The European Union has long been moving towards the sustainable transition 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 think 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 towards consumption towards green products and investment towards financial assets issued by sustainable companies. Pessimists, on the other hand, believe that the EU's policy for the sustainable transition imposes high and unjustified costs.
Who is right? Let's try to answer by evaluating if European companies have gained an advantage over US ones, also held back by the parenthesis of Trump, in a very emblematic and dynamic segment, that of sustainable finance.
La 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. It's about a rapidly growing area and the estimates in circulation place ESG investing at stratospheric levels: could reach $35 trillion in 2025. So, given this rapid growth, competitiveness today also depends on how companies are positioned to tap into sustainable finance markets. In fact, for a company the ESG rating measures the performance in managing environmental risks (E – Environmental), social risks (S – Social) and those of its administration (G – Governance).
Well, comparing US companies listed in the S&P500 with a similar group of European companies listed on the stock exchange, it shows that on average EU listed companies enjoy 14% higher ESG ratings than US companies (64,43 for the European against 56,37 for the US). Wanting to break it down, the advantage of European companies is maximum in the E-Environmental component (+22,5%; 63,08 against 51,48), intermediate in the S-Social component (+16,0%; 68,35 against 58,90) e negligible in the G-Governance component (+0,4%; 59,88 against 59,66). Furthermore, it is shown that the advantage of the EU does not depend on the different sectoral composition of all EU companies which, at most, would give European companies +0,64% compared to US ones. Instead, the EU advantage is found to be related to EU firms more often than their US counterparts are committed to providing sustainability reports and provide better quality sustainability reports.
In fact, even before it was fully operational in Europe directive no. 2014/95/EU on non-financial reporting, between 2011 and 2017 almost two-thirds of the listed European companies considered in the analysis (62,29%) prepared sustainability reports according to the GRI (Global Reporting Initiative) scheme, while less than half did so (44,86 .8,51%) of the Americans. Furthermore, by estimating the quality of the GRI reports – ie how much companies choose more or less advanced reporting methods – it is estimated that the average European report is XNUMX% 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 field, the optimists are right.
°°°° Interested readers can find further details on the December 2020 issue of the Report on Saving and Sustainable Finance.
