President Joe Biden, known for moderation and compromise in his long political career, is presenting a vision of sweeping change. He has pressed ahead with budget reconciliation to take action in Congress on a $1.9 trillion stimulus to address the health and economic crises facing the US. At the same time, he’s made it clear that the US recovery should be intertwined with structural change, in particular advancing racial justice and transitioning to a net-zero emissions economy by 2050.
Now businesses are assessing what kind of regulatory and legislative package is likely to be implemented.
Companies know that an institutionalist is at the helm of a potentially transformative agenda. That the administration is expected to leverage existing policy frameworks and voluntary business disclosure trends to achieve such transformation is an indication of this. Consider too the expectation that the Securities and Exchange Commission (SEC) will provide more guidance on environmental-social-governance (ESG) reporting.
The president established early momentum for many of his policy goals by signing an abundance of executive orders, and he’s expected to roll out his agenda through more than one route.
Reconciliation opens the door to some of Biden’s tax increase proposals. Swift action by House committees, including the House Ways and Means Committee, to advance COVID-19 relief indicates that the reconciliation process thus far is progressing as expected. President Biden has proposed a two-part package consisting of 1.9 trillion for emergency COVID relief (the American Rescue Plan) plus an economic recovery plan (the Build Back Better Recovery Plan). The scope of any tax increase proposals considered under budget reconciliation will be limited by the need to gain the near-unanimous support of House Democrats and all 50 Democratic senators, as well as adhering to the strict reconciliation rules. Given these political considerations, our PwC Tax Policy team expects to see strong efforts to enact:
Federal agencies will help implement Biden’s equity and climate agenda. The White House domestic policy council and the Office of Management and Budget are tasked with coordinating the effort across all federal agencies. Agencies are assessing systemic barriers to equity and inclusion, and they will be developing methodologies to direct more resources toward historically underserved communities. Agencies are expected to advance environmental goals with enhanced enforcement of existing programs and by issuing new regulations such as mandatory corporate disclosures on climate change related-risk.
Congressional action can also advance bipartisan goals, which may include an infrastructure spending bill and measures to promote corporate board diversity.
With the Biden administration pulling regulatory and legislative levers to implement its priorities, here’s our policy outlook across key areas for business along with implications for how to respond to shifts.
The pandemic has sharpened business focus on the wellbeing of employees and customers, accelerating the shift to stakeholder capitalism. Now government policy will make a coordinated push in the same direction. The SEC has announced plans to update its decade-old climate disclosure guidance, signalling a likely shift toward more standardized climate change disclosures for public companies. This follows its guidance last fall on a principles-based approach to new human capital disclosures as part of its broader project to modernize Regulation S-K.
President Biden has asked the Department of the Interior to review all fossil fuel leases on public lands and waters and the director of national intelligence and all federal agencies to assess the security implications of climate change in their work. There will also likely be greater expectations on companies to integrate climate risk into their decision making. This is particularly important for businesses supporting critical infrastructures — evidenced by the power grid failure caused by winter storms in Texas. Cybersecurity and data privacy offer other examples of critical ESG risks to be managed.
Veteran regulator Gary Gensler, the president’s nominee to lead the SEC, and Treasury Secretary Janet Yellen are both expected to pursue rules and enforcement around domestic priorities on climate change and social justice. In a new role as senior policy advisor role at the SEC, Satyam Khanna will coordinate the agency’s efforts related to climate risk and other ESG developments. The US will simultaneously reengage globally on climate change, groundwork already laid through climate envoy John Kerry’s role at the international climate summit (COP26) in November. Gina McCarthy, a former EPA administrator, is expected to play a pivotal role in coordinating the administration’s domestic strategy as the first national climate advisor.
