February 27, 2025 • 26 mins
The world of ESG regulation and investing was already suffering a period of shaky confidence even before President Donald Trump returned to the White House. Now, companies are facing a new period of uncertainty when it comes to Environmental, Social, and Governance policies. Reporter Frances Schwartzkopff tells Akshat Rathi why the EU is rolling back some ESG legislation. And reporter Saijel Kishan explains that many companies today are still keeping their ESG plans in place — but just not talking about it.
Explore further:
- Past episode with activist Lucie Pinson about changing banks’ investing strategies from the inside
- Past episode with California Democratic Representative Ro Khanna about what to expect in Trump’s second term in the White House
- Past episode with Eric Toone of Breakthrough Energy Ventures on the kinds of green startups he believes can be the most profitable
Zero is a production of Bloomberg Green. Our producer is Mythili Rao. Special thanks this week to Aaron Rutkoff, Siobhan Wagner and Jessica Beck. Thoughts or suggestions? Email us at zeropod@bloomberg.net. For more coverage of climate change and solutions, visit https://www.bloomberg.com/green.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome to Zero. I am Akshatrati.
Speaker 2 (00:02):
This week the ESG backlash.
Speaker 1 (00:20):
The world of ESG regulation and investing was already suffering
a period of shaky confidence even before Donald Trump came
back to the White House, and now Trump appears to
be bringing in a new period of uncertainty about just
how accountable companies will have to be to governments and
investors when it comes to their environmental, social, and governance policies.
(00:44):
So this week we're looking at the history of ESG
and its future. Reporter Sagel Kishan, who has been watching
these developments from New York, tells me how the US
used to be a leader in ESG once upon a time,
and we talk about why many companies today are still
keeping their ESG plans in place but just not talking
(01:04):
about it. But first I spoke with Copenhagen based reporter
Francis Schotzkoff about how the ESG movement grew into its
current form, why Europe is leading on it, and why
major rollbacks appear imminent. Fran Welcome to the show.
Speaker 3 (01:35):
Thanks very much for inviting me.
Speaker 1 (01:37):
So ESG is at an inflection point both in Europe
where you are based and around the world, most notably
in the US. Can you take us a little bit
back in time and tell us about the origins of ESG.
Speaker 3 (01:51):
Before we get to ESG, let's go further back in
time too, after the Great Crash in the US.
Speaker 1 (01:58):
All the way back in nineteen ten twenty nine.
Speaker 3 (02:01):
Yep, that's right, all the way back then, there was
very little regulation around how companies needed to report their earnings.
That was triggered, as we know now from historians accounts
of financial incongruities in many ways, and at the time,
there were very few regulations around how companies had to
report information, and as a consequence, there was a lot
(02:22):
of yeah, shaky reporting, and that helped fuel the Great
Depression and the Crash of nineteen twenty nine. After that
happened in the US, in particular, financial reporting began to
be standardized. It took, as we know, decades, and the
ifrs and the GAP rules in the US are still
changing to accommodate the changing economy.
Speaker 1 (02:45):
These gap rules there sort of got this weird acronym
generally acceptable accounting practices. Is that right?
Speaker 3 (02:53):
Yeah? Man, It's a fabulously banal description of exactly what
it is. They lay out how companies are supposed to
talk about their finances in terms that are standardized, so
that an investor can look across different companies and say, oh,
you know, this match is that they're doing well here
and not well there without having to worry that a
(03:16):
company is somehow fudging the figures.
Speaker 1 (03:21):
And so these environmental social governance factors as we know
them as ESG. Today they are known as non financial metrics,
which is not just about how much money did you
make in profits, how much revenue did you raise as
a company, but going beyond that. So when did that
come into the picture?
Speaker 3 (03:40):
Corporate sustainability or corporate social responsibility has been around for
several decades. It grew out of many different kinds of
bad news events, companies being caught in various polluting or
mistreating their workers. And the perspective over time has changed,
so it's a company not just beholden to its shareholders
(04:02):
but also to society. That solidified in the EU around
a piece of legislation called the Non Financial Reporting Directive,
and that emerged actually after the financial crisis around twenty
twelve twenty thirteen.
Speaker 1 (04:17):
So about a decade ago is when you really started
doing rule making around these non financial metrics. Before that,
it was just companies using those metrics as a voluntary
disclosure to investors that, look, we care about the environment,
here's what we're doing about it. We care about society,
as we are doing about gender diversity in our workforce
(04:39):
or something.
Speaker 3 (04:40):
Yeah. At first, companies reported on their own, and then
the EU in the last decade after the financial crisis
saw the need for companies to be mandated more or
less to report on these kinds of factors, and they
created what's called the Non Financial Reporting Directive. But even
that failed to provide investors and the wider world with
(05:03):
the kind of information people felt would tell them about
what companies were doing. The information was not standardized. For example,
for example, on human rights, a company might say, well,
we adhere to UN policies around human rights, and that
would conceivably be the end of it, and without explaining
what they actually do, explaining where the risks are, explaining
(05:27):
what efforts they make to actually identify possible human rights
violations in their supply chains and in their operations.
Speaker 1 (05:33):
And so the EU starts making rules, they're still a
bit vague. They're not quite helping investors to use non
financial metrics to make decisions. But then comes what non
governmental organizations called the Golden age of ESG rule making,
starting in twenty nineteen. Why was it called the Golden age?
