Regulatory developments
Until 2023, ESG regulations advanced rapidly, with the EU, UK, and the US, particularly California, leading the way. The primary focus is on ESG disclosures to standardize sustainability claims, improve comparability, prevent greenwashing, and enhance awareness. While large public companies are the main targets, smaller and private firms will also be impacted in a phased manner. Besides ESG disclosures, pioneering regulations like the EU’s Carbon Border Adjustment Mechanism (CBAM) and Nature Restoration Law are emerging. CBAM seeks to balance carbon-intensive goods produced within and outside the EU by imposing a carbon emissions tax. In the case of the Nature Restoration Law, the ambition is to restore biodiversity and natural habitats, targeting the protection and restoration of at least 20% of the EU’s land and sea areas by 2030. Regardless of the nature of ESG regulations, 2024 has presented a complex landscape for the approval of such laws due to political influences. Even sustainable initiatives are facing challenging times.
Politically driven ESG scenario
Europe
The first quarter of 2024 has been a different story. Along with the highest temperatures ever in Brazil, flooding in Argentina, droughts in many parts of Europe, wildfires, big hailstorms, and mild winters in the Northern Hemisphere, which make climate change evident, another climate is changing too and that is politics. With so many elections being held this year, including in two of the biggest economies: the US and the EU, parties don’t want to lose a single vote due to controversies related to upcoming regulations. Even those that are already effective have been under scrutiny, like the recently approved SEC disclosures and the Senate Bills in California. It seems that approved legislation is not written in stone and can be amended according to political winds and pressure from economic groups.
This has been clear with farmers’ protests in Europe, complaining over environmental regulations, including diesel prices, the phase-out of the tax break for farmers on diesel fuel, pesticide reduction, restrictions on water and land usage, and tax on carbon and nitrogen emissions curbs, among others. Countries with protests include Spain, France, Belgium, Italy, Germany, the Netherlands, Romania, Poland, Greece, and Portugal.
European Parliament Elections are going to be held in June and for sure this scenario is shaping the current uncertain situation of the ESG regulations that failed to be approved: CSDDD and the Nature Restoration Law, both initiatives of the existing Parliament elected in 2019. In addition, the pressure from economic groups, agriculture the most visible one due to the farmer’s protests, will at least delay ESG regulations adoption.
UK
The UK is another country that has implemented ESG regulations, some recent like Biodiversity Net Gain (BNG) and the Sustainability Disclosure Requirements (SDR), and older ones, like the Modern Slavery Act, effective in 2015. However, after Boris Johnson’s resignation and Rishi Sunak’s assumption in October 2022, the situation changed. The UK is committed to a 2050 net zero target from 2019, but measures from the current administration are conflicting with this goal. Said by himself in a speech in September 2023 and called in the media a “major policy U-turn”, he had a new approach to tackle climate change based on “sensible, green leadership”.
Although Sunak still proclaims that the UK is on track to meet the target, the Climate Change Committee warned in the report Progress in reducing emissions in June 2023, that the UK was slowing its decarbonization pace, putting at risk the 2030 and 2035 emissions reduction targets. Two emblematic decisions from Sunak’s administration are the approval of the Cumbria coalmine in December 2022, the first to be approved in more than 30 years, and the issuance of new oil and gas licenses in the North Sea, in a bid to support the oil and gas industry and make the UK more energy independent from Russian oil. In addition, a measure coming from Johnson’s administration is the delay of the 2030 ban on sales of new, fully petrol and diesel cars to 2035. A measure that was confirmed by Rishi Sunak.
On the other hand, the Offshore Petroleum Licensing Bill and the Anti-Greenwashing Rule are two regulations in line with sustainability and both are on the path to being approved this year, the first one is expected to be effective at the end of April, and the second, on May 31.
It is worth noting that elections of the House of Commons in the UK are going to be held most probably in January 2025, so it is expected that since the second half of this year if not sooner, this issue will drive decisions where the approval of ESG regulations are not the exception.
United States
In the United States, there is considerable discussion and debate surrounding the recently approved SEC’s climate disclosures and the SB 253 and SB 261 from the State of California. As elections get closer, initiatives from the Republican Party through advocate lawyers, judges, mayors, and companies are firmly opposing effective ESG laws.
The Biden administration has been very active in promoting initiatives aligned to tackle climate change, targeting the decarbonization of energy- and emissions-intensive industries, through the allocation of considerable investments. Although there are no ESG regulations at the federal level, it is expected that the current approved legislation will also affect companies outside the state of California, as they mandate disclosures of companies doing business in California and not headquartered in this state. Also, the SEC regulation will impact public companies independently of their location.
Other relevant movements against ESG initiatives in the US are the issues that investment companies are facing when they request ESG metrics or alignment to sustainability as decisive factors of investment. The most notable case is Blackrock, which has received a lot of media attention due to its significant growth in ESG investing. Despite the attacks the company has received, as being accused of anti-capitalist or anti-American by the Republican Party, its ESG-related assets under management grew last year by about 53%. However, since the company’s 2020 announcement that it was going to prioritize sustainability in its investment strategy, several US states have pulled back investment, with Texas being one with a withdrawal of $8.5 billion divestment in March this year. Some critics argue that BlackRock’s sustainable investment policies endanger the US energy industry and fall outside of the firm’s fiduciary duty to deliver returns to shareholders.
On the other side, Blackrock has also been accused of greenwashing, according to a report from the Commonwealth Think Tank (April 2023) that mentioned that ESG bonds from the company were going into fossil fuel firms. The recent case against Vanguard Investments Australia (March 2024), set by ASIC establishes a precedent for this type of funds and the ESG claims made by asset managers. Vanguard subsidiary was found guilty of making misleading claims about one of its ESG funds.
With the US presidential elections imminent, the forecast appears quite hectic and uncertain. November will undoubtedly be a pivotal month for the trajectory of sustainability trends in the US business landscape for the forthcoming four years.
Although the political scenario influences the global ESG landscape and especially the pace in how regulations are adopted by the different governments, circumstances are changing towards a more standardized and reliable landscape for investors, clients, and people, where more transparency and accuracy are needed to build trust in the business environment.
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