Key Points:

  • Europe has led the way in regulation aimed at mitigating climate change. This regulation presumes climate change poses a material risk to investors and that trustees and managers have a fiduciary duty to incorporate this risk in their oversight policies and management of investment portfolios.

  • The Biden administration’s position that climate change is an existential threat suggests that the United States may soon enact regulation similar to that adopted in Europe.

  • This article summarizes European regulation to help US investors now in planning how to align their investment policies, portfolio positions, and reporting practices with the new regulatory structure for sustainable finance emerging in Europe, likely soon to follow in the United States.

Ari Polychronopoulos

Climate research informs us that in 2017 anthropogenic global warming reached 1.0° C above pre-industrial levels (IPCC, 2018). Most of us understand that this continued warming of our planet is causing severe adverse consequences for ecosystems, biodiversity, and human society. Today’s immigration crises and resultant political stress in Europe and the United States only hint at the scale of challenges to come.

Even climate change skeptics must accept the reality that the United States has rejoined the Paris Agreement, a legally binding international UN treaty under the United Nations Framework Convention on Climate Change. The Paris Agreement represents a worldwide commitment to limit global warming to significantly less than 2.0° C above pre-industrial levels in an effort to avoid the more extreme risks of global warming and thereby sustain a hospitable climate. Achieving this ambitious goal requires unpreceded cooperation—both among governments and between business and government.

To date, Europe has led this effort, particularly from the regulatory side. Now, President Biden is characterizing climate change as an existential threat and his administration intends to join Europe’s regulatory effort. Accordingly, US investors may look to Europe’s regulatory approach as a guide to understanding this coming regulatory shift and its implications for climate transition investing.

European regulation presumes that climate change poses a material risk to investors and that trustees and managers have a fiduciary duty to incorporate this risk in their oversight policies and management of investment portfolios. In contrast, US regulation has taken nearly the opposite approach. In October 2020, the US Department of Labor (DOL) issued its final rule on ESG investing.1 The rule requires fiduciaries to base investment decisions on financial factors alone without promoting “nonpecuniary” objectives, which would include efforts to reduce global warming. The ruling was the Trump administration’s exclamation point to its exit from the Paris Agreement and the rollback of numerous environmental regulations, emphasizing the administration’s hostility to climate change regulation.2