There is a growing dissatisfaction with sustainability policies spreading from one side of the Atlantic to the other, making it more challenging for advocates of environmental, social, and governance (ESG) policies to push for green growth.
Earlier this year, there were several leading U.S. financial institutions who withdrew from Climate Action 100+. Climate Action 100+ is an international coalition committed to ensuring that companies address climate issues. This withdrawal emphasises the growing trend of U.S. based institutions abandoning earlier environmental commitments amid both financial pressures and rising political division.
But how is the green backlash affecting Europe? Is the trend being mirrored here? We’re here to explore this growing ESG backlash, and what the state of ESG is in both the US and Europe.
What is happening in ESG in Europe?
Europe and the EU have always led in regards to ESG regulations and practices, with the EU accounting for half of all global ESG investments.
Greater acceptance of ESG in the EU is largely due to its regulatory environment, as it’s been much more proactive compared to the U.S. The EU implemented an Action Plan for Sustainable Finance in 2018, which consisted of laws for a standardised EU categorisation system, benchmarks for low carbon emissions, and rigorous disclosure rules.
ESG now has a solid framework of regulation in Europe, including the European Union’s Taxonomy, which defines climate-friendly investments, and the Corporate Sustainability Reporting Directive (CSRD), which came into force this year and requires companies to report on the impact of corporate activities on the environment and society.
ESG is currently in a pretty positive position in Europe, and despite the sea of regulations that can sometimes be confusing, the introduction of the CSRD promises a standardised framework for reporting on ESG. This is why the looming threat of a backlash to ESG is worrying, as great strides are already being made, and need to be maintained to see actual environmental results.
The United States’ Backlash to ESG
US Regulation is lagging behind, with the U.S. Congress having yet to pass any substantial laws specifically addressing climate change. The Federal Reserve and Office of the Comptroller of the Currency have yet to issue any meaningful rulings regarding this as well.
In the United States, conservative politicians have been successful in tamping down ESG product marketing, in diluting regulations that promote ESG disclosures, and in discouraging financial firms from co-ordinating on curbing greenhouse gas emissions.
Many lawmakers are actively resisting ESG initiatives, and some have delivered major speeches promoting anti-ESG initiatives. More than 30 states have introduced anti-ESG legislation. According to Capital Monitor analysis, most of it seeks to prohibit state agencies from “doing business with financial institutions that have exclusion policies for fossil fuels or firearms,” arguing that such policies harm industries in their respective jurisdictions.
Increasingly, investors are removing ESG mandates from their funds. In the third quarter of 2023, more funds were removed than were added to investment practices, per a study by Morningstar. This is a reversal of the trend that has been occurring for the last several years, when adding ESG criteria boosted investment.
Without stronger regulation, the U.S. ESG market remains incredibly susceptible to greenwashing and similar unethical practices. It also makes it harder for non U.S. based companies to work in the region and manage their ESG practices while trying to operate in the United States. This backlash to ESG, the stagnation of regulations and the removal of funds isn’t just a problem for the U.S., but it is a trend that threatens to spill over into other parts of the world too.
Impact of Backlash in Europe
Europe has so far largely resisted the anti-ESG tide, due to greater political and consumer support for greener products and a swathe of regulations that underpin the operations of the finance industry and companies in the economy.
In Europe’s financial services industry, there are 20 regulations and 25 recommended practices related to ESG, in contrast to only two regulations and five recommended practices in the United States, as reported by ESG Book.
There has been some activity and efforts in Europe to soften environmental rules and legislation, placing emphasis on the potential cost of going green. There has been a dent in European investor demand for ESG, but this has been small. New ESG fund launches fell 10% in Europe in 2023, but the slide in the United States was even more pronounced, down 75%, according to Morningstar.
In addition to this, there is a growing worry surrounding what ESG regulation means for the energy sector, current energy prices and the looming possibility of an energy crisis. Russia’s invasion of Ukraine and the subsequent risks of an energy crisis have led some to rethink about energy security. To the dismay of some, and the relief of others, some production of natural gas and nuclear power will be considered “green” under the EU’s taxonomy, a reflection of how approaches towards renewable energy have changed.
The ardour for ESG regulations has slowed down, with some clamouring for a respite from the ‘alphabet soup’ of ESG frameworks.. This trend can be seen in the significant changes to the last draft of the new European Sustainability Reporting Standards (ESRS).
One of the major changes made by the EU Commission to the European Financial Reporting Advisory Group’s (EFRAG) proposals was to align the ESRS standards with the International Financial Reporting Standards (IFRS) to ensure international interoperability, as well as to take on the ISSB’s softer financial philosophy.
At the last minute, the EU also rejected the Corporate Sustainability Due Diligence Directive (CSDDD), which would have mandated that organisations conduct due diligence to address and mitigate climate change impacts. Initially widely accepted, the CSDDD faced criticism when Germany hinted at abstaining due to fears that it would burden businesses. It is possible that the CSDDD will be approved in a revised version that is more business-friendly.
Furthermore, ineffective communication in regards to ESG investing has played a role in hindering progress towards a sustainable economy. In response to farmer protests, the EU has abandoned its objective of reducing pesticide use by half by 2040.
The shifting goalposts for ESG are making it all the more difficult for companies to gauge what their reporting requirements will be. But, despite this growing animosity towards ESG, the EU has taken significant steps in adopting sustainability reporting standards that set the pace for the global economy.
More companies in the U.S. and Europe will become subject to the CSRD in years to come, with reporting requirements required for all EU companies, and all U.S. ones with considerable EU presence, with more than 500 employees. Beginning in 2025 and 2026, smaller entities will be required to report their information as well.
Even as sentiment grows a little less confident on these regulations, compliance is becoming mandatory, and ESG is retaining its fixture on the company agenda.
ESG is here to stay
Although global sustainability goals are being swung back and forth between the U.S. and Europe, ESG is certainly here to stay. It’s important now more than ever that companies accept the place ESG has on the agenda, and strive to improve their ESG strategies and practices, both for themselves, and for the world.
Companies need to prepare today for compliance, especially with the introduction of the CSRD. Creating accurate ESG reports poses a significant hurdle for numerous organisations. The range of ESG measurements is extensive and differs depending on the industry, company scale, and level of complexity.
It’s why it’s important to have the right ESG reporting software for your company; to help navigate the developing landscape of ESG regulations.
Convene ESG allows you to do just this by providing an end-to-end platform to collect data, track progress, compare with peers, align with frameworks and produce ESG reports.
With Convene ESG, you can collect your data for all the necessary metrics in the CSRD legislation, ensuring that you are compliant with regulations. This will allow you to further explore your company’s sustainability strategies. With various global and regional frameworks also built in to Convene ESG, you will easily comply and report against any other standards without the need to repeat the reporting process.
Convene ESG is designed to make the reporting process as easy as possible, meaning that you can anticipate changes in current ESG legislation, be ready to face the challenges of future regulations and fully integrate ESG considerations into your company culture.
