In recent years, rising interest and demand from real estate investors and consumers have brought Environmental, Social, and Governance (ESG) initiatives and regulations to the global forefront. The environmental aspect has gained significant importance among these three factors, as sustainability is no longer considered a side issue. Real estate players mainly focus on adopting more sustainable practices to safeguard and increase their portfolio value worldwide.  

Under Biden’s administration, the ESG landscape in the United States has evolved in recent years, with a growing emphasis on environmental criteria and governance practices. While climate change mitigation and environmental standards are under increased scrutiny, there is also a significant focus on how companies ensure responsible management, transparency, and sustainable decision-making in their governance structures.  

However, while the EU has established a more uniform regulatory landscape, the U.S. still needs a comprehensive national approach to drive ESG adoption. This article examines the US approach to ESG, highlighting essential laws and initiatives introduced in recent years and upcoming changes the real estate industry will need to anticipate. From key federal regulations — mandatory and non-mandatory — to voluntary frameworks and state-level initiatives, this blog aims to provide a comprehensive overview of the current state of ESG initiatives in the U.S.

Key federal regulations & initiatives

In the European Union, standardized directives like the Corporate Sustainability Reporting Directive and the Sustainable Finance Disclosure Regulation ensure that all EU countries follow the same sustainability disclosure rules. It offers regulatory transparency for real estate owners and investors. While some member states may implement stricter national regulations, the EU’s central coordination provides coherence and consistency in ESG implementation. 

On the other hand, U.S. regulation is overall influenced by a federalist system. It means individual states have considerable autonomy to set their own ESG regulations. As a result, ESG standards still vary widely from state to state. For instance, California’s active climate goals contrast with more lenient regulations in states like Texas. This inconsistency creates challenges for companies operating nationwide. 

Source: National Oceanic and Atmospheric Administration.

However, the urgency to address climate change has never been more critical, as climate-related hazards increasingly impact the country’s economy. In 2023, the U.S. broke an unsettling record, experiencing 28 weather and climate disasters. According to the National Oceanic and Atmospheric Administration, this surpassed the previous record of 2020 for a total cost of $92.9 billion. This figure does not yet account for the anticipated economic impact of the recent Hurricane Milton. 

Joe Biden’s administration progressed significantly in supporting net zero efforts over the last few years. Notably, the Inflation Reduction Act (IRA) from 2022, one of the most significant investments in the American economy, energy security, and climate legislation in U.S. history, has fostered a growing federal commitment to sustainability. 

Securities and Exchange Commission 

The Securities and Exchange Commission (SEC) plays a pivotal role in ESG and non-financial reporting. Since its founding in 1934, the SEC’s mission has primarily focused on financial risks. However, it has shifted towards broader ESG disclosure. It now requires publicly traded companies to disclose specific ESG-related information material to investment decisions. 

US Federal Insurance Office 

The Federal Insurance Office (FIO) is a division of the U.S. Department of the Treasury. Its primary role is to monitor the insurance industry and provide oversight on issues that have national or international relevance, particularly those that may impact the financial system’s stability.

As the insurance sector becomes increasingly exposed to risks due to climate change, the FIO plays a crucial role in assessing how these risks affect the industry. It works alongside other federal agencies to ensure insurance providers respond to these increasing risks.

For instance, the FIO proposed the US Federal Supplier Climate Risks and Resilience Rule to enhance the climate resilience of federal supply chains. Under this rule, major federal contractors must assess, disclose, and mitigate their greenhouse gas emissions and climate-related risks to their operations, products, and services. 

The National Building Performance Standards

Building Performance Standards (BPS) are primarily state-level and local initiatives. However, there has been increasing federal support for these initiatives, especially under Biden’s administration, which launched the National BPS coalition. This coalition gathers a nationwide group of state and local governments. They are committed to inclusively designing and implementing building performance policies and programs in their jurisdictions. By the end of 2023, 12 jurisdictions, including New York, Washington, and DC, had passed BPS laws.

Overall, the Building Performance Standards (BPS) policies and laws aimed at reducing the carbon impact of the built environment. To achieve that, they require existing buildings to meet energy and greenhouse gas emissions-based performance targets. Widely practiced across the U.S., these standards enforce continuous improvement through reporting, verification, and sometimes third-party validation.

