Europe moves ahead on ESG as US faces division

There appears, on the surface, to be a growing divide between the US on the one hand, and Europe (and the rest of the world) when it comes to ESG. In Europe, ESG is undoubtedly to the fore, not just in the investment world but in a much wider sense. This is clearly seen in the ongoing regulations coming out of Brussels, and also at national level.

Europe is at the forefront when it comes to ESG regulations, with a number on the table or becoming law, with recent examples including a EU nature restoration law, EU regulation on deforestation-free products, an anti-greenwashing directive and the Corporate Sustainability Due Diligence Directive.

Net zero is still high on the agenda despite recent comments from the UK’s prime minister that “banning things and stopping people from doing things is not the right approach” to reaching net zero, and that he is committed to meeting the 2050 net-zero target in a “pragmatic and proportionate way”.

But in the US there has been a lot of noise from mainly Republican voices attacking ESG as a concept – especially in terms of investment activity and the SEC, but also state contracting rules. The rhetoric often reaches absurd levels – take for example a comment from Congressman Ralph Norman, the sponsor of the Businesses Over Activists Act, one of a number of bills attacking ESG: “ESG is an evil pollutant that must be eradicated from corporations and businesses.”

What is not clear is how much of a threat this is to European businesses operating in the US, and whether it truly represents a sea change in attitude towards ESG in the US. It is part of a campaign by some on the Right in the US against “wokery”, including diversity and gender issues, and incorporating climate change denial.

In Europe, there appears to be a level of support for green policies and a recognition of the need to act on climate change. A recent Eurobarometer survey found a huge majority of Europeans believe climate change is a serious problem facing the world (93%), and more than half believing that the transition to a green economy should be sped up (58%) in the face of energy price spikes and concerns over gas supplies after Russia’s invasion of Ukraine.

Almost nine in ten EU citizens (88%) agree that greenhouse gas emissions should be reduced to a minimum, while offsetting the remaining emissions to make the EU climate-neutral by 2050, the survey found. And 87% think it is important that the EU sets ambitious targets to increase renewable energy use.

Frans Timmermans, executive vice-president for the European Green Deal, said: “European citizens understand the threat of climate change, and continue to support climate action by the EU, national governments, business and individuals. They recognise the long-term risks posed by the climate and biodiversity crises but also the opportunity that we have to build a brighter, healthier and safer future if we act now on the green transition.”

And this was before the summer heatwaves brought devastation to large parts of the world. According to Copernicus, the global average temperature for July 2023 is the highest on record for any month. Ever. The month is estimated to have been around 1.5°C warmer than the average for 1850-1900. And global average sea surface temperatures also reached record high levels in July.

Samantha Burgess, deputy director of the Copernicus Climate Change Service, says: “We just witnessed global air temperatures and global ocean surface temperatures set new all-time records in July. These records have dire consequences for both people and the planet exposed to evermore frequent and intense extreme events.”

She adds: “2023 is currently the third warmest year to date, at 0.43ºC above the recent average, with the average global temperature in July at 1.5°C above preindustrial levels. Even if this is only temporary, it shows the urgency for ambitious efforts to reduce global greenhouse gas emissions, which are the main driver behind these records.”

As a result of the extreme temperatures this year, heat stress has become an important issue for businesses. And clearly we can expect to see extreme temperatures more often in the future. As Claire Souch, vice president of climate risk, Moody’s RMS, points out: “Although typically described as a ‘chronic risk’, heat stress is increasingly exhibiting extremes, such as heatwaves, as well as compounding and interrelated effects on drought, water stress, and wildfires.”

She explains that warmer oceans and increased evaporation mean heavier precipitation and increased likelihood of flooding in coastal areas.

“The impacts of heat stress on many businesses in the US and Europe are expected to more than double by 2050 under a moderate climate change scenario, and more than quadruple in parts of Asia such as Singapore, Sri Lanka, and Bangladesh. Under an extreme climate change scenario, these impacts could be as much as double the moderate scenario across all regions,” Souch says.