Impact Investing | November 2, 2022

What’s at stake for climate, ESG and impact investors in the U.S. midterm elections

Amy Cortese
ImpactAlpha Editor

Amy Cortese

ImpactAlpha, Nov. 2 – The annual global climate summit known as COP27, this year in Egypt, will coincide with next week’s midterm elections in the United States, putting in sharp relief the climate stakes for the U.S. – and the world. 

“Every election is now a climate election,” as Bloomberg Green’s Zahra Hirji and Akshat Rathi put it.

The midterm elections could upend Democrats’ tenuous hold on power and their hard-won climate agenda. The Inflation Reduction Act has unleashed unprecedented funding that is already turbocharging investment in electric vehicles, renewable energy and battery plants across the U.S., especially in Rust Belt cities. The Biden administration has promised to slash greenhouse gas emissions in half by 2030 and transition to carbon-free electricity by 2035. 

Republicans plan to hold hearings, block appointments, target key agencies and otherwise challenge his agenda if they regain power.  

President Joe Biden could still wield executive orders and, of course, veto power, even if Republicans take back one or both houses of Congress.

But Republican control of the House or Senate could set back the momentum for global climate action, already challenged by war, inflation, shortages and fears of recession. Biden has tried to reclaim climate leadership after four years of rollbacks under former President Trump undermined global cooperation. 

“The results of the midterm elections will dramatically shape the opportunities for business and investor communities to engage in building a sustainable future,” said Fran Seegull of the Impact Investing Alliance. 

Beyond the U.S., recent elections in Colombia and Australia swept in leaders committed to climate action and a just transition. In Brazil, Luiz Inacio Lula da Silva notched a narrow win over incumbent Jair Bolsonaro this week. Lula, as he is known, promised to protect the Amazon rainforest after years of deforestation and elevate indigenous communities. Bolsonaro, who has attacked the election process, has conceded to a transition of power, allaying fears that Trump-style resistance could throw the country into disarray. 

At the same time, a virulent strain of nationalism and authoritarianism has emerged in Europe and around the world. China’s Xi Jinping has consolidated power, and has leagued up with Russia’s Vladimir Putin, souring relations with the U.S. 

“It’s a bad time to be getting the world to agree on anything,” said Mark Campanale of Carbon Tracker. “You’ve got tension in Taiwan, with China. You’ve got America at war with itself.”

Contested terrain

Climate is just one area of U.S. progress that hangs in the balance. Also at risk are reproductive rights, environmental social and governance investing, or ESG, and even the strength of the U.S. economy. The post-pandemic recovery has produced record low unemployment, impressive wage hikes and huge deficit reductions, even as inflation has soured the public mood. 

And with election deniers on the ballot in many states, the uncertain future of democracy means U.S. political risk can no longer be ignored as a factor in investment decision making. Here’s some of what’s at stake:

ESG backlash

Banks and other financial firms have already been cowed by Republican attacks on ESG and what some politicians charge are anti-fossil fuel policies.

The Global Financial Alliance for Net Zero, or GFANZ, formed with much fanfare at last year’s COP26 climate summit, has already backpedaled on requiring its members to phase out fossil fuel investment in line with the United Nations’ Race to Net Zero initiative. 

“Investors are in a worse position today than they were last year, and more afraid to actually do anything” that will rile Republican politicians and attorney generals, said Campanale before heading off to COP27. Former Speaker of the House Paul Ryan says he tells corporate executives to play down ESG to avoid fights with politicians like Florida Gov. Ron DeSantis.

“This is going to escalate,” West Virginia’s Republican treasurer, Riley Moore, told Politico. “We are going full throttle once we get into 2023. We are going to see a lot more movement on this at the state level.” 

Moore, who leads the coalition of Red State treasurers behind a spate of anti-ESG policies, added: “You’re really going to start to reach critical mass as it relates to assets under management and capital that can be leveraged against the ESG movement.”

Disclosure rules

Climate change poses a material risk to companies and a systemic risk to the planet. Under Gary Gensler, the Securities and Exchange Commission has been crafting new rules for climate disclosure, including the question of indirect, or “Scope 3” emissions. The financial watchdog is also mulling new ESG fund labeling rules akin to those enacted in Europe. 

If Republicans win a majority of House seats, they will take aim at the rulemaking process. One option under consideration: holding the rulemaking hostage as part of the upcoming budget process. Red State Republicans are also gearing up for legal challenges to the eventual SEC climate disclosure rules. 

Pro-climate is pro-jobs

The Inflation Reduction Act has been called an industrial policy bill masquerading as an energy and climate bill. Already, corporations have pledged some $22 billion for U.S. manufacturing operations that will employ some 15,000 people, according to Coalition for a Prosperous America.

“The manufacturing incentives tucked into the Inflation Reduction Act have unleashed a tidal wave of investment in U.S. manufacturing unlike any we have seen in decades,” says the D.C-based think tank. 

Democrat Tim Ryan, who is in a contested contest for Ohio’s U.S. Senate seat, touts the incentives as evidence of his party’s efforts to rebuild the state’s manufacturing base. J.D. Vance, the Republican candidate, frames the incentives as giveaways to elites. Republicans have vowed to scrutinize, investigate and otherwise stymie the implementation of the IRA, even if they don’t have the power to rescind it outright.

Climate finance for emerging markets

After Trump zeroed out climate funding to developing economies, President Biden managed to muster $5.6 billion in this year’s budget, a doubling of his first year budget. Next year he would roughly double that again, to $11.4 billion. Developed countries have failed to meet their (repeated) promise to deliver $100 billion a year to help developing nations address climate mitigation and adaptation.

Securing those funds will be difficult if Democrats lose their grip on Congress, as special climate envoy John Kerry acknowledged to Bill McKibben in a recent New Yorker article.

“We’re also looking at several other ways” to channel funds to developing nations, Kerry said, including reforming multilateral development banks to encourage them to increase their concessionary lending.

Racial equity

One of President Biden’s first acts was to issue an executive order, known as Justice40, aimed at ensuring that 40% of the benefits of federal investments in clean energy, housing, transit and other areas to flow to disadvantaged communities. The IRA, for example, earmarks $47 billion for  marginalized communities that have faced underinvestment. Republicans have attacked key parts of the Justice40 initiative as unconstitutional. 

A preview could be seen in a January letter to President Biden from 16 Republican governors regarding the Infrastructure Investment and Jobs Act. 

“Excessive consideration of equity, union memberships, or climate as lenses to view suitable projects would be counterproductive,” they wrote. “Your administration should not attempt to push a social agenda through hard infrastructure investments and instead should consider economically sound principles that align with state priorities.”

Reproductive rights

The June Supreme Court decision to overturn Roe v. Wade and rescind federal abortion rights “has opened what may be the most significant schism in American society in a long time,” write Preventable Surprises’ Jerome Tagger and Christina Zausner of Reproductive Rights 360 is a guest post on ImpactAlpha. Women being forced out of work to give birth and care for children “is bound to have severe consequences for the American economy,” they write. 

As ImpactAlpha contributing editor, Imogen Rose-Smith warns, “GOP state lawmakers could use legislation to push public pension plans into divesting from companies and businesses that support abortion.”