By Neha Soman | US Environmental Policy Student
Climate change is a multi-pronged issue that affects essentially every sector of the economy, every country, and every individual. There are endless solutions that our governments, companies, and we, ourselves, can take to mitigate climate change and sustainable investing is a prominent solution that has gained popularity in recent years. The US government, along with other governments globally, should establish policies and fiscal incentives that encourage sustainable investing.
To start, what is sustainable investing? Sustainable investing is essentially a strategy that investors use when assessing possible investments with the aim of generating strong financial returns and ensuring that companies deliver positive environmental and social impacts. Alongside the traditional metrics for investments, like profitability, debt, growth potential, sustainable investing also considers ESG (environmental, social, and governance) factors of a company.[1] The goal of sustainable investing is the same as typical investing: long-term financial gains, but sustainable investing achieves this by avoiding companies with climate risks, corruption, unhappy workforce, mismanagement, etc.
Why is sustainable investing important? The loss of biodiversity and ecosystems are quite expensive – according to the World Bank[2], they could cost the global economy $2.7 trillion by 2030. Rises in sea level endanger coastal real estate and infrastructure. Water scarcity, projected to increase by the United Nations that estimates that global water demand will exceed supply by 40% by 2030[3], will likely affect supply chains and operations. Pushing companies to consider environmental factors in their investment decisions will also likely have a beneficial impact on their returns because of these costs. Corporate responsibility is also a strong signal of a balanced, rational company.
Sustainability and its potential benefits have attracted individual investors. According to a report by Morgan Stanley Institute for Sustainable Investing, 77% of individual investors around the world have stated that they are interested in investing in companies that realize strong financial returns while also considering environmental and social impact. 54% of individual investors expect to increase their allocations in sustainable investments in the next year.[4] The government can play a substantial role in the rise and adoption of sustainable investing practices through their establishment and enforcement of policies and corporate incentives that align with climate goals.
In the US federal government, financial regulation that relates to ESG standards and sustainable investing is managed by two main groups: the Department of Labor and the Securities and Exchange Commission (SEC)[5].
The Department of Labor (DOL) oversees the Employee Retirement Income Security Act (ERISA), which allows it to regulate how ESG is permitted or not permitted with regards to investment decisions for private retirement plans. In 2020, the department introduced a new rule that required ERISA plan fiduciaries to make their investment decisions solely based on the risk-adjusted economic value of their possible investments, essentially signifying these fiduciaries weren’t allowed to consider ESG standards in their investment decisions. When the Biden Administration took office, the DOL chose not to enforce this rule, allowing ESG to be a factor for consideration when considered through a risk/return analysis. Although the DOL regulation technically only applied to fiduciaries under the ERISA plan, the DOL’s guidance has an indirect impact on public plan behavior. In the past, the DOL’s guidance legitimized the importance of ESG standards from an economic perspective when analyzing investment decisions[6].
Another agency that has consequential impact on ESG adoption is the Securities and Exchange Commission (SEC). ESG has emerged as an area of focus for the SEC due to investor demand for sustainability standards. The SEC’s main concern with ESG standards is that asset managers and companies might exaggerate the scope of their ESG considerations and strategies which would result in portfolios that don’t actually align what they disclose to their investors and clients. In 2024, the SEC adopted amendments to its rules that “require information about a registrant’s climate-related risks that have materially impacted, or are reasonably likely to have a material impact on, its business strategy, results of operations, or financial condition.”[7] The SEC has been scrutinizing firms’ and companies’ internal policies and practices to ensure that they line up with their disclosures.4
The most important question is: what can the government do to incentivize sustainable investing? The definitive goal of sustainable investing is to elicit better returns. As companies that focus on ESG standards become more profitable, in turn, investors will be more likely to invest in them. The government can create incentives to push businesses to meet strong ESG and climate standards and increase their profitability.[8] Subsidies or tax cuts for companies and investors focused on ESG can increase their attractiveness to investors by making them more profitable, minimizing risk, and increasing their potential for stronger returns. These incentives would allow the recipient companies to dedicate more money to sustainability while also, more generally, creating a more positive market environment for ESG-focused economic growth. Transparent regulatory standards and reporting guidelines to clarify what the expectations from ESG investments are and to ensure that the measuring and reporting of ESG performance is accurate are also essential to the growth of ESG investments. These policies would support investor confidence and likely lead to more ESG investments.[9] In an ideal world, the federal government would also require funds and plans under its authority to divest from companies that don’t meet strong ESG standards. For example, in Maine, the state government passed legislation calling for divestment of public assets, including the pension fund and state treasury, from fossil fuels.[10] The DOL also has the authority to mandate the divestment of retirement plans from fossil fuels and other industries that negatively impact the climate. However, this likely won’t happen in this decade due to the political polarization of climate change. Regardless, there are a lot of actions the government can take that are politically feasible to encourage sustainable investment. As the impacts of climate change grow stronger, individuals, corporations, markets, and governments should do anything they can to mitigate these effects.
[1] Stobierski, Tim. “What Is Sustainable Investing?: HBS Online.” Business Insights Blog, Harvard Business School Online, 14 July 2022, online.hbs.edu/blog/post/sustainable-investing.
[2]“Protecting Nature Could Avert Global Economy Losses of $2.7 Trillion per Year.” World Bank, World Bank Group, 1 July 2021, www.worldbank.org/en/news/press-release/2021/07/01/protecting-nature-could-avert-global-economic-losses-of-usd2-7-trillion-per-year.
[3] Jaynes, Cristen Hemingway. “Global Freshwater Demand Will Exceed Supply 40% by 2030, Experts Warn.” World Economic Forum, 23 Mar. 2023, www.weforum.org/stories/2023/03/global-freshwater-demand-will-exceed-supply-40-by-2030-experts-warn/.
[4] “Sustainable Investing Interest.” Morgan Stanley Institute for Sustainable Investing, 26 Jan. 2024, www.morganstanley.com/ideas/sustainable-investing-on-the-rise.
[5] Behbin, Mana, et al. “ESG Investing: The US Regulatory Perspective.” Morgan Lewis, Morgan Lewis, 12 Mar. 2024, www.morganlewis.com/pubs/2024/03/esg-investing-the-us-regulatory-perspective#:~:text=Some%20anti%2DESG%20bills%20require,when%20considering%20how%20to%20vote.
[6] Cifrino, David A. “The Politicization of ESG Investing.” Harvard ALI Social Impact Review, Harvard ALI Social Impact Review, 22 Jan. 2025, www.sir.advancedleadership.harvard.edu/articles/politicization-of-esg-investing.
[7] SEC, The Enhancement and Standardization of Climate-Related Disclosures for Investors (2022), Release Nos. 33-11042; 34-94478
[8] Friday, Catherine, et al. “Six Ways That Governments Can Drive the Green Transition.” EY, EY, 13 May 2022, www.ey.com/en_gl/insights/government-public-sector/six-ways-that-governments-can-drive-the-green-transition.
[9] Nugraha, Tuhu, and Annanias Shinta D. “The Vital Role of Government in Advancing ESG Investment through Fintech in Developing Countries.” Modern Diplomacy, 26 Mar. 2024, moderndiplomacy.eu/2024/03/26/the-vital-role-of-government-in-advancing-esg-investment-through-fintech-in-developing-countries/.
[10] ME LD99 (HP 65), An Act To Require the State To Divest Itself of Assets Invested in the Fossil Fuel Industry