MARKETS AND INVESTING September 16, 2020
What do President Trump and Democratic nominee Joe Biden’s election platforms include in relation to environmental, social and governance (ESG) issues?
Below, Washington Policy Analyst Ed Mills and Institutional Equity Strategist Tavis McCourt, CFA, discuss what the 2020 U.S. election results could mean for ESG-related policies and company ratings. To learn more about sustainable investing and how a customized strategy can fit your financial and personal goals, reach out to your financial advisor.
The net-zero carbon goals set forth in the Green New Deal and modified for Biden’s platform (goal deadline of 2030 in the Green New Deal, 2050 under Biden platform) would make it easier to track and compare CO2 emissions. Such regulations could impact some companies’ ESG ratings. While many ESG investors may currently focus on companies’ level-one carbon footprint, carbon reduction regulations could call for specific disclosures around three levels of carbon output: product, manufacturing and supply chain. Companies with large manufacturing footprints or outsourced supply chains would likely see the most impact to their ESG scores or profiles.
The implementation of these net-zero policies would likely require a Democrat sweep and a vote to eliminate the Senate filibuster.
Recent ESG ratings have been materially adjusted due to companies’ perceived responses to COVID, which may have included expanding health benefits and days off, allowing work from home where applicable, providing personal protective equipment to essential employees, and balancing return-to-work plans with employees’ childcare needs. If a Biden administration and Congress addressed these issues in an infrastructure bill, it could remove the negative pressure on ESG ratings for companies that have not responded as well or adequately disclosed what their response entailed.
The Biden platform includes several policy proposals titled “Made In All Of America By All Of America’s Workers” that are aimed at fueling an economic recovery for working families. These policies would likely be included in any economic recovery bills passed early next year in the event of a Democratic sweep. Overseas supply chains in areas of cheap labor or weak labor laws hurt ESG scores, so for companies forced to bring some of their manufacturing footprint – or at least part of their supply chains – back to the U.S., their ESG scores could improve even if margins are lower. Republican initiatives to bring manufacturing back to the U.S. could have the same effect.
Any pay gap legislation or programs around childcare, education or fair housing that would improve diversity in the workforce would benefit companies that have been negatively impacted by ESG investors or ratings firms for poor support of those programs. The government taking over some of those initiatives would level the playing field a bit across corporations. These proposals are tenets of several policy ideas from the Biden platform, woven throughout the Build Back Better campaign.
These policies seem clear, and the involved companies should see increased revenue from the projects as well as improved ESG profiles themselves, even if already viewed positively.
Given the proposal from the Biden campaign, a public option on the healthcare exchanges may be a policy focus if Democrats control the House, Senate and White House and if the Senate filibuster is eliminated. It may not become law as proposed, however. If passed, the public option could materially impact healthcare companies if corporations are legally permitted to and decide to transition their employees to the public option rather than provide it themselves. Right now, strong benefits packages – especially insurance coverage – positively boost ESG profiles and attract employees, but the public option could be established in a way to allow corporations to not offer coverage, and therefore not be subjected to the same ESG hit or negative press they would otherwise take.
Stricter regulations around drug pricing and the over-prescription or over-marketing of opioids could impact ESG investors. Some proposals to increase transparency could provide ratings agencies a better view of the poor performers in that area.
Policies are being proposed by both parties, but the Trump administration has yet to implement substantive changes. The Biden administration may result in more concrete progress forward. Major action requires legislative changes, and Congressional action is more likely in the event of a Democratic sweep and elimination of the filibuster. It remain questionable whether a Republican-controlled Senate would support bipartisan action, especially if the pharmaceutical industry invests heavily to help Republicans maintain their majority.
Known as the fair minimum tax rate, the U.N. Principles for Responsible Investment view paying “fair tax rates” as a top tenet of their ESG guidelines. If U.S. companies suddenly have to pay increased taxes to at least the 15% minimum tax rate, companies that have managed their taxes below that rate may see a benefit to their ESG scores. The Biden platform is calling for some corporate tax rates to revert to a middle ground between where they are now and pre-Trump tax cut levels (the average being mentioned is 28%). Raising taxes is always difficult without a single party sweep, and even a Democrat sweep may need the filibuster eliminated to pass a minimum corporate tax rate.