Underpreparedness for the transition risk of moving to a low-carbon economy. Companies are starting to get comfortable with the need to consider the physical risks of climate change (e.g., operational and business impacts from rising ocean levels and extreme weather events like hurricanes and wildfires), but the concept of transition risk from moving to a low carbon economy is less familiar to many. There are many drivers of transition risk that need to be factored in, including policy and regulations (such as taxing GHG emissions), low-carbon technology advancement (ROI of new technologies and impairment of obsolete models), market (increased cost of raw materials) and shifting societal preferences (pressure from stakeholders). For many industries, transition risk will be just as significant or more so than physical risk.
Diversity and inclusion (D&I) and climate-risk data is not yet standardized and investment grade in most companies. In 2019, 90% of the companies in the S&P 500 index issued sustainability reports, up from about 20% in 2011. But so far there has been no mandatory US standard governing such disclosures. Meanwhile, companies face evolving global reporting expectations such as the Task Force on Climate-related Financial Disclosures (TCFD) or the International Business Council/World Economic Forum, with multiple reporting standards and frameworks (e.g., the Sustainability Accounting Standards Board (SASB) or the Global Reporting Initiative (GRI)). With the SEC now expected to move toward more standardized disclosures, companies need to consider just how much of their D&I and climate-risk information lies outside of the mainstream regulatory reporting ecosystem. As investor pressure and regulations converge, businesses should put the same reporting and controls infrastructure around these non-financial metrics that they have around financial disclosures so that both qualitative and quantitative information is captured and reported at investment grade levels.
What can be measured must be managed. A major theme underlying all of this is accountability. Investors, regulators and other stakeholders are pressing for greater transparency and disclosures because they intend to use this information to keep score, make investments or further policy decisions. At PwC, we’ve learned stakeholders want companies to drive change. They want increased diversity and deliberate inclusion efforts that lead to better business performance and broader economic development. Tech-enabled solutions can track and measure diversity data, uncover new insights to strengthen the culture of inclusion and accelerate business progress. Companies will be expected to embed ESG in strategy-setting at the board level, which means the need for better quantitative metrics will likely increase to help stakeholders gauge a company’s progress toward strategic goals.
Embrace a broad view of climate risks and opportunities
Part of the TCFD framework involves scenario analysis and stress testing of business models under different transition pathways. These exercises should consider both physical and transition risks, and they should incorporate new opportunities in planning risk mitigation strategies. Financial services firms, for example, should assess the risk that assets could be worth less than expected due to changes associated with the energy transition or due to exposure to physical perils, while also considering opportunities for green investment or new products tailored specifically to help address climate resilience. Energy companies should consider the implications of carbon pricing and the other incentives for low-carbon investment on plans to develop carbon capture and storage, renewable electricity and heat systems, while also carefully choosing where to build new assets. Across industries, energy transition plans present opportunities for supply chain efficiencies, product and service diversification and acquisitions and/or divestitures.
Drive meaningful insights from ESG data: While the timeline for establishing a common framework for reporting on ESG comparable to how we report on financial information today remains uncertain, companies should move toward transparent, investment-grade reporting now. That includes focusing on sector and company-specific indicators that are material to long-term enterprise value creation. Make sure your process is ready for future expectations of investor-grade, digital-friendly data with systems, processes and internal controls that can help tell your story efficiently and in a way that builds trust. It’s just as important to upskill personnel to proactively drive meaningful insights around the information being reported. Leading companies know that ESG is not just about risks and reporting but about opportunities as well.
Tell your D&I story: Discomfort around your current profile should not prevent you from embarking on a transparent journey. Focus on the actions you're taking to accelerate progress and tell that story to your stakeholders. Start with where you are today and where you want to be tomorrow, and then assess what’s getting in the way. Shift the mindset from D&I being an HR issue to being a strategic issue that affects the bottomline and impacts shareholder value. A strategy for sustainable change can influence recruitment approaches, people experience, career journeys and organizational leadership. Corporate board diversity could be among the specific legislative policies to find support both within the Biden administration and the Democrat-controlled Congress.
