Environmental Social Governance (ESG) is losing steam in the U.S., making its way out of corporate board rooms and policymaking. Pushback exposed how these investments favored political ideologies over fiduciary duties, yielding lower returns for shareholders and retirees. Even once-big promoters are backing off. The fad is fading.
The Securities and Exchange Commission (SEC), under new leadership, also recently announced it would be pulling back from its own climate-reporting rule adopted just a year ago. The statute has been a point of controversy and contention among elected officials and business leaders. These types of mandates are difficult (and costly) to implement.
Apparently, the European Union (EU) did not get the memo. Or at least have chosen to ignore it. And the roughly 3,000 large U.S. companies that do business across the Atlantic will be affected.
Within the last few years, the EU has enacted sweeping disclosure regulations, the most immediate and comprehensive being the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CS3D). Requiring large companies to report on social and environmental performance and imposing strict requirements for climate transition planning, these directives are aimed at driving change in the behavior of companies that operate in the EU.
The standards span ESG-related topics and are intended to provide insight into companies’ sustainability impacts, risks, strategies, and opportunities, mandating investment to mitigate supposed negative outcomes. The reporting is not necessarily limited to a company’s own operations but would extend to direct and indirect business relationships across the value chain. CSRD reporting requires approximately 84 disclosures, each with separate metrics, and 1,100 data points.
The process is sure to be challenging given the scope and the reliance on information from parties not controlled by the company. The costs and burdens will be massive, making it increasingly difficult for U.S. companies to continue conducting business on the continent.
One organization estimates the costs of implementation could run large companies up to $218 million in the first year and $152 million for subsequent years, with average recurring administrative costs at $89,500 per year. These are expenses that a business could put elsewhere such as investments, innovation, expansion, higher wages, enhanced operational efficiency, and lower consumer prices.
Failure to report this information comes with consequences. Noncompliance could cost a company upwards of $1 million in fines and even land violators in jail. Since so many EU leaders embrace environmental and climate policies, a company’s lack of participation could also risk reputational damage, competitive disadvantages, loss of partnerships, supply chain disruptions, and recruitment difficulties.
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Kristen Walker is a policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.theamericanconsumer.org or follow us on Twitter @ConsumerPal.