UK taxonomy
The UK has committed to being climate-neutral by 2050 and has set out its 'roadmap' in support of this aim. But transitioning to a low-carbon, more sustainable economy requires significant investment. In 2021 the Office for Budget Responsibility estimated that the costs for the UK to become climate-neutral by 2050 would be in the region of £1.4 trillion. To help redirect the necessary investment towards sustainable projects and activities, the UK has recognised the need for a common language and clear definitions of what is sustainable.
What is the UK's Green Taxonomy?
In October 2021 the UK Government published its 'roadmap' – Greening Finance: A Roadmap to Sustainable Investing in which it set out its plans to develop a Sustainability Disclosures Requirements (SDR) regime and a Green Taxonomy.
Ahead of the publication of the roadmap, in June 2021 the UK Government set up an independent expert group, the UK Green Technical Advisory Group (GTAG) to provide independent, non-binding advice to the UK Government on the design and implementation of the Green Taxonomy.
The Green Taxonomy will provide a common framework, setting the bar for investments that can be defined as environmentally sustainable, helping to tackle ‘greenwashing’, improve understanding of environmental impact to help companies and investors make informed green choices, support investment in sustainable projects and boost efforts to tackle climate change.
Prior to Brexit, the UK had been instrumental in developing the EU Taxonomy Regulation and as part of the Brexit process, had adopted the EU Taxonomy Regulation. It was widely expected that the Green Taxonomy would mirror the structure of the EU Taxonomy, covering the same 6 environmental objectives as the EU Taxonomy: (i) climate change mitigation, (ii) climate change adaptation, (iii) the sustainable use and protection of water and marine resources, (iv) the transition to a circular economy, (v) pollution prevention and control and (vi) the protection and restoration of biodiversity and ecosystems underpinned by detailed standards known as Technical Screening Criteria (TSC). Activities would also need to meet three tests: (a) make a substantial contribution to one of the six environmental objectives, (b) do not significant harm to the other objectives and (c) meet a set of minimum safeguards.
Where are we now?
In December 2022 the UK Government announced that it would be repealing retained EU law relating to financial services including the EU Taxonomy Regulation effectively removing the very ambitious obligation to make and adopt TSC by 1 January 2023. However, setting standards, including creating a taxonomy, is considered to be a key component in the UK on delivering its net zero aims and the UK Government reaffirmed its commitment to delivering a UK taxonomy in its update to the roadmap - 'Mobilising Green Investment' which was published in March 2023.
The expectation in March 2023 was that the UK Government would consult further on the development of the Green Taxonomy in Autumn 2023. Whilst this has not yet happened, the March 2023 update, as well as reaffirming the Government's commitment to delivering a Green Taxonomy, indicated that the regime will be proportionate so that it does not place an undue burden onto companies whose size or scale makes the disclosure of taxonomy-related information unreasonable and that there will be a voluntary testing period of at least two years before mandatory obligations are introduced in order to ensure that any future Taxonomy provides accessible and reliable information that is useful to markets.
In August 2023, the Department for Business and Trade published its initial guidance on the UK Sustainability Disclosure Standards (SDS). The SDS will set out corporate disclosures on the sustainability-related risks and opportunities that companies face. They will form the basis of any future requirements in UK legislation or regulation for companies to report on risks and opportunities relating to sustainability matters, including risks and opportunities arising from climate change.
The UK SDS will be based on the IFRS Sustainability Disclosure Standards issued by the International Sustainability Standards Board (ISSB) in June 2023 and although the UK Government is currently consulting on how to implement IFRS S1 and IFRS S2 in to UK law, the guidance states that UK endorsed standards will only divert from the global baseline if absolutely necessary for UK specific matters.
Creation of the UK SDS, which are expected to form part of a new UK Sustainability Disclosure Requirements regime that includes the Green Taxonomy and a requirement for certain companies to publish transition plans, is expected to occur by July 2024 and whilst the UK Government will make decisions as to whether and what UK registered companies and LLPs will be required to disclose, the Financial Conduct Authority (FCA) will make decisions for UK listed companies.
In the meantime, the FCA has delayed the release of its policy statement setting out the final rules on sustainable investment labels, disclosures and naming and marketing, leaving asset managers uncertain as to the nature of the impending changes to labelling and disclosure requirements. The general anti-greenwashing rule which affects all regulated firms is still expected to come in to force when this policy statement is published.
Challenges
Although we may not yet have specific requirements for UK companies and LLPs, the direction of travel means that even if your organisation may not be required to comply with the UK's Sustainable Disclosure Requirements or SDS, your funders and investors or other stakeholders may be required to do so or be focussing their efforts on supporting organisations who have sustainability at the top of their agenda.
But being able to assess your activities to determine what proportion of them are Taxonomy-aligned and then providing this information, as well as the supporting data, is not without its challenges. There is a lack of internal expertise in many organisations and the cost of complying may also be high. Embedding this type of risk assessment into your business strategy may also require real organisational change. It’s a change that needs to happen from the top down and isn't something that can happen overnight.
How we can help
Our highly skilled teams of specialists in areas such as green, social and sustainable finance, impact investment and blended finance, governance, employment and corporate can assist you in considering what organisational changes need to be made in order for you to move towards being able to comply with the applicable reporting requirements.
Our offering
Strategic review
Understanding your business is the key to understanding what your organisation needs to do in order to comply with the applicable reporting requirements. We will get to know you and your team and work with you to assess what changes need to be made.
What is involved
Our experts will work with you to help you assess your readiness to comply with the applicable reporting requirements. We can assist with reviewing sustainability targets and progress towards achieving those targets as well as developing sustainability policies. You know your business best and we can help shape the targets and policies that will work for you. We can provide training on areas of interest to your executive team/board members.
What it will help you to achieve
Knowing what your proportion of your organisation's activities are considered environmentally sustainable and being able to report this data as well as complying with other non-financial reporting requirements demonstrates your awareness of and commitment to managing the risks which we all face as a result of climate change, natural habitat destruction and other economic activities and will make for a more resilient company attractive to a wider variety of stakeholders.