Speaker 3 (05:52):
That's right. In twenty nineteen, you begin with the creation
of what's called the Taxonomy Regulation. The idea there on
the EUS was to create a list of business activities
business operations that are considered to be in the beginning
environmentally sustainable. Eventually, they had hoped to create a taxonomy
or list of activities that would also be socially sustainable.
(06:16):
And the idea there was to help companies that to
help investors to identify our right, is this business sustainable
or not? Can we anticipate this would exist and help
the world help people implant it. In twenty thirty forty
years after that, they started creating a whole bunch of
disclosure requirements around that and around the finance industry. The
next step was called the Sustainable Finance Disclosure Regulation, which
(06:42):
mandated that banks and insurers and other organizations report on
some of these factors.
Speaker 1 (06:47):
You know, in one way even to get to the
very metrics that we take for granted now, which is
profits and revenues it took decades, whereas with ESG rules
it's only really been ten years in the making. Why
is it so complicated to get those rules to be
good enough for investors to actually make decisions or good
(07:09):
enough for companies to feel they are not spending far
too much time reporting on them.
Speaker 3 (07:15):
The first reason both that companies give and banks and
asset managers give is data, data, data, data. These are
things that people haven't measured. They've never thought really about
how much water they use beyond paying their water bill.
They've never thought about how much carbon is encapsulated in
(07:36):
the buildings they occupy. Although gender has been around for
a longer period of time, they've not dug deep into that.
And then you also have more controversial issues like labor
union participation. The second thing after data is just the
cost involved in getting all that together and the methodology
and definitions. These are all things that are completely new.
Speaker 1 (07:58):
So currently, with all this rule making peered in the
Golden era, what is actually being enforced in the EU
and how are companies responding to it?
Speaker 3 (08:09):
So far, there's been more saber rattling than financial penalties.
One of the reasons is most of these pieces of
regulation are being phased in over time. The Sustainable Finest
Disclosure Regulation, for example, that was implemented in March of
twenty twenty one, and the first two three years were
(08:29):
in many asset managers and bankers' minds pretty chaotic. That
piece of legislation is still going is now under review
and one of the expectations on the part of the
regulators is that you comply as best you can. But
they recognize that with these rules in flux, it's a
little problematic to being people on the head for a
(08:52):
rule that's changing or that's not completely understood.
Speaker 1 (08:56):
Beyond SFDR, there are other rules that have been created, right,
come with new acronyms csrdcst PD. What are those and
when do they come into force?
Speaker 3 (09:06):
That's right. The first set that I just referred to
the Sustainable Finance package that was targeted at the finance industry.
The idea was to leverage the finance industry to push
the rest of the economy to begin the disclosure process.
Next in line, then you have what's called the Corporate
Sustainability Reporting Directive and get ready for the next acronym,
(09:31):
the ESRs, the European Sustainability Reporting standards. These are much
appreciated and much loathed set of standards on what companies,
both financial and non financial have to report. The idea
is you begin with the finance industry and you push
the rest of the industry, and that's what CSRD does.
(09:52):
It requires companies to upwards of fifty thousand when it
first was conceived to report on all these various ESG factors.
Speaker 1 (10:02):
And then after that comes CS triple D, which is
supposed to create punishments if the companies get it wrong.
Is that right and what is CS trip D?
Speaker 3 (10:14):
That's right, and that stands for the Corporate Sustainability Due
Diligence Directive. The idea there is that CSRD and even
SFDR are really largely about disclosure. It's about telling people
what you're doing and what you're not doing, telling people
what the problem is, telling people how they're going to
fix it. But disclosure doesn't necessarily mean companies are going
(10:39):
to change their behavior. And that's where CS triple D
comes in because the argument is that you kind of
need a stick. We've seen bad things happen in the past,
and the idea behind CS triple D is that that
is the stick that prompts companies to actually take action.
It includes a civiliability risk for the companies that are
(11:01):
in scope, and it also mandates transition plans for the
largest companies. Bad things have happened in the past. In fact,
one of the events that triggered the creation of the
Due Diligence Director was the twenty thirteen collapse of the
Rana Plaza in Bangladesh, when hundreds of women died, hundreds
of women who were so enclosed for the Western world,
(11:22):
and the repercussions were felt throughout the garment industry, but
hardly anybody was held responsible for that, and as a consequence,
the European lawmakers, led by a Dutch parliament member named
Laura Walters, designed this piece of legislation to hold companies
responsible for actions in their supply chain. The argument is
(11:45):
you can't push responsibility away by saying it was not
my fault, I didn't know.
Speaker 1 (11:52):
And that's why there is also transition plans within the
Due Diligence Director because it's a way of saying, look,
you company have an imp on the world and that
climate change can cause impacts for your company, and say
physical asset risks, maybe your particular asset in the ocean
is now more vulnerable to sea level rise as a
(12:12):
result of climate change, and thus you need to have
a plan. And so that is also the reason why
the transition plans are part of the due Diligence Directive
because they ask companies to both look at what they
are doing to tackle climate change, but also what are
they doing to manage the risks that will come from
climate change, because if they are managing the risks, then
(12:35):
the shareholders in those companies are more assured that this
company has a longer future, right, that's correct.
