How policymakers can drive the TCFD agenda, with Europe in the driving seat.

The EU’s HLEG recommendations can dovetail with other regulatory changes to back up the climate reporting shift.

There has been extensive commentary on the work of the Taskforce on Climate-Related Financial Disclosures (TCFD), first on its formation and then on its recommendations, which were presented in final form to the G20 in Hamburg in July 2017.
In short, the TCFD is a big deal; and the reaction has served to emphasise that following the watershed Paris Climate Agreement in December 2015 change is underway in the financial community, as it is for other parts of the economy affected by the climate and energy transition. Less considered is how policymakers and regulators can help drive this key agenda relating to disclosure and climate risk.
The first point to make is that the TCFD’s genesis is policy-based. It was the G20 who first pulled the trigger in 2014 when its finance ministers met. Following their initiative, Mark Carney, as FSB Chairman, and fresh from his own high-level interventions on climate change and the “tragedy of the horizon”, approached Michael Bloomberg about establishing the Taskforce.
It has therefore come full circle for the TCFD to present their report to the G20. But there’s a problem. Although taskforce members themselves have indicated that their recommendations are aimed as much at policymakers and regulators as they are at the business and finance community, the G20 now doesn’t know exactly what to do with the report.
The G20’s July communique carried only a reference to the TCFD report, and made no attempt beyond that to take it forward, either directly or indirectly. The primary reason for this is quite simple: the depressing reality of US federal climate policy in 2017, and how that has spun on its axis since 2014 when a rather different US administration was in office.
To be clear, even if Obama (or Hillary Clinton) had been in office, there would have been limitations on the G20’s mandate to direct action on the TCFD report. But with US internationalclimate policy under Trump playing unwilling participant or blocker, the G20’s political will in this area is fractured. Those who advocate making the taskforce recommendations bite therefore need to look elsewhere if policymakers and regulators are going to act.
The EU – or European countries – have for some time looked the most likely candidates to carry the TCFD torch. This is not only because of the leadership shown by senior figures such as Carney. The last 12 months have demonstrated that even if they were initially late to the game on the implications of climate risk for finance and investment, the European Commission now really seems to have grasped it. The catalyst was Financial Services Commissioner, Valdis Dombrovkis, the former Prime Minister of Latvia, fresh from his appointment in the summer of 2016, and his decision to add substance to the deliberations about climate finance in the Capital Markets Union (the Commission’s flagship finance initiative under President Juncker) by appointing a “High-Level Expert Group” (HLEG) on sustainable finance.
The HLEG has just published its interim report, prior to a final report that will go to the Commission at the end of 2017. The signs, in the report’s ambition and scope, are promising. The interim report carries unqualified endorsement for “clear, comprehensive and comparable” disclosure of information, and it cites the need for forward-looking analysis on how portfolios are aligned with the transition. On the latter point, proponents of a stronger disclosure regime are highly supportive of scenario analysis, where corporates (and possibly financial institutions) run publicly available assessments about how they will tackle the climate and energy transition under different policy and technology scenarios. This constituency will therefore welcome the report’s positive reference to scenario analysis (specifically giving climate-related disclosures in the energy or extractives sectors as an example).

A key point about the HLEG is that it will be reporting into a regulatory environment that offers opportunities for incorporation into existing or promised initiatives. Two such possibilities are the EU’s Prospectus Regulation and the Non-Financial Reporting Directive (NFRD), both of which deal with aspects of corporate reporting. The updated Prospectus Regulation, having entered into force very recently, has now been passed on to the relevant EU-wide body ESMA (the European Securities and Markets Authority) which will draft guidance, including possibly on what factors should be publicly disclosed as material factors in company prospectuses. The NFRD does what it says on the tin, laying down the rules on the disclosure of non-financial information by large companies. It has been criticized for its lack of specificity and that it risks placing ESG information in a silo. But it is being reviewed in 2018, and there will be pressure on the Commission to take account of HLEG proposals in the review.
That said, there will inevitably be challenges to what the HLEG recommends, and investors (corporates and financial institutions) will need to be alert to signs of push-back from opposing interests: e.g. business coalitions or national regulators who are unenthusiastic. The IHS Markit report in May which questioned the TCFD recommendations on scenario analysis – on the grounds that it could undermine efficient capital allocation – demonstrates how progress may not be straightforward.
It is also worth noting the potential for other international bodies to push forward policy and regulation on climate-related financial disclosure. IOSCO (the International Organisation of Securities Commissions) is essentially the international equivalent of ESMA and, although it may not have the regulatory mandate that ESMA has inside the EU, IOSCO wields considerable influence in setting standards for capital markets. It would therefore be surprising if this organization has not been prompted by the TCFD report to examine the climate disclosure agenda.The other field that investors must monitor is national regulators. Again, we probably come back to Europe – and especially the French and German financial regulators (the AMF and BaFin respectively) – as those most likely to move. Still feeding off the post-Paris momentum and energized by their new President’s ambitions to do more on climate, the French have their Energy Transition Law – which inter alia strengthened carbon disclosure requirements for listed companies – to build on. The German Government would like to have done more with the TCFD report at the recent G20 summit; the question is whether they and their regulators will want to push on with the agenda once the German election is out of the way.

We probably come back to Europe – and especially the French and German financial regulators (the AMF and BaFin respectively) – as those most likely to move.

Franco-German interest also poses the question about how active UK policymakers and regulators will be. The UK Treasury and the Corporation of London would like the City of London to be the global green finance hub – witness the Corporation’s Green Finance Initiative. But there must be a concern that, with Brexit demanding so much time and attention, UK regulators are too preoccupied to be in the vanguard. It can’t help that the British Government is losing influence in Brussels, which is most disappointing when taking into account all that the Brits have done to drive forward the EU climate and energy agenda. Against this background in Europe, it would be no surprise to see a dynamic develop between EU-wide action and the priority accorded by the most progressive regulators. This brings us back to a core question: can government make a difference on this agenda through a pro-active approach; and do investors actually care about the policy and regulatory
implications and developments?
TCFD members, based on the track record of taskforces of this kind, are confident that business and finance will act on their recommendations. That seems reasonable. Peer pressure can be powerful, and a combination of action from the most forward-thinking companies and shareholder initiatives (e.g. on AGM resolutions) can help push things forward.
The HLEG’s emphasis towards a sustainable financial system through integrating ESG factors fully into financial decision making is also highly encouraging. In line with this, HLEG’s advocacy for harmonization of acceptable definitions and frameworks around ESG and sustainable finance at EU level addresses something that has plagued and hindered the scaling of the sustainable and responsible finance industry globally.
However, although there is undoubtedly rising interest in climate risk among the investor community, caution anda view that climate change is tomorrow’s problem rather than today’s (in effect, reinforcing Carney’s fears about the tragedy of the horizon) can still be strong restraining factors. Likewise, regulators can be cautious beasts. There are therefore risks that investors and regulators will hold each other back, which could undermine an orderly climate and energy transition. In short, more national regulators will probably need to stick their necks out and show some leadership; and investors – who are advised to stay fully on top of the policy agenda, above all in the EU (think for example about responding to the HLEG consultation in train) – would be advised to engage with governments: it’s always more productive to try to influence change than be a passive bystander.

Shuen Chan and Richard Folland are Partners of Sustineri, a boutique advisory that provides expertise, insights and solutions to institutional investors in a world that is accelerating towards a low-carbon future