The government has today published its roadmap for ‘greening’ the financial services sector in the UK.
Key to this is the introduction of new sustainability disclosure requirements, which will incorporate and expand on current TCFD rules. For this first time these will include new consumer-focused standards to show how environmentally-friendly different financial products are.
In order to do this the Treasury has set out in its policy paper (‘Greening Finance: A Roadmap to Sustainable Investing’) plans to introduce a green taxonomy in the UK. This will help create a common definition of what counts as ‘green’ economic activity, which should help companies and investors understand the environmental impact of investment decisions.
The Treasury says that without a clear taxonomy there is the danger of greenwashing.
The taxonomy will have six environmental objectives. These are:
- Climate change mitigation
- Climate change adaption
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems
For each of these objectives there will be a set of detailed standards (known as technical screening criteria, or TSC). For the first two objectives in the list above, these criteria will be subject on to consultation in the first quarter of 2022. Critiera for the other objectives will be published and consulted on at a later date.
There will be an individual TSC for each economic activity included in the taxonomy, which identifies how that activity can make a substantial contribution to the environmental objective.
To be considered taxonomy-aligned an activity must meet three tests:
- Make a substantial contributions to at least one of these six environmental objectives
- Do no significant harm to the other objectives
- Meet a set of minimum safeguards. These will be based on minimum OECD standards for doing business for multinational enterprises
One of the key points about taxonomy is that it is focused on reported data, rather than projections. As a result it can show what a company has done to date, when it comes to reducing greenhouse gases, tackling pollution or cutting waste, rather than focusing on ‘promises’ to improve in future.
Under the sustainable disclosure requirements companies will be required to disclose the percentage of their capital expenditure, operational expenditure and turnover that relates to taxonomy-aligned activities.
The Treasury says that these corporate disclosure will provide investors and consumers with an indicator of a company’s current environmental performance, as well as its investment in sustainable activities.
This will then feed through to the SDR published by pension and investment companies and providers of other financial products, who will be able to disclose the proportion of the assets they invest in that are taxonomy-aligned.
This should enable investors to identify the pensions and investment products which are making a substantial contribution to environmental objectives.