Speaker 3 (12:41):
Yeah, The argument is that the larger companies need to
be prayered for climate change. There are deniers out there,
of course, we know that, but the vast majority of
the large global companies acknowledge that the climate change exists
and something needs to be done about it, and investors
and other stakeholders want to know what these companies are doing.
Speaker 1 (13:00):
So now we've got a little bit of an understanding
of how the rulemaking began, where there's been pushed back
and back and forth with industry, which has to happen
in any sort of rulemaking, But there has been pushback,
and this pushback is starting to build up into this
omnibus legislation, So by the time listeners hear this episode,
the EU might have already put out the legislation and
(13:23):
told the world what within those ESG rules it is
going to either step back on or make it easier
for companies. Right, what does it entail?
Speaker 3 (13:33):
There's been building over the last couple of years significant
pushback against some of the regulations. The concern here is
largely that the demands are too great, particularly for medium
sized and smaller companies. They simply don't have the capacity
at this moment in time, the resources, the knowledge to
(13:54):
deliver the kind of information that's being required of them.
Unlike in the US, there is general agreement that this
kind of information is needed. So it's not a question
of saying, let's pull the plug on all of it.
It's more a question of pairing it down to the essentials.
What are those essentials? Europe has one idea about how
(14:17):
these rules need to be changed. There are indications that
they are going to probably significantly pair back some of
the reporting requirements. We do know that they do want
to ease the burden on companies to provide all the
data that these standards now require and there are more
standards coming.
Speaker 1 (14:36):
And so another wrench that's been thrown in the ESG
machine and the EU is what the US wants to do.
You've done reporting that the Commerce Secretary, Howard Lutnik is
interested in using US trade tools to try and influence
ESG rulemaking that is domestic to the European Union. How
exactly would that work?
Speaker 3 (14:58):
Yeah. One of the concerns on the U side is
that the EU rules are engaging in what's called extra territoriality.
That means they're governing the behavior of businesses that are
not headquartered in the EU as they have operations outside
of the EU. Now, the intention of the EU was
to control the production of goods and services that end
(15:23):
up in the EU, but some, as we know, the
vast majority of those are going to be made somewhere
else and imported into the BLOCK. The US feels that
this is an overreach, a regulatory overreach on the EU's part.
It also brings up the question of competitiveness and a
level playing field. The US is concerned that its companies
(15:44):
will be at a competitive disadvantage. This is somewhat ironic
because one of the reasons that the EU has for
rolling back some of its own ESG disclosures is because
it's concerned that the regulations will in fact hurt its
companies in the global market if the regulatory playing field
isn't level.
Speaker 1 (16:05):
But isn't it hypocritical on the US side too, because
the US does do rulemaking that has extra territorial impact
all the time. Sanctions are a very good case in point. Right,
they can go after Russia or Iran and leay sanctions
on them and stop their companies from doing whatever the
US wants. So how is it that the US can
(16:26):
then turn around and tell the EU, well, your rules
are having an extra territorial impact and so please shut them.
Speaker 3 (16:33):
Yeah, that's exactly right. That's one of the arguments here
in the EU is that the that the US does
in fact have several pieces of legislation money anti money
laundering for example, among them, that have extra territorial reach.
It's hard to say how that that battle over extra
territoriality will.
Speaker 1 (16:51):
End after the break. New York based reporters see Kushion
tells me about esg's American history and why with Trump
back in office, companies are keeping quiet about their environmental
and sustainability commitments. By the way, if you've been enjoying
(17:12):
this episode, please take a moment to rate and review
the show on Apple Podcasts and Spotify. It helps other
listeners find the show. Sagel, Welcome to the show.
Speaker 4 (17:29):
Good to be here.
Speaker 1 (17:30):
So I just spoke with Fran about the history of
ESG in Europe and we talked about how governments saw
standardizing initially financial disclosures and then in the later half
of the twentieth century applying the same lens to non
financial disclosures. In the twenty first century, we've seen that
Europe has become a leader in rulemaking on ESG. But
(17:53):
within this broad idea of investing with purpose, the US
has a longer history, right could you talk us through it?
Speaker 4 (18:00):
That's right. Actually, sort of investing with a purpose traces
its routes back to religious investors who were shunning things
like alcohol and gambling from their investments. That then later
morphed into sort of this more corporate activism. It was
at the time of anti Vietnam protests, the divestment movement
in South Africa, which was under apartheids. So this pushed
(18:23):
a bunch of investors mainly actually in the Boston area
to use their shoholder clout to push companies to start
doing good.
Speaker 1 (18:33):
And that had some success, right because we know that
apartheid era investors did have an impact on the government there.
And so how did it build up into what we
now call ESG today. So we saw in.
Speaker 4 (18:47):
Two thousand and four, two thousand and five officials at
the UN and they coined this label ESG. They wanted
to actually pivot away from do gooding investing in moral investing,
and they want to basically use the language of Wall Street,
which is risks and opportunities. Socially responsible investing actually kind
(19:09):
of was criticized by mainstream finance for being too sort
of granola and crunchy, so to speak. So talking about
risks and opportunities was squarely in the language of bankers
and traders and other investors. So yeah, the whole idea
was for investors and finances to when they're doing they're
(19:30):
making decisions on whether to lend or finance or invest,
they would also take into account environmental and social issues
into that decision making.
