The EU has enacted robust ESG regulation to aid a more sustainable future and, compared to the US, has encountered less skepticism and pushback by implementing these measures. By adopting ESG challenges and opportunities, the US would be positioned to promote sustainable development more efficiently and effectively.
As part of the European Green Deal, there has been increased regulation to help achieve climate neutrality by 2050. This legislation has focused on pollution, biodiversity, agriculture, mobility, and carbon reduction. Another key component of the Green Deal is the Sustainable Finance Action Plan (“SFAP”). This policy aims to promote sustainable investing and comprehensive climate-related disclosures for investors and corporations. The Sustainable Finance Disclosure Regulation (“SFDR”) requires financial market participants to report on their investment strategy and outcomes to prevent greenwashing. Moreover, the Corporate Sustainability Reporting Directive (“CSRD”) will come into play in 2024 to regulate reporting on ESG matters.
But how does the US compare? The US is witnessing an increasingly divided policy environment regarding ESG. Currently, the US has two proposed bills to increase transparency, reporting, and, in some scenarios, the disclosure of greenhouse gas (“GHG”) emissions. Firstly, the ESG strategy rule follows the SFDR and requires public funds and financial advisors to disclose their ESG strategy. Depending on the reporting entity's ambition level, reporting on GHG emissions, proxy voting, and engagement practices is also required. Secondly, the Climate Risk Disclosure Act would require public companies to report on climate and transition risks and opportunities. The reporting framework would be established similar to the Task Force on Financial-Related Climate Disclosures (“TCFD”) guidelines.
The biggest challenge is whether this legislation will stand. It is anticipated that a final decision on these rules will come in October 2023, but legal challenges are expected to arise once the rules are passed. Passing meaningful climate regulation in the US has been challenging due to the political landscape. Republican legislatures have rolled back many environmental protection laws and limited the Environmental Protection Agency's authority. ESG has become a highly divisive term in the US. As a result, individual states are taking matters into their own hands to limit the role of ESG and climate action. In the financial space numerous states, including Texas and Florida, have enacted regulations preventing pensions and local governments from investing in funds considering ESG factors, citing that ESG goes against the manager's fiduciary duty. Some private investors in these areas avoid funds with an exclusion list targeting fossil fuel. This is due to the heavy reliance of these states on the fossil fuel industry. Not to mention, many states have withdrawn millions of dollars from asset management firms like Blackrock - all because of the firm's ESG agenda.
Rather than assessing how climate issues might impact returns and uncover new opportunities, ESG and climate change have become part of an ongoing political dispute in the US. The country faces a fragmented policy environment, both at the federal and the state levels, where anti-ESG movements have been on the rise.
When it comes to decarbonization strategies, the EU is driven by ambitious climate policies and regulatory frameworks. The EU's commitment to achieving net-zero emissions by 2050 has spurred substantial investments in renewable energy, electric mobility, and sustainable technologies. The EU has established clear, binding targets like the Green Deal and the European Green Deal Investment Plan. In contrast, the US is experiencing a growing decarbonization trend but currently lacks a unified national strategy. The US lacks enforceable national targets and has varying commitments across states with a potential shift to have greater or fewer ESG regulations depending on political administrations.
It is inevitable that politics will continue to play a significant role in the integration of ESG in the US. The onus is on financial institutions, fund managers, and corporations to set ambitious goals and to promote sustainable development and ESG practices. The EU is working to establish the status quo for ESG integration and decarbonization, and hopefully, the US will follow suit.
To learn more about the regulatory landscape in the EU and US and decarbonization strategies for fund managers and corporations, tune into our webinar on September 27, 2023 at 11 a.m. EST.
