A gap is emerging and growing between environmental, social, and governance (ESG) rules from European regulators and those in the United States
The differences come not only from the volume of new regulations emanating from EU authorities, but also from a more measured, less prescriptive approach from US agencies, notably the Securities and Exchange Commission.
The widening gulf is in many ways no surprise. European agencies have moved more quickly in addressing ESG issues than their American counterparts, a fact many US regulators have acknowledged. However, the divergence raises compliance questions for companies operating in both jurisdictions, particularly given the uncertainties that lie ahead in America’s political process, say experts.
“I don’t know that any new regulations will truly be implemented before the next US presidential election” in 2024, says Brooke Hopkins, managing director at AlixPartners, a global consulting firm. Hopkins, who works with numerous companies on ESG regulatory issues, highlighted the SEC’s recent proposal on company climate disclosures, noting that the agency will likely give US companies at least 12 to 18 months to comply once the rule is finalized — a time frame “that brings us very close to the next election.”
The SEC in March introduced its groundbreaking climate-disclosure proposal, an attempt to increase transparency over what US publicly traded companies are doing to meet stated commitments to reduce their carbon emissions. The SEC’s effort was prompted largely by investor demands to know more about how US companies are fighting climate change. (The amount of investor funds pouring into so-called sustainable investments has continued to grow in recent years, with some estimates putting the total amount at more than $35 trillion.)
The SEC’s proposal, extended to allow more time for public comment, is open until mid-June. However, there already are questions over potential legal challenges to any final SEC rule, adding further uncertainty over how companies should prepare for any future regulation.
Some experts, however, believe that the SEC will be able navigate any such challenges. “It is likely that the SEC could still see some legal action for demanding too much information for the intended purpose,” says Addisu Lashitew, a fellow at the Brookings Institution. “The SEC, however, seems to have drafted the law with the intention of minimizing such a risk,” Lashitew adds. “Besides, the consultation period would allow it to modify potentially risky parts of the proposed law that could be overturned by courts.”
EU moves further ahead
Meanwhile, in the past few months, there has been no letup in European steps to increase corporate transparency over ESG issues. For example, the European Council, the EU’s governing body, adopted the Corporate Sustainability Reporting Directive (CSRD), a new requirement that all large companies publish regular reports on their environmental and social impact activities. The EU law requires certain large companies to disclose information on the way they operate and manage social and environmental challenges. The European Central Bank and the European Securities and Markets Authority have also put forward climate related stress tests for institutions they supervise.
By contrast, the US Federal Reserve and the Office of the Comptroller of the Currency (OCC), the two leading US bank regulators, have yet to offer banks any guidance or new rules of supervision on climate risk. The OCC has said it would likely provide guidance by the end of this year. US President Joe Biden’s nominee for Fed vice-chair for supervision, Michael Barr, told a Senate confirmation hearing recently that the central bank’s powers related to the climate issue were “important but quite limited,” and mainly focused on assessing the risks banks might face from climate change. “I think the Federal Reserve… should not be in the business of telling financial institutions to lend to a particular sector or not to lend to a particular sector,” Barr said.
Comparison of US and EU rules
At the national level there are even greater disparities. The US Congress has passed no legislation on climate change or emissions reduction. This is in sharp contrast to the EU, where the European Parliament has adopted a European Climate Law that legally commits EU countries to meet the Paris Agreement accord on climate emissions reduction.
Lacking a similar, legally binding piece of national legislation to build on, the SEC has framed its new disclosure law somewhat narrowly, more as a means of corporate risk management intended to inform and protect investors, said Lashitew of the Brookings Institution
Hopkins of AlixPartners concurs. “A big difference we are seeing with the proposed legislation is how principled the US is being, with the EU being fairly technical.”
Greenwashing still a threat
Despite the gaps in EU and US regulations, there is the ongoing focus of regulators on both sides of the Atlantic on companies who portray themselves as good corporate ESG citizens, but in practice are failing to deliver on their promises.
The SEC, even under existing corporate disclosure rules, has the authority to go after companies who are misleading investors about their ESG credentials — so-called greenwashing. “We know the SEC has their own analytics team and I definitely think the pressure is going to be on companies,” says Hopkins. “It will be interesting to see how hard the investor community continues to pressure them.”
