The European Union has the world's most rigorous Environmental, Social and Governance (ESG) regulations and the most ambitious decarbonization and net-zero targets. But the EU's approach to ESG rules and reporting has too many sticks and few carrots for businesses. European companies are suffocating under numerous EU directives and national laws in bureaucracy that are undermining Europe's competitiveness in many industries, including in green and climate technology.
The ESG rive has been much stronger in Europe than in the United States, and many European oil companies have felt the growing reluctance of funds and asset managers to invest in the industry. Moreover, new EU directives on corporate ESG and sustainability are additionally burdening all European firms with spending much more on regulatory compliance and reporting than their peers across the Atlantic.
Industry in Europe is too focused on penalties and not enough focus on rewards to continue doing business in Europe. Industry believes that firms have better chances of doing well in other jurisdictions, primarily in the United States. Valuation Gap
The ESG movement in Europe has become so strong that some of the top oil firms based in major European economies and listed on European stock markets are reportedly considering moving to a New York listing.
These include Shell and TotalEnergies, two of the biggest Europe-based oil majors.
Reports emerged earlier this year that Shell was considering moving its primary listing to the NYSE. Shell's CEO Wael Sawan said in April that the current location in London is "undervalued," referring to the valuation gap between lower-valued European oil majors and their U.S. peers listed in New York, such as ExxonMobil and Chevron.
TotalEnergies has also aired the idea of a primary listing in New York to attract a larger share of U.S. investors.
Unlike European investors, U.S. investors have resisted the ESG-driven backlash against oil firms, making the U.S. a more attractive option for a primary market of the supermajors.
According to Bloomberg's estimates, Europe's majors trade at a discount of about 40% to their American rivals. TotalEnergies could have been valued $108 billion higher if it was valued the same way as an average big U.S. oil producer, per earnings multiples calculated by Bloomberg.
Competitiveness Gap
It is not only oil executives who feel that their Europe-based firms are undervalued. Many other major companies see the EU regulations as increasingly burdensome, undermining their competitiveness compared to American rivals.
In the green energy technology sector, even with Europe's most ambitious net-zero goals among all regions, companies find less support and incentives than in the U.S. And some European firms plan more investments in America than in their home markets.
EU regulations, especially on reporting and ESG compliance, are further complicating the business of Europe-based companies.
For example, the EU's Directive on Corporate Sustainability Due Diligence, which entered into force in July, aims to foster sustainable and responsible corporate behavior in companies' operations and across their global value chains. Firms are thus obligated to identify and address adverse human rights and environmental impacts of their actions inside and outside Europe, including in their supply chains.
Moreover, the EU's Carbon Border Adjustment Mechanism (CBAM), commonly known as the "carbon border tax," was launched on October 1 last year in the first transitional phase for imports of several carbon-intensive groups of products into the European Union. The first phase of the EU's carbon import pricing legislation will not impose levies on the products—such will apply from 2026.
However, it is not certain that the carbon border tax would be as effective as it has been designed to be, a new report by Mario Draghi, former European Central Bank President and former Italian Prime Minister, showed on Monday. Draghi was tasked by the European Commission to prepare a report of his personal vision on the future of European competitiveness.
Referring to the carbon border tax, Draghi wrote in the report,
"While CBAM is an important instrument for European companies to stay competitive against their international peers that face lower or no carbon prices, its success is still uncertain."
In sustainability and industry, "Europe must confront some fundamental choices about how to pursue its decarbonisation path while preserving the competitive position of its industry. Black-and-white solutions are unlikely to be successful in the European context," Draghi said.
"Most importantly, the "European Green Deal" was premised on the creation of new green jobs, so its political sustainability could be endangered if decarbonisation leads instead to de-industrialisation in Europe – including of industries that can support the green transition," according to Draghi.
The renowned economist and politician also noted that "innovative companies that want to scale up in Europe are hindered at every stage by inconsistent and restrictive regulations."
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Regulations, including ESG rules and directives, are impeding European competitiveness, company CEOs said in the latest survey of the European Round Table for Industry (ERT).
The survey showed in May that business confidence among CEOs and chairs of many of Europe's largest companies has rebounded to the highest level since May 2022. Industry leaders, however, "are markedly more positive about their companies' business outlook outside Europe than within."
When asked to point out the highest-impact strategies available to EU leaders to restore competitiveness, an overwhelming 91% of CEOs highlighted that improving and simplifying the EU's regulatory environment would be the most effective policy lever.
"Across capital investment, employment and sales, CEOs are significantly less optimistic about the future inside Europe than abroad," said Sara Murray, Managing Director, International, The Conference Board.
"CEOs are clear that Europe's hurdles are due to cumbersome regulation, failures to fully integrate the single market, and timidity on technological leadership."
By Tsvetana Paraskova for Oilprice.com
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Industry in Europe is too focused on penalties and not enough focus on rewards for companies to continue doing business in Europe.
Any wonder then why companies in the EU believe they have better chances of doing well in other jurisdictions, primarily in the United States or why some of the top oil companies based in major European economies and listed on European stock markets are reportedly considering moving to a New York listing?
Militancy in climate change goals and strict ESG rules are permeating the EU economy and not only undermining industry but also encouraging the relocation of top European companies to the United States and also China.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert