Introduction
Over the past decade, environmental, social and governance (ESG) principles have moved from a niche concern for socially responsible investors to a central focus in the global financial and political arena. However, as ESG has grown in importance, it has also become increasingly entangled in political and geopolitical tensions.
While Europe, despite some recent signs of retrenchment, is moving forward with a regulatory-driven ESG agenda, the United States has experienced a significant political backlash against such initiatives, which is likely to be exacerbated by the election of Donald J. Trump as the 47th president of the United States.
It has become fashionable to speak of a growing transatlantic divide on ESG. However, this summary risks oversimplifying the reality. First, a complex interplay of regulatory ambition, political resistance and financial pragmatism is at the heart of ESG issues in both the US and Europe. Second, even in Europe, there are recent signs that the approach of recent years is undergoing some adjustment.
The US: Political Backlash Meets Market Reality
In the United States, ESG has become a source of political controversy. Spurred on by influential voices such as former Fox host Tucker Carlson, ESG has come under increasing pressure (often lumped in with the different issues of DEI or wokeness in general).
Conservative leaders in several states, such as Florida and Texas, have targeted ESG principles, criticising them as ideologically driven and detrimental to economic growth. These states have introduced a number of anti-ESG bills, claiming that such practices hurt returns and conflict with fiduciary duties. In January 2025 a federal court in Texas has ruled that the asset manager of an air company’s pension fund violated its fiduciary duty by investing according to ESG factors.
Following Donald Trump’s re-election in 2024, this backlash is likely to gain even more momentum. What has been happening at the state level in some Republican-led legislatures will now reach Washington. Early indications are that his administration will roll back key ESG-related policies implemented during President Biden’s tenure. The Securities and Exchange Commission’s (SEC) rules requiring disclosure of climate-related risks are already under legal challenge and could be further weakened under the new administration. Similarly, the Department of Labour’s rule allowing pension fund managers to consider ESG factors is likely to be reconsidered.
However, these political developments do not tell the whole story. Major investment firms, including BlackRock and Vanguard, are making public moves to align themselves with the current political trends, but will continue to integrate ESG considerations into their decision-making, driven by long-term risk mitigation and client demand. The fundamentals are not likely to change radically, even in this new political climate in the US. This is not only because, as global players, they still must consider markets where ESG is in high demand. It is also because, in the view of many, ESG is not (and never has been) a simple fancy or ‘woke’ buzzword, but has been incorporated into business decisions because it is perceived as a reliable indicator of a company’s long-term success and financial viability. Moreover, business groups with a global presence need to comply with a regulatory framework that, in many areas of the world, remain committed to ESG.
Europe: Regulatory Overreach and Political Reactions
In recent years, the European Union (EU) has adopted a comprehensive regulatory framework aimed at embedding ESG principles in the corporate and financial sectors. Two landmark pieces of legislation exemplify this approach:
- Corporate Sustainability Reporting Directive (CSRD): This directive requires large and listed companies to provide detailed reports on their sustainability performance, significantly increasing transparency and accountability.
- Corporate Sustainability Due Diligence Directive (CSDDD): The CSDDD imposes obligations on companies to identify and mitigate human rights and environmental impacts throughout their supply chains, representing a bold attempt to hold corporations accountable for global operations.
However, despite (or likely because of) this impressive array of regulations, Europe is not immune to backlash. Concerns about over-regulation have gained traction in the political discourse. For example, Mario Draghi’s long-awaited report on European competitiveness highlighted the risk of regulatory fatigue and its potential negative impact on European competitiveness, and openly called for a reduction in red tape for European SMEs.
French President Emmanuel Macron echoed these sentiments in several instances, such as his speech at the Berlin Economic Dialogue in October 2024, emphasizing the need to balance environmental goals with economic realities. According to Macron, the European economic model, built on the premise of a level playing field, is no longer sustainable: radical change is needed or the EU will be ‘out of the market’ in a few years’ time. A few weeks later, Macron doubled down with a metaphor, calling on Europe to become at least an omnivore in a world of carnivores.
In the European political debate, it is increasingly stated or implied that Europe’s ESG approach of strict regulation, which increases costs and potentially closes markets to European companies, is likely having a negative impact on Europe’s ability to compete globally, especially with the other major giants, notably the US and China.
