UK government sets out roadmap to green finance

Out-Law News | 21 Oct 2021 | 3:09 pm | 3 min. read

The UK government has laid out its ambition to ‘green’ the country’s financial system, aligning it with the commitment to achieve net zero emissions by 2050.

In a policy paper, Greening Finance: A Roadmap to Sustainable Investing (48 page / 27.7MB PDF) HM Treasury said the move towards a sustainable finance market would involve three stages: ensuring decision-useful information on sustainability is available to decision-makers; making this information a day-to-day part of business and financial decisions; and shifting financial flows to align with a net-zero and nature-positive economy.

The roadmap focuses on the ‘informing’ phase, to be delivered through economy-wide sustainability disclosure requirements.

The aim is for these requirements to be integrated across the economy, with investment managers, financial services firms and corporates all required to report consistent information on sustainability. The regime will streamline existing disclosure requirements, including the UK’s commitment to make reporting aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) mandatory, with new requirements, such as reporting environmental impact.

There remains a risk that the government, in trying to lead, will add to the overlapping and proliferating climate-related standards, creating an additional burden for companies and their management

The disclosures will also be consumer-focused, and firms selling investment products will have to publish consumer-focused disclosures showing the impact, risks and opportunities of the activities they finance on sustainability. The Financial Conduct Authority (FCA) is also to develop a label to help consumers make informed investment decisions taking sustainability into account.

In line with efforts being taken by the FCA and other regulators to minimise ‘greenwashing’ in marketing, financial firms will have to substantiate sustainability claims they make.

The disclosure requirements will include reporting under the UK Green Taxonomy, which will provide a robust list of economic activities that count as environmentally sustainable.

Corporate governance expert Tom Proverbs-Garbett of Pinsent Masons, the law firm behind Out-Law, said the section on taxonomy was interesting as it attempted to encapsulate what ‘environmental, social and governance’ (ESG) actually covers.

“This is no mean feat but illustrates its vast scope, with ‘environment’ said to cover how organisations impact and are impacted by climate change and broader environmental issues; social factors ranging from modern slavery to international development; and governance being the means by which a company is controlled and directed,” Proverbs-Garbett said.

Proverbs-Garbett said the idea of the sustainability disclosure requirements bringing together new and existing sustainability reporting requirements was sensible and could deal with the problem of inconsistent data and differing methodologies meaning information is not always comparable.

“There remains a risk that the government, in trying to lead, will add to the overlapping and proliferating climate-related standards, creating an additional burden for companies and their management,” Proverbs-Garbett said.

“This is apparent in the proposal to consult on the form of these disclosures, based on reporting under international standards – still in development – and in line with the UK Green Taxonomy as proposed in the paper. It is acknowledged that any regulatory changes will need to ensure that UK reporting under proposed international standards is consistent with both existing and forthcoming disclosure requirements so that companies are not required to report the same information twice, but in acknowledging the potential for overlap, the problems is starkly revealed,” Proverbs-Garbett said.

Climate change expert Euan McVicar of Pinsent Masons said the economy-wide approach proposed for the Sustainability Disclosure Requirements had the potential to “change the dial” on reporting for UK corporates.

“There is, though, much detail yet to come on who will be affected and what this will look like. Larger pension funds and financial institutions subject to Prudential Regulation Authority oversight are likely to be some way down this path already but many corporates will find this challenging to engage with in a meaningful way if they don’t start preparing now,” McVicar said.

McVicar also welcomed the focus for firms on making credible claims about sustainability.

“There are signs that greenwashing in all its various forms will not be tolerated. The risks associated with making false claims but also well-intentioned, but overly vague or ambiguous claims are likely to grow. We can expect to see not only regulators but also investors, lenders, insurers, competitors and customers as well as non-governmental organisations and activists all calling out greenwashing and potentially taking legal action in response to it,” McVicar said.

The roadmap contains a number of other proposals, such as bringing ratings agencies under the FCA regulatory umbrella because of the increasing importance of ESG ratings to investors. Proverbs-Garbett said these, alongside continuing work being done by the FCA on promoting active investor stewardship that positively influences companies’ sustainability strategies, were light on detail and could add a further layer of complexity to this already labyrinthine area.

“However, the direction of travel is clear and there is hope that 2022 will see real progress towards standardisation and clarity,” Proverbs-Garbett said.

The government said it would update its Green Finance Strategy in 2022, going beyond the short-term roadmap timescales and setting out an indicative sectoral transition pathway out to 2050 to align the financial system with the UK’s net zero commitment.