A divergent Europe leads to a K-shaped approach to sustainability
EU proposes the Industry Accelerator Act
Carbon accounting harmonization?
Asset manager settles anti-ESG lawsuit
NY Congestion charge wins court battle, Greenpeace loses theirs
A “K-shaped” approach to sustainability is emerging in Europe.
Like the post-COVID financial recovery, in which some benefited greatly while others did not, a similar pattern has emerged with sustainability in Europe. While the “green deal” has largely been undone by deregulation, companies continue to move forward voluntarily. It is quite remarkable to consider that companies are acting voluntarily in the interests of the environment, but that trend seems to be increasing in Europe.
After Europe’s Omnibus Simplification Package, the demise of the gas-powered car ban, and the postponement of the Deforestation Rules (EUDR), next on the chopping block may be the 20-year-old emissions trading system (ETS).
Italy is the latest country to object to the ETS scheme. Prime Minister of Georgia Meloni aims to reduce Italy's energy costs by reimbursing gas-fired power providers for the ETS permits they have to buy - effectively eliminating carbon pricing in the Italian electricity sector. Brussels is unlikely to agree, but the move comes just a couple of weeks after German Chancellor Friedrich Merz said the ETS needs to be reexamined, causing Europe’s carbon price to fall by 10%. Other nations, such as Poland and the Czech Republic, have worked to postpone the next iteration of the trading scheme (ETS2), which will expand it into other sectors.
On the other end of the K are companies that reduced emissions early to decrease their exposure to ETS permits and costs. Surprisingly, these companies are continuing to mitigate their emissions without the regulatory drivers.
These leaders are also signalling disappointment with the rollbacks. In a joint letter to the Dutch government, Tata Steel and Dutch NGO Natuur en Milieu called on the Netherlands to maintain the integrity of the ETS, saying “future-proof technologies, such as green steel, green chemicals and electrification, need long-term, stable policies.” Donal O’Riain of green cement company Ecocem, said that under “a clear policy trajectory we’ve already commenced a multi-hundred-million euro capex programme. If that trajectory weakens, those who have invested carry greater risk, while those who delay are rewarded.”
A new report from the University of Hamburg on German companies removed from the CSRD scope found that half of the companies were already planning to report, and 75% still plan to report voluntarily. Other European auto industry stakeholders that invested heavily in EVs have complained about the rollback of Europe’s gas-powered car ban.
While those pushing for simplification argue it will restore Europe’s competitiveness, early movers warn the opposite. Companies that invested early in decarbonization now face greater uncertainty, while laggards may benefit from looser rules. The result is a sustainability landscape increasingly split into a K-shaped transition where policy drivers decline, and corporate climate action increases.
2. EU’s Industrial Accelerator Act
In many ways, Europe is reversing its sustainability agenda, but in other ways, it is expanding - the net effect is a pivot from command-and-control to incentive-based policy. Enter the Industrial Accelerator Act - a new proposal released on Wednesday. This policy aims to increase “demand for low-carbon, European-made technologies and products.”
It will introduce ‘Made in EU’ and low-carbon requirements for public procurement, applying to strategic sectors such as steel, cars, and net-zero technologies. It also includes new conditions on direct foreign investments over €100 million in specific sectors, ensuring they bring value to Europeans. Ultimately, the goal is to increase Europe’s manufacturing share to 20% of GDP by 2035 (up from 14.3% today), and with it, new clean jobs.
European Commissioner for climate Wopke Hoekstra said, “Today’s new proposal is another step towards building more robust and clean industries, securing our supply chains and protecting our economic security.” The proposal will now be debated in the European Parliament and Council before being adopted later in the year.
3. Carbon Accounting Harmonization?
Last week, an Aspen Institute summit brought together leaders in the climate field to discuss a new entrant - Carbon Measures - a group backed by Exxon and other industrial companies - promoting a “ledger" approach to measure emissions. Also present at this meeting were reps from the 25-year-old Greenhouse Gas (GHG) Protocol, which recently partnered with ISO and is used by 97% of disclosing S&P 500 companies.
Setting the tone a couple of days before the meeting, the GHG Protocol argued: “fragmentation in carbon accounting is our greatest enemy and a single, climate science-aligned global framework is essential to reduce complexity and accelerate action.” In Aspen, the groups agreed that harmonization is important, but there was little indication that the competing standards would merge anytime soon.
While these two groups work out their differences, the GHG Protocol is focusing on the release of its highly anticipated Scope 2 update. Last week, there were two important comments released:
EFRAG: The European Financial Reporting Advisory Group (EFRAG) released its position paper on Scope 2, saying it supports Scope 2 guidance for its ability to improve comparability, but cautioned that the new rules must be cost-effective and should not be overly complex or lengthy.
Investor Group: A group of 14 investors with $1.2 trillion in assets under management issued a statement in support of the GHG Protocol’s Scope 2 changes. Suggesting that the update better aligns reporting with the realities of the energy market and that the updates will “improve their ability to assess companies’ resilience in the energy transition, while stimulating investment opportunities for much-needed transition technologies,” like batteries.
The GHG Protocol is expected to release a second draft of its Scope 2 guidance in the coming months based on comments, ahead of releasing the final update in late 2027.
At the end of three days in Aspen (I was a participant), little was solved. While nice words were exchanged, currently, the GHG Protocol and ISO are jointly developing product carbon footprint standards. Simultaneously, Carbon Measures is set to work through the International Chamber of Commerce to develop its own version of a product carbon footprint standard. This will inevitably create confusion, which will likely delay climate action.
4. Asset Manager Settles in Anti-ESG Lawsuit
This week, one of the three defendants, Vanguard, settled for $29.5 million while admitting no wrongdoing. The agreement also commits Vanguard not to advocate for any climate measures in its portfolio companies or to advise them to “take any particular course of conduct to reduce carbon emissions.” It also means they cannot join any climate groups, such as the newly reformed Net Zero Asset Manager Initiative or the UN-backed Principles for Responsible Investing (PRI).
Vanguard claims they made the settlement to avoid tens of millions of dollars in legal costs, saying, “We’ve reached a resolution to put this matter behind us.” However, their codefendant State Street seems to be willing to continue saying, “This lawsuit remains baseless and without merit. There was not, and is not, any collusion here. We remain confident that the facts and legal substance are on our side.”
5. Climate Court Cases: Wins and Losses
An ongoing trend this year has been the rise of climate litigation, including cases seeking to block the EPA from repealing the “endangerment finding” (the foundation of US climate regulation). This week, judges reached decisions in two cases, one at either end of the spectrum.
A federal judge determined that the Trump administration’s attempt to block the New York City congestion charge was unlawful. The decision ends a more than year-long lawsuit and allows the toll, which has resulted in 22% less air pollution and 23% faster commute times, to continue.
A North Dakota judge sided with oil and gas pipeline firm Energy Transfer over Greenpeace’s role in blocking the Dakota Access Pipeline. The judge’s final verdict means that Greenpeace will have to pay a $345 million jury award, which will bankrupt its US operations if it loses an appeal.
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This week’s episode of the Climate Rising podcast from the Harvard Business Review is a deep dive into regenerative agriculture. It features an interview with A.J. Kumar, of Indigo Ag, who discusses how the company is working with farmers, food companies, and carbon credit buyers to scale regenerative agriculture and unlock co-benefits.
