While there’s disappointment with delays to the UK Green Taxonomy, progress is being made on climate transition plans and sustainable finance labels.
It was impossible to ignore the political turmoil in the UK last year with three Prime Ministers and a crashed economy. The contagion also spread to the UK’s sustainable finance policy plans with delays to the country’s green taxonomy announced days before Christmas, prompting fears that the UK could fall behind its peers on greening its economy.
But talking to policy experts, the sustainable finance picture in the UK is not all doom and gloom. There are disappointments, such as the perceived failure of the UK’s leadership of 2021’s COP26 and the taxonomy delay. However, there are also bright spots, such as the Transition Plan Taskforce (TPT) and progress on creating a set of labels for sustainable funds.
Following on from its 2020 commitment to reach net zero by 2050, the UK’s work on sustainable finance policy started seriously in October 2021 with the launch of a roadmap to help make sure the country met its binding commitment to be net zero greenhouse gas emissions by 2050.
The plans include Sustainable Disclosure Requirements (SDR) from the financial sector and a related sustainable investment labelling regime. There is also the UK Green Taxonomy creating a system for classifying whether an economic activity is sustainable, with a Green Technical Advisory Group (GTAG) providing advice on its design and implementation.
GTAG, made up of 18 industry figures, says it will build on the work of existing international taxonomies and set a high bar in uniquely taking a science-based approach. Taxonomies have already been developed in places such as the EU, China, Malaysia, Bangladesh and Russia.
But they have proved fiendishly difficult to create due to technical and political problems. Particularly heated debates have been on whether weapon stocks should be excluded from the EU social taxonomy (which is currently on a hiatus) and the inclusion of gas and nuclear in the EU’s sustainable finance taxonomy.
The delay to the UK Green Taxonomy was announced on 14 December by Baroness Penn, Treasury Lords minister who said the government would repeal legal requirements to have technical details for the taxonomy made into regulations by 1 January 2023, following advice from GTAG and other stakeholders.
“Slow down” necessary
Ingrid Holmes, Executive Director of the Green Finance Institute (GFI), which chairs GTAG, is disappointed, but not surprised by the delay. “Given the levels of turmoil across government due to external events, but also all the changes in leadership at the top, it just means there is a lack of bandwidth,” she tells ESG Investor.
Holmes says against that backdrop it makes sense to slow the process down and “get it right”. GTAG, she says, is constantly feeding into government departments such as HM Treasury and the Department for Business, Energy and Industrial Strategy (BEIS), in particular on issues of usability of the taxonomy.
Its advice to the government is also now published externally, with the first report coming out last October. Holmes says more GTAG reports will be coming out on encouraging international interoperability [with other taxonomies], addressing the challenges of including ‘do no significant harm principles’ in the taxonomy and how the taxonomy underpins other policies in the UK.
A person familiar with the matter was more forthright in their comments on the taxonomy delay, saying many involved in GTAG and beyond were “furious” by the lack of effort within the UK government. A spokesman for HM Treasury told ESG Investor that its next step with the taxonomy would be set out in its updated Green Finance Strategy to be released later this year.
Eliette Riera, Head of UK Policy at the Principles for Responsible Investment (PRI), who sits on the GTAG, is also disappointed but not surprised at the delay to the taxonomy. She explains there wasn’t sufficient time to have a thorough consultation on the taxonomy in time for the January deadline enshrined in law. “The line we’ve always taken at the PRI is that if we are going to have a taxonomy in the UK….it needs to be science-based. But it also needs to take the consumer experience into account.”
She says while there are also opportunities to learn from the EU on its taxonomy, the UK shouldn’t wait too long to create its own to not lose its second-mover advantage. She notes that around 80% of listed companies in the UK will have to soon start reporting under the EU taxonomy. “So it’s really important we [UK] get this right,” she says.
Riera also says that while there have been a lot of political changes, there has been a good group of civil servants within government working on the taxonomy throughout. “We’re very committed to working on this. We are disappointed in the delay. And we hope this is just a delay.”
UK leadership on Transition Plan Taskforce
More positively for Riera, the UK is showing leadership with the efforts of the Transition Plan Taskforce (TPT) to provide a framework for companies to disclose their climate transition plans. The UK government plans to make the climate transition plans mandatory and have supplementary frameworks for different sectors.
It will be a first worldwide, and Riera says the work of the TPT, chaired by Amanda Blanc, CEO of Aviva, is groundbreaking as it is trying to give investors a whole economy overview with regards to the climate transition.
Riera says there is already global interest in the work, with the PRI being asked to work with its networks in Asia on how the TPT could be replicated there.
The TPT is currently consulting on its framework for disclosure until the end of February. Some criticisms have been that the framework is too heavily based on the Taskforce for Climate-Related Financial Disclosures (TCFD). A managing director of an ESG consultancy also criticises BEIS, the UK government department for business, for not being involved in the work, telling ESG Investor, “why is finance driving this?”.
HM Treasury launched and co-chairs the TPT, but a representative from BEIS is an observer. TPT members include a mix of very senior figures from business, finance and academia.
Behind the scenes, Holmes explains, companies from the real economy and financial services have signed up to trial prototype transition plans. “I think companies are drawn from 20 sectors. So it’s quite diverse,” she says.
Plans for sustainable finance labels
Alongside disclosure from corporates, the UK is also working on disclosure from the financial sector on sustainability which will feed into a labelling system for funds in a bid to combat greenwashing.
The Financial Conduct Authority (FCA) is leading on this with the development of Sustainability Disclosure Requirements (SDR). Its proposals for SDR are currently under consultation and includes three potential sustainable investment labels: Sustainable focus, Sustainable achievers and Sustainable impact.
Holmes says an interesting aspect of the work is that it says investors should be integrating ESG considerations into company valuations as part of a responsible investment approach, and that to be considered sustainable, a fund has to be either selecting companies that are sustainable now or be working to improve their sustainability. She adds that if they want to achieve the ‘Sustainable impact label’, a fund has to have a clear theory that informs every step of the investment process.
She says that the FCA is also trying to map in the consultation how SDR sits with the EU’s Sustainable Finance Disclosure Regulation (SFDR), which Holmes says is potentially too prescriptive, and related US initiatives too.
All of this work by the UK government on sustainable finance policy is under scrutiny by at least three bodies in the UK Parliament: the All-party Parliamentary Group on ESG, the All-party Parliamentary Group on Sustainable Finance and the Environmental Audit Committee which is currently taking public evidence for its inquiry entitled ‘the Financial sector and the UK’s net zero transition’. Last Friday, an independent review from Chris Skidmore MP, looked at the country’s progress on net zero and made a number of recommendations related to green finance policy.
This pressure is important, given that James Alexander, chief executive of UKSIF, who sits on GTAG, warns that finance and business shouldn’t be moving at a faster pace than the government on sustainability.
“It’s absolutely crazy that we’re not advancing this policy across every area of government,” he says.
The UK was expected to be creating UK Climate Transition Benchmarks and UK Paris-aligned Benchmarks after retaining EU laws in this respect after Brexit, but there appears to be no further movement on this.
However, there was some positive movement in December with the announcement of a consultation on regulating ESG rating providers to take place this year and a new Green Finance Strategy as part of Edinburgh Reforms that outline the government’s vision for the UK’s financial services going forward.
The UK, will also been keen to make sure that its respected financial centre London, maintains the top spot in the Global Green Finance Index ranking cities on their sustainability. Holmes said a big driver of London’s high ranking is the policy and regulatory framework in the UK.
“I’m confident that we will get to a good place on this regulatory regime over the next year and make sure we secure that number one spot on the green renewable finance index again in 2023,” she says.