The UK’s Green Technical Advisory Group (GTAG) has published a series of recommendations to the government on how to improve Do No Significant Harm (DNSH) assessments for the country’s planned taxonomy.
As with many aspects of incoming UK sustainable finance regulation, the group recommends using the UK’s second mover status to learn from and improve on measures adopted in the EU. It notes that DNSH under the EU taxonomy has a number of usability issues, including inconsistent and ambiguous criteria, lack of clarity on definitions and inflexible disclosures.
In order for an economic activity to be considered sustainable, it must contribute to one of the taxonomy’s environmental objectives, meet minimum social safeguards and not do significant harm to other environmental objectives.
The GTAG makes six key recommendations on DNSH to the government. First, it calls for the government to retain the concept of DNSH in the UK taxonomy, with some clarifications and changes.
One of the main recommendations looks to improve transparency of disclosures by allowing companies with activities that are not fully taxonomy aligned, but meet the substantial contribution test and some DNSH criteria, to disclose the extent to which they meet the criteria.
Under the current EU approach, activities that do not meet all of the DNSH criteria are classified as not-aligned without any nuance, but the proposed UK approach would allow firms to explain which criteria are not met and why, and flag planned remediation efforts or data gaps.
“This is an important distinction – having a reporting framework that does not allow for this distinction to be communicated denies important information to the market and risks undermining the effectiveness of the UK’s wider green finance agenda,” the GTAG says.
The GTAG’s report claims that some entities with predominantly green portfolios – which should theoretically have a high level of alignment – end up with very low actual alignment to the EU taxonomy because of DNSH. The lack of visibility on relative performance against DNSH criteria may result in misdirected capital flows, it says.
Looking at the design parameters for the DNSH criteria, the GTAG recommends prioritising the use of existing ESG data points, as well as focusing on objective measurement, quantitative thresholds and eliminating the use of subjective language such as “minimise” or “reduce”. These parameters should also be made public.
As the UK government looks to onshore the EU’s DNSH criteria, the GTAG recommends it uses the opportunity to address usability issues by streamlining, but warns this should not weaken the scientific basis for criteria or the taxonomy’s overall ambition level.
The other proposals include ensuring that a single government department or institution is responsible for producing guidance to complement DNSH reporting and that the UK should advocate for its approach on a global level, given how many taxonomies in other jurisdictions use the EU taxonomy as a starting point.
To back up its recommendations, the GTAG highlights a long series of usability issues with the EU taxonomy’s approach to DNSH, which it says is too difficult to understand, measure and evidence, and has inconsistent structures and inflexible disclosures. This results in challenges in applying criteria across multiple jurisdictions and entities and means end users have inconsistent approaches and interpretations of compliance with the criteria, it says.
The usability issues echo criticisms put forward by the EU’s own technical advisory group, the Platform on Sustainable Finance, in October last year.
Ingrid Holmes, the GTAG’s chair and executive director of the Green Finance Institute, said the UK should use its “fast follower” status to benefit.
“It is clear that there are significant usability issues with the EU taxonomy’s approach to devising Do No Significant Harm criteria,” she added.
“GTAG has set out a roadmap to iterating and improving on the foundations laid by the EU that the UK can adopt to create a taxonomy that works effectively for the market, going further and faster on stimulating investment in the climate transition while safeguarding nature and wider environmental objectives.”
The GTAG recommends the government sets out the purpose of, approach to and definition of DNSH in the expected autumn 2023 consultation on the UK taxonomy, including questions around any change in approach as recommended by the expert group.
The 22-member GTAG was established to provide advice on taxonomy development. The DNSH recommendations are its third set of advice, following a report on general development and one on international operability. Its members include UKSIF CEO James Alexander, PRI head of UK policy Eliette Riera and Bloomberg’s Nadia Humphreys.