Ella Williamson: Welcome to Sustainable Intelligence, where we discuss all things sustainability for the private markets. I am Ella Williamson and I’m so excited to be joined today by Dr. Julie Anderson, Director of the Master of Science in Sustainability Management at the American University’s Kogod School of Business.
Julie has over 25 years of global asset management experience and is a leading expert in ESG and sustainability strategy. We’re diving into the risks investors face when sustainability regulations are rolled back, from mispriced risk to capital misallocation, and what this all means for long-term value.
Julie, could I ask you to start by giving us the big picture? What are some of the most notable examples of sustainability regulations being weakened or delayed in recent times.
Julie Anderson: So first of all, thanks for having me on the show. It’s a pleasure, and I think it is important to start from that big picture.
So, as most people know, major regulatory retreats are happening across all jurisdictions globally, from the SEC climate rule modifications or elimination to the EU’s Omnibus change, stop the clock directive, you name it. We’re seeing what appears to be a regulatory retreat. What I think is happening here is that we’re creating a period of global fragmentation versus what we were hoping for, which was global harmonization. But I do wanna stress here that these regulatory delays aren’t eliminating sustainability imperatives. What they’re doing instead is creating a more differentiated market that gives space for rewarding, sophisticated analysis, and in the end, hopefully, creates an opportunity to generate alpha or excess return.
So, as difficult and disconcerting as this is because the climate crisis is real, I personally believe that the pause is appropriate at this point in time and it’s going to open up opportunities for both companies and investors.
Williamson: Thanks for that, Julie. And if we look at this regulatory backtrack, what kind of signals does it send to investors? How does it impact their confidence or risk assessment?
Anderson: Right. So I think let’s first talk about, you know, there’s two key actors in this. The first one are companies and without regulation, companies are gonna have to make strategic decisions about whether they proceed with comprehensive sustainability initiatives or take a more wait and see approach.
And because of this choice that companies face, the other actor is of course the investors. And we’re gonna see both information gaps and a dispersion or bifurcation between sustainability leaders and laggards. And that’s gonna become more pronounced. So as a result, we are going to have to use more sophisticated analytics—investors will have to.
So when we think about what does the backtracking, what signal does it send to investors? I think number one, regulatory uncertainty increases market inefficiency, as I mentioned this growing gap. But the counterfactual to that, or the most important thing to remember is that market inefficiency is precisely where investment opportunity lies, especially for large, sophisticated investors. And that’s where I believe we’re gonna see, again, this competitive advantage from the investor side based upon the investor. So in this case, even though we’re talking about the signals from backtracking, I’d like to focus on the opportunities that this opens up for investors. So again, information asymmetry between sophisticated investors with robust, analytical tools versus what we would call retail investors are those that have to rely on standardized disclosures.