Arguments that used to be the preserve of the political extremes, such as the nationalists, are now appearing in a much more moderate tone in the mainstream parties, especially the centre-right, but not
only. This mood has also recently manifested itself in legislative decisions. In November 2024, the European Parliament voted to postpone parts of the European directive on deforestation, softening the requirements for certain countries and industries. The decision, made possible by the convergence of the votes of far-right/right parties with the centre-right European People’s Parliament and some MEPs from the liberal Renew Europe, underlines the growing tension between environmental goals and concerns about regulatory burdens.
Even leading states with centre or centre-left majorities are now at the forefront of the growing skepticism, reaffirming the principle of ambitious climate agenda but subordinating its implementation to economic and social feasibility. Germany is the most telling example, with the departing SPD majority openly calling for a significant delay and reduction in regulatory burdens.
Ursula von der Leyen has started her second term as President of the EU Commission by promising to reduce the regulatory burden by at least 25%, with a particular focus on small and medium-sized enterprises. A simplification proposal has been long awaited and is expected to be published towards the end of February 2025. Speculation is running wild as to how Europe will reconcile its ambitions with the current reality.
ESG: A Geopolitical Issue?
It is becoming increasingly clear that ESG, at its core, intersects with critical geopolitical issues and will not be left out of an increasingly competitive international environment. These issues are increasingly shaping the strategic interests of nations and companies alike.
For Europe, ESG regulation has often been seen as the main tool to reinforce its role as a global leader in climate and sustainability efforts. It has also served as a tool for projecting soft power, particularly through supply chain legislation such as the CSDDD and EUDR, which aim to influence corporate practices beyond European borders. However, the rest of the world does not seem ready to follow the EU, at least not down a regulatory path of similar magnitude.
The key issue is that the EU’s ambition has not been backed up by sufficient investment and financial support to help businesses and consumers ‘afford’ the transition. The EU has not enacted anything of the magnitude of US Inflation Reduction Act that is powering the American green economy, let alone what China has done in the past to achieve total dominance in key sectors such as solar panels and batteries for electric cars. Of course, it is not so much a lack of will as a lack of means: without massive joint debt issuance to finance the transition, or a truly unified capital market, the EU cannot muster the necessary resources.
Conversely, beyond the surface of political polarisation, the US approach may end up proving itself more effective long-term strategy for promoting the energy transition, at least if the IRA is not significantly dismantled (as many in Europe privately wish for in order to regain some advantage over the US) or Trump does not really try to stop US financial giants from pursuing ESG factors, albeit without vaulting them too much.
Paradoxically, after years of fighting “greenwashing” (companies overstating their ESG credentials), the new normal in the US, and possibly in Europe in the future, will be “green-hushing”, where financial giants are likely to pursue ESG criteria, but without trumpeting them.
At the international level, ESG considerations are becoming entangled in trade and diplomacy. The EU’s sustainability standards, for example, could cause friction with trading partners who see them as crypto-protectionist. Emerging economies such as Brazil and Indonesia have already criticised some part of EU regulations, arguing that it unfairly targets their agricultural sectors.
Trump’s return opens up several scenarios, but ESG could be part of the predictably stormy relationship between the two sides of the Atlantic. US companies and politicians are already claiming protection from the overreach of EU ESG regulations, many of which will directly or indirectly affect US companies. As with European attempts to tax US tech giants or restrict their use of personal data, ESG could become a battleground where the Trump administration could use a mix of coercion and persuasion to advance what it sees as in the interests of the US or its political or business allies.
The Road Ahead
As ESG continues to evolve, its geopolitical relevance will only increase. It is already widely held that geopolitics should be fully incorporated in ESG factors, in order to ensure the overall and long-term sustainability of all other aspects.
The Trump-led retreat from ESG, the concrete extent of which remains to be seen, will not remove the reality that technology is evolving, that cheap Chinese electric cars are overrunning the market in many countries, or that a sizeable proportion of investors and consumers globally will continue to take ESG, wholly or partially, into account. Yesterday’s world will not return.
The acronym ESG may well fall into disrepute, but it is merely a buzzword for long-term trends that have always been an inevitable part of long-term business decisions. In most industries the pursuit of these underlying criteria will continue to be a key component of long-term value creation or a necessity to counter the effects of climate change.
