Strict ESG rules undermine the competitiveness of European industry

The European Union has the most rigorous environmental, social and governance (ESG) regulations in the world and the most ambitious decarbonisation and net zero targets. But the EU’s approach to ESG rules and reporting has too many sticks and few carrots for businesses. European companies are suffocating under numerous EU directives and national laws in red tape that undermines Europe’s competitiveness in many industries, including green and climate technology.

The ESG flood has been much stronger in Europe than in the United States, and many European oil companies have felt the growing reluctance of funds and asset managers to invest in the industry. In addition, the new EU directives on corporate ESG and sustainability further burden all European firms with spending significantly more on regulatory compliance and reporting than their peers across the Atlantic.

Industry in Europe is too focused on sanctions and not focused enough on rewards to continue doing business in Europe. The industry believes that firms are more likely to do well in other jurisdictions, particularly the United States. The assessment gap

The ESG movement in Europe has become so strong that some of the leading oil companies based in major European economies and listed on European stock markets are considering switching to listing in New York.

These include Shell and TotalEnergies, two of Europe’s largest oil companies.

Reports emerged earlier this year that Shell was considering the move its primary listing on the NYSE. Shell CEO Wael Sawan said in April that the current London location was “undervalued”, referring to the valuation gap between lower-valued European oil majors and their New York-listed US peers such as ExxonMobil and Chevron.

TotalEnergies also floated the idea of ​​a primary listing in New York to attract a larger share of American investors.

Unlike European investors, US investors have resisted the ESG backlash against oil firms, making the US a more attractive option for a primary market for the supermajors.

Conformable Bloomberg estimatesthe European majors trade at about a 40% discount to their American rivals. TotalEnergies could have been valued at $108 billion more if it had been valued the same as a mid-sized U.S. oil producer, on earnings multiples calculated by Bloomberg.

The competitiveness gap

It’s not just oil executives who think their European firms are undervalued. Many other major companies see EU regulations as increasingly burdensome, undermining their competitiveness compared to American rivals.

In the green energy technology sector, even with Europe’s most ambitious net zero targets of all regions, companies find less support and incentives than in the US, and some European firms plan more investment in America than in their home markets .

EU regulations, particularly on ESG reporting and compliance, further complicate business for companies based in Europe.

For example, those of the EU Direction on Corporate Sustainability Due Diligence, which came into effect in July, aims to promote sustainable and responsible corporate behavior in companies’ operations and throughout their global value chains. Companies are therefore required to identify and address the negative human rights and environmental impacts of their actions inside and outside Europe, including in their supply chains.

In addition, the EU’s Carbon Border Adjustment Mechanism (CBAM), commonly known as the “carbon border tax”, was launched on October 1 last year, in the first transition phase for imports of several groups of carbon-intensive products in the European Union. The first phase of EU carbon import pricing legislation will not impose taxes on products such as it will apply from 2026.

However, it is not certain that the carbon border tax would be as effective as it was designed to be. new report by Mario Draghi, former President of the European Central Bank and former Italian Prime Minister, showed on Monday. Draghi was tasked by the European Commission to prepare a report of his personal vision on the future of European competitiveness.

Referring to the carbon border tax, Draghi wrote in the report,

“While CBAM is an important tool for European companies to remain competitive with their international peers facing low or no carbon prices, its success is still uncertain.”

In sustainability and industry, “Europe must face some fundamental choices about how to pursue its decarbonisation path while maintaining the competitive position of its industry. Black and white solutions are unlikely to be successful in the European context,” said Draghi.

“Most importantly, the ‘European Green Deal’ was based on the creation of new green jobs, so its political sustainability could be jeopardized if decarbonisation instead leads to deindustrialisation in Europe – including industries that can support the transition ecological”, according to Draghi.

The renowned economist and politician also noted that “innovative companies that want to expand in Europe are hindered at every step by inconsistent and restrictive regulations.”

Regulations, including ESG rules and directives, are hindering European competitiveness, company CEOs said in the latest European Industry Roundtable (ERT) survey.

The survey showed in May, business confidence among CEOs and chairmen of many of Europe’s largest companies returned to its highest level since May 2022. Industry leaders, however, “are much more positive about the business outlook for companies them outside Europe than inside Europe”.

When asked to outline the most impactful strategies available to EU leaders to restore competitiveness, 91% of CEOs pointed out that improving and simplifying the EU’s regulatory environment would be the most effective policy lever.

“In terms of capital investment, employment and sales, CEOs are significantly less optimistic about the future in Europe than abroad,” said Sara Murray, Managing Director, International, The Conference Board.

“CEOs are clear that Europe’s obstacles are down to cumbersome regulations, failures to fully integrate the single market and timidity towards technological leadership.”

By Tsvetana Paraskova for Oilprice.com

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