Businesses could face ESG uncertainty under Trump presidency

Michael Watson of Pinsent Masons, a specialist climate and sustainability adviser, said the recent victory for Donald Trump in the US presidential elections was “very significant” for global climate policy, citing rhetoric from Trump’s campaign which suggests his new administration will not only slow down the speed at which new climate policy is adopted but actively “go backwards in relation to the implementation of legislation”.

“At one level, one can anticipate that there will not be a climate policy in the US [under Trump’s new administration],” Watson said. “Trump said he will withdraw from the Paris climate agreement and potentially also the underlying UN Framework Convention on Climate Change, and he said that the US, by virtue of that, would not be participating in the COP meetings annually and will therefore be absent from that negotiation and absent from the attempt to coalesce a global coalition to address climate change.”

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Watson said Trump appears to consider climate action to be at odds with the interests of US businesses and the economy more broadly, and that there is some speculation that, to relieve administrative and cost burdens, Trump could even prohibit US businesses from collecting ESG-related data. It is also possible that asset managers could face further restrictions on making ESG-related investments.

That move would, Watson said, deepen existing “geopolitical fault lines” on climate policy and present a major conflict of law and practice issue for global businesses active in both the US and EU markets, highlighting the ESG-related data collection and reporting requirements arising under the EU’s Corporate Sustainability Reporting Directive (CSRD) in this regard.

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Under the CSRD, businesses will be required to report both on how sustainability issues affect their performance, position, and development, and on their own impact on the environment and people. The reporting requirements apply extra-territorially and will impact an increasing number of businesses over time. From a US perspective, large US companies with shares listed on a European stock exchange will be among the first businesses required to report in 2025; by 2029, a much broader set of US companies with activities and presence in the EU will be in-scope of CSRD.

Businesses operating in the US could also be impacted by the CSRD even if they are not directly in-scope of the regime, Watson said. This is because the reporting obligations of in-scope companies extend to their entire value chain, meaning those businesses will require customers and suppliers – including those based in the US – to collect and share relevant ESG data with them in order to achieve compliance themselves.

“With the Trump regime's commitment to rollback ESG legislation, it is not outwith the realms of possibility that [those businesses] would be prohibited from producing that data,” Watson said. It would difficult, he added, for businesses affected by CSRD and any conflicting US legislation to “marry those two competing regimes”. Watson said, though, that even if the federal government retrenches, states such as California are unlikely to, leading to further complexity.

Any rollback or slowing of climate policy in the US would have global implications, Watson said, highlighting how it could impact on funding for climate action initiatives and “create greater divergence” between US regulation and regulation in Europe and parts of Asia where there has been “significant regulatory and other progress on climate change”.

Any “drag” on climate action in the US could even “lead to slower regulatory change in Europe, China and other parts of Asia, Australia, in particular”, because of economic self-interest, he said.

“The thing about climate is it's the most important challenge facing the world, but it's often not the most urgent [in the view of policymakers to address],” Watson said.

“Some analysis indicates that progressive action on climate and progressive and ambitious regulation on climate might impose costs and burdens on business, industry and society in those regions or countries where there is more regulatory change. If the US is removing those requirements, the relative competitive situation might lead to those countries where there's more significant regulation becoming less competitive in the short term. This is the kind of classic challenge with climate because, in the long term, all the data indicates that early action on climate is the cheapest and most effective time to take that action,” he added.

Watson said that some facets of “green industrialisation” in the US spurred by law and policy introduced under the Biden administration will be harder for Trump to roll back. He said measures like the Inflation Reduction Act have helped position US businesses to play a leading global role in servicing the climate and energy transitions, such as with the development of new ‘cleantech’. Businesses that benefit from subsidies in those areas might, however, seem set to see those subsidies cut under Trump, he said.

If the US retreats from the climate agenda, it might offer economic opportunities for other countries, Watson said. For example, he said investors could focus on supporting renewables and cleantech projects in other jurisdictions, and that by attracting investment countries could build the skills and capacity to export technologies and expertise to address the climate crisis.

For businesses, the re-election of Trump should be a trigger to consider how climate policy globally might evolve and to determine what change might mean for them, Watson said.

“One very practical thing that we work with clients a lot on is horizon scanning, looking ahead for the next 12 to 18 months and working out what regulatory regimes will look like in the context of their business; what they need to comply with; what they need to prepare for,” Watson said. “This will involve a materiality assessment and planning for different scenarios, including ‘known knowns’, and bringing legal and other professional expertise to bear to war game the new regulatory and commercial regimes that they'll be facing.”

“The scenarios that they plan and the decisions they make may not be perfect, but [by engaging in that way] businesses are going to be as well informed as possible and prepared as effectively as possible for what might be facing them,” he said.