There is a push from the Republicans to de-list Chinese equities due to human rights issues, support Hong Kong/Taiwan independence and, generally, pursue more direct action around the relationship with China. Regardless of the results of the November election, trade policy with China will likely be renegotiated – it’s a very bipartisan issue – but the Trump administration seems to be more focused on de-listing Chinese companies from U.S. exchanges.
The U.S. Department of Labor (DOL) is proposing a rule that would make it more difficult for ESG funds to be used in retirement plans. The DOL is also working on a rule that would make proxy access for investors more difficult. As both of these rules are being proposed under the current Trump administration, they may be more likely to come into fruition under another Trump victory. A change in proxy access for investors could dramatically impact the influence that activist investors, such as the Climate Action 100+, have on companies in terms of ESG propositions.
One of the tenets of Biden’s Build Back Better campaign is universal broadband in the U.S. While this issue has been brought up in past administrations, the COVID pandemic and resulting work- and school-from-home situation has brought this issue to the forefront. While the Trump administration has not outright opposed universal broadband, we believe it would not be a policy they’d push if reelected.
A Biden administration would likely fold this into an infrastructure spending bill for the economic recovery, and we’d also expect them to push to restore net neutrality. For the last few years, even before COVID, telecom companies that came out in favor of or that were working to build universal broadband and net neutrality saw benefits to their ESG profiles. However, if these issues were to be federally instituted, that ESG boost for vocal supporters would likely dwindle. On the other hand, companies that were actively involved in building the new universal broadband network would likely see a strong boost in ESG ratings/profiles.
Utilizing an ESG investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Sustainable/Socially Responsible Investing (SRI) considers qualitative environmental, social, and corporate governance, also known as ESG criteria, which may be subjective in nature. There are additional risks associated with Sustainable/Socially Responsible Investing (SRI), including limited diversification and the potential for increased volatility. There is no guarantee that SRI products or strategies will produce returns similar to traditional investments. Because SRI criteria exclude certain securities/products for non-financial reasons, investors may forgo some market opportunities available to those who do not use these criteria. Investors should consult their investment professional prior to making an investment decision. All expressions of opinion reflect the judgment of the author and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results.
RETIREMENT AND LONGEVITY
March 25, 2020
You’ve got options if your best-laid income plans veer off track.
You saved decisively and proactively, invested prudently and accumulated a nest egg you’re proud of. Now, you’re ready to enjoy a retirement filled with freedom, new experiences and fond memories. But even the best-laid plans can go awry.
Consider these common blind spots related to retirement savings withdrawals.
Creating a sound retirement withdrawal strategy is no easy feat. It requires structuring your income streams to cover the expected costs of housing, food, healthcare, entertainment, transportation and more for an unknown period of time, often two to three decades.
Unfortunately, many new retirees find they spend more than their withdrawal strategy allows; others realize later that their plan doesn’t use the full power of their various income streams.
Coordinate with your financial and tax advisors to structure your retirement income in a way that maximizes expected cash flow while minimizing taxes. And if overspending is the main reason your withdrawal strategy is off course, consider drafting a spending policy statement (SPS) with the help of your advisor.
Similar to an investment policy statement, an SPS documents your long-term spending goals. It serves as a reminder to avoid actions that could throw off your future plans. By putting these intentions in writing and revisiting them regularly with your advisor, you’ll be better able to manage spending expectations and evaluate your options when new situations arise.
Overspending, particularly on discretionary items, can slowly chip away at your savings and eventually disrupt your long-term projections.
One option is to curtail your costs – perhaps with the help of an SPS, described above. Cutting back doesn’t have to be painful. It could mean forgoing your daily latte in favor of homebrew or hosting potlucks instead of dinner parties. A little discipline can help you bring your spending back in line with your plan.
Many retirees craft their retirement strategy around withdrawing a percentage of their total portfolio each year, increasing that amount to account for inflation. Under this formula, a $1 million portfolio and 4% withdrawal rate would provide pretax income of $40,000 in year one and, assuming inflation runs 3% annually, $41,200 in year two, $42,436 in year three and upward from there.* However, if your retirement assets decline in value over several years while the amount you withdraw is rising, there could be monetary trouble later on.
