The European Union has been moving towards sustainable transition for some time and the pace has now accelerated, first with the European Green Deal (EGD) and then with the strong green (e.g. Next Generation EU) and social (e.g. Sure) connotations included in the recovery programs from the COVID-19 crisis. Optimists believe that in addition to being necessary to safeguard the future, becoming sustainable gives Europe a real competitive advantage in a world where demand will increasingly shift from consumption to green products and investment in financial assets issued by sustainable enterprises. Pessimists, on the other hand, believe that the EU sustainable transition policy imposes exorbitant and unjustified costs.
Who is right? Let’s try to answer this question by assessing whether European companies have gained an advantage over their US counterparts, held back also by the Trump interlude, in a very emblematic and dynamic segment, that of sustainable finance.
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Sustainable finance consists of various components:
The most dynamic is that of SRI funds – Sustainable & Responsible Investment Funds – whose investment strategies typically use ESG ratings. This is a fast-growing area, and current estimates place ESG investment at stratospheric levels: it could reach $35 trillion by 2025. So, given this soaring growth, competitiveness today also depends on how well companies are positioned to tap into sustainable finance markets. In fact, a company’s ESG rating measures its performance in managing environmental (E – Environmental), social (S – Social) and governance (G – Governance) risks.
Well, comparing U.S. companies listed on the S&P500 with a similar group of European companies listed on the stock exchange, it shows that on average EU listed companies enjoy ESG ratings 14% higher than U.S. companies (64.43 for European versus 56.37 for the U.S.). Breaking this down, the advantage of European companies is highest in the E-Environmental component (+22.5%; 63.08 vs. 51.48), intermediate in the S-Social component (+16.0%; 68.35 vs. 58.90), and negligible in the G-Governance component (+0.4%; 59.88 vs. 59.66). In addition, it is shown that the EU advantage does not depend on the different sectoral composition of EU companies as a whole, which, at most, would assign European companies +0.64% over US companies. Instead, it is found that the EU advantage is related to the fact that EU companies more often than their U.S. counterparts engage in sustainability reporting and provide better quality sustainability reports.
In fact, even before Directive No. 2014/95/EU on non-financial reporting went into effect in Europe, between 2011 and 2017, nearly two-thirds of the listed European companies considered in the analysis (62.29%) prepared sustainability reports according to the Global Reporting Initiative (GRI) framework while less than half (44.86%) of U.S. companies did so. Furthermore, estimating the quality of GRI reports – i.e. how much companies choose more or less advanced reporting methods – it is estimated that the average European report is 8.51% more accurate than the US one.
These results confirm that EU policies in favor of sustainability can pay off by offering European companies advantages in accessing sustainable finance. So, at least in this area, the optimists are right.
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First published in FIRST online, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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