Speaker 1 (19:40):
And so now within this big broad tent of ESG,
factors which are even today ill defined in the aggregate.
You know, Europe is trying to make some progress, but
in the US, where there's no rule making really happening,
it's whatever you kind of want to make of it.
So if you just take the e part, which is
probably more clearly defined than our where you have clear
(20:01):
goals set on emissions, on reaching climate targets, could you
just talk us through what the backlash in the US
has been, which began well before trump second term began.
Speaker 4 (20:13):
Yeah, that's right. You could trace its early routes to
twenty twenty one, and it was around the time when
Texas passed through a state bill basically restricting business with
companies that it claimed to be shunning fossil fuels. It passed,
and yeah, it was pretty low key, under the radar.
But towards the end of twenty twenty one, Ronda Santis,
(20:36):
then Florida governor who was eyeing a run for president,
he took on this attack on ESG and started attacking
Black Rock, whose CEO I think has been a big
champion of ESG. Then twenty twenty two, Elon Musk, Peter Thiel,
and even former Vice President Mike Prince all piled in
(20:57):
and started characterizing ESG as well capitalism and something created
by the radical left that would be a threat to
the American way of doing business.
Speaker 1 (21:07):
So if we were to take a Wall Street perspective,
is there any way to know whether ESG factors, if
they're looked at from the lens of risk and opportunity,
if those factors have had any impact on company profits,
And let's take it one by one.
Speaker 2 (21:25):
ES and G.
Speaker 4 (21:26):
Lately we've seen ESU risks and that's coming in the
form of insurance. We've seen big insurance companies leave states
like California, Yorkshire obviously prone to to extreme weather events
like wildfires, so that's been been a big risk on
the s. We've seen, perhatually more concrete examples of risk
(21:47):
playing out in portfolios. We've seen companies like Fox having
to dole out millions of dollars in sexual harassment claims
or settlements. Tesla had to pay a large party to
a former contractor who accused the company of racism. And
just two years ago we saw the auto workers strikes
(22:08):
that really impacted the like sort of like Forward and
General Motors, and they had to put millions of dollars aside.
Their share price is tanked and just to explain, like
the worker strikes at the s in issue, it's about
worker rights, labor issues and things like that.
Speaker 1 (22:24):
And the G which is sort of the forgotten factor
in ESG, Where does that play a role.
Speaker 4 (22:29):
Yeah, I mean G it's I mean it's kind of
mainstream finance. It's more of a process. It's not an
investable idea like investing in E issues, like investing in
a solar company for instance. But for the G issues,
you know, boardroom diversity comes into that. And you know,
after the George Floyd protests here in the US in
twenty twenty, we've seen a lot of companies ramp up
(22:53):
their board diversity initiatives which recently haven't actually been unwound. Yeah,
it's mainly S and E, which is where you see
the sort of the impacts on the bottom line.
Speaker 1 (23:05):
But if we take the Wall Street lens on ESG,
which is these do provide certain risks, and they provide
a signal to investors looking at the portfolio that they
have in their company. They seem to say, there are
some fundamental risks that we do need to account for
as we invest. And so our ESG minded investors who
(23:28):
understand these risks, who are sitting in the US welcoming
of the Use approach which is actually doing the rulemaking,
even if it is not the US that is taking
the lead.
Speaker 4 (23:39):
I mean, it is really a mixed bag. I mean,
obviously you'll see sustainable investors who welcome this and want
to bring these rules on board, and to an extent,
they're doing a lot of this voluntarily anyway. But we've
got the likes of big groups, lobbyist groups who are
pushing back on these rules and saying that it's going
to be costly, weigh on small businesses, especially at a
(24:03):
time where small businesses after the pandemic have struggled, and
now that we have a president who's for deregulation, there's
even more stronger pushback.
Speaker 1 (24:12):
It's only been a month since Trump has been in power.
You know, there are four more years of this. How
do you expect this to play out for ESG over
the next four years?
Speaker 4 (24:23):
I mean, look, the pressure is going to continue. I
mean we've seen even before Trump was elected, Wall Street
pretty much go silent on climate change, talking about climate risks,
leaving net zero groups and really shy away. They faced
investigations some companies have been sued or faced legal action,
(24:44):
and so a lot of companies are just like, hey,
this has just been too much for us, more than
what we bargained for. But having said that, they're not
going completely silent because they still have Blue state clients,
pension plans in California and New York, they have European
clients that this still in the case of two and
still very sort of cognizant of climate change and impacts
(25:05):
on portfolios.
Speaker 1 (25:06):
And especially on the E factors. I mean, we are
going to see more extreme weather events and those are
risks that companies will face. Are they just quietly trying
to deal with those risks?
Speaker 4 (25:18):
Now? That's right. Quietly it's a good word. It's e
flom called green hushing, where people are still doing the
work but just not being so vocal about it.
Speaker 1 (25:28):
Now, thank you, Sigel, thank you, thank you for listening
to zero. And now for the sound of the week.
