(Bloomberg) For TotalEnergies SE Chief Executive Officer Patrick Pouyanne, the difference in the performance of his company’s stock and that of Exxon Mobil Corp., the largest US producer of oil and gas, is in no small part explained by an acronym: ESG.
Exxon’s aggressive oil and gas strategy has been rewarded by investors, with its shares more than doubling in the past three years. For Europe’s second-biggest oil company, in contrast, pressure on the region’s asset managers to invest using environmental, social and governance standards has capped gains and prompted Pouyanne to flirt with the idea of listing shares in the US.
The French oil giant is not alone in pointing to the skewing effect of ESG regulations that critics say have put European businesses at a competitive and valuation disadvantage to their US peers, with potentially long-lasting effects for the bloc’s economy. Companies from Mercedes-Benz Group AG to Unilever Plc are pushing back. The European Round Table for Industry, whose members have combined annual sales of $2.2 trillion, says overly stringent regulations are “accelerating loss of competitiveness” and warn that members’ prospects “are better outside Europe.”
Over the past five years — a period during which Europe started formulating the world’s most ambitious ESG regulatory framework — the US’s S&P 500 Index has soared more than twice as much as Europe’s benchmark Stoxx 600 Index. Although several factors — including the dominance of Big Tech — have contributed to the richer US valuation, ESG requirements in Europe haven’t helped.
European energy firms broadly trade at a 40% discount to their US peers. If TotalEnergies were valued in line with the average big US crude producer, its market capitalization would be boosted by $108 billion, based on earnings multiples calculated by Bloomberg.
TotalEnergies reaffirmed the views expressed by its CEO on Europe’s ESG policies, declining to say more. Exxon, for its part, said its strategy is to provide products the world needs, while it invests $20 billion through 2027 in areas such as carbon capture and low-emission fuels.
Faced with diverging ESG rules between the US and Europe, some companies have weighed their options. Commodities trader Glencore Plc, which recently said it is abandoning plans to exit coal, has been touted as a potential candidate to ditch its London listing for New York. German utility RWE AG is among businesses directing more investments across the Atlantic than its home market, while Norwegian battery company FREYR Battery Inc. has moved its headquarters to the US.
“The biggest risk of the European approach is that it has put energy-intensive industry at a significant competitive disadvantage,” said Dimitri Papalexopoulos, chairman of Greece’s Titan Cement International SA and also of the European Round Table’s Committee on Energy Transition & Climate Change. “If Europe’s share of these global sectors is lost, others from elsewhere will simply pick it up and prosperity will go there.”
The number of EU companies in the Fortune Global 500 has shrunk. Europe’s share of worldwide aluminum production fell to 5% in 2022 from 30% in 2000. The bloc has gone from being a chemicals exporter to a net importer.
“While EIIs (energy intensive industries) in other regions face neither the same decarbonization targets nor require similar investments, they benefit from more generous state support,” former European Central Bank President Mario Draghi said in his long-awaited report on EU competitiveness released Monday.
European officials acknowledge problems with the fast pace and complexity of the regulations rolled out since 2019, adding, however, that the measures are needed to avoid a dual climate and biodiversity crisis. “There are short-term pains, obviously, because it requires some effort, but the benefits are starting to emerge,” said Helena Vines Fiestas, chair of the EU’s Platform on Sustainable Finance and co-chair of the UN’s Taskforce on Net Zero. “We’re working really hard on simplifying and making things on the ground work.”
The US has reams of environmental-protection rules, but its overall framework is dwarfed by the breadth and depth of the EU’s, particularly around disclosure. Also, the anti-ESG movement has thrived in the US, and if former President Donald Trump returns to the White House, his “drill, baby, drill” mantra looks set to lower the regulatory burden for producers. Even his rival Kamala Harris has backed off from her earlier call for a ban on fracking — the technique used to produce most US oil and gas today.
As the EU expands regulations — over the European Parliament’s last five-year term about 8,000 acts were adopted, many environment-related — the US is offering incentives. President Joe Biden’s signature climate law — the Inflation Reduction Act of 2022 — is a package of tax credits and rebates intended to propel investment in everything from electric vehicles to solar panels. Goldman Sachs Group Inc. estimated it could unleash as much as $3.3 trillion in spending, pitting what some call a US carrot against Europe’s stick.
Europe’s approach is more about “telling companies what to do,” said Tal Lomnitzer, a senior investment manager on the global sustainable equity team at Janus Henderson Investors.
The EU’s Green Deal legally obliges the bloc to hit net zero emissions by 2050, with at least a 55% cut by 2030. The EU also has pledged to pour money into the green transition, including a plan to raise €1 trillion from public and private sources. In response to the IRA, Europe launched the Green Deal Industrial Plan in 2023, setting aside roughly $270 billion from existing EU funds. The bloc is also distributing billions to member states from its pioneering carbon market for addressing climate.
But the appeal of the US program is sucking up investment, with more than 60 European and Asian companies announcing projects in the year after the IRA was passed, an analysis by Bank of America Global Research showed.
“A lot of corporates have found this scheme very attractive, very efficient, very quick to implement versus Europe, where things are a bit slower sometimes,” said Panos Seretis, head of global sustainability research at Bank of America.
Norway’s FREYR is limiting spending on a project in its Scandinavian market to instead focus investment in the US. German utility RWE earmarked €20 billion last year for the US, almost twice the spending plans for its home base.
“The IRA creates a positive and stable investment environment with a simple regulatory framework,” RWE CEO Markus Krebber said.
