Here's Why ESG Isn't Dead Yet
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I'm Stephen Carroll and this is Here's Why, where we take one news story and explain it in just a few minutes with our experts here at Bloomberg.

They're three letters that have inspired, confused and angered. Environmental, social and governance rules are meant to make the world a better place. But the concept hasn't always been well defined and it's become a political wedge issue in the United States. I terminated the ridiculous and incredibly wasteful Green New Deal. I call it the Green New Scam.

I declared a national energy emergency and it's so important, national energy emergency to unlock the liquid gold under our feet. My administration has also begun the largest deregulation campaign in history, far exceeding even the record-setting efforts of my last term. Europe's approach has been quite different, but regulatory fatigue has become an issue, with France and Germany indicating that they want EU regulations to be simplified.

Will the EU unpick years of work developing this area? Here's why ESG isn't dead yet. Our managing editor for ESG Investing, Tasneem Brogger, joins us now for more. Tasneem, are we seeing a major shift in attitude from businesses towards ESG regulation? So ESG is on life support, perhaps.

but it's not dead, as you say. The issue is very different from the issue in the US, where we've got the anti-woke movement and we've got the Republican Party making very clear that they have started a campaign against ESG. In Europe, it's much more of a perhaps rational, one could argue, reaction to just an endless stream of regulations that have been coming. And so we've reached a point where companies now are about to have to start rebuking

reporting hundreds of data points in their annual reports, which will start coming out very soon, and Germany and France complaining that this has simply gone too far. It's an anti-competitive development. Their economies are obviously struggling and dragging down the whole Eurozone. So we've got a change in the tone around, you know, what is going on with the regulatory burden, especially when it comes to ESG. Tasneem, talk us through some of the rules that have come in for particular criticism

in terms of what we've been hearing recently? So the concerns that we've heard have been very closely tied to the Corporate Sustainability Reporting Directive, which is to do with requirements for companies in terms of the data points that they need to start reporting on.

It's initially for very big companies, but the original idea is to sort of have it spread out over smaller companies in the years to come. Now, the big complaint from Germany and France especially is that there are simply too many companies being included in the scope of this regulation, companies that are actually too small to deal with the costs

and the burden associated with the compliance needed to live up to this directive. You know, it's a conversation that's gaining a lot of momentum. We've seen similar comments from Italy. And so there's a sort of a moment of general acknowledgement that something needs to change.

What has the European Union said in response to this criticism? The European Union has actually acknowledged that this is the time to listen. We've got the new financial services commissioner, Albuquerque, who's made the point that, yes, there's a need for tweaks, there's a need for adjustments. But

But she's also made the point very clearly that Europe is committed to its Green Deal, it's committed to the principles of sustainability that have sort of, you know, von der Leyen has also made clear are sort of fundamentally part of the European way of thinking. So she describes it as we need to make adjustments, but the anchor remains in place, the anchor of sort of seeing sustainability as crucial to the way in which one conducts business in Europe.

Of course, it took years of consensus building in Europe to develop these rules as well. So we're not at a point where policymakers are going to get rid of these regulations. No, that's exactly right. And it is, as I said earlier, it is very different from the dynamic that we're seeing in the U.S.,

The US seems to be much more driven by ideology and sort of, to an extent, even degrees of denying that climate change is a thing, denying the science. That's not what we're seeing in Europe. We are seeing concern around protecting, you know, small and medium-sized businesses. Obviously, these are the companies that are employing the bulk of the labour force in most of the big economies today.

So there's simply a desire to make sure that these drivers of economic growth aren't burdened with too much of a reporting requirement.

that the administrative burden doesn't become excessive. So I think, you know, there's this process in place now. We've got what's called the omnibus process, which is where more than one piece of legislation will be dealt with in one go. That's being put forward by the European Commission at the end of this month. And that will deal with the CSRD, the Corporate Sustainability Reporting Directive. It will also deal with something called CSDD, which is to do with due diligence legislation.

That's also caused some complaints because of the extent to which companies' value chains suddenly come under scrutiny and violations of human rights, for example, somewhere in the supply chain could expose them to legal liability. And then there's also the taxonomy regulation, which kind of underlies a lot of the other regulations in terms of coming up with a vocabulary of definitions of all the corners of sustainability organizations.

These three huge blocks of regulation within ESG in Europe will be given a good once over at the end of this month. And the expectation is that there will be a rolling back, probably in line with what France and Germany are asking for, which is that SMEs in particular will be protected. And some of the data points potentially will be wound back in terms of the complexity of what's being demanded. OK, so we have an idea of where some compromises could be found in

Just Tasneem, if we're thinking about this from a global perspective, you've noted the different approach being taken in Europe, but rules made in the European Union do tend to have an impact beyond its borders. That's exactly right. So part of the issue here is that all of these regulations and directives are designed in a way that companies and investment firms that target clients and customers in the EU will have to comply, not all of them immediately, but

but over a sort of a number of years. And that has irritated, we can say, American companies in particular. We've had the American Chamber of Commerce and EU, which includes, you know, Ford and Amazon and Exxon and sort of really big American companies saying this is the moment of regulatory overreach. And they're demanding, you know, a pause in a lot of this ESG regulatory rulemaking. They're also trying to get exemptions for U.S. companies. And we've

We've also had Howard Lutnick, who's likely to become Commerce Secretary, who's specifically singled out EU ESG regulations as an area that he's going to look at. And he's described it as willingness to use trade tools. He didn't specify what he means by that, but simply indicated that there are levers that the US is willing to pull in order to target Europe's ESG regulations.

Thanks to our Managing Editor for ESG Investing, Tasneem Brogher. For more explanations like this from our team of 3,000 journalists and analysts around the world, search for Quick Take on the Bloomberg website or Bloomberg Business app. I'm Stephen Carroll. This is Here's Why. I'll be back next week with more. Thanks for listening.

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