About 28,000 foreign subsidiaries operating in Europe are to be compelled to comply with the EU’s environmental, social, and governance (ESG) rules, overriding lobbying attempts by US corporations who had hoped to remain exempt.
As part of a strategy to toughen up the European Union’s reporting requirements for non-financial firms, the bloc’s parliament has agreed to drop a planned exemption that had been backed by the US Chamber of Commerce to the EU.
The plan was announced on 23 March as part of a wider package of corporate reporting proposals to be negotiated with member states but could yet face opposition from individual members of parliament.
Under the new proposal the European operations of firms such as McDonald’s and General Motors would have to comply with the same ESG reporting requirements as their European equivalents with the aim of making it impossible for foreign companies to gain any competitive advantage via less rigorous ESG standards.
Pascal Durand, who is part of the Renew Europe grouping in the parliament and who is overseeing the introduction of the EU’s Corporate Sustainability Reporting Directive, told Bloomberg that allowing foreign companies to apply potentially laxer ESG standards “was politically impossible”.
He added: “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.”
The EU proposal represents a step forward in the bloc’s effort to set a global benchmark in environmental reporting.
In the US, the Securities and Exchange Commission has set its own ESG requirements and will require firms to provide detailed information on greenhouse gas emissions.
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 was not acting fast enough to avert a climate catastrophe.
The EU is using a “taxonomy”, a long-term project that is finalising rules intended to define sustainable businesses. Lawmakers in the bloc are concerned that they can’t rely on other jurisdictions to come up with adequate rules.
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.