European Union flags flutter outside the EU Commission headquarters. - REUTERS/Yves Herman
WASHINGTON: The European Union’s (EU) environmental, social and governance (ESG) framework – a shadow of its former self after a year of deep cuts – is drawing renewed threats from the United States.
At issue is the so-called extraterritoriality of the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD).
The EU just struck a deal to exempt more than 80% of companies once in scope. But it’s also agreed that the rules will continue to apply to large foreign firms doing business in the bloc.
The United States has made its displeasure clear. President Donald Trump’s top trade negotiator, Jamieson Greer, characterises the EU’s ESG deal as inadequate.
He also said the trans-Atlantic tariff agreement struck this year, which includes assurances from the EU that its ESG regulations won’t impede trade, would be at stake if more concessions aren’t forthcoming.
“They have to deliver on this,” Greer said during a recent Senate hearing. “The reality is, if the Europeans don’t deliver on what they’ve committed, they won’t receive the benefit of the tariff relief they’ve been granted.”
The threats add to tensions between Washington and Brussels over issues spanning tech regulations to defence spending.
When it comes to ESG standards, the Trump administration has made no secret of its disdain, with key planks such as net zero goals being dismissed as “terrible” policy by US Energy Secretary Chris Wright.
EU lawmakers interviewed by Bloomberg said there’s no real leeway in the bloc’s overhauled ESG framework to give the United States what it wants.
“This outcome was politically unavoidable,” said Jorgen Warborn, a lawmaker from the centre-right European People’s Party who oversaw talks to cut back CSRD and CSDDD in the EU Parliament.
“Options such as repealing the directive entirely or limiting it only to EU-based companies were never viable – both to preserve a level playing field and to secure a parliamentary majority,” Warborn told Bloomberg.
CSDDD, which puts companies at risk of significant financial penalties if they fail to monitor value chains for environmental and human rights violations, “is, by its nature, an extraterritorial instrument,” he said.
So its “overall reach remains” intact.
Proponents of ESG warn that failure to require companies operating in the EU to comply with the bloc’s sustainability rules would have serious consequences, not least because investors wouldn’t know how to assess where to place their capital.
For now, however, there’s little evidence that investors are deterred by the risk that US companies might lag behind their European peers on ESG disclosures and due diligence.
Europe-domiciled funds holding US equities drew US$56bil in net new money in the 12 months through October, according to data for large and small-cap strategies compiled by Morningstar Direct. That’s about the same as went into Europe-domiciled funds holding European equities.
US-domiciled funds holding US equities, meanwhile, drew US$39bil in the period, which is more than three times the amount that flowed into US funds holding European equities, the Morningstar data show.
A spokesperson for the European Commission said the bloc’s rules ensure all companies operate on a level playing field, adding that the EU will enforce the rules fairly and without discrimination.
At the same time, engagement with the United States will continue as Europe implements the EU-US joint trade agreement, the commission spokesperson also said, in comments sent by email.
The EU and the United States agreed in July to limit tariffs on most EU exports to 15% in a deal that included a commitment from the EU to ensure CSDDD and CSRD don’t get in the way of trade.
Since then, EU lawmakers and member states have resolved some specific US concerns, including axing mandatory climate transition plan requirements.
Overall, though, the legislation “safeguarded” the core purpose of Europe’s ESG regulations, said Pascal Canfin, a senior lawmaker negotiating for the EU’s centrist Renew Party. “The proof is that the Trump administration continues to oppose these laws,” Canfin said after the Dec 16 vote.
Companies such as Exxon Mobil Corp “could face fines of up to almost US$10bil” if they don’t comply with CSDDD, he added.
US lawmakers have made clear they intend to push back hard. Commerce Secretary Howard Lutnick has also warned that he’s ready to explore the use of “trade tools” to retaliate against EU ESG rules. — Bloomberg