(25:55):
That's not the sound of a machine, but the sound
of the wings of a hummingbird when it's flying. A
hummingbird's heart can beat as fast as twelve hundred times
a minute. If you like this episode, please take a
moment to rate or Review the show on Apple Podcasts
and Spotify. Share this episode with a friend or with
a bird watcher. You can get in touch at zero
(26:16):
pod at Bloomberg dot net. Zero's producer is Mightily Raw.
Bloomberg's Head of podcast is Sage Bowman and head of
Talk is Brendan Newnan. Our theme music is composed by Wondering.
A special thanks to Aaron Roudkoffer and Jessica beg I
am Akshatarti back
Welcome to Zero. I am Akshatrati.
Speaker 2 (00:02):
This week the ESG backlash.
Speaker 1 (00:20):
The world of ESG regulation and investing was already suffering
a period of shaky confidence even before Donald Trump came
back to the White House, and now Trump appears to
be bringing in a new period of uncertainty about just
how accountable companies will have to be to governments and
investors when it comes to their environmental, social, and governance policies.
(00:44):
So this week we're looking at the history of ESG
and its future. Reporter Sagel Kishan, who has been watching
these developments from New York, tells me how the US
used to be a leader in ESG once upon a time,
and we talk about why many companies today are still
keeping their ESG plans in place but just not talking
(01:04):
about it. But first I spoke with Copenhagen based reporter
Francis Schotzkoff about how the ESG movement grew into its
current form, why Europe is leading on it, and why
major rollbacks appear imminent. Fran Welcome to the show.
Speaker 3 (01:35):
Thanks very much for inviting me.
Speaker 1 (01:37):
So ESG is at an inflection point both in Europe
where you are based and around the world, most notably
in the US. Can you take us a little bit
back in time and tell us about the origins of ESG.
Speaker 3 (01:51):
Before we get to ESG, let's go further back in
time too, after the Great Crash in the US.
Speaker 1 (01:58):
All the way back in nineteen ten twenty nine.
Speaker 3 (02:01):
Yep, that's right, all the way back then, there was
very little regulation around how companies needed to report their earnings.
That was triggered, as we know now from historians accounts
of financial incongruities in many ways, and at the time,
there were very few regulations around how companies had to
report information, and as a consequence, there was a lot
(02:22):
of yeah, shaky reporting, and that helped fuel the Great
Depression and the Crash of nineteen twenty nine. After that
happened in the US, in particular, financial reporting began to
be standardized. It took, as we know, decades, and the
ifrs and the GAP rules in the US are still
changing to accommodate the changing economy.
Speaker 1 (02:45):
These gap rules there sort of got this weird acronym
generally acceptable accounting practices. Is that right?
Speaker 3 (02:53):
Yeah? Man, It's a fabulously banal description of exactly what
it is. They lay out how companies are supposed to
talk about their finances in terms that are standardized, so
that an investor can look across different companies and say, oh,
you know, this match is that they're doing well here
and not well there without having to worry that a
(03:16):
company is somehow fudging the figures.
Speaker 1 (03:21):
And so these environmental social governance factors as we know
them as ESG. Today they are known as non financial metrics,
which is not just about how much money did you
make in profits, how much revenue did you raise as
a company, but going beyond that. So when did that
come into the picture?
Speaker 3 (03:40):
Corporate sustainability or corporate social responsibility has been around for
several decades. It grew out of many different kinds of
bad news events, companies being caught in various polluting or
mistreating their workers. And the perspective over time has changed,
so it's a company not just beholden to its shareholders
(04:02):
but also to society. That solidified in the EU around
a piece of legislation called the Non Financial Reporting Directive,
and that emerged actually after the financial crisis around twenty
twelve twenty thirteen.
Speaker 1 (04:17):
So about a decade ago is when you really started
doing rule making around these non financial metrics. Before that,
it was just companies using those metrics as a voluntary
disclosure to investors that, look, we care about the environment,
here's what we're doing about it. We care about society,
as we are doing about gender diversity in our workforce
(04:39):
or something.
Speaker 3 (04:40):
Yeah. At first, companies reported on their own, and then
the EU in the last decade after the financial crisis
saw the need for companies to be mandated more or
less to report on these kinds of factors, and they
created what's called the Non Financial Reporting Directive. But even
that failed to provide investors and the wider world with
(05:03):
the kind of information people felt would tell them about
what companies were doing. The information was not standardized. For example,
for example, on human rights, a company might say, well,
we adhere to UN policies around human rights, and that
would conceivably be the end of it, and without explaining
what they actually do, explaining where the risks are, explaining
(05:27):
what efforts they make to actually identify possible human rights
violations in their supply chains and in their operations.
Speaker 1 (05:33):
And so the EU starts making rules, they're still a
bit vague. They're not quite helping investors to use non
financial metrics to make decisions. But then comes what non
governmental organizations called the Golden age of ESG rule making,
starting in twenty nineteen. Why was it called the Golden age?
Speaker 3 (05:52):
That's right. In twenty nineteen, you begin with the creation
of what's called the Taxonomy Regulation. The idea there on
the EUS was to create a list of business activities
business operations that are considered to be in the beginning
environmentally sustainable. Eventually, they had hoped to create a taxonomy
or list of activities that would also be socially sustainable.
