The part of the UK’s ‘Greening Finance: A Roadmap to Sustainable Investing’ report that has grabbed the most headlines since it’s launch last night is its plans for new climate disclosure requirements.
It’s not the country’s first foray into climate reporting, though. Last year, it’s Financial Conduct Authority signed off on rules requiring premium-listed companies to report against the Taskforce on Climate-related Financial Disclosures (TCFD), and it is currently looking to extend those rules to other companies, including insurers and pension providers. The Department for Work and Pensions laid legislation before UK Parliament over the summer requiring pension schemes to make certain TCFD disclosures.
What’s notable about the Roadmap is that it lays out plans to broaden the focus of climate reporting from risk – the basis of the TCFD requirements – to impact, partly through the creation of its taxonomy.
The government appears to have learnt lessons from Europe’s experience of introducing reporting rules, and is opting for a more streamlined approach under the banner ‘Sustainability Disclosure Requirements’. This package will cover new rules for companies, investors and investment products.
Policymakers in the EU have garnered widespread criticism for their decision to introduce separate, overlapping, and sometimes incompatible, ESG reporting rules – namely the EU Taxonomy, the Corporate Sustainability Reporting Directive and the Sustainable Finance Disclosures Regulation.
Under the SDR, companies in the UK – including those in financial services – will have to disclose information based on upcoming standards from the new International Sustainability Standards Board (ISSB).
The ISSB is the body invented earlier this year by the International Financial Reporting Standards Foundation, to create a set of global expectations on the sustainability information that should be disclosed by financial market participants. There is currently a tug-of-war over which country will host the Board, with the UK confirming it was vying for the position in the summer.
Regardless of who ends up hosting the ISSB, its standards “will form a core component of the SDR framework, and the backbone of its corporate reporting element,” the UK says in its report. “To deliver this, the government will create a mechanism to adopt and endorse ISSB-issued standards for use in the UK.”
The Board is expected to be formalised in coming weeks, and will consult on a draft climate standard early next year.
There will be questions raised over whether this means the UK will depart from Europe on the central idea of ‘double materiality’. EU rulemakers, and many member states, have made it clear that they expect companies to report on the impact of their business activities on society and the environment as well as the impact of environmental and social issues on their bottom lines. ISSB, on the other hand, is focusing on the latter.
This is where the UK’s move to integrate a national green taxonomy into the SDR is crucial.
“The ISSB’s standards, building on the work of the TCFD, will focus on information which is material to investors,” acknowledges the report. “SDR will go further, requiring wider information on how firms impact the environment. This includes requiring disclosure against the UK’s Green Taxonomy.”
The taxonomy will be based on the EU’s version, which it began to develop back in 2019. Currently, the plans for the UK version look identical to the EU’s, except nuclear is expected to count as green (the report’s authors shy away from addressing the role of gas in the energy transition – the other big stumbling block for policymakers working on the EU taxonomy).
The UK’s framework will mirror the EU’s focus on climate, biodiversity, water, water and the circular economy, and eligible activities will have to contribute to one of these objectives without undermining any others. Basic social safeguards, based on the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, will also be required – just as with the EU.
Unsurprisingly, the UK has started by developing technical standards for which economic activities support climate mitigation and adaptation, and will be putting them to consultation in the first quarter of 2022, with a view to legislating by the end of next year.
The report shows that, while pureplay green activities like wind energy will be eligible under the taxonomy, coal will be out from the start, and activities in hard-to-abate sectors like cement will be judged on how they compare with their peers (“subject to not locking in carbon-intensive activities”). Like the EU, it will make room for activities that ‘enable’ the climate transition even if they are carbon heavy, such as the manufacture of wind turbines.
The other four environmental themes will be put out for consultation at the start of 2023.
Reporting against the Taxonomy will form part of SDR, with “certain companies” required to disclose the percentage of their spending (opex and capex) and turnover linked to eligible activities.
“Providers of investment funds and products will have to do the same for the assets that they invest in,” the report confirms.
Ultimately, the government expects asset owners and managers to publish details of how they identify and manage sustainability “opportunities and impacts” as well as risks – and how that influences their policies and strategies. They will also have to outline how they measure such risks, opportunities and impacts, including targets and taxonomy-alignment. For investment products, the expectations will be the same, except the focus will be on investment outcomes not strategies and policies.