European Union Lawmakers Agree to Force Foreign Firms to Comply With ESG Rules

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European lawmakers have agreed to force roughly 28,000 foreign subsidiaries to comply with the bloc’s ESG rules, marking a blow to representatives for U.S. corporations who had lobbied for the opposite outcome.

In a wide-reaching revamp of the EU’s reporting requirements for non-financial firms, the bloc’s parliament has dropped a planned exemption that had been backed by the American Chamber of Commerce to the European Union, according to draft documents seen by Bloomberg. An announcement is expected on Wednesday, as part of a wider package of corporate reporting proposals.

Europe has been working for years to ensure its rules for environmental, social and governance standards become a global benchmark. The latest proposal means the local operations of giant corporations such as McDonald’s Corp. and General Motors Co. would all be required to live up to the same ESG reporting requirements as their European peers.

U.S. SEC Unveils Landmark Climate Change Risk Disclosure Rule

The plan put forward by EU lawmakers, which will now be negotiated with member states, seeks to make it impossible for foreign companies to gain any competitive advantage via less rigorous ESG standards, according to Pascal Durand, the lawmaker overseeing the introduction of the EU’s Corporate Sustainability Reporting Directive.

Allowing foreign companies to apply potentially laxer ESG standards “was politically impossible,” Durand, who represents the Renew Europe party in the EU parliament, told Bloomberg.

Europe’s proposed ESG rules for companies are “probably going quite far in terms of how much an EU law can export itself, or export its content, into the global economy,” said Mirjam Wolfrum, director of policy engagement for the European operations of CDP, a nonprofit voluntary environmental disclosure system.

But Wolfrum said it was a “welcome approach” because such regulations “could help get the attention of what is needed in terms of environmental reporting into the global economy.”

U.S. Climate Reporting

The development comes as the Securities and Exchange Commission sets its own ESG requirements for companies operating in the U.S. The SEC will require firms to provide detailed information on greenhouse gas emissions; corporations with big indirect carbon footprints will be expected to disclose so-called Scope 3 emissions, which is the broadest and most challenging gauge.

New ESG demands across jurisdictions are part of a global response to increasingly alarming reports from scientists that climate change is accelerating at a dangerous pace. The United Nations’ Intergovernmental Panel on Climate Change provided its bleakest assessment yet last month, and warned that the private sector isn’t doing enough to avert a climate catastrophe.

European lawmakers say they’re trying to redirect the flow of capital in ways that shield the environment and promote social justice. The EU’s toolbox is based on a so-called taxonomy, which is a multi-year undertaking that’s still finalizing rules intended to define sustainable businesses. Lawmakers in the bloc worry that they can’t rely on other jurisdictions to come up with adequate rules.

“The European Union is not the only power involved in drawing up new non-financial standards,” Durand said. But if others prevail, “then sustainable development would be defined by a non-European vision, making it more difficult for European values to be effectively taken into account.”

A key feature of Europe’s ESG rules that is largely absent in other parts of the world hinges on the concept of double-materiality, whereby a company takes into account not only the impact of the outside world on its business, but also the impact of the company on the outside world. That includes elements such as biodiversity and social and human rights, “which are values important for European policy makers,” Durand said.

The American Chamber of Commerce to the European Union has warned requiring subsidiaries to report risks creating a “misleading picture of a group’s sustainability profile.” It says that consolidated ESG reports, based on similar requirements set in home markets, are more comprehensive.

EU lawmakers behind the proposal cited what they referred to as “ample evidence” that stakeholders in the bloc aren’t getting the information they need to support sustainable investing. Much of the EU’s focus relies on disclosure, and the new directive will require companies to report how strategies and business models align with a climate-neutral economy, restore biodiversity and provide greater transparency around their supply chains and workers’ rights.

Photograph: European Union (EU) flags hang from flagpoles outside the Berlaymont in Brussels, Belgium, on Wednesday, Oct. 7, 2020. Photo credit: Geert Vanden Wijngaert/Bloomberg.