Public consultation on UK green taxonomy needed ‘as soon as possible’

Green taxonomies are classification systems designed to identify economic activities that are environmentally sustainable, helping investors and companies to make informed green and sustainable choices, boost sustainable and green finance and investment, and prevent greenwashing. Earlier this month, Jeremy Hunt set out more than 30 planned regulatory changes across the financial sector, dubbed the ‘Edinburgh reforms’. Sharon Smith of Pinsent Masons said: “Given that the chancellor said in his Edinburgh reforms speech that the government’s green finance strategy will be updated in early 2023, it is important that a public consultation on the UK green taxonomy is issued as soon as possible.”

“The chancellor said that the government is acting to secure the UK as the premier financial centre for sustainable finance and investment, and ensure the financial system plays a major rule in the delivery of the UK’s net-zero target. In view of the need to mobilise much more green and sustainable finance to meet these objectives, as well as the significant risks which the climate and biodiversity loss emergencies pose to the UK economy, the development of the UK taxonomy should be a governmental priority,” Smith said.

Last week, Baroness Joanna Penn, a junior Treasury minister, told MPs that the Financial Services and Markets Bill currently before parliament will repeal retained EU law related to financial services, including the EU’s taxonomy regulations. ‘Using the powers in the Bill, HM Treasury intends to first commence the repeal of the statutory requirement to make technical screening criteria regulations by 1 January 2023, so that the obligation no longer applies. Then it will consider how to use the powers in the Bill to restate and modify retained EU law, and decide whether to change the UK’s approach.’ Penn added.

Smith said: “It is important that interested stakeholders, including corporates and institutional investors, have the opportunity to comment on any such policy decision - the UK taxonomy should be developed in a broad consultative process to maximise its credibility, usability, and interoperability with the EU regime and other international sustainability frameworks, and to reduce greenwashing.”

Euan McVicar of Pinsent Masons added: “Investors may be concerned if the UK taxonomy diverges significantly from or is not readily interoperable with the EU regime.  Easing the flow of capital from other jurisdictions into or through the UK is likely to be important to government objectives to make London the go-to centre for green finance.”

The chancellor also used his Edinburgh reforms speech to outline several new measures related to sustainable finance and environmental, social and governance (ESG) issues. Hunt said the government remains committed to seeing financial service firms deploy more capital in productive assets such as UK infrastructure and low-carbon and clean energy projects. He said this would be facilitated by Long-Term Asset Funds (LTAFs), a type of fund structure tailored to the UK market, replacing the EU’s European Long Term Investment Fund regime. Hunt added that firms have already begun to seek FCA authorisation for funds taking advantage of this new structure.

The government re-iterated that it is working for the UK to become the world’s first net-zero aligned financial centre. It plans to consult early next year on bringing ESG ratings providers into the FCA’s regulatory perimeter to ensure these products are transparent and use consistent standards. The Treasury will also join the industry led ESG Data and Ratings Code of Conduct Working Group, recently convened by the FCA, as an observer. “These services are increasingly a component of investment decisions, and the government wants to ensure improved transparency and good market conduct,” Hunt said.

The government’s original green finance strategy (43 pages / 12.3 MB PDF) was launched in July 2019, and in October 2021, the government published its ‘Greening Finance: a Roadmap to Sustainable Investing’ policy paper (48 pages / 2.04MB PDF) setting out its ambition to ‘make the UK the best place in the world for green and sustainable investment’. The roadmap set out plans for economy-wide sustainability disclosure requirements (SDRs) to include disclosures against a UK green taxonomy, the structure of which would “draw on the EU approach which the UK helped design as a former member state”.

The policy paper outlined how the UK green taxonomy approach, mirroring the EU’s approach, would include six environmental objectives: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems. Each of the environmental objectives would be underpinned by a set of detailed standards, known as technical screening criteria (TSC). To be considered taxonomy-aligned, an activity must make a substantial contribution to one of the six environmental objectives; do no significant harm to the other objectives; and meet a set of OECD and UN safeguards.

In October 2022, the Green Technical Advisory Group (GTAG) published advice on the development of the UK green taxonomy. GTAG recommended that the government enabled full market engagement to ensure that when the UK green taxonomy is published for consultation, the amendments outlined in its advice paper and subsequent GTAG advice papers can be fully addressed. The Financial Conduct Authority (FCA), which is currently consulting on Sustainability Disclosure Requirements (SDR) and investment labels (179 pages / 1.97MB PDF) until 25 January 2023, has said that it intends to consider how it might update its rules to include disclosures relating to the UK taxonomy once it has been developed.