UK Green Taxonomy Consultation

HM Treasury has recently launched a consultation to gather insights into whether to establish a ‘green taxonomy’ as part of the UK’s wider sustainable finance framework and climate policy. The key purposes of implementing such a classification tool are to support investment into activities aligned with sustainability goals and to mitigate greenwashing.

What is a green taxonomy?

A green taxonomy is a classification system that sets out clear definitions of the economic activities and investments that can be defined as environmentally sustainable. It aims to direct investment towards sustainable activities and encourage businesses to adopt business models aligned with certain metrics. This, in turn, enhances transparency and comparability in sustainable practices. The taxonomy would act as a common framework as part of the UK’s transition to “a net zero, climate resilient and nature positive economy”.

What are the aims of the consultation?

The consultation seeks to develop a clear understanding of the use cases of a green taxonomy and how to maximise the usability of any classification tool. In particular, the consultation paper hopes to learn from the taxonomy implementations in other jurisdictions, for example the EU taxonomy.

The UK Green Taxonomy also has the potential to interact with other sustainable finance regulations and frameworks, including:

• the IFRS Sustainability Standards
• the Transition Plan Taskforce (TPT)
• the regulation of ESG ratings; and
• the FCA’s sustainability disclosure and fund labelling regime (SDR).

What are some other prominent green taxonomies?

The EU taxonomy is the world’s first official system for classifying environmentally sustainable activities. It feeds into the EU’s sustainable finance framework and acts as a market transparency tool across Europe. The taxonomy allows financial and non-financial companies to share a common definition of sustainable economic activities, protects investors from greenwashing and enhances market harmonisation.

The EU Taxonomy Regulation has been in force since July 2020 and sets out the overarching conditions that an economic activity must meet in order to qualify as environmentally sustainable including:

1. Contributes to one or more environmental objectives as set out in the Regulation;
2. Does not harm any of the other environmental objectives;
3. Is carried out in compliance with the minimum safeguards; and
4. Complies with certain technical screening criteria.

Bangladesh is also considered a front-runner in the development of sustainable taxonomies, driven largely by its vulnerability to the effects of climate change. The Sustainable Finance Policy for Banks and Financial Institutions was developed to help the country attain its global targets under the Paris Agreement and Sustainable Development Goals. The policy includes a green taxonomy which classifies green banking activities, green marketing and disclosures.

These are just two examples of other taxonomies that UK companies may interact with as part of a wider trajectory towards net zero operations, and which may be able to inform the development of a green taxonomy in the UK. Indeed, it is considered more practical if there is interoperability between the taxonomies of different jurisdictions to ensure investment can be facilitated internationally, as seen with the Association of Southeast Asian Nations.

What are the consequences of a green taxonomy for UK businesses?

The UK Green Taxonomy could support companies and the financial sector in the transition to a sustainable economy by encouraging private funding of sustainable projects and technologies, and directing investment to projects with significant environmental impact. Nevertheless, there are concerns that a taxonomy could cause administrative hassle for businesses, particularly those who have already aligned their operations to alternative technical specifications, or who may not have the relevant expertise to evidence the criteria. As with the EU taxonomy, a UK Green Taxonomy could increase the requirement for non-financial regulatory disclosure.

How can businesses get ready for the taxonomy?

There are many ways that organisations can respond to the proposed green taxonomy and get ready for its introduction:

• respond to the consultation directly by providing use case examples, and feed into the discussions to shape the most effective green taxonomy
• conduct regular horizon scanning of taxonomies in other jurisdictions to understand how the classification tools have worked internationally
• review criteria for your sustainable investment products and services and ensure there is a robust understanding of how these criteria are monitored and evaluated
• consider the administrative implications of aligning existing products and services with a green taxonomy and plan accordingly
• review marketing material for sustainable investment products and services to ensure you are not at risk of greenwashing.

Whilst we are far from a globally standardised taxonomy, and there may be many months of review ahead of any direct policy implications, it seems only prudent that the UK creates clarity around the classification of sustainable investment opportunities to facilitate work towards its environmental targets and mobilise investment from the private sector.

Author

This insight was authored by Hanna McRobbie, a Trainee Solicitor on our ESG team. If you have any queries regarding this article, please contact Hanna: hanna.mcrobbie@weightmans.com