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In November 2020 the UK Government announced that it will implement a green taxonomy – a common framework for determining which activities can be defined as environmentally sustainable. In theory this could help to improve our understanding of the impact of company activities on the environment, thereby helping to green portfolios and loan books.
While this feels intuitively appealing, it is in fact extremely challenging to assess every type of economic activity, determine whether it is green or not, and then apply that consistently to every company. There are good arguments to think a green taxonomy is conceptually a bad idea.
However, we are where we are. The proposal for a UK taxonomy is a response to the now well-established EU taxonomy, which is attempting to define what is green and what is not for the EU-27. A ‘Platform on Sustainable Finance’ has been set up by the European Commission (EC) to advise them on the technical screening criteria for the EU taxonomy. The Platform has 57 members and 10 observers, including representatives from a range of lobby groups and many members selected to represent different interest groups.
It is critical that, in contrast to the Commission’s process, these metrics and thresholds are set independently from vested interests and are set in a way that is transparent and scientifically rigorous, with membership of the UK Green Technical Advisory Group entirely based on expertise, not industry representation
The EC Platform and its proposals have encountered a range of implementation issues, resulting in significant delays. These are primarily the result of lobbying from some EU Member States as well as corporate vested interests, who are seemingly intent on weakening proposed thresholds in the taxonomy so that firms that aren’t particularly sustainable can be labelled ‘green’ even if their environmental performance does not merit this based on scientific evidence. In December 2020 more than 100 scientists urged the Commission to urgently tackle these shortcomings.
Once it is finalised, the UK taxonomy will take the metrics and thresholds in the EU taxonomy as its basis and then a new UK Green Technical Advisory Group, an equivalent to the Commission’s platform, will be established to review these metrics “to ensure they are right for the UK market”.
Given where we are with the development of the EU taxonomy and its integration into EU regulations, it makes sense to relate UK taxonomy decisions to metrics and thresholds set by the EU. However, it is critical that, in contrast to the Commission’s process, these metrics and thresholds are set independently from vested interests and are set in a way that is transparent and scientifically rigorous, with membership of the UK Green Technical Advisory Group entirely based on expertise, not industry representation.
In that way, the UK taxonomy would become the more rigorous and robust of the taxonomies and help create a race to the top dynamic with the EU and other countries introducing green taxonomies. Financial firms and their clients seeking higher standards, of which there will be many, would likely opt for the higher UK standards.
Furthermore, in the context of debates about equivalence rulings and the operationalisation of the new UK-EU Trade and Cooperation Agreement, it would also be helpful for the UK to be proactive in setting more rigorous technical standards than the EU, underpinned by independent, transparent and accountable standards setting processes informed by world-leading UK scientific expertise. This is an easy win for the UK in an area where we have a clear interest in seeing the adoption of more stringent standards globally.
Dr Ben Caldecott is founding Director of the Oxford Sustainable Finance Programme at the University of Oxford Smith School of Enterprise and the Environment. He is the inaugural holder of the Lombard Odier Associate Professorship of Sustainable Finance at the University of Oxford, the first ever endowed professorship of sustainable finance.