An ESG backlash erupts in Europe over world’s strictest rules

For TotalEnergies SE Chief Executive Patrick Pouyanne, the difference between his company’s stock performance and that of Exxon Mobil Corp., the largest U.S. oil and gas producer, is largely explained by an acronym: ESG.

Exxon’s aggressive oil and gas strategy has been rewarded by investors, with its shares more than doubling over the past three years. For Europe’s second largest oil company, by contrast, pressure on asset managers in the region to invest using environmental, social and governance standards has limited gains and led Pouyanne to flirt with the idea of ​​listing shares on US.

The French oil giant is not alone in highlighting the distorting effect of ESG regulations that critics say have put European businesses at a competitive and valuation disadvantage to their US peers, with potentially long-lasting effects on the bloc’s economy. Companies from Mercedes-Benz Group AG to Unilever Plc are pulling out. The European Industry Roundtable, whose members have a combined annual sales of 2 trillion euros ($2.2 trillion), says overly strict regulations are “accelerating the loss of competitiveness” and warns members’ prospects “are better outside Europe” .

Over the past five years – a period in which Europe began formulating the world’s most ambitious ESG regulatory framework – the US S&P 500 index has risen more than twice as much as Europe’s benchmark Stoxx 600 index. Although several factors – including the dominance of Big Tech – have contributed to a richer valuation in the US, ESG requirements in Europe have not helped.

European energy firms generally trade at a 40% discount to their US peers. If TotalEnergies were valued in line with the average large U.S. crude producer, its market capitalization would be boosted by $108 billion, based on earnings multiples calculated by Bloomberg.

TotalEnergies reiterated its CEO’s views on Europe’s ESG policies, declining to elaborate. Exxon, for its part, said its strategy is to provide products the world needs while also investing $20 billion by 2027 in areas such as carbon capture and low-emission fuels.

Faced with diverging ESG rules between the US and Europe, some companies have weighed their options. Commodity trader Glencore Plc, which recently said it was abandoning plans to exit coal, has been touted as a potential candidate to ditch the London listing for New York. German utility RWE AG is among the companies directing more investment across the Atlantic than in its home market, while Norwegian battery company FREYR Battery Inc. moved its headquarters to the US.

“The biggest risk of the European approach is that it has put the energy-consuming industry at a significant competitive disadvantage,” said Dimitri Papalexopoulos, president of Greece’s Titan Cement International SA and also of the Energy Transition and Climate Change Committee of European Round Tables. “If Europe’s share of these global sectors is lost, others elsewhere will simply take over and the prosperity will go there.”

The number of EU companies in the Fortune Global 500 has decreased. Europe’s share of world aluminum production has fallen to 5% in 2022 from 30% in 2000. The bloc has shifted from being a chemical exporter to a net importer.

“While EIIs (Energy Intensive Industries) in other regions neither face the same decarbonisation targets nor require similar investments, they benefit from more generous support from the state,” said the former president of the European Central Bank, Mario Draghi, in his long-awaited report on EU competitiveness, published on Monday. .

European officials acknowledge problems with the fast pace and complexity of regulations implemented since 2019, adding, however, that the measures are necessary to avoid a double crisis on climate and biodiversity. “There are short-term pains, obviously, because it requires effort, but the benefits are starting to emerge,” said Helena Vines Fiestas, chair of the EU Platform for Sustainable Finance and co-chair of the UN’s Net Zero Task Force. “We’re working really hard to simplify and make things on the ground work.”

The US has a lot of environmental protection rules, but its overall framework is dwarfed by the breadth and depth of the EU, particularly with regard to disclosure. The anti-ESG movement has also thrived in the US, and if former President Donald Trump returns to the White House, his “drill, baby, drill” mantra looks set to reduce the regulatory burden on producers. Even his rival Kamala Harris has backed away from her previous call for a ban on fracking – the technique used to produce most of the oil and gas in the US today.

As the EU expands regulations — some 8,000 pieces of legislation were passed in the European Parliament’s last five-year term, many related to the environment — the US is offering incentives. President Joe Biden’s signature climate law — the Inflation Relief Act of 2022 — is a package of tax credits and rebates designed to propel investment in everything from electric vehicles to solar panels. Goldman Sachs Group Inc. estimated it could unleash as much as $3.3 trillion in spending, putting what some call an American carrot to Europe’s stick.

Europe’s approach is more about “telling companies what to do,” said Tal Lomnitzer, senior investment manager in the global sustainable equity team at Janus Henderson Investors.

The EU’s Green Deal legally commits the bloc to net-zero emissions by 2050, with at least a 55% reduction by 2030. The EU has also pledged to invest money in the green transition, including a plan to raise €1 trillion from public and private sources. In response to the IRA, Europe launched the Green Deal Industrial Plan in 2023, allocating around $270 billion of existing EU funds. The bloc is also handing out billions to member states from its pioneering carbon market to tackle climate.

