In this third blogpost of the series focusing on the legislative and regulatory developments around the world, we analyse the content of the United Kingdom’s emerging regulations toward sustainable finance. In the previous blogposts, we analysed the EU’s ambitions and the content of its newly adopted rules.
Given that the UK is now no longer a member of the EU, its legislative and regulatory systems may also evolve independently from those of the EU. Regulations relating to sustainable finance are one of the first areas in which we are likely to see, and indeed already have seen, divergence between the two. However, while roadmaps for the UK’s own regulatory environmental, social and governance (ESG) framework have been slowly emerging, we have yet to see the full extent to which the UK will or will not align with the rules and objectives set out in related EU regulations.
In July 2019, just a few weeks after becoming the first major industrialised country to pass a net zero emissions law, the UK Government launched its Green Finance Strategy. The Green Finance Strategy seeks to align private sector financial flows with clean, environmentally sustainable and resilient growth while simultaneously strengthening the competitiveness of the UK financial services sector. The core objectives are intended to be achieved through three strategic pillars: greening finance, financing green and capturing the opportunity. The third pillar notably seeks to ensure that UK financial services also capture domestic and international commercial opportunities arising from the integration of climate considerations into mainstream financial decision-making.
UK action to foster sustainable finance
The UK may indeed claim a number of “firsts” regarding sustainability in the finance sector. For example, the Green Investment Bank (GIB) launched by the UK Government in 2012 was considered the world’s first Green Bank. The GIB was publicly funded and sought to mobilise private finance into the green energy sector (it has since been acquired by the Macquarie Group and renamed the Green Investment Group). The London Stock Exchange also became the first exchange globally to introduce a dedicated green bond segment (in 2015) and, more recently, a dedicated Transition Bond Segment (launched in February 2021 as part of the LSE’s Sustainable Bond Market). Moreover, Moreover, while the UK’s recent issuance of a sovereign green bond lags behind a host of other nations (including e.g. Germany and Italy), this year’s Spring Budget announcement of a green retail savings product that will offer people in the UK an investment opportunity in green debt is another world first.
Nevertheless, in terms of the rules surrounding sustainable finance, the UK does not (yet) appear able to make quite the same claims. Most notably, the UK decided not to implement the EU Sustainable Finance Disclosure Regulation (SFDR) and the detailed criteria supplementing the EU Taxonomy Regulation (as discussed in Part 2 of this Blog Series) upon the end of the Brexit transition period on 31 December 2020. This not only signalised one of the first areas in which the UK may deviate (at least in part) from EU rules and standards going forward, but also means that the UK has yet to implement its own green taxonomy and ESG disclosure regime.
In fact, back in September 2020, the UK’s economic secretary to the Treasury confirmed that the UK would “at the very least […] match the ambition of the EU Sustainable Finance Action Plan”. Since then, the UK has been setting the scene for new rules intended to achieve its own ambition regarding global leadership in green finance. The mandates of key regulators, such as the Financial Conduct Authority (FCA) and the Prudential Regulation Committee, have also been expanded to include consideration of climate-related risks and trends in their decisions. As a result, the FCA published a new climate change and sustainable finance webpage, outlining the regulator’s sustainable finance strategy. Among other things, the FCA has also been consulting on proposals to introduce climate-related disclosure requirements for certain regulated firms (including asset managers) and to extend the application of climate-related disclosure rules for listed companies.
A UK Green Taxonomy and mandatory TCFD-aligned disclosures
Following an announcement of the UK Chancellor of the Exchequer, Rishi Sunak, in November 2020, the UK committed itself to implementing a UK “green taxonomy” as well as economy-wide mandatory reporting of climate-related financial information, aligned with disclosure recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). The TCFD was created by the Financial Stability Board to improve and increase reporting of climate-related information. The TCFD’s disclosure recommendations are designed to solicit forward-looking information around governance, strategy, risk management, and metrics and targets of the reporting organisation. As regards the UK’s taxonomy, there has been some indication that this is intended to be “more ambitious” than that of the EU, although it is not yet clear what this may mean exactly.
While the UK’s green taxonomy is intended to use the scientific metrics from the EU taxonomy as its basis, these metrics will be subject to the review of a Green Technical Advisory Group (established in June 2021) to ensure their “appropriateness” to the UK market. An Energy Working Group, with the role of providing advice on key technologies and how to address nuclear power in the UK taxonomy, should reportedly also be established as part of the Green Technical Advisory Group. As a reminder, the EU Taxonomy Climate Delegated Act published on 21 April 2021 ultimately did not include gas nor nuclear energy but noted that these (as well as agriculture) would be covered in a future, complementary Delegated Act. As noted in the previous blog post, the inclusion of fossil gas and nuclear power under the EU taxonomy’s sustainability label remains subject to sustained lobbying efforts from both industry and Member States. The UK green taxonomy should arguably not succumb to this same pitfall.
As regards TCFD-aligned disclosures, these are expected to be fully mandatory across the UK economy by 2025, with a significant amount of requirements to be in place by 2023. This plan was most recently affirmed in a speech of the UK Chancellor on 1 July 2021 and a new roadmap setting out the UK’s approach to sustainability disclosures is expected to be published ahead of the 26th UN Climate Change Conference of the Parties (COP26) hosted in Glasgow later this year. While the UK thereby intends to become the first G20 country to mandate TCFD-aligned disclosures by large companies (a recent government consultation indicates the likely thresholds for publicly quoted and privately held companies to fall in-scope) and financial institutions across its economy, it should be noted that it is not the first country globally to announce its intentions to implement mandatory TCFD-aligned climate risk reporting. New Zealand became the first country to do so in September 2020 and a number of countries, including Switzerland, quickly followed suit.
Conclusion
While we await the further development and implementation of the UK regulatory framework for sustainable finance, it is worth noting that any significant deviation by the UK from the EU regime is likely to increase compliance complexity for international firms operating in both the UK and the EU, as well as potentially hamper the ability of investors to compare sustainable economic activities across Europe.
Moreover, while UK regulators are already diligently rolling out climate reporting in line with the TCFD disclosures, a question mark remains around a possibly wider regulatory landscape for sustainable investing. Unlike the EU regime which addresses (at least to some extent) each of the environmental, social and governance aspects of ESG, the UK regulatory roadmaps are currently climate-focussed only. Whether (and how) the remit may be extended to social and governance aspects in future again remains to be seen.
Next up: Part 4 – the USA.
