ESG Laws in Europe Will Hurt American Businesses

ESG Laws in Europe Will Hurt American Businesses

New EU regulations will raise costs for American consumers; Congress should act.

This summer, the European Commission passed the Corporate Sustainability Reporting Directive, a set of burdensome Environmental, Social, and Governance (ESG) reporting requirements for companies that operate in the European Union (EU), even those based elsewhere. The Biden administration has done so little to push back against the law that some congressmen have suggested it may even coordinate with European officials behind the scenes. With or without active collusion, President Biden’s silence will lead to a host of problems that will hurt the American consumer. EU regulations will tacitly govern large American corporations that do business abroad, while smaller companies will see higher barriers to entering the European market.

Starting next year, all companies with more than 500 employees operating in the European Union must report to EU authorities more than 250 pages of disclosures related to environmental, social, and governance matters like climate change and extensive supplier due diligence. In 2025, these regulations will apply to companies with 250 employees or 20 million euros in assets, and in 2028, to all companies. 

Such reporting will require dramatic shifts of corporate resources toward ESG and compliance departments, burdening companies with bureaucratic work rather than value-adding functions like research and development. Inevitably, many companies––especially smaller ones––will choose not to operate in Europe because of these expensive and time-consuming compliance regulations. 

Meanwhile, many large companies will find it more practical to restructure their worldwide operations around EU regulations. This is known as the “Brussels effect” and will lead to the EU having an outsized effect on how regulations affect the global economy—not just Europe. 

In the short term, American businesses may need to decide if complying with EU regulations is worth it and how that will affect how they do business at home.

As large U.S. corporations become used to European requirements, we may see similar changes at home. In many cases, strict regulations in a large market lead to less-regulated markets adopting similarly strict rules, welcomed by big businesses prepared to deal with such changes at the expense of smaller players. 

If legislators and the president accept the EU’s ESG regulations without pushback, it would clear the way for passing similar regulations in the United States down the road.  The Securities and Exchange Commission (SEC) has already proposed less extreme ESG reporting rules. Still, these have been significantly delayed and, fortunately, may not pass at all. 

However, once major American companies are made to adapt to stringent European reporting requirements, incentives may change. Big businesses might find that crippling domestic regulations are just what they need to corner their respective markets. And as long as Congress continues to outsource its lawmaking to our growing administrative state, we risk allowing such decisions to be made by bureaucrats far removed from electoral politics.

The overhead spent complying with burdensome EU regulations could compromise price, quality, and innovation in the products offered here. In a globalized world, these are tariffs by another name, replacing populist rhetoric with vague notions of saving the planet via big business. The United States is almost as populous as the EU and far more affluent on a per-capita basis, and the European market has been shrinking relative to the U.S. market since the Great Recession. We should be calling the shots on our side of the pond, but we can only do that if Congress and the President act and stop accepting what European bureaucrats dictate. 

The President and Congress must show Europe that if it chooses to kneecap American businesses, the indispensable defense and extensive trade the United States can offer will no longer be a given.

Mike Viola is the Director of Business Intelligence at the Foundation for Economic Education (FEE) and previously worked in investment research for five years. He tweets at @mf_viola.