Unbundling Climate Change Risk from ESG

Abstract

The divergence between the United States and the European Union over ESG disclosure and compliance policy for asset managers and companies is a striking feature of the corporate governance landscape. This divergence derives at least in part from differences in core features of the relevant political economy. In particular, retirement security in the US is significantly tied to stock market values; this is not so in Europe. The US is a petro-state, the world’s largest producer of crude oil; the EU produces very little crude but imports substantial amounts. At least two implications follow: First, climate change should be unbundled through the other elements of ESG, which can be facilitated through the creation of a “Net Zero Transformation rating.” Second, corporate governance activists should shift attention away from producers of fossil fuels toward heavy users, like utilities, and pivotal producers, like the automobile companies. A demand side strategy is more likely to hasten a net-zero transformation than a supply side strategy.

Keywords: Climate change, ESG, corporate governance, retirement savings

JEL Classification: K22; K32, F21, F64, G38, P50, Q48