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EU will lead US on ESG regulation development

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Clarity in guidelines to drive ESG rules

The EU’s development of environmental, social and governance regulations will likely push the US into following suit, Chris McGarry, partner at White & Case, told the Global ABS conference in Barcelona on Tuesday.

“The EU has decided that structurally, in terms of its economic heft and its rule-making capability, that it has to do the job for the world,” McGarry said.

He added that the US Securities and Exchange Commission appeared unable to pass as wide-ranging and effective regulation on ESG, with “lots of chatter they’re going to be sued” further complicating matters.

“Can the US pass as effective a piece of regulation? I’m a bit sceptical,” he said. “But I don’t think they’ll need to because I think the EU can effectively regulate all large-ish businesses in the US too.”

Andrew McClymont, structured finance analyst at Trepp, speaking on the same panel, added that the lack of simple, “quantifiable ways of defining ESG" in ABS and CLO regulation was still hampering the market. Indeed, that was the frequent complaint among delegates at the AFME Sustainable Finance Conference in May.

However, McGarry disagreed and said the European regulators were beginning to show the route forward, but that perhaps there was “ESG fatigue” confusing market participants.

“The direction of travel is so clear,” McGarry said. “If you look at the recent history of the EU legislative process, over the last decade 99% of EU Commission-approved draft directives have been adopted either verbatim or with minor amendments.

“All of this is out there, but because there’s so much ESG noise, I think people don’t appreciate fully that there are clear guidelines about what people need to do.”

McGarry added that the EU Commission’s corporate sustainability due diligence directive would be applicable globally and have a huge impact on the ESG activities and disclosures of businesses once it entered the statute book in a few years.

“ESG just got very real,” he added.

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