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UK Taxonomy Can Learn from EU’s Mistakes

Advisory group urges the government to focus on “drafting efficiency” when developing criteria, while following the science.  

The UK’s Green Taxonomy must address challenges unearthed during the development of the EU taxonomy and streamline its do no significant harm (DNSH) criteria, according to the Green Technical Advisory Group (GTAG). 

The UK taxonomy will provide clarity for investors as to which economic activities can be considered sustainable, with DNSH criteria in place to ascertain that an investment targeting one of the taxonomy’s environmental objectives does no significant harm to its other objectives.  

Thus far, the majority of the over 40 taxonomies in place globally – including Russia, China and Malaysia – have been designed based off the EU template, according to Ingrid Holmes, GTAG Chair and Executive Director of the Green Finance Institute (GFI), noting that two-thirds of these taxonomies have utilised the EU DNSH criteria.  

However, GTAG has argued in recommendations published on 2 August that the UK government must ensure its iteration does not replicate existing weaknesses in these criteria.  

“There are over 700 different DNSH requirements within the EU taxonomy, but notable repetition and redundancy,” Holmes told ESG Investor. 

2021 FTSE Russell analysis noted that the EU’s DNSH criteria could be reduced to around 100 requirements. 

“In addition, some requirements are inconsistent and ambiguous – or impossible to prove,” Holmes said.  

The GTAG paper noted that 88% of the EU’s DNSH criteria are too hard to measure due to having poor or no quantitative or process-based thresholds, such as mitigating storm water overflows. 

Further, the EU’s DNSH criteria are not well integrated with existing reporting regimes, with only 20% of criteria referencing international standards, GTAG said.  

“There is no sense simply replicating something that needs more work,” said Holmes.  

The GTAG is made up of 18 industry figures and was established in 2021 to provide independent advice to the UK government on implementing a Green Taxonomy. 

The UK taxonomy is expected to cover objectives including climate adaptation, preventing and controlling pollution, and protecting and restoring biodiversity and ecosystems. 

Clarity and interoperability 

GTAG has recommended that the UK government confirms the purpose of its approach and definition of DNSH within its H2 2023 consultation for the UK taxonomy to provide market clarity and promote international interoperability.  

It is also important for the government to clearly set out what it means by terms such as ‘net zero’ to ensure that DNSH reporting is consistent and to reduce the risk of greenwashing, the paper said. 

Further, the government should look to improve the transparency of taxonomy disclosures by adopting an approach that would enable companies that are not fully taxonomy-aligned to disclose the extent to which they are aligned with the DNSH criteria, thus providing investors with additional decision-useful information. However, any projects that are unable to meet the DNSH criteria should not be technically classified as taxonomy-aligned, GTAG added.  

GTAG has also called for “functional design parameters” for the drafting of DNSH criteria, such as prioritisation of quantitative thresholds and reducing the overall number of criteria.  

“The focus should be on drafting efficiency – not weakening the scientific basis or the overall ambition of the UK Green Taxonomy,” the paper said.  

Given the near global adoption of the EU’s DNSH, many of the recommendations raised by GTAG “will be relevant in other jurisdictions that are developing green taxonomies”, according to Holmes. 

She said that the group has advised the UK government, if it agrees with the findings, to use its influence in groups such as the International Platform on Sustainable Finance and International Organization of Securities Commission to “advocate for a similar approach to DNSH to be adopted, thus increasing usefulness and impact – but also interoperability”.  

Last year, the UK government announced that it would miss its original 1 January 2023 legal deadline to propose regulations on climate technical screening criteria for its taxonomy, noting its development was a “complex, technical exercise”. Further progress on the taxonomy is now expected later this year.  

“The delays have created an opportunity to work through some of the teething issues with the EU taxonomy, including the usability of the DNSH requirements,” Holmes said.  

“What DNSH seeks to do is capture the wider concepts of sustainability, many of which may not yet be conceptualised in current regulation, and guide investors toward a more integrated approach to suitable investment that works for people and planet.”  

Holmes admitted that streamlining DNSH criteria will require significant effort, but GTAG believes that the benefits of doing so are “worth the extra effort”. 

“Getting the taxonomy right will help address some of the concerns in the market about greenwashing but also, critically, guide investment toward climate investments that also support nature recovery and wider environmental objectives.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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