(06:16):
And the idea there was to help companies that to
help investors to identify our right, is this business sustainable
or not? Can we anticipate this would exist and help
the world help people implant it. In twenty thirty forty
years after that, they started creating a whole bunch of
disclosure requirements around that and around the finance industry. The
next step was called the Sustainable Finance Disclosure Regulation, which
(06:42):
mandated that banks and insurers and other organizations report on
some of these factors.
Speaker 1 (06:47):
You know, in one way even to get to the
very metrics that we take for granted now, which is
profits and revenues it took decades, whereas with ESG rules
it's only really been ten years in the making. Why
is it so complicated to get those rules to be
good enough for investors to actually make decisions or good
(07:09):
enough for companies to feel they are not spending far
too much time reporting on them.
Speaker 3 (07:15):
The first reason both that companies give and banks and
asset managers give is data, data, data, data. These are
things that people haven't measured. They've never thought really about
how much water they use beyond paying their water bill.
They've never thought about how much carbon is encapsulated in
(07:36):
the buildings they occupy. Although gender has been around for
a longer period of time, they've not dug deep into that.
And then you also have more controversial issues like labor
union participation. The second thing after data is just the
cost involved in getting all that together and the methodology
and definitions. These are all things that are completely new.
Speaker 1 (07:58):
So currently, with all this rule making peered in the
Golden era, what is actually being enforced in the EU
and how are companies responding to it?
Speaker 3 (08:09):
So far, there's been more saber rattling than financial penalties.
One of the reasons is most of these pieces of
regulation are being phased in over time. The Sustainable Finest
Disclosure Regulation, for example, that was implemented in March of
twenty twenty one, and the first two three years were
(08:29):
in many asset managers and bankers' minds pretty chaotic. That
piece of legislation is still going is now under review
and one of the expectations on the part of the
regulators is that you comply as best you can. But
they recognize that with these rules in flux, it's a
little problematic to being people on the head for a
(08:52):
rule that's changing or that's not completely understood.
Speaker 1 (08:56):
Beyond SFDR, there are other rules that have been created, right,
come with new acronyms csrdcst PD. What are those and
when do they come into force?
Speaker 3 (09:06):
That's right. The first set that I just referred to
the Sustainable Finance package that was targeted at the finance industry.
The idea was to leverage the finance industry to push
the rest of the economy to begin the disclosure process.
Next in line, then you have what's called the Corporate
Sustainability Reporting Directive and get ready for the next acronym,
(09:31):
the ESRs, the European Sustainability Reporting standards. These are much
appreciated and much loathed set of standards on what companies,
both financial and non financial have to report. The idea
is you begin with the finance industry and you push
the rest of the industry, and that's what CSRD does.
(09:52):
It requires companies to upwards of fifty thousand when it
first was conceived to report on all these various ESG factors.
Speaker 1 (10:02):
And then after that comes CS triple D, which is
supposed to create punishments if the companies get it wrong.
Is that right and what is CS trip D?
Speaker 3 (10:14):
That's right, and that stands for the Corporate Sustainability Due
Diligence Directive. The idea there is that CSRD and even
SFDR are really largely about disclosure. It's about telling people
what you're doing and what you're not doing, telling people
what the problem is, telling people how they're going to
fix it. But disclosure doesn't necessarily mean companies are going
(10:39):
to change their behavior. And that's where CS triple D
comes in because the argument is that you kind of
need a stick. We've seen bad things happen in the past,
and the idea behind CS triple D is that that
is the stick that prompts companies to actually take action.
It includes a civiliability risk for the companies that are
(11:01):
in scope, and it also mandates transition plans for the
largest companies. Bad things have happened in the past. In fact,
one of the events that triggered the creation of the
Due Diligence Director was the twenty thirteen collapse of the
Rana Plaza in Bangladesh, when hundreds of women died, hundreds
of women who were so enclosed for the Western world,
(11:22):
and the repercussions were felt throughout the garment industry, but
hardly anybody was held responsible for that, and as a consequence,
the European lawmakers, led by a Dutch parliament member named
Laura Walters, designed this piece of legislation to hold companies
responsible for actions in their supply chain. The argument is
(11:45):
you can't push responsibility away by saying it was not
my fault, I didn't know.
Speaker 1 (11:52):
And that's why there is also transition plans within the
Due Diligence Director because it's a way of saying, look,
you company have an imp on the world and that
climate change can cause impacts for your company, and say
physical asset risks, maybe your particular asset in the ocean
is now more vulnerable to sea level rise as a
(12:12):
result of climate change, and thus you need to have
a plan. And so that is also the reason why
the transition plans are part of the due Diligence Directive
because they ask companies to both look at what they
are doing to tackle climate change, but also what are
they doing to manage the risks that will come from
climate change, because if they are managing the risks, then
(12:35):
the shareholders in those companies are more assured that this
company has a longer future, right, that's correct.
Speaker 3 (12:41):
Yeah, The argument is that the larger companies need to
be prayered for climate change. There are deniers out there,
of course, we know that, but the vast majority of
the large global companies acknowledge that the climate change exists
and something needs to be done about it, and investors
and other stakeholders want to know what these companies are doing.
