A UK Green Taxonomy is under development

In November 2020, the Chancellor set out plans to position the UK at the forefront of international green finance. The British Government in turn outlined proposals to support green finance flows and extend the country’s role in this sector ahead of hosting COP26.

One of the key proposals is the implementation of a UK Green Taxonomy – a classification system providing investors and corporates with a common language to identify whether an economic activity is environmentally sustainable. Such a framework would be instrumental in supporting the transition to a more sustainable economy. UK and EU taxonomy-related regulations are still in early stages but given the fast-evolving regulatory conjunction, it is interesting to have an overview of policy developments on Taxonomy in these areas.

Adapting the EU Taxonomy to the UK context

Since a green taxonomy determines the degree of sustainability of economic activities, the more different taxonomies there are, the more confusing it is to investors and corporates. Fortunately, it is very likely that the UK Green Taxonomy will align with most of the EU Taxonomy, with minor adjustments to fit its transition pathway.

As a result, understanding the EU Taxonomy’s features is a good way to get an idea of what the future UK Taxonomy will be like.

The Taxonomy Regulation published by the European Commission in June 2020 is based on six key objectives:

Climate change mitigation
Climate change adaptation
The sustainable use and protection of water and marine resources
The transition to a circular economy
Pollution prevention and control
The protection and restoration of biodiversity and ecosystems

On 4 June 2021, a Delegated Act dealing with the first two objectives was adopted. It delivers the first set of technical screening criteria under which specific economic activities should qualify as contributing substantially to climate change mitigation and adaptation. The regulation will apply from 1 January 2022.

One month later, the Delegated Act Supplementing Article 8 of the Taxonomy Regulation – related to disclosures - was adopted by the Commission. Another Act covering the remaining objectives is expected to be published in 2022.

The EU also created the Platform on Sustainable Finance (PSF), an advisory body to advise them on the technical screening criteria. However, due to numerous debates, disagreements among the Member States and corporates, and lobbying, the implementation of certain rules on the Taxonomy was postponed resulting in significant delays compared to the original timeline. British regulators and experts see here significant improvement matters for the implementation of their taxonomy. According to Dr Ben Caldecott, founding Director of the Oxford Sustainable Finance Programme, it is critical that in contrast to the Commission’s process, the metrics and thresholds for the UK Taxonomy are set independently from vested interests and based on science and expertise, not industry representation. Still, it is legitimate to wonder whether the UK has the capacity to deliver a robust Taxonomy in the following years and how it intends to progress.

The UK approach to implementing its Taxonomy

The UK may use the EU Taxonomy metrics and thresholds as a benchmark and review them to ensure they fit the UK context. The Green Technical Advisory Group[1] (GTAG) will focus on developing recommendations for technical screening criteria for economic activities which can make a substantial contribution to the transition. The Group will be chaired by the Green Finance Institute[2] and made up of financial and business stakeholders, taxonomy and data experts, experts from the Environment Agency, the Committee on Climate Change and NGOs. An Energy Working Group will be also established as part of the GTAG to recommend key technologies such as hydrogen, carbon capture, utilisation and storage, and how to address nuclear power in the taxonomy.

The British government intends to publish the technical screening criteria for climate change adaptation and mitigation by the end of 2021 and by 2023 for the remaining four environmental objectives. Some experts, however, think it will not be enough to facilitate the UK transition. Besides, in its final report on Sustainable Finance, the TEG said it “welcomes the decision to study a future so-called ‘brown’ taxonomy criteria”. Thus, in the EU and the UK, a Brown Taxonomy might be designed and implemented over the long run.

Could the UK go further and implement a Brown taxonomy?

The EU Taxonomy does currently not identify polluting activities that need to be transitioned or scaled-down. However, the PSF published a draft report on 12 July 2021, on Brown and Social Taxonomies for consultation and are expected to submit their final report to the European Commission in Autumn 2021.

According to some experts, having a complementing ‘Brown’ Taxonomy using science-based evidence, could help in standardising negative ESG screening and limiting investments, subsidies, and policy support to these activities.

As the British Government announced on 20 April 2020 that they would set in law the world’s most ambitious climate change target, i.e. cutting emissions by 78% by 2035 compared to 1990 levels, the GTAG could potentially go beyond what the EU has done so far and develop such a Brown Taxonomy. However, the likelihood seems low over the short term given how difficult the task is and how hard the potential reaction from jeopardised sectors to avoid their activities being classified as ‘brown’ could be. Still, we recommend companies in the UK to maintain a developments tracker, to keep being aware of regulatory requirements and to be able to plan compliance projects in good conditions.

^{[1] More precisely, the GTAG will be to provide non-binding advice to HMG on the market, regulatory and scientific considerations for developing and implementing a UK Taxonomy. In particular, this includes advising on approach to developing a UK Taxonomy that is usable and practicable for financial and non-financial firms; on UK Taxonomy requirements; on determining technical screening criteria; on how to deal with and manage any data gaps; and on how the UK Taxonomy could be used to align and accelerate the delivery of wider HMG policy, such as its Net Zero Strategy. In addition, the Group may advise HMG on other issues if identified by HMG.}

^{[2] The Green Finance Institute was established in 2019 as a direct response to a key policy recommendation made by the industry-led Green Finance Taskforce to the UK Government in March 2018. It is an independent, commercially focused organisation backed by the government and led by bankers.}