Warning on implications of US retreat from ESG
The widening divide between the EU and the US is reshaping the global sustainable finance landscape and raising serious questions about the future of EU competitiveness, a Matheson briefing has stated.
The paper, ‘, contrasts the inconsistent US path on ESG with a rapid advance in Europe since the adoption of the Paris Agreement in 2015.
Ambitious and fragmented
EU regulation must now evolve from an ambitious, fragmented system into a co-ordinated, investor-friendly framework, the Matheson lawyers state.
The future direction for ESG is less about values and more about reputational management and satisfying investor demand, the lawyers state.
Tara Doyle, Orlaith Finan, and Brónagh Maher of Matheson LLP argue that, although the EU's regulatory architecture was built to guide capital towards climate targets, investors should also have the freedom to pursue returns from climate-adaptation strategies and transition-focused investments.
That ESG data providers remain unregulated at EU level, and that such data is not standardised and often incomparable, adds to the compliance challenges for asset managers, the lawyers state.
To support this, the EU must create a coherent and streamlined regulatory environment, they say.
The EU, positioning itself as a global leader in sustainable finance, launched its ambitious in 2018.
This complex framework of disclosure requirements aimed to align financial markets with climate goals.
However, recent US developments show a clear policy shift.
Initial US steps – such as the Securities and Exchange Commission’s (SEC) proposed climate disclosure rules and the Inflation Reduction Act's (IRA) clean-energy tax credits — suggested alignment.
But US withdrawal from the Paris Agreement, abandonment of the UN Sustainable Development Goals (SDGs), and legal setbacks to the SEC’s ESG-related initiatives signal a retreat.
This has been compounded by state-level actions curbing ESG investing, and a wave of US asset managers withdrawing from climate alliances such as the Net Zero Asset Managers Initiative (NZAM).
Simplification agenda
The EU has reaffirmed its commitment to be the first climate-neutral continent by 2050.
However, given concerns about the regulatory burden and competitiveness, the EU Commission has also launched an ambitious simplification agenda to reduce administrative burdens.
Central to this is the Omnibus I proposal introduced in early 2025, which seeks to reduce sustainability reporting obligations by 80%, and delay compliance timelines.
Described as simplification rather than deregulation, these measures may have unintended consequences, particularly for fund managers reliant on investee company data to meet Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation obligations, the lawyers say.
With third-party ESG data providers still unregulated and their methodologies inconsistent, asset managers face increased compliance risks and costs — potentially undermining trust in sustainable investing, the lawyers point out.
Complicated landscape
Complicating matters further is the ongoing review of the SFDR.
Introduced before the and competitiveness reports, and before the new commission took office, the review may result in a major overhaul of the framework.
This includes replacing the existing disclosure-based classification with a product-classification regime.
While critics argue that the current SFDR is too complex for retail investors and not useful for professionals, asset managers have already invested heavily in compliance.
A fresh regulatory shift risks eroding investor confidence and adding further compliance costs, the Matheson lawyers point out.
Regulation elevates standards
In an ongoing data gap, asset managers are required to disclose sustainability risks and impacts without parallel reporting obligations on investee companies, making accurate and comparable disclosures difficult.
Notably, some European pension funds have begun withdrawing from climate initiatives, the paper states.
Despite the argument that ‘the US innovates and the EU regulates,’ the lawyers say regulation is not inherently negative and can elevate industry standards and build investor confidence.