Economy and Society April 16, 2024: ESG approaches diverge in U.S. and Europe

ESG developments this week

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the environmental, social, and corporate governance (ESG) trends and events that characterize the growing intersection between business and politics.

In Washington, D.C., and around the world

ESG approaches diverge in U.S. and Europe

The United States and Europe are approaching ESG differently. As American policymakers, regulators, and investors have pushed back against the investment strategy, European governments, corporations, and investors have generally remained supportive of ESG, according to Reuters:

In the United States, conservative politicians have been successful in tamping down environmental, social and corporate governance (ESG) product marketing, in diluting regulations that promote ESG disclosures, and in discouraging financial firms from co-ordinating on curbing greenhouse gas emissions.

But Europe has so far largely resisted the anti-ESG tide, due to greater political and consumer support for greener products and a swathe of regulations that underpin the operations of the finance industry and companies in the real economy. … Across Europe’s financial services sector there are 20 rules and 25 voluntary guidelines pertaining to ESG, compared to just two rules and five voluntary guidelines in the United States, according to ESG Book. …

European financial firms’ commitment to ESG could prove crucial to the survival of international climate alliances. Initiatives such as Glasgow Financial Alliance for Net Zero (GFANZ) and Climate Action 100+ have seen defections by U.S. firms, but their European membership has largely remained intact.

ESG funds continue growing in Europe

Although U.S. investors started pulling money out of ESG funds over the last several quarters, European money on a net basis has continued flowing into ESG investment products:

Sustainable funds in Europe attracted inflows in Q4, but investors pulled $5 billion from U.S. sustainable funds in the last quarter of 2023, for a total of $13 billion over 2023, according to the data.

In Europe, sustainable funds performed better than the broader market and attracted $3.3 billion of net new money in the fourth quarter, thanks to passive funds which collected $21.3 billion, Morningstar said. Europe remained the world’s biggest market for sustainable funds, but the fourth-quarter fund inflows were much lower than the revised $11.8 billion inflows in the previous quarter, per the data.

Meanwhile, outflows from U.S. sustainable funds jumped to $5.1 billion in the fourth quarter, nearly double the restated $2.7 billion outflows in the third quarter.

Three-quarters of European funds could be ESG-compliant by 2027

PwC Luxembourg estimated in a report that roughly three-quarters of all European investment funds will be ESG-compliant by 2027. Currently, about 61.5% of European funds comply with ESG standards, according to the report:

The level of assets allocated to ESG strategies in Europe will rise to €9.7tn over the next four years, according to PwC Luxembourg. The global consultancy group made the forecast based on trends it analysed around launches, flows and investor appetite over the course of 2023. The upsurge will mean that three-quarters of all funds will either be Article 8 or 9 by 2027.

In the 17-page report, PwC Luxembourg said ESG-compliant funds, defined as those meeting Article 8 or Article 9 criteria under the Sustainable Finance Disclosure Regulation, account for 61.5% of all funds currently. This represents around €5.8tn of the total €10.8tn market.

While the market as a whole is expected to expand to €12.5tn over the coming years, PwC Luxembourg said EU ESG assets under management will keep step and increase thanks to a predicted compound annual growth rate of just under 11%.

International ESG differences could create opportunities for American banks

ESG opponent Stephen Soukup, the author of “The Dictatorship of Woke Capital,” argued several months ago that differences between the U.S. and Europe on ESG could create a competitive advantage for American companies:

It is important to remember here that as American asset managers are retreating from ESG, European asset managers are not. They are, in fact, moving in the other direction. Likewise, as the Biden Administration’s “whole of government” approach to climate, sustainability, and Net Zero is hampered by divided government, constitutional restraints, and pending litigation, the European Union’s much more aggressive approach to these matters is not. The EU is, indeed, moving more slowly today than it was last summer, but it is still scooting down the road to economic oblivion at comparatively breakneck speed.

In practice, what this means is that ESG could place American companies at a competitive ADVANTAGE, relative to their European and even many Asian counterparts.

Over the weekend, Bloomberg reported that regional U.S. banks are lending more capital to oil, gas, and coal companies as European banks move away from the fossil fuel sector:

A group of US regional banks is ratcheting up lending to oil, gas and coal clients, grabbing market share as bigger European rivals back away.

The list of banks includes Citizens Financial Group Inc., BOK Financial Corp. and Truist Securities Inc., according to data compiled by Bloomberg. The companies have climbed between 13 and 40 steps up the league table for fossil-fuel lenders since the end of 2021, placing them among the world’s top 35 banks by number of deals. Fifth Third Securities Inc. and US Bancorp, already in the top 30, both ascended 10 steps in the same period.

Since the start of 2022, the combined number of fossil-fuel loans provided by Citizens Financial, BOK Financial, Truist Securities, Fifth Third and US Bancorp rose more than 70% on an average annualized basis, compared with the preceding six years, the Bloomberg data show.

In the states

BMO Bank opens lending to fossil fuel companies following West Virginia pushback 

BMO Bank, the U.S. subsidiary of the Toronto-based Bank of Montreal, recently abandoned its internal practice of denying credit to the coal industry. The decision came after West Virginia Treasurer Riley Moore (R) sent a warning letter to the bank arguing the practice would disqualify BMO from state contracts:

The change came to light Monday after West Virginia Treasurer Riley Moore took a victory lap in an announcement of the financial firms it was adding to its boycott list, which doesn’t include BMO. In late February, the bank received a warning that it could be put on a state list of companies that Moore’s office considers to boycott the fossil fuels industry. …

In response to that February notice, Timothy Cox, US general counsel for BMO, said in a March 25 letter to the state treasurer’s office that it removed a statement detailing its restrictions on lending to the coal industry as a result of policy changes in November 2023. Cox’s letter was obtained by Bloomberg News via a public records request.

“As a result of policy changes made in November 2023, we removed a Coal Statement from BMO’s websites as it did not fully reflect our current policies,” Cox’s letter to Moore’s office said. “After receipt of your letter, we realized that a cached version of the statement remained on our websites and took it down. We have no plans to republish the Coal Statement.”