Business Outlook: Europe Resists US-Led ESG Attacks – Business

Steady investor demand in Europe for environmentally and socially responsible investments, as well as extensive regulatory frameworks, are helping Europe’s financial industry withstand political pressures that have caused some of their U.S. counterparts to abandon their green programs.

In the United States, conservative politicians have been successful in restricting environmental, social and corporate governance (ESG) product marketing, diluting the regulations that promote these policies and discouraging financial firms from coordinating their actions to limit greenhouse gas emissions.

But Europe has so far largely resisted the wave of anti-ESG backlash due to greater political and consumer support for greener products and thanks to the regulations that underpin the operations of the financial industry and companies in the real economy.

Some politicians have been active in Europe to relax environmental rules and legislation, highlighting the costs to consumers of switching to greener solutions.

This has led to the relaxation of some new regulations promoting ESG in Europe. But the data on financial flows show that Europe as a whole remains a firm leader in the ESG sphere, writes Reuters.

European investors have seven times more capital in sustainable fund assets than U.S. investors, after five consecutive quarters of U.S. outflows, Morningstar data showed.

“We’ve seen faster regulations lead to faster compliance, which has shielded European financial institutions from ESG headwinds,” said Nathan Abella, head of research at ESG Book, a global leader in sustainability data and technology.

The financial services sector in Europe has 20 rules and 25 voluntary guidelines relating to ESG, compared to just two rules and five voluntary guidelines in the United States, according to the ESG Book.

In addition, there is greater demand from ESG investors in Europe, driven by public pension funds. Some 73% of European pension schemes say climate change is an investment priority in 2023, compared to 53% of US schemes, based on the 2023 LSEG.

European financial firms’ commitment to ESG could prove crucial to the survival of international climate alliances. Initiatives such as the Glasgow Financial Alliance for Net Zero (GFANZ) and Climate Action 100+ have seen defections from US firms, but their European membership has largely remained intact.

This is important because most of their members are European. One of the GFANZ coalitions, for example, the Net-Zero Banking Alliance, has 71 European members but only nine from the US. The Net-Zero Insurance Alliance has eight European firms as members, but none from the United States.

Regulatory support

ESG has a robust regulatory framework in Europe, including the European Union taxonomy that defines climate-friendly investments. Other key EU rules are the Sustainable Finance Disclosure Regulation, which forces financial groups to disclose their sustainable investments, and the Corporate Sustainability Reporting Directive (CSRD), which applies to companies in the real economy.

In addition, people in Europe tend to be more united in their support for climate action.

A 2022 survey by the non-profit Pew Research Center found that Europeans, regardless of political persuasion, are more likely to consider climate change a “major threat.” In the US, the survey found a wide divide in climate views between people on the right and left of the political spectrum.

“There is disagreement in the EU or in Europe about the importance of this (ESG), but the disagreement is not as big as in the US,” said Kamiar Mohades, associate professor of economics and politics at Cambridge Judge Business School.

But Europe is not immune from attacks on ESG regulations. CSRD, and a separate law aimed at ensuring that corporate supply chains are environmentally friendly and protect human rights, was amended in the past year to cover fewer companies and allow more time for compliance.

There has been a recent decline in demand for ESG from European investors, but it is limited. Launches of new ESG funds fell by 10% in Europe in 2023, but the decline in the United States was significantly more pronounced, reaching 75%, according to Morningstar.

US outflows from sustainable investment funds in the fourth quarter reached $5.1 billion, compared to $3.3 billion inflows in Europe, making assets under management in Europe seven times larger than those seen in the United States.

“What we’re seeing in Europe is that everyone continues to be quite focused on ESG and how it applies,” said David Zahn, head of sustainable fixed income at asset manager Franklin Templeton.

However, Zahn emphasized that ESG is not the only concern of investors.

“They are not only interested in ESG. They want to see portfolios that take ESG into account and maybe have some constraints, but they also want productivity,” he added.