European regulatory trends reveal the destination to which the United States and other developed nations, including Australia, are likely now setting their course.6 In Europe, the two principal bodies making recommendations for climate transition regulation are the Task Force on Climate-Related Financial Disclosures (TCFD) and the Technical Expert Group on Sustainable Finance (TEG). For those new to the alphabet soup of European financial regulatory bureaucracy, the TCFD was established in 2015 by the Financial Stability Board (FSB), an international organisation funded by the Bank for International Settlements that recommends financial regulatory standards to G20 governments. The TEG was established by the European Commission in 2018 to develop and recommend sustainable finance legislation to the European Union (EU).
TCFD. The FSB established the TCFD to “develop recommendations for more effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions and, in turn, enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks.”7 The TCFD framework requires companies to disclose risks related to the transition to a low-carbon economy and risks related to the physical impact of climate change. Of companies with market capitalisations greater than US$10 billion, 42% currently disclose at least some information in line with TCFD recommendations (FSB, 2020). In November 2020, the United Kingdom announced that reporting along TCFD guidelines will be mandatory by 2025 and will apply to almost all of the nation’s economy: public companies, large private companies, banks, insurance companies, asset managers, and pension schemes.
TEG. As outlined on the European Commission’s website, the purpose of the TEG is to provide “an EU classification system—the so-called EU taxonomy—to determine whether an economic activity is environmentally sustainable; an EU Green Bond Standard; methodologies for EU climate benchmarks and disclosures for benchmarks; and guidance to improve corporate disclosure of climate-related information.”8
The EU taxonomy is a “tool to help investors, companies, and issuers and project promoters navigate the transition to a low-carbon, resilient, and resource-efficient economy” (TEG, 2020, p. 2). The taxonomy sets reporting standards and performance thresholds. Starting in January 2022, all fund providers, insurance product providers, and pension plans who market their strategies in the EU as being sustainable must report using the taxonomy framework. Financial market participants will be required to disclose how the taxonomy was used “in determining the sustainability of underlying investments, to what environmental objective(s) the investments contribute, and the proportion of underlying investments that are taxonomy aligned, expressed as a percentage of the investment, fund, or portfolio” (TEG, 2020, p. 37).
The EU Green Bond Standard (GBS) is intended to increase the “transparency and comparability of the green bond market, as well as to provide clarity to issuers on the steps to follow for an issuance, in order to scale up sustainable finance.”9 The purpose of the GBS framework and reporting requirements for proceeds of green bond issues is to increase the availability of financing, and to lower the cost of that financing, for projects aimed at reducing climate change.