The planet on pause

The context

This position is taken in a double context:

a. Regulatory

The debate around the standardization of corporate environmental, social and governance (ESG) standards, for which two visions are currently trying to impose themselves:

• On the one hand, Europe with the CSRD and the environmental, social and governance standards (ESRS) defined by EFRAG;

• On the other hand, for the Anglo-Saxon world (not including the United States, which is developing another standard via the SEC), the IFRS Foundation has launched a specific committee on ESG standards, the ISSB (International Sustainability Standards Board), chaired by Emmanuel Faber, the former head of Danone, who is known for his sensitivity to ecological issues.

Alignment work has been undertaken between these organizations, and the European standards will be compatible with the others. On the other hand, Europe remains for the moment in effect 'better off', because the ESRS standards concern several environmental subjects (climate, pollution, water, biodiversity, circular economy) when the ISSB is only interested in climate. The European CSRD also aims to impose the concept of double materiality as a reference in the positioning of companies: all organizations would thus be required to specify the impact of environmental changes on their business model (simple or financial materiality, the only one recognized by the ISSB), but also the impact of their activities on the environment.

• While the ESRS standards have not yet been published, and in a context of pressure from various employer organizations to lighten them, Emmanuel Macron's statement, without directly mentioning the CSRD, seems to indicate a desire to limit the scope of non-climate-specific environmental standards (pollution, water, biodiversity, circular economy). This would be a race to the bottom to align with the ISSB, which currently only considers climate in its standards.

b. Industrial

While it was the 'pause in environmental regulations' that got the buzz, Emmanuel Macron's speech on May 11 was primarily about reindustrializing the country on a decarbonization trajectory. The president called for 'reducing emissions' and 'improving sustainable development'. This is not a pause in environmental efforts, but rather in the creation of regulatory standards, which would be seen as an impediment to economic development.

This call for green reindustrialization should be read in an international context marked by a double competition:

• On the one hand, China is today the main beneficiary of the energy transition (despite an energy mix dominated by coal) because of its central role in the supply chains of materials critical to the development of clean energies, such as the manufacture of batteries, photovoltaic cells or wind turbine magnets: 73% of cobalt, 68% of nickel, 59% of lithium and 40% of copper are refined in China.

• On the other hand, the United States has engaged in an ambitious Green New Deal since the election of Joe Biden, aiming to support the green industry in a Keynesian logic of economic recovery through public spending. The Bipartisan Infrastructure Deal has made $1.2 trillion available for infrastructure projects based on climate change mitigation and adaptation. The Inflation Reduction Act (IRA), passed in August 2022, amounts to nearly $400 billion in grants and tax credits.

• Emmanuel Macron, through his stance, defends the reindustrialization of France and Europe via public policies comparable to the Green New Deal to resist the power of the United States and China and counter the protectionism of American policy.

The American Green New Deal, an example to follow?

As its name does not suggest, the Inflation Reduction Act (IRA) includes historic measures for decarbonization. The United States thus aims to stimulate the production of green technologies to take the lead in the global fight against climate change currently dominated by China.

a. Success: reconciling the end of the world and the end of the month

The IRA is part of the Biden administration's commitment to support the middle class through job creation and strengthening America's competitiveness. During a visit to a semiconductor factory in Arizona, the American president thus declared that 'America will be shipping products overseas - not jobs'. 100,000 jobs related to energy transition occupations were created within 6 months of the implementation of the scheme, and it is estimated that the total number of jobs created by 2030 could be as high as 9 million.

This social project is aligned with an environmental objective: the tax incentives are directed mainly towards the production of green energy by targeting electric vehicles, solar panels and batteries produced on American soil. The ambition is to reduce US carbon emissions by 40% in 2030 compared to 2005 while reducing the cost of clean technologies by 25%.

A true success of the IRA is therefore the reconciliation, both in spirit and in fact, of two major issues: the prosperity of peoples and the preservation of the planet through the fight against global warming.

b. Limitations: protectionism and restrictive vision of ecological issues

The main criticism of the IRA, from the European point of view, is its protectionist nature, which could harm the Union's economy - currently, Europe concentrates about 25% of the production of electric vehicles. To qualify for IRA tax incentives, 50% of a battery's components must be manufactured or assembled in North America, for example, and that will be all of them starting in 2029. Although Europe is trying to negotiate adjustments to mitigate the effects of this protectionism, the American policy remains legitimate from the point of view of the country's sovereignty, and is also positive for the world's population since it aims to reduce greenhouse gas emissions and thus contain global warming, which knows no borders.

