ESG reporting requirements pose a threat to U.S. society

Recently, two new rules were voted into the European Union that will significantly impact ESG (Environment, Social, Governance) reporting requirements for member nations. They include CSRD (Corporate Sustainability Reporting Directive) and ESRS (European Sustainability Reporting Standards). Although the U.S. hasn’t gotten that far along, it typically follows suit. 

In essence, the EU is moving from a shareholder environment to a stakeholder environment. The word “stakeholder” includes virtually everyone: terms like “the community served” can include geographical area and involve consumers, vendors, suppliers, utility companies, transportation companies, and the full gamut. 

By adopting the first set of ESRS, the European Commission has ushered in a new era of environmental responsibility for businesses and investors. What is now a matter of voluntary disclosure will become mandated reporting for governance, strategy, risks/opportunities, metrics, and targets beginning in 2024. Companies will be required to report their impact on climate change, pollution, water, ecosystems, and biodiversity. Here in the U.S., the Security and Exchange Commission is also expected to expand toward board diversity and human capital rules in 2024. 

ESRS has 12 standards that require reporting in four categories: general, environmental, social, and governance. Climate reporting will be mandatory for nearly all firms, and firms will be required to assess risks to and by their operations. These reports will include the value chain both upstream and downstream. 

In the U.S., the SEC’s proposed rule amendments would require a domestic or foreign registrant to include certain climate-related risk information in its registration statements and periodic reports, including greenhouse gas emissions — indirect emissions from upstream and downstream value-chain activities, and both direct and indirect emissions from purchased electricity.

The United States is currently responsible for only 13 percent of global carbon emissions and has no control over emissions from China, India, and other countries. It will cost an estimated $50 trillion to decarbonize the U.S. by 2050, and the feds do not know how many degrees of warming such spending might mitigate. Why burden companies with such enormous costs when attempts to reduce greenhouse gas emissions offer such uncertain results?

The regulatory environment with its data reporting and collection requirements siphons off financial and human capital. It is an invisible but real “tax” on all organizations under these mandates on what was once voluntary. This increases administrative expenses for allocating staff to collect, monitor, and report data. ESG also contributes (collectively) to increasing utility, fuel, transportation, and procurement costs of materials used in the production of goods and services.

The driving goal of ESG is to encourage and direct investment in companies that adhere to very subjective metrics that have not been established by or agreed upon in a democratic process. The SEC should protect investors and free markets. Its proposed rules, however, erode these principles by forcing companies to make decisions based upon subjective social goals that are contrary to the law of supply and demand. The SEC is one of numerous agencies undermining traditional free-market capitalism in favor of stakeholder capitalism. 

ESG revises the “purpose of a corporation.” Rather than letting companies make decisions based on maximizing short-term shareholder profit, ESG proponents proclaim that the private sector has a duty to all its stakeholders, including employees, customers, and communities. That means considering things like environmental sustainability and social equity alongside profit – in other words, adopting ESG principles. 

Make no mistake about ESG: it is one of the most dangerous threats to American society from both an economic and ideological perspective. One only needs to look at Europe’s track record on energy and agricultural policies, social equity mandates, and now corporate rating systems to see what’s in store for us.