

ESG is morphing from an investment strategy to a political philosophy impacting financials and housing. The result is a new crop of leaders who are pushing ESG-themed policy changes.

ESG-mandated investing is growing rapidly in the U.S. 24% of flows in U.S. stock and bond funds having an ESG focus. This is pressuring policymakers to push for government-mandated ESG disclosures from public companies that go beyond existing voluntary disclosure regimes.

We expect this will lead to even more ESG-focused investing. Such investing is causing ESG to become a political philosophy that unites progressive Democrats. ESG is a way to frame the progressive focus on a Green New Deal, social justice, and governance reforms like board diversity.

ESG in Washington, D.C.

ESG has become a trendy catch phrase in Washington. We recognize that ESG is often used to evaluate businesses. Cowen, leveraging technology from Truvalue Labs, has a proprietary ESG scoring for most of our equity coverage.

The term, however, is becoming more expansive. It is also political as some Democrats have an ESG policy agenda. We see this from President Joe Biden, from the regulatory agencies, and from the Democratically controlled Congress. The result is a mix of proposals. They range from those which can be easily implemented to those that are more symbolic than actionable. Other provisions are designed to force Republicans into uncomfortable votes.

Observations on ESG Investing & Government Policy

ESG investing is growing rapidly. We expect it to accelerate further as Team Biden pushes rule changes and legislation requiring public companies to boost and harmonize ESG disclosures. The growth of ESG investing is giving rise to ESG as a political philosophy. It is a way to unite the varied interests of progressive Democrats under a single slogan. Rep. Alexandria Ocasio-Cortez is a prime example of a Democrat pushing an ESG agenda, though more senior Democrats also have come on board

Enacting much of this agenda into law will be challenging given the need to secure 10 Republican votes in the Senate to overcome the filibuster.  Most of these measures are ineligible for a reconciliation package, which only require a simple majority. Yet, that may not matter. Legislative pressure is combining with ESG investor oversight to pressure financial firms and the housing sector to become more ESG friendly. We see this with banks rethinking with whom they want to do business, looking for creative ways to qualify consumers for credit, and pledging to use their clout to reduce emissions.

Yet, that may not matter. Legislative pressure is combining with ESG investor oversight to pressure financial firms and the housing sector to become more ESG friendly. We see this with banks rethinking with whom they want to do business, looking for creative ways to qualify consumers for credit, and pledging to use their clout to reduce emissions.

Impact of ESG Policy on Financials & Housing

These broad policy priorities are not going away. It represents a new layer of risk for financials and housing. It is not just about how they do business. There’s also a focus on whether they are combating climate change, boosting social justice and improving governance.

For some financial and housing firms, this will impose higher costs and put revenue at risk. However, there is also opportunity to expand the customer footprint and to partner with ESG advocates and ESG-focused businesses.