With the changing of the guard in Washington, it is time to look again in ESG terms at the opportunities and uncertainties. When examining the ESG attributes of an investment, it can often be the case that government, legislation and regulation will be deemed externalities. That is to say, these are factors and forces that are largely outside the control of the direct stakeholders of the investment. In the case of a company, it is possible to manage with and around these externalities, but usually not possible to change them. Such efforts as lobbying can put a heavy thumb on the scale to tilt matters in favor of the company, but that is far less certain than choosing suppliers, hiring employees, funding R&D, or changing branding.
A regime change at the national or state/local level can present these companies with an environment that is more or less conducive to business. A President can come into office and, within the limits of the law, regulate, deregulate, or re-regulate in ways that can help or hinder business prospects. New legislation can establish subsidies for emerging technologies and remove subsidies from legacy industries. The larger point is that the assumptions around operating a business in environmental, social and governance terms can shift rapidly.
A perfect example to hold out is the Keystone XL pipeline, a central part of the strategy for moving Canadian tar sands oil through the US for refinement and distribution. The project has been fraught with challenges ranging from carbon and clean water concerns to operational safety to the property rights of farmers to the interests of indigenous peoples. The Obama administration halted KXL, the Trump administration reversed the call, and the Biden administration is expected to halt it again, possibly permanently. It is easy to see the deep environmental and human rights controversies that are, while external to the business of pulling tar sands oil out of strip mines, processing it and transporting it to Cushing, OK, directly affecting the direction of public policy and even election outcomes which change the operating environment for the business. In the 70+ days from the day before elections to inauguration, KXL went from viable to dead on the tracks.
In large and small ways, ESG-oriented investments are evaluated for these externalities and discounted according to the real possibility that an off-balance sheet and unpriced risk like climate change becomes material to the viability of the investment. Government, legislation and regulation become the mechanism for operationalizing and pricing in environmental and societal impacts on behalf of the community and the commons.