Debate over the economics and practicalities of Environmental, Social, and Governance (ESG) policy has been simmering on both sides of the Atlantic for some time. However, the inauguration of President Trump, and the Republican Party's control over both Congress and the Senate Congress, tipped the balance in favour of ESG scepticism State-side. Given the pre-election rhetoric, it came as no surprise that President Trump signed a slew of anti-ESG executive orders soon after his inauguration – including:
- withdrawal by the US from the Paris Climate Accord
- declaring an energy emergency streamlining permitting
- reviewing for rescission all regulations that impose undue burdens on energy production and use.
But what impact will these changes have outside of the US and what do they mean for the future of ESG policy in Europe?
ESG policy in Europe: As it stands today
The European Commission has undertaken several initiatives over the last decade which were aimed at promoting ESG criteria within the EU, including:
- European Green Deal: an ambitious policy framework which encompasses a wide range of regulatory and financial measures designed to reduce carbon emissions, promote sustainable economic growth, protect the environment, and make Europe climate-neutral by 2050.
- Sustainable Finance Disclosure Regulation (SFDR): a regulation requiring financial market participants and advisors to disclose how they integrate ESG factors into their investment decisions and advice processes (with a view to preventing 'greenwashing').
- Corporate Sustainability Reporting Directive (CSRD): a directive requiring companies with significant activity in the EU to provide detailed reporting on sustainability issues, including environmental impact, social matters, and governance practices.
- Corporate Sustainability Due Diligence Directive (CSDDD): a directive placing a corporate due diligence duty on large companies operating in the EU to identify and address adverse human rights impacts (such as child labour) and environmental impacts in their operations.
- Taxonomy Regulation: a regulation establishing a classification system to provide clear criteria which allows investors to determine whether an activity is environmentally sustainable.
These initiatives reflect the EU's commitment to embedding sustainability principles across various sectors of its economy.
The rise of ESG scepticism in Europe?
However, although ESG has been a significant driver of corporate responsibility and sustainable investment for years, the long-term viability and effectiveness of ESG policies have been the subject of frequent debate.
Firstly, the complexity of implementing ESG policies across EU member states which have varied regulatory landscapes, economic conditions, and industrial bases has posed a considerable challenge. The establishment of uniform 'one-size-fits-all' ESG standards that are both comprehensive and universally applicable has meant that some member states have felt the burden of ESG policies more than others. And whilst some steps have been taken to allow flexibility within an otherwise regimented system to take account of these differences, this has led to variances in requirements at a national level, which in turn has led to increased compliance costs and operational inefficiencies for those companies which operate in multiple jurisdictions.
Secondly, similar to in the US, there has been growing scepticism among stakeholders regarding the impact and effectiveness of ESG initiatives. Whilst various reporting frameworks (eg TCFD, GRI, SASB) exist, and the ISSB (an independent standard-setting body within the IFRS Foundation) has published a set of disclosure standards designed to be a global baseline for sustainability reporting, there is still no single universally accepted and adopted standard. This lack of standardised metrics for measuring and reporting on sustainability performance has made it difficult for investors to compare companies' ESG performance accurately or for regulators to enforce consistent reporting practices. This in turn has led critics to argue that many companies engage in "greenwashing" (where they project an image of environmental responsibility without making substantial changes to their business practices) and some investors to question whether ESG-focused investments genuinely deliver superior long-term returns or merely serve as marketing tools.
Finally – and perhaps most compellingly – the economic pressures facing the EU cannot be overlooked. The region's economies have been grappling with challenges such as slow growth rates, high levels of public debt, and geopolitical uncertainties. Policymakers have faced increasing pressure to relax stringent ESG requirements in favour of measures that boost economic recovery and competitiveness. This pressure can be seen from the delay in application of some sustainability-related legislation, eg the Deforestation Regulation, and also from the results of the EU parliamentary elections in June 2024, which saw a significant increase in support for Eurosceptic (and less ESG-friendly) parties, with Marine Le Pen’s Rassemblement National (RN) party emerging as the single largest delegation and populist movements gaining traction, (such as Alternative für Deutschland (AfD) party in Germany, and Freiheitliche Partei Österreichs in Austria), which prioritise national interests over collective EU-wide initiatives.
What's next for ESG in Europe?
Predictions always run the risk of aging poorly – but from discussions across our network of European offices, here's what we think is next for ESG in Europe.
- The executive orders signed by President Trump following his inauguration are likely to act as a bellwether for renewed challenge to ESG policy across the European continent. Populist movements emphasising national interests (in particularly, to stimulate sluggish national and EU economic growth) will continue to shout loudly about the perceived adverse impacts and unclear benefits of ESG policy. For example, Mario Draghi, the Italian prime minister, has urged the EU to raise investment and cut regulation. These voices may now focus even more intently on the efforts made by the US, China and other major economies towards ESG objectives, and question the extent to which the EU is placing itself at a competitive disadvantage through its ESG policy.
- That said, it's unlikely that the shadow cast by ESG-scepticism from across the Atlantic will translate into a bonfire of ESG policies – a slowing in the pace of new sustainability related legislation perhaps – but not a complete reversal. Unlike in the US, where scepticism often translates into a discussion over the fundamental legitimacy of ESG as a concept (ie are the goals of ESG policy 'valid' or 'invalid'), in Europe it tends to be more nuanced. In particular, even the staunchest sceptics in Europe have tended to accept that ESG policy has at least some legitimate goals – and so they have instead focussed their criticism on the mechanism by which those goals are achieved. Expect more discussion on the appropriate balance between economic growth and the objectives of ESG policy (such as the scope and timing for the implementation of ESG policy), but not a discussion about whether ESG policy should be kiboshed altogether.
- A long-awaited EU omnibus simplification package (expected in February 2025) will consolidate, harmonise and refresh the CSRD, CSDDD and Taxonomy Regulation, with the aim of reducing the compliance burden. Whilst some EU Commissioners have said that "simplification" does not equate to "deregulation", there is no unanimity on that point. Expect discussions to be ongoing.
- There may be some deeper soul-searching within the Commission as to how Europe can remain competitive as an economic market relative to the US and the rest of the world. Over the last few weeks, parliamentarians have queried whether Europe needs its own Elon Musk-style Department for Government Efficiency (DOGE). All eyes will be on the Commission's recently published mission statement for the next 5 years – its "Competitive Compass" – and how effective it will be in driving competitiveness and economic growth, and in delivering the omnibus simplification package to see how far those reform proposals go.
- The success of the ISSB standards for driving consistency and comparability in sustainability reporting depends on their widespread adoption, which, despite the US abstaining, looks encouraging. However, the challenge lies in how the standards are adopted – jurisdictional modifications to the standards could mean that the information is not as comparable as intended. This will be an area that the ISSB continues to monitor.
- The alphabet-soup of ESG terminology will fall swiftly out of fashion. The litany of ESG acronyms have the dual disadvantage of alienating those who are not au fait with ESG policy, whilst also being relatively meaningless to those who do (eg the term "ESG" is itself broad-ranging and can mean different things to different people). Instead, businesses will focus on the substance of environmental, social and governance policies.
Whatever 2025 holds in store for ESG, expect us to be at the forefront of commercial legal advice in the UK and across Europe.
