Less than two weeks before it opened the doors to COP26, the UK Government launched Greening Finance: A Roadmap to Sustainable Investing. This new and hugely ambitious national plan is one of the most significant policy documents for the sustainable finance sector since the UK’s departure from the EU. Following many months of uncertainty in the sector over the government’s approach, the roadmap provides significant clarity on a number of areas key to the continued growth of sustainability in the UK.
Building on the Green Finance Strategy from 2019, the roadmap outlines the government’s intention to raise the UK’s ambitions in ‘greening’ the financial system – one of the Strategy’s original aims. Specifically, the roadmap centres on sustainability disclosures, promoting the flow of this decision-useful information across the whole economy, including between companies and financial services, to impact financial decision-making.
It seeks to do this through a new ‘Sustainability Disclosure Requirements’ (SDR) regime, first trailed in the Chancellor’s Mansion House Speech in July. The SDR provides the greatest sense yet of the direction of travel the UK’s rules may take – although, given that many UK financial services firms operate internationally, more clarity is urgently required for our sector on how it could be interoperable with other reporting regimes, especially in Europe.
The SDR will encompass all corporate and financial sustainability disclosure requirements in a single, integrated framework. It will outline the role of the UK’s planned green taxonomy, the recommendations of the Task Force on Climate-Related Financial Disclosures and – in time (and subject to consultation) – reporting based on the standards being developed by the International Financial Reporting Standards Foundation, through its new International Sustainability Standards Board.
Clearly this is a huge undertaking. The SDR will also ask certain companies to disclose how their climate transition plans align with the UK government’s net-zero commitment, initially on a ‘comply or explain’ basis.
The global focus of the new rules is evident, and the intention to build on emerging ‘best in class’ international standards, like those from the IFRS, is very welcome. However, there are scant references in the roadmap to Europe’s rules – most notably, there is no mention of either the Sustainable Finance Disclosure Regulation (SFDR) or Corporate Sustainability Reporting Directive (CSRD).
A key question for many in the sustainable finance sector will be how the framework will interact with SFDR, which has become a commonly recognised disclosure framework for many investors, despite its flaws. We expect some of our members will have concerns on potentially producing two very different sets of disclosures for their clients, both of which ostensibly aim to achieve the same outcomes.
For UK firms serving clients in Europe that may have very recently completed their initial disclosures against SFDR, compatibility would be beneficial. Many firms will already have been impacted by the wishes of European clients, and indeed their thinking and work on ESG funds may already have been shaped by the SFDR. We will therefore look to work closely with government and regulators to explore how we might promote greater consistency between SDR and SFDR in future. This should help ensure SDR can be implemented smoothly when it is brought into law in the UK over the coming years.
By comparison, on the ‘green taxonomy’, the roadmap seemingly commits to less of a marked departure from Europe. There is helpful confirmation that the Technical Screening Criteria for the climate change mitigation and adaptation objectives will be based on those of the EU taxonomy, while more generally the EU taxonomy’s structure will be adopted by the UK. The UK has also learnt lessons from Europe’s experience, and is bring in taxonomy reporting requirements for corporates prior to investors. This is a key positive change from the EU’s approach.
With no set, irreversible direction yet offered for the UK’s green taxonomy, its Green Technical Advisory Group, of which UKSIF is a member, will play an important role in determining whether goes in a different direction. UKSIF will be calling for alignment with the EU’s framework in the short term, but will consider the case for divergence in the long run. We will look at an expansion to cover transitional activities, and will advocate for clear ‘use cases’ to avoid leaving room for stakeholders to misinterpret its objective, and to ensure it remains strictly based on science, not politics.
The third main area highlighted in the roadmap is investor stewardship, which the document very positively recognises (as we do) as crucial to the transition. In a list of stewardship-related expectations on the pensions and investment sector, the Government says investors should “actively monitor, encourage, and challenge companies by using their rights and direct/indirect influence to promote long-term, sustainable value generation” and consider withholding capital if firms are not seen to be taking adequate action to support the transition to Net Zero.
Although perhaps overshadowed by the focus on SDR, we strongly support the focus on investor stewardship, and believe that collectively government, regulators, industry and others need to publicly make a more effective case for active stewardship over divestment, which will not lead to meaningful decarbonisation of the real economy. We believe much more needs to be done to convince pension savers and others that good stewardship can be strategic and impactful, whilst ensuring the industry achieves its full potential in this area.
One very important area missing from the roadmap is biodiversity. UKSIF recently wrote a letter on behalf of the sector to the Chancellor, voicing support for a series of recommendations including outlining how nature will be treated under the SDR framework and formally addressing how the findings of the recent Dasgupta Review on the economics of biodiviersity will be taken forward. Ahead of the second leg of COP15 in China early next year and growing collective awareness, the roadmap’s lack of focus on biodiversity issues is perhaps a missed opportunity for the UK.
Overall, the roadmap signals to the sector that the government intends for us to play a far more prominent role in the years ahead in addressing climate-related risks, disclosing sustainability information in far greater detail, and moving much faster towards a net-zero future, all of which our sector can warmly welcome.
James Alexander is the CEO of the UK’s sustainable investment forum, UKSIF
Oscar Warwick Thompson is UKSIF’s Senior Policy and Communications Manager