Help to avoid this issue by working with your advisor annually to set a fixed withdrawal percentage based on the year-end value of your portfolio. This tactic causes some years to be flush while others are leaner, but you’ll have the confidence of knowing you’re not negatively affecting future plans with today’s spending.
Alternately, you and your advisor can consider establishing a “floor” – an amount that covers your basic needs and can be withdrawn in any market environment – enabling discretionary spending to be adjusted based on your portfolio’s performance.
Retirees often underestimate the effect an inefficient withdrawal plan has on what they pay in taxes. Many even avoid withdrawing from tax-favored retirement accounts for as long as possible, seeing 72 as the earliest they’ll want to draw from traditional IRAs and 401(k)s to avoid paying the ensuing income tax bill. Unfortunately, by that time, the balances in those accounts may be large enough that your required minimum distributions may push you into the next highest tax bracket.
Since withdrawing from retirement accounts can begin as early as 59½ without penalty – and sometimes earlier under special rules – consider withdrawal strategies with your advisor and tax professional that could keep you from paying higher tax rates on your income in the future.
Establishing multiple sources of retirement income also gives you the option of withdrawing the money as tax-efficiently as possible, especially helpful when an unexpected expense crops up.
Thanks to advances in medicine, better understanding of diet and ever-evolving technology, we’re living longer than generations before us. While that’s a good thing, planning fastidiously for potential long-term care needs is an often overlooked aspect of a comprehensive retirement withdrawal strategy. Consider this: the 2019 Genworth Cost of Care Survey cited the national median cost of a private nursing home room as $8,516 per month, and currently, some care costs are rising at nearly double the rate of U.S. inflation.
Your retirement as a whole could be affected if you, like so many, find you require increased or specialized care as you age and your plan can’t accommodate the added expense.
Rein in the unknown by creating a specific funding plan with your advisor. Consider long-term care funding options such as traditional long-term care insurance or life insurance with long-term care payout riders, as well as asset-based long-term care contracts. Keep in mind that you should be planning for long-term care years before you’ll ever need it. If you wait past your 40s and 50s, affordable policies may no longer be an option for you. Now is also a good time to bolster your emergency fund, so you’ll be best prepared for whatever the future holds.
Though modern retirement has a lot of moving parts, proper planning and a willingness to make course corrections can create a retirement defined by independence and new beginnings.
*This is a hypothetical example for illustration purposes only and does not represent an actual investment.
Sources: genworth.com; marketwatch.com; fool.com; money.usnews.com; kiplinger.com
Investing involves risk, and you may incur a profit or loss regardless of strategy selected. Raymond James financial advisors do not render advice on tax matters. You should discuss any tax matters with the appropriate professional. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance, and time horizon before making any investment or withdrawal decision. The cost and availability of Long Term Care insurance depend on factors such as age, health, and the type and amount of insurance purchased. Guarantees are based on the claims-paying ability of the insurance company.
FAMILY AND LIFE EVENTS
March 31, 2020
As part of the coronavirus relief package, student borrowers will receive a six-month reprieve from loan payments.
The Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act, was passed into law on March 27, 2020. The CARES Act has numerous provisions aimed at providing relief to businesses and individuals affected by the coronavirus outbreak – including student borrowers.
Many working Americans are still paying off their student loans (with an average balance of over $35,000, according to Experian) and are facing economic hardships due to the coronavirus outbreak. As a result, the CARES Act includes the following provisions:
Note that private student loans and federal loans held outside of the Department of Education will not receive relief from the CARES Act. Another important caveat? These provisions have no impact on any automatic payments you may have in place, so should you wish to take advantage of the suspension, you’ll need to take action to pause them.
While the suspension of payments doesn’t provide the same amount of relief as outright forgiveness, it allows borrowers to focus their financial resources on other expenses such as food, housing or high-interest debt. Remember, student loan interest won’t accrue and federal student loan forgiveness programs won’t be impacted during the suspension period, so student borrowers will pick up right where they left off.
Please reach out to your financial advisor or tax professional with any related questions.