About the author: James Maloney is the founding partner of Tiger Hill Partners, a regulatory and public affairs firm.
Washington’s fingerprints are on a host of changes that are shaping the investing landscape. This comes partly from expanded regulatory actions, but just as much from industry demand for investors to account for issues ranging from international relations to incipient technology to climate change. In this new dynamic, Washington not only sets economic rules, it directs market signals. To stay ahead, investors must understand the Beltway from an investment perspective, not just a regulatory one.
This is easier said than done. The decision-making process in Washington can seem complicated, filled with feints, and frenzied to a point where it’s hard to keep apace. But several recent proceedings illustrate actionable near- and long-term matters of consequence.
Geopolitical uncertainty is front of mind for many investors. Of particular note, President Biden’s recent meeting with China’s President Xi Jinping at the Asia-Pacific Economic Cooperation Summit spotlighted two countries at odds. Savvy investors could read the tea leaves in preceding congressional actions. A week before the summit, Sens. Bob Casey (D., Penn.) and Rick Scott (R., Fla.) introduced the Disclosing Investments in Foreign Adversaries Act. On the same day, House Foreign Affairs Committee Ranking Member Gregory Meeks (D., N.Y.) and Chairman Michael McCaul (R., Texas) introduced the China-focused Preventing Adversaries from Developing Critical Capabilities Act.
Both bills advance restrictions on investments in China. The Senate bill builds on Sens. Casey’s and John Cornyn’s (R., Texas) Outbound Investment Transparency Act, which passed that body in late July as an amendment in the National Defense Authorization Act, and would create new requirements to screen national security-related U.S. investments in the country. The new Senate legislation would require private equity firms, hedge funds, and venture capital firms to disclose all investments in China. The House bill expands the definition of “critical technologies” in President Biden’s early-August Executive Order to curb Chinese investments.
The final enactment of all of this legislation is uncertain, but the message is clear: A bipartisan, bicameral congressional effort is underway to use cross-border investments as a cudgel against the PRC. This introduces the flip side of the coin: How will China retaliate? What would be the ripple effect of further isolationism? Could pressure extend to Gulf states’ sovereign wealth funds and their capital allocations?
On the role of climate change, the Biden administration’s whole-of-government approach to addressing climate risk includes financial regulators. At the Securities and Exchange Commission, a rule on “The Enhancement and Standardization of Climate-Related Disclosures for Investors” is nearly finalized. A sticking point has been how the agency treats indirect emissions in companies’ supply chains. Although the SEC is likely to remove those “Scope 3” emissions from this rule, once enacted, investment firms among other companies will be required to disclose material climate-related risks, risk-related governance, direct greenhouse gas emissions, and other climate-related financial metrics.
The SEC’s actions are in line with other regulators, such as the Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency, which recently issued finalized interagency principles for large financial institutions to manage climate-related financial risks.
These actions can be viewed one of two ways: Validation for climate-focused investors and firms with existing climate-risk metrics, or burdensome compliance astray from regulators’ mandates. Either way, climate risk as a standardized fiduciary duty brings environmental factors to the investment fore.
The M&A market has been volatile, due in no small part to federal intervention. Today’s Federal Trade Commission inserts itself in trendlines alongside high financing costs and supply chain concerns. Chair Lina Khan’s aggressive legal actions against both vertical and horizontal mergers, as well as anti-trust factors outside of pricing, have cooled activity. She shows no sign of slowing in her efforts to overhaul a decades-old federal regulatory strategy, and after bringing a first-of-its-kind suit in September involving a private equity firm’s purchase of medical practices, Khan clarified any doubt about her intentions. Indeed, the FTC and Department of Justice are in the final review phase of extensive revisions to the rules that implement the Hart-Scott-Rodino Act and premerger notifications. The rewrite would extend dominant market position and labor market concentration as actionable cause across all sectors.
Existing regulatory actions cannot easily be undone, but the leadership and vision for all federal agencies hinge on the 2024 elections. While the presidential outcome will guide our future regulatory environment, the congressional outcome could impact investment portfolios and strategies.
If Republicans lose their House majority, investment firms can expect a revival of hearings to support the FTC’s scrutiny on “healthcare-roll-ups.” Dockets could also consist of hearings that couch investors’ residential real estate portfolios in the context of our housing crisis, and elevate regulatory guidance over perceived risks from the rise of non-bank lending. Not only could assets be on the table, but a rewrite of the definition of systemic risk could place more firms under the compliance regime now applied to the nation’s largest banks.
On the other hand, Washington has provided some enduring tailwinds for clued-in firms. The Biden administration appropriated funding on the scale of the New Deal focused on the energy transition. That has created a rising-tide boost for clean-energy investors. The Infrastructure Investment and Jobs Act breathed new life into public-private partnerships and programs to leverage private investments over a prolonged period of time. The U.S. Department of Commerce is also driving private investment and innovation through dozens of tech hubs, implementation of its strategic plan for global competitiveness, and its robust CHIPS initiative. And prominent investors are part of an active dialogue with policymakers on ways in which technologies such as artificial intelligence can be responsibly regulated without stifling competition—a series of decisions that will have major market implications in years ahead.
For investors at a crossroads, a beneficial path, if not the most attractive one, is the road to Washington. We have entered an era in which our nation’s capital drives investment decisions just as readily as it regulates them.
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