Speaker 1 (13:00):
So now we've got a little bit of an understanding
of how the rulemaking began, where there's been pushed back
and back and forth with industry, which has to happen
in any sort of rulemaking, But there has been pushback,
and this pushback is starting to build up into this
omnibus legislation, So by the time listeners hear this episode,
the EU might have already put out the legislation and
(13:23):
told the world what within those ESG rules it is
going to either step back on or make it easier
for companies. Right, what does it entail?
Speaker 3 (13:33):
There's been building over the last couple of years significant
pushback against some of the regulations. The concern here is
largely that the demands are too great, particularly for medium
sized and smaller companies. They simply don't have the capacity
at this moment in time, the resources, the knowledge to
(13:54):
deliver the kind of information that's being required of them.
Unlike in the US, there is general agreement that this
kind of information is needed. So it's not a question
of saying, let's pull the plug on all of it.
It's more a question of pairing it down to the essentials.
What are those essentials? Europe has one idea about how
(14:17):
these rules need to be changed. There are indications that
they are going to probably significantly pair back some of
the reporting requirements. We do know that they do want
to ease the burden on companies to provide all the
data that these standards now require and there are more
standards coming.
Speaker 1 (14:36):
And so another wrench that's been thrown in the ESG
machine and the EU is what the US wants to do.
You've done reporting that the Commerce Secretary, Howard Lutnik is
interested in using US trade tools to try and influence
ESG rulemaking that is domestic to the European Union. How
exactly would that work?
Speaker 3 (14:58):
Yeah. One of the concerns on the U side is
that the EU rules are engaging in what's called extra territoriality.
That means they're governing the behavior of businesses that are
not headquartered in the EU as they have operations outside
of the EU. Now, the intention of the EU was
to control the production of goods and services that end
(15:23):
up in the EU, but some, as we know, the
vast majority of those are going to be made somewhere
else and imported into the BLOCK. The US feels that
this is an overreach, a regulatory overreach on the EU's part.
It also brings up the question of competitiveness and a
level playing field. The US is concerned that its companies
(15:44):
will be at a competitive disadvantage. This is somewhat ironic
because one of the reasons that the EU has for
rolling back some of its own ESG disclosures is because
it's concerned that the regulations will in fact hurt its
companies in the global market if the regulatory playing field
isn't level.
Speaker 1 (16:05):
But isn't it hypocritical on the US side too, because
the US does do rulemaking that has extra territorial impact
all the time. Sanctions are a very good case in point. Right,
they can go after Russia or Iran and leay sanctions
on them and stop their companies from doing whatever the
US wants. So how is it that the US can
(16:26):
then turn around and tell the EU, well, your rules
are having an extra territorial impact and so please shut them.
Speaker 3 (16:33):
Yeah, that's exactly right. That's one of the arguments here
in the EU is that the that the US does
in fact have several pieces of legislation money anti money
laundering for example, among them, that have extra territorial reach.
It's hard to say how that that battle over extra
territoriality will.
Speaker 1 (16:51):
End after the break. New York based reporters see Kushion
tells me about esg's American history and why with Trump
back in office, companies are keeping quiet about their environmental
and sustainability commitments. By the way, if you've been enjoying
(17:12):
this episode, please take a moment to rate and review
the show on Apple Podcasts and Spotify. It helps other
listeners find the show. Sagel, Welcome to the show.
Speaker 4 (17:29):
Good to be here.
Speaker 1 (17:30):
So I just spoke with Fran about the history of
ESG in Europe and we talked about how governments saw
standardizing initially financial disclosures and then in the later half
of the twentieth century applying the same lens to non
financial disclosures. In the twenty first century, we've seen that
Europe has become a leader in rulemaking on ESG. But
(17:53):
within this broad idea of investing with purpose, the US
has a longer history, right could you talk us through it?
Speaker 4 (18:00):
That's right. Actually, sort of investing with a purpose traces
its routes back to religious investors who were shunning things
like alcohol and gambling from their investments. That then later
morphed into sort of this more corporate activism. It was
at the time of anti Vietnam protests, the divestment movement
in South Africa, which was under apartheids. So this pushed
(18:23):
a bunch of investors mainly actually in the Boston area
to use their shoholder clout to push companies to start
doing good.
Speaker 1 (18:33):
And that had some success, right because we know that
apartheid era investors did have an impact on the government there.
And so how did it build up into what we
now call ESG today. So we saw in.
Speaker 4 (18:47):
Two thousand and four, two thousand and five officials at
the UN and they coined this label ESG. They wanted
to actually pivot away from do gooding investing in moral investing,
and they want to basically use the language of Wall Street,
which is risks and opportunities. Socially responsible investing actually kind
(19:09):
of was criticized by mainstream finance for being too sort
of granola and crunchy, so to speak. So talking about
risks and opportunities was squarely in the language of bankers
and traders and other investors. So yeah, the whole idea
was for investors and finances to when they're doing they're
(19:30):
making decisions on whether to lend or finance or invest,
they would also take into account environmental and social issues
into that decision making.
Speaker 1 (19:40):
And so now within this big broad tent of ESG,
factors which are even today ill defined in the aggregate.
You know, Europe is trying to make some progress, but
in the US, where there's no rule making really happening,
it's whatever you kind of want to make of it.
So if you just take the e part, which is
probably more clearly defined than our where you have clear
(20:01):
goals set on emissions, on reaching climate targets, could you
just talk us through what the backlash in the US
has been, which began well before trump second term began.
