UK government told to adopt EU taxonomy framework, warned against ‘political compromise’

It comes as the FCA defended its proposed ESG fund labelling initiative.

EU UK regulation

The UK should replicate the basic framework of the EU’s pioneering green taxonomy and do its best to promote international convergence, according to advice delivered to the UK government today.

It is the second batch of non-binding recommendations to be developed by the UK’s Green Technical Advisory Group (GTAG) and will feed into the implementation of a national taxonomy. The GTAG is envisaged as playing a similar role to the EU’s influential Technical Expert Group, which established the conceptual underpinnings for the bloc’s taxonomy.

The latest advice doubles down on the need for alignment with the EU’s framework in recognition of Europe’s position as the largest single market for UK capital flows and the significant influence that the EU taxonomy has had on green taxonomies worldwide – some two thirds of all taxonomies according to GTAG.

But the UK should also improve on aspects of the EU taxonomy which “are challenged as not being scientifically rigorous”, GTAG said, and learn from the EU experience about “the importance of clear communication to the market and taxonomy users regarding decision making processes”.

“The overarching learning is that the market is willing to accept taxonomy-related regulation, so long as it is transparently science-based.”

In 2022, the EU reclassified nuclear and gas energy as sustainable in a late and controversial U-turn, following lobbying from member states to protect nationally sensitive sectors. The “political compromise” means that there is a real possibility of a departure from thresholds aligned to net-zero 2050 targets, warned GTAG.

A group of UK lawmakers have already said that the government should avoid slapping a green label on fossil fuels such as natural gas, while an earlier statement made by a government spokesperson to Responsible Investor suggested there is “strong evidence” to support the inclusion of nuclear energy in the taxonomy.

The UK should subsequently ensure that its taxonomy can be made easily interoperable and exert its diplomatic influence to accelerate convergence with other global taxonomies, said GTAG. Interoperability – or the idea that disclosures made against the UK taxonomy, for example, can be easily transferred to align with that of China or vice versa – is fast becoming a priority to ensure that regional policies do not inhibit global capital flows.

In addition to proposing general alignment with the EU, GTAG has set out of a range of strategies to achieve interoperability including creating a shared EU/UK taxonomy with other non-EU states, such as Switzerland, where costs of maintaining and decision-making is shared.

The group has also suggested the creation of a default list of activities which are considered “always green” for global use.

Securing international buy-in will require the UK to leverage its global influence either bilaterally or through participation in the forums such as the G20, SASB, TCFD, the International Sustainability Standards Board and the EU’s common ground taxonomy project, said GTAG.

The group is now working on streamlining the EU taxonomy’s Do No Significant Harm (DNSH) criteria or a requirement for green activities to not come into conflict with other environmental goals. It comes after the EU’s taxonomy advisors found that nearly half of the 300 or so DNSH tests would be difficult to put in practice.

Streamlining DNSH would mean that the UK taxonomy is “more practical and usable while avoiding watering its impact down”, said GTAG. It is due to publish advice on the topic in the following months.

FCA faces lawmakers

On Wednesday, MPs on the Treasury Sub-Committee on Financial Services Regulations grilled Sacha Sadan, the FCA’s ESG chief, and Mark Manning, technical specialist for sustainable finance and stewardship, on the UK regulator’s proposed regime for fund labelling.

Sadan and Manning were questioned on a range of topics including the FCA’s analysis of how funds would be affected by the regulations, the potential financial impact to consumers of switching from funds which don’t qualify for the labels, and the potential impact of the regulator’s proposals on fund flows and numbers in the wider market.

MPs also heard evidence from James Alexander, CEO of the UK sustainable finance association UKSIF; Chris Cummings, CEO of the Investment Association (IA); and Kate Levick, associate director of sustainable finance at think-tank E3G.

Questions at times became heated, with subcommittee chair Harriett Baldwin telling the FCA representatives that she would “particularly express shock that you hadn’t thought about the cost either for industry or the consumer” after they said that they didn’t have a figure on potential costs to consumers of switching out of formerly green funds which fell short of the proposed regulatory requirements.

Labour MP Angela Eagle also clashed with Cummings over the number of funds that would be eligible for the new labels. In response to a remark that the new standards are coming in “at pace”, Eagle said “we don’t really have long left, we’ve dawdled so much in dealing with climate change to begin with. You’ll have the planet burning by the time we get to the standards you like at the pace you seem to want”.

Cummings responded by noting that £6 trillion of IA money was committed to GFANZ initiatives, and that the group had been involved in a number of pioneering sustainable finance initiatives. “As an industry I think we’ve been rather leading the call for higher standards and making sure there’s greater transparency and that’s really what we’re looking for, transparency,” he said.