But the appeal of the U.S. program is attracting investment, with more than 60 European and Asian companies announcing projects in the year since the IRA was passed, an analysis by Bank of America Global Research showed.

“Many companies have found this scheme very attractive, very effective, very quick to implement compared to Europe where things are a bit slower at times,” said Panos Seretis, head of global sustainability research at Bank of America.

Norway’s FREYR is cutting spending on a project in its Scandinavian market to focus investment in the US. German utility RWE committed 20 billion euros to the US last year, almost double the spending plans for its home base.

“The IRA creates a positive and stable investment environment with a simple regulatory framework,” said RWE CEO Markus Krebber.

For Estelle Brachlianoff, CEO of French water treatment company Veolia Environnement SA, “the US is winning.” Dutch bank ING Groep NV CEO Steven van Rijswijk said the US is doing better in attracting investment. European regulations are “out of touch, they’re putting investment on hold,” said CEO Josu Jon Imaz San Miguel of Repsol, an oil and gas producer that is moving toward cleaner energy. He wants Europe to “learn a lot from what is being done in the US”.

Unlike the US, where the federal government can offer tax breaks, EU taxation falls to member states, leaving the bloc to work largely through loans and grants.

The climate directives – with acronyms such as CSRD, SFDR or CSDDD – have cemented Brussels’ reputation as the ultimate Hydra of bureaucracies. Its disclosure requirements have spawned a cottage industry of consultants, with revenue from ESG reporting software set to double to $2.1 billion by 2029.

The Corporate Sustainability Reporting Directive will require companies to provide more than 1,000 data points on everything from water consumption to boardroom diversity in supply chains, with more requirements to follow. The Sustainable Finance Disclosure Regulation, with reporting requirements for investors, is facing an overhaul after criticism that it did not adequately define concepts such as “sustainability”.

The Corporate Sustainability Due Diligence Directive requires detailed corporate transition plans and opens up businesses to lawsuits if there are ESG violations in their value chains. For companies with hundreds of global suppliers, this can become “very complex”, said Sophie Tuson, head of the environment unit at London law firm RPC.

Compliance costs are rising. Olga Smirnova, director of internal audit at Heineken NV, says money spent by the Dutch brewer on ESG reporting has grown at an “exponential” rate. Desiree Fixler, formerly head of sustainability at Deutsche Bank AG’s investment arm DWS before becoming a high-profile whistleblower, is now denouncing European ESG regulations on social media.

“Most companies are absolutely suffocating with the amount of data capture they have to do,” Fixler said.

While the EU has encouraged electric vehicles, investors in Porsche AG recently called on the luxury carmaker to slow its EV push, worried about profitability. Mercedes-Benz and Volvo Car are also setting aside some EV ambitions. Sales of electric vehicles in markets such as Germany and Italy are falling, BloombergNEF data shows.

Despite the protests, however, there are some who warn of a climate reckoning ahead.

For now, “oil and gas may outperform, but if that sector doesn’t shrink, then the effects in terms of extreme weather and so on will make the absolute performance in the large portfolios actually lower than it might have been otherwise.” , he said. Eric Pedersen, director of responsible investments at Nordea Asset Management.

As onerous as the disclosure rules are, Johan Floren, senior ESG adviser at the $100 billion Swedish pension fund AP7, says he needs them to do his job. “Without information, the market doesn’t work,” he said.

Some of Europe’s biggest financial firms are removing their ESG risk registers. BNP Paribas SA, the EU’s biggest lender by assets, is restricting fossil fuel financing. The $550 billion Stichting PensioensFonds ABP, Europe’s largest pension fund, said in May it had exited liquid assets in oil, gas and coal, a portfolio worth about 10 billion euros. It plans to offload another €4.8 billion in illiquid fossil fuel assets.

The fund will only invest in companies that are “on the transition path to a sustainable economy and in companies that do not harm the climate or biodiversity,” ABP board chairman Harmen van Wijnen told Bloomberg.

The EU may be ahead of the game in terms of ESG regulations. Efforts are underway to make sustainability reporting global, with countries representing nearly 55% of the world economy working to adopt the disclosure requirements set by the International Sustainability Standards Board.

Some say there is no other way. After two decades of persuading markets to address climate change, it is clear that voluntary measures have failed, said Simon Braaksma, senior director of sustainability at Royal Philips NV.

“People who are crying, maybe they should roll up their sleeves and contribute more to solving these societal problems,” he said.

Photo: The Northern Lights carbon capture and storage project, controlled by Equinor ASA, Shell Plc and TotalEnergies SE, in Blomoyna, Norway. Photographer: Andrea Gjestvang/Bloomberg

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