Beyond this geopolitical criticism, to which the response through European industrialization is logically defended by Emmanuel Macron, the American example raises several critical points:

• Technology seems to be the only solution to climate issues, in line with green growth theories;

• The climate appears as the only environmental issue, and the reduction of carbon emissions as the only valid objective of an ecological policy. The climate is however only one of the 9 planetary limits, one of the 9 systems that allow man to live on Earth. Other limitations include biodiversity, the water cycle, biogeochemical cycles of nitrogen and phosphorus, ocean acidification, pollution or land use change. If climate is a real concern, it is far from being the only one, and yet it is very often presented as such. Why this blindness? perhaps again because CO2 allows us to apply a simple and technical approach to the environmental problem: measurement, definition of thresholds, reduction actions supported by technology. According to Maslow's law of the instrument, 'to the one who has a hammer, everything looks like a nail'. The planetary balances are unfortunately much more complex than the assembly of an Ikea piece of furniture.

European ESG standards for CSRD, a complement and not a brake on industrial development

Financial incentive policies - subsidies, tax credits, etc. - are one of the tools of public power, just like taxes, prohibitions or standards. Thus, we can both prohibit the rental of thermal flats and provide tax incentives for the renovation of housing: these two measures are not in opposition but complement each other. So why did Emmanuel Macron take this position? Doesn't the - real - risk of bureaucratic inflation mask the real advantages of the ESRS standards contained in the European CSRD directive?

a. Going beyond the climate issue

In order to defend Emmanuel Macron's position, Elisabeth Borne declared on May 13 that there would be 'no pause in climate ambition', perhaps unwittingly conveying the idea that the only environmental issue was the climate, which is precisely the problem: this rescue attempt simply pushed the boat further away.

Yet this was a real strength of the proposed ESRS - indeed, initial texts have been released, with the final version expected to be published in the summer of 2023 (for application in January 2024). Europe, unlike other regions of the world, would thus have been the first to highlight the importance of defining common standards for environmental issues such as pollution, water, biodiversity or the circular economy.

b. Inscribing corporate business models within global limits

The other major strength of CSRD is the concept of dual materiality, which places the company at the heart of its environment, in line with stakeholder theory, and no longer as a bubble entity that merely captures opportunities or protects itself from risks presented by the outside world.

This philosophical conception of the place of the company is reflected in the regulations by the obligation to define the business model and the strategy with regard to the planetary limits quantified by scientific analyses. For example, for biodiversity, the currently proposed standard outlines that a company's business model must align with the targets set by the global framework (IPBES) of no net loss by 2030, a net gain from 2030 onwards and full recovery by 2050.

c. Standardize ESG standards to limit current abuses

It is not regulation that complicates the game around ESG topics, but rather its absence or lack of normativity. Currently, companies are mostly asked to communicate about their commitments, but the content of these commitments is not clearly defined. Even for the subject of carbon, the most developed to date, there are many ambiguities concerning the methods of calculation to reach the objective of 'net zero', and many organizations abuse the compensation mechanisms to artificially lower their emissions.

This was the objective of the CSRD: to respond to the fuzziness of the current standards. We find ourselves in a situation where everyone declares what they want (e.g. the sustainable origin of the rubber used in factories or the creation of schools in developing countries); everything is included in the declaration of extra-financial performance, agencies create highly divergent rating systems and it is all these speeches and labels which, uncontrolled by the absence of ambitious regulations, ultimately harm the development of environmental policies by ridiculing their scope.

Conclusion

Emmanuel Macron is right when he presents Europe as the most advanced in terms of environmental regulation to date. We should be proud of this quality and highlight the major advances of the new standards rather than reducing them to red tape in opposition to industrial development. It is by proving that the combination of intellectual exigency, ecological ethics and economic prosperity is an effective response to current challenges that Europe will be able to secure its place in the global game.

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