Source: State and Local Building Performance Standards

Department of Labor Legislation for Financial Advisors

The Department of Labor (DOL) is critical in regulating financial advisors and retirement plans. Since Obama’s administration (2009-2017), the DOL has started to address ESG factors regarding retirement investing. If the administration prioritized mainly economic needs over environmental concerns during Trump’s presidency (2017-2021), Biden’s proposal through the DOL aimed to make financial returns and ESG factors equivalent. For instance, the Biden administration’s DOL rule encourages financial advisors to use ESG factors to mitigate risks and identify investment opportunities. 

The DOL’s legislation is part of a broader federal effort to integrate ESG considerations into the U.S. financial system. It aligns with other federal initiatives, such as the SEC’s mandatory Climate Risk Disclosures and the FIO’s focus on climate-related risks, to implement effective ESG measures.

Voluntary ESG initiatives and regulations 

ESG reporting in the U.S. is still largely voluntary, although the SEC has worked on stricter ESG disclosure rules. Companies can follow voluntary frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) or the Global Reporting Initiative (GRI). However, no federal mandate requires uniform reporting, leaving an important part of ESG reporting up to companies’ will.

State-level ESG initiatives

States and local governments are at the forefront of implementing ESG policies and programs, often ahead of federal initiatives. Some states have resisted ESG initiatives, particularly those related to climate change, revealing a growing divide in ESG adoption across the country. However, others like California and New York, are proactive in promoting ESG-related initiatives. They have ultimately led with robust standards on energy conservation, renewable energy, and emissions reductions. They implement initiatives and frameworks that incentivize ESG practices to promote sustainability. 

Source: BloombergNEF, State Legislature

Pro-ESG States 

California has some of the most stringent environmental regulations in the U.S. The state’s Greenhouse Gas Emissions Reporting Program mandates corporate disclosures, turning the state into a leader in renewable energy and climate change legislation. The California Secretary of State Office passed the Climate Corporate Data Accountability Act in September 2023. This act requires large corporations to report their Greenhouse Gas Emissions by 2026. 

New York State has a robust set of ESG-focused initiatives. This includes the Climate Leadership and Community Protection Act and climate-risk disclosure obligations for financial institutions under the state’s Department of Financial Services.

States’ reluctance to ESG

Where the European Union’s political environment is more aligned in support of ESG principles, with sustainability deeply embedded in the European Green Deal and climate action plans, ESG initiatives in the U.S. face political resistance. Some states and federal lawmakers oppose the idea of government-mandated ESG practices. This politicization of ESG issues has led to slower regulatory progress at the federal level. Several states have introduced legislation to push back against the influence of ESG in investment decisions.

For instance, Texas enacted laws prohibiting state pension funds from doing business with financial institutions that divest from oil and gas companies. This signals strong opposition to policies that are viewed as harmful to the state’s key industries. The state has also pushed back against ESG investing practices, which are seen by the state as undermining the fossil fuel sector.

Similarly, Florida has introduced measures that restrict the inclusion of ESG factors in investment decisions for state pension funds. The state has also passed legislation targeting companies promoting what the state considers “woke” ESG policies.

To go deeper: Anti-ESG Crusade in US Sweeps 15 States With More Laws in Works

Significant progress has been made in the U.S. regarding the implementation of ESG. However, the ESG regulatory framework remains fragmented, with decentralized enforcement and penalties less stringent for non-compliance than those in the EU.

The EU’s regulatory model also incorporates both financial and double materiality. This approach holds companies accountable for how environmental and social factors affect financial performance and how activities impact society and the environment. In contrast, the U.S. federal approach focuses on financial materiality, requiring companies to disclose mainly climate-related risks that may influence their financial performance. 

Moving forward, the U.S. will need to address these enforcement gaps to remain competitive and be a leader in the global ESG landscape. As sustainability increasingly drives economic resilience and investor trust, this year’s elections will significantly impact the future of ESG. According to a recent analysis from Carbon Brief, the U.S. is very likely to miss its Paris Agreement-aligned decarbonization targets, under the second Trump’s administration. According to them, CO₂ emissions are expected to fall only 28% below 2005 levels by the end of the decade in the U.S. Regardless of this outcome, real estate stakeholders must position themselves as ESG leaders, as it is no longer merely a compliance issue but a strategic imperative directly impacting asset value and long-term sustainability.