Cybersecurity is already a top priority in the Biden administration. “The reality is we are dangerously insecure in cyber. Your entire life — your paycheck, your healthcare, your electricity — increasingly relies on networks of digital devices that store, process and analyze data. These networks are vulnerable, if not already compromised,” Senator Angus King and Representative Mike Gallagher wrote.
Biden’s first cybersecurity appointment shows how seriously he views the issue: Anne Neuberger holds an elevated role as deputy national security advisor for cybersecurity in the National Security Council to coordinate cyber strategy across all federal agencies and departments. In her first briefing on February 17, she gave an update on the investigations into the recent cyberespionage campaign.
Expect to see more coordinated federal action against nation-state actors in an effort to extract greater costs on adversaries. Department of Justice indictments of hackers involved in major attacks like WannaCry and NotPetya are examples of efforts to impose risks and consequences on adversaries.
Working alongside Neuberger, the new Cybersecurity Infrastructure Security Agency (CISA) director will focus on protecting critical infrastructure and federal computer networks from hackers, as well as defending civilian federal networks.
A new role, national cyber director within the Executive Office of the President, is in the works for fiscal 2021 as directed by the National Defense Authorization Act (NDAA). If confirmed by the Senate, this director will lead a staff of some 75 cyber professionals.
Adding muscle to federal coordination is the FBI strategy, unveiled by FBI Director Christopher Wray in September 2020. Central to that strategy is the role the FBI plays as lead agency in law enforcement and intelligence and as an indispensable partner to federal counterparts, foreign partners and private sector partners.
To respond as a unified whole to the most recent global cyberespionage campaign, the FBI, CISA and the Office of the Director of National Intelligence (ODNI) have formed the Cyber Unified Coordination Group, UCG. Under Biden, expect the federal government to continue this “one throat to choke” approach and review its approach to deterrence.
Expect more public-private partnerships. Cybersecurity is the ultimate team sport. True partnerships among potential victims of malicious activity and those who can help hold the line against it is a necessity for an effective, agile threat response. Building public-private partnerships will likely be a priority under the Biden administration.
The Analysis and Resilience Center (ARC) for Systemic Risk is an example of public-private collaboration. Launched in October, the nonprofit group aims to ward off threats to the US financial and energy sectors. Another example is the National Defense Cyber Alliance (NDCA), a nonprofit organization bringing together the US intelligence and cleared defense contractor communities — similar to how the National Cyber-Forensics and Training Alliance (NCFTA) supports the financial and retail sectors against criminal threats.
The endgame of public-private collaboration? National and corporate resilience, defined by the Cyberspace Solarium Commision report as the ability to survive an attack, sustain critical functions under adverse conditions and resume those functions after a disruption.
Resilience comes from information sharing, joint incident response exercises, training and learning from corrective actions. The commission, initially envisioned as a one-year project, was reauthorized for fiscal year 2021.
C-suite executives should capitalize on the seriousness with which the government is approaching cybersecurity.
President Biden’s many executive orders to date notably leave a hardened US trade posture intact. Officials have signalled a slower approach on resetting relations as the administration builds up its trade team and prioritizes actions to support US competitiveness, such as expanding “Buy American” requirements for federal procurement.
How will Biden’s US recovery plans, corporate tax proposals and commitments to strengthening multilateral coordination shape US trade policy ahead? Businesses face a range of outcomes. The more executives are able to map poligcy interdependencies, the stronger their story of the overall impact on their business. The breadth of the burgeoning global trade and tax considerations, coupled with narrow Democratic majorities in the House and Senate, call for prompt attention, especially with the US job creation focus of this administration. With a 50-member caucus in the 100-member chamber, each senator can be a deal-maker or a deal-breaker on matters that could have an impact on sourcing, supply chains, and domestic as well as global operations.