Speaker 4 (20:13):
Yeah, that's right. You could trace its early routes to
twenty twenty one, and it was around the time when
Texas passed through a state bill basically restricting business with
companies that it claimed to be shunning fossil fuels. It passed,
and yeah, it was pretty low key, under the radar.
But towards the end of twenty twenty one, Ronda Santis,
(20:36):
then Florida governor who was eyeing a run for president,
he took on this attack on ESG and started attacking
Black Rock, whose CEO I think has been a big
champion of ESG. Then twenty twenty two, Elon Musk, Peter Thiel,
and even former Vice President Mike Prince all piled in
(20:57):
and started characterizing ESG as well capitalism and something created
by the radical left that would be a threat to
the American way of doing business.
Speaker 1 (21:07):
So if we were to take a Wall Street perspective,
is there any way to know whether ESG factors, if
they're looked at from the lens of risk and opportunity,
if those factors have had any impact on company profits,
And let's take it one by one.
Speaker 2 (21:25):
ES and G.
Speaker 4 (21:26):
Lately we've seen ESU risks and that's coming in the
form of insurance. We've seen big insurance companies leave states
like California, Yorkshire obviously prone to to extreme weather events
like wildfires, so that's been been a big risk on
the s. We've seen, perhatually more concrete examples of risk
(21:47):
playing out in portfolios. We've seen companies like Fox having
to dole out millions of dollars in sexual harassment claims
or settlements. Tesla had to pay a large party to
a former contractor who accused the company of racism. And
just two years ago we saw the auto workers strikes
(22:08):
that really impacted the like sort of like Forward and
General Motors, and they had to put millions of dollars aside.
Their share price is tanked and just to explain, like
the worker strikes at the s in issue, it's about
worker rights, labor issues and things like that.
Speaker 1 (22:24):
And the G which is sort of the forgotten factor
in ESG, Where does that play a role.
Speaker 4 (22:29):
Yeah, I mean G it's I mean it's kind of
mainstream finance. It's more of a process. It's not an
investable idea like investing in E issues, like investing in
a solar company for instance. But for the G issues,
you know, boardroom diversity comes into that. And you know,
after the George Floyd protests here in the US in
twenty twenty, we've seen a lot of companies ramp up
(22:53):
their board diversity initiatives which recently haven't actually been unwound. Yeah,
it's mainly S and E, which is where you see
the sort of the impacts on the bottom line.
Speaker 1 (23:05):
But if we take the Wall Street lens on ESG,
which is these do provide certain risks, and they provide
a signal to investors looking at the portfolio that they
have in their company. They seem to say, there are
some fundamental risks that we do need to account for
as we invest. And so our ESG minded investors who
(23:28):
understand these risks, who are sitting in the US welcoming
of the Use approach which is actually doing the rulemaking,
even if it is not the US that is taking
the lead.
Speaker 4 (23:39):
I mean, it is really a mixed bag. I mean,
obviously you'll see sustainable investors who welcome this and want
to bring these rules on board, and to an extent,
they're doing a lot of this voluntarily anyway. But we've
got the likes of big groups, lobbyist groups who are
pushing back on these rules and saying that it's going
to be costly, weigh on small businesses, especially at a
(24:03):
time where small businesses after the pandemic have struggled, and
now that we have a president who's for deregulation, there's
even more stronger pushback.
Speaker 1 (24:12):
It's only been a month since Trump has been in power.
You know, there are four more years of this. How
do you expect this to play out for ESG over
the next four years?
Speaker 4 (24:23):
I mean, look, the pressure is going to continue. I
mean we've seen even before Trump was elected, Wall Street
pretty much go silent on climate change, talking about climate risks,
leaving net zero groups and really shy away. They faced
investigations some companies have been sued or faced legal action,
(24:44):
and so a lot of companies are just like, hey,
this has just been too much for us, more than
what we bargained for. But having said that, they're not
going completely silent because they still have Blue state clients,
pension plans in California and New York, they have European
clients that this still in the case of two and
still very sort of cognizant of climate change and impacts
(25:05):
on portfolios.
Speaker 1 (25:06):
And especially on the E factors. I mean, we are
going to see more extreme weather events and those are
risks that companies will face. Are they just quietly trying
to deal with those risks?
Speaker 4 (25:18):
Now? That's right. Quietly it's a good word. It's e
flom called green hushing, where people are still doing the
work but just not being so vocal about it.
Speaker 1 (25:28):
Now, thank you, Sigel, thank you, thank you for listening
to zero. And now for the sound of the week.
(25:55):
That's not the sound of a machine, but the sound
of the wings of a hummingbird when it's flying. A
hummingbird's heart can beat as fast as twelve hundred times
a minute. If you like this episode, please take a
moment to rate or Review the show on Apple Podcasts
and Spotify. Share this episode with a friend or with
a bird watcher. You can get in touch at zero
(26:16):
pod at Bloomberg dot net. Zero's producer is Mightily Raw.
Bloomberg's Head of podcast is Sage Bowman and head of
Talk is Brendan Newnan. Our theme music is composed by Wondering.
A special thanks to Aaron Roudkoffer and Jessica beg I
am Akshatarti back
Popular Podcasts
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com