“Clearly lagging behind”; Europe’s ESG metrics outpace US

Europe’s ESG metrics are no stranger to criticism. Still, they are certainly outshining any American analogues, at least for now. 

This is according to Ian Harcourt, RBS International’s Luxembourg head for institutional banking, speaking as part of Funds Europe’s latest report into the continent’s ESG trends. 

Ultimately, it’s an assessment relying on context, especially in Europe, where metrics have been plagued by confusion and teething issues.

ESG commands a lot of respect in Europe. 

From national parliaments right to the heart of Brussels – politicians want companies to care about their employees, their governance and their impact on the planet. 

At the same time, investors embrace the movement. And while they may have been okay with ESG financing on principle in the past, more is needed nowadays. 

Effective ESG investing means having quantifiable impacts demonstrated through comprehensive metrics. Investors know this and want to see progress in this area as much as lawmakers do.

It says that ESG is developing into a “more complex and sophisticated aspect of finance” where “warm words and broadly framed intentions are no longer sufficient.”

But when it comes to metrics and KPIs, it warned there are two contexts still with widespread discordance:

1. The first is within Europe – where different sectors and, in many cases, countries will have different sustainability frameworks, making homogeny difficult. 
2. The second is when Europe is compared to the rest of the world, particularly the US. Here, American funds have simply not kept pace with their European counterparts, meaning metrics feature less in reporting. 

“The US is clearly lagging behind Europe in regard to measurements plus reporting standards,” Harcourt said, “because the subsidies, along with the support that the US government was giving, and how long they would last, was unclear.”

Yes. Europe is indeed a global leader in ESG, and Europe’s ESG metrics are probably the most complex and advanced worldwide. 

More crucial, though, are Harcourt’s comments about the US government. Not only do they resonate, but they touch on the real issue for ESG across the Atlantic – that it has been swept into polarised politics. 

Democrats, in general, favour ESG. Republicans – particularly those on the fiscal right – reject ESG. Moreover, Republicans with power, such as Florida Governor Ron DeSantis and Texas Governor Greg Abbott, actively work against ESG-oriented funds like BlackRock, saying they undermine fossil fuels. 

With Republicans now regaining control of the House of Representatives, their views on the subject may have a more significant impact on corporate law in future. 

In that environment, attention will likely focus on ESG principles rather than ESG metrics.

In comparison, yes. But ESG metrics in Europe are a work in progress too.

There remains a lot of cross-border and cross-sector variation in how firms report their activities, which causes headaches for investors and governments, who want to assess firms against each other and against international standards. 

The report calls for the sustainability KPIs to be assessed according to the “right targets” and to “reflect material improvement.”

For investors, sustainability is here to stay, the report says. 

From this, we expect further diversification of metrics, at least in Europe, over the next ten years. How eager the US is to follow suit is a matter for the ballot box.