The Biden administration will be shaping US policy against a trade backdrop that has already shifted, while operating under many of the same constraints. In the three months since US elections, global trade activity began pulling out of a sharp downturn, driven by recoveries in Asia, particularly in China. Moreover, several major regional trade agreements took flight. The Regional Comprehensive Economic Partnership (RCEP) deepens trade relations between the ASEAN economies and China, Japan, South Korea, Australia and New Zealand. Similarly, the EU-China Comprehensive Agreement on Investments opened the door to broader free trade opportunities between China and the EU. Also, the EU concluded talks with a post-Brexit UK on a trade agreement that took effect in late 2020.
Meanwhile, the World Trade Organization (WTO) remains effectively sidelined while parties continue to seek a solution to a long-standing dispute over how to staff and operate the organization’s appellate mechanism. The absence of a trade policing authority has been part and parcel of the growth in regionalized and nationalized trade interests in recent years. The extent to which the Biden administration will seek to reinvigorate the WTO system will be a key indicator of whether the decentralizing trend in trade rules is here to stay.
The overlap between tariffs and tax issues are top of mind, with the Organization for Economic Cooperation and Development (OECD) continuing to explore ways to tax the digital economy. The Trump administration conducted trade investigations concluding that digital taxes would be discriminatory against US entities. It remains unclear how the Biden team plans to respond to the challenge, which is creating yet further uncertainty in the trade arena. The OECD/G20 Inclusive Framework proposals in particular will probably require additional compliance resources if implemented along the lines currently being considered.
Prepare for focus on supply chain resiliency with US supply vulnerabilities under review
President Biden will likely seek cooperation instead of confrontation with key allies in an effort to coordinate trade policy on China. As a result, the expansive use of trade measures and retaliatory, unilateral actions under the Trump administration are likely to stay in place in the near term, including the 25% and 7.5% tariffs on approximately $250 billion and $120 billion worth, respectively, of Chinese imports. At the same time, the administration has directed federal agencies to review vulnerabilities to US supplies of pharmaceutical products, critical minerals, semiconductors and large-capacity batteries while technology transfer and export restrictions on dozens of Chinese companies are also under review.
The pandemic and tariff escalations exposed the latent risks for predictable landed cost into the US market from China as well supply availability risks for a particular product or component. This has put pressure on companies to move sources of supply and production out of China and into other countries. Bipartisan interest in reducing US dependence on China is rising, especially with regard to medical and technology supply chains. President Biden may seek to undertake some domestic investment in key sectors and technologies that can give the US some industrial advantages relative to other countries.
Model for preferences, prepare for tighter trade enforcements
Though there may be some support for a US-UK trade agreement in Congress, and negotiations at the technical level may continue, the administration will likely focus on rebuilding trade ties with key allies such as Japan, South Korea and members of the EU. These efforts will take place against a rapid rise in regional trade agreements (RTAs) in recent years. Over 300 RTAs are now in force, according to the WTO. Trade arrangements have a lot of variation between them in terms of coverage and ambition. When businesses look into these in detail, they’ll often find that there are already preferences that may suit as manufacturers and importers model supply chain scenarios.
As the US government heightens scrutiny of, and expands enforcement actions on, cross-border trade, importers should continue to exercise due diligence. The Buy America Act raises the bar on where component and assembly work is sourced for products to be bought with taxpayer money. Separately, a bill introduced in Congress last year to address the use of forced labor reflects heightened scrutiny of cross-border trade by the legislative branch.
As a result, scrutiny is increasing on what constitutes a US product or service, or where the transformations into a final product take place and where employees are located. This may prompt interest in on-shoring some back-office activities. Trade compliance audits tend to step up after a new trade agreement, such as the United States-Mexico-Canada Agreement (USMCA). Biden’s US trade representative, Katherine Tai, was a key figure in USMCA negotiations. She has said her top priority will be realizing a “worker-centered trade policy” by guaranteeing that trade agreements strengthen US jobs, in addition to securing low prices for imports.