The “Greening Finance” Roadmap outlines plans for new sustainability-related disclosures and implements a “Green Taxonomy” to evaluate corporate environmental behaviour and counter greenwashing.
“Greening Finance: A Roadmap to Sustainable Investing” (Roadmap) sets out the Government’s ambition to make the U.K. a world leader in attracting green investment. The Roadmap focuses on the first step to deliver on this ambition: ensuring that reliable information exists to enable financial decisions to factor in, and be assessed by, objective environmental and sustainability criteria.
The ultimate objective is to establish a globally consistent reporting standard for environmental sustainability that will help investors and consumers better judge the sustainability characteristics of products and firms, consistent with the U.K.’s Sustainability Disclosure Requirements (SDRs). This U.K. initiative parallels similar work which is ongoing in the E.U., particularly with regards to the development and use of a new Green Taxonomy (see below).
The Roadmap builds on the U.K. Government’s 2019 Green Finance Strategy paper, and focuses on three principal areas:
The Roadmap explains that the SDR regime will bring together existing sustainability-related disclosure requirements under one integrated framework, building on current global standards and recognised best practice.
In November 2020, the Chancellor, Rishi Sunak, announced that the U.K. intends to make disclosure requirements recommended by the Task Force on Climate-Related Financial Disclosures (TCFD) mandatory across the U.K. economy by 2025. U.K. regulators have already taken steps towards implementing TCFD recommendations, which the SDRs will build on. For example:
Now, following their implementation, the SDR reporting requirements will apply to corporates (i.e. U.K. registered financial services companies and listed entities), asset managers and asset owners and investment products. While relevant regulators and government departments will, subject to consultation processes, determine the precise scope, timing and reporting detail of the disclosure requirements, as well as other statutory requirements, it is expected that the regime will broadly cover the following types of disclosure:
The Roadmap notes that a growing number of organisations are publishing transition plans to support their commitments to reach net zero emissions. The SDRs will require disclosures on transition plans and certain firms will be required to publish transition plans that align with the U.K. Government’s net zero commitment, or provide an explanation as to why they have not done so. While there is not currently an agreed standardised transition plan template in place, guidance is being developed by groups such as the TCFD as well as the Glasgow Financial Alliance for Net Zero (GFANZ) which aims to change this. As standard transition plans emerge, the U.K. Government and regulators will look to incorporate these into U.K. regulation and update disclosure requirements as appropriate.
Indicative timing guidelines provided in the Roadmap suggest that there will likely be a staggered approach to new mandatory reporting, starting with “economically significant” companies within one to two years from receiving royal assent for the required primary legislation.
The Roadmap notes that a growing number of financial products are marketed as supporting climate or environmental objectives, but without an accepted definition or standard of what economic activities should count as being environmentally sustainable it is difficult for companies, investors and consumers to understand clearly the environmental impact of their investment decisions. This also gives rise to the risk of “greenwashing”—misleading or exaggerated environmental or sustainability claims—which the U.K. Government seeks to eliminate. The U.K. Green Taxonomy (Taxonomy) will set out criteria that specific economic activities must meet to be considered environmentally sustainable and therefore “Taxonomy-aligned.”
The Taxonomy has six environmental objectives, each of which will be underpinned by a set of detailed technical screening criteria (TSC). The environmental objectives are:
The Roadmap explains that the Green Technical Advisory Group, an independent body made up of a range of industry experts and academics, will initially focus on developing TSC for the first two objectives (climate change mitigation and climate change adaption), before turning to the remaining four objectives in 2023. The TSC for the first two objectives will be based on those of the E.U. Taxonomy, and the Roadmap states that legislation is expected by the end of 2022.
Certain corporates will have to report which of their activities are “Taxonomy-aligned,” and investment funds and investment products will have to do the same for their respective products. To be considered "Taxonomy-aligned" an activity must meet three tests:
Taxonomy-alignment will require companies to assess their current practices, as well as their future objectives:
The Roadmap highlights the role that institutional investors, through their investment stewardship role, can play in encouraging a shift in capital allocation towards more sustainable economic activity, thereby helping in the greening of the U.K.’s economy.
The U.K. Government wants investors to make use of the improved sustainability data made available by SDR reporting to enhance their role as responsible stewards of capital, including by:
The Roadmap notes that the U.K. Government will assess progress, including on the matters listed above, at the end of 2023.
The Roadmap makes clear the U.K. Government’s expectation and intention to see ESG reporting becoming core to business decision-making and investment, through an enhanced regime of mandatory SDRs.
The era of generalised and aspirational sustainability reporting is coming to an end and in its place we can expect to see a more informative and standardised reporting regime, aligned with developing global reporting standards. For corporates, this will involve so-called detailed “double materiality” sustainability review and reporting on their businesses, and for investment managers, an increased emphasis on disclosure of the sustainability impact of their stewardship activities.
Businesses will have to begin preparing for a more detailed and regulated approach to their ESG reporting, including developing their own transition plans and Taxonomy-aligned reviews of their various business activities.
Finally, in the debt and securities markets we have seen a dramatic increase in ESG-linked transactions over the last 12 months, commonly rewarding borrowers and issuers with cheaper financing if ESG key performance indicators are met. Market participants, while keen to engage, can be somewhat cautious of borrowers and issuers tapping into this trend without a genuine and meaningful commitment to the underlying cause, i.e. the “greenwashing” concern mentioned earlier. Over the past decade or so, documentation in the European leveraged finance market has moved significantly in favour of a more “permissive” approach where reporting and information disclosure requirements on borrowers and issuers have generally been relaxed. Better disclosure against established baseline standards and compliance with an internationally accepted taxonomy can only raise standards over the setting of those key performance indicators, while providing clarity, measurability and credibility to the ESG-element of any financing.
For assistance in preparing for this new wave of regulation, please contact any of the persons listed below.