UK Green Day: key takeaways for corporates

As the dust settles on the flurry of announcements made last week on 30 March as part of the UK government’s Green Day, we zero in on the announcements that are likely to be most relevant to corporates operating in the UK:

Mandatory transition plans - The government will consult in Q4 on the introduction of requirements for the UK’s largest companies (so this will include private companies, not just listed companies) to disclose a transition plan (if they have one). The expectation is that the requirement will be on a ‘comply or explain’ basis to ensure parity between listed and private companies. The consultation will take place in autumn/winter once the Transition Plan Taskforce (TPT) has published the final version of its guidance on transition plans. See our previous blog post for more information on the TPT’s guidance.

UK Green Taxonomy - The government will consult in the autumn on a UK Green Taxonomy to provide definitions of which economic activities should be labelled as “green”. It has said it is keen to learn the lessons from taxonomies in other jurisdictions (such as the EU taxonomy), with a view to producing a simpler, more proportionate taxonomy that is tailored for the UK market. It had already indicated that it intends to include nuclear in the green taxonomy (subject to consultation). It has said it is also considering whether it is appropriate to pursue a “transition taxonomy” or include certain transitional activities within one taxonomy. Once the taxonomy is finalised, the government expects companies to report initially against the taxonomy on a voluntary basis for at least two years, after which it will consider requiring mandatory disclosures.

Scope 3 emissions – The government will launch a call for evidence in Q3 on Scope 3 emissions reporting to better understand the costs and benefits of producing and using this information. The government acknowledges that Scope 3 emissions can account for 80-95% of an organisation’s total carbon footprint. It has also said it will also update the Environmental Reporting Guidelines, including for Streamlined Energy and Carbon Reporting (SECR).

ISSB disclosure standards and SDR regime – The government will review the first two sustainability disclosure standards being developed by the International Sustainability Standards Board (ISSB) as soon as these have been published in final form (expected in June 2023) to assess whether they are appropriate for UK companies. The government is aiming for the endorsement decisions to be made within 12 months of publication of the ISSB standards. The UK is one of a handful of countries to have confirmed that it plans to implement the ISSB’s global sustainability standards into national law. In the UK, this will be done as part of the forthcoming Sustainability Disclosure Requirements (SDR) regime. The government has said it plans to set out further detail on the SDR implementation timeline in the summer/Q3. For more information on the ISSB standards, see our previous blog post.

ESG ratings providers - The government is consulting on the regulation of ESG ratings providers, which no doubt will be welcomed by many corporates who have been at the receiving end of ESG ratings and scores that are often difficult to decipher and/or inconsistent. The consultation closes on 30 June. See our client briefing for more information.

TNFD – The government will explore in Q4 how best to incorporate the final Taskforce on Nature-related Financial Disclosures (TNFD) framework into UK law. See our previous blog post for more information on the TNFD.

Voluntary carbon markets – The government will consult in 2023 on the specific steps needed to support the growth of high integrity voluntary carbon markets (e.g. carbon offsets and credits) to protect against the risks of greenwashing and provide clarity on what constitutes a good quality carbon credit. The government also published a Nature Markets Framework on 30 March setting out its approach to accelerating high-integrity carbon markets to enable farmers and land managers to attract investment in natural capital. The government wants the UK to serve as a global hub for voluntary carbon trading. The forthcoming consultation will be of equal interest to corporates that buy carbon credits on the voluntary market to offset hard-to-abate emissions and corporates involved in their own carbon offsetting projects.    

UK ETS – The government has said it plans to legislate to continue the UK Emissions Trading Scheme (UK ETS) beyond 2030 until at least 2050, and is currently reviewing its approach to the free allocation of ETS allowances to better target free allocations for those most at risk of carbon leakage to ensure they are fairly distributed. It has also said it will explore expanding the UK ETS to more sectors of the economy including high emitting sectors. It will publish shortly the government’s response to the consultation on initial expansion of the UK ETS’s scope.

UK CBAM – The government is consulting on whether to introduce a Carbon Border Adjustment Mechanism (CBAM) – not unlike the proposed EU CBAM - to address the risks of “carbon leakage” (i.e. when industry move from one country to another to take advantage of lower levels of carbon pricing and climate regulation). The CBAM would place a carbon price on imported products, to reflect the carbon emitted in their production and any gap between the carbon price applied in the country of origin and the carbon price that would have been incurred had the imported products been produced in the UK. The government envisages that a CBAM may be best suited to sectors that are already subject to the UK ETS and could potentially apply from 2026 (alongside reforms to the UK ETS allocation of free allowances). The consultation closes on 22 June. For more information, see the consultation document.

UK response to the US Inflation Reduction Act – Although the government sees the net zero energy transition as the “economic opportunity of the 21st century” and wants the UK to be “the world’s first net-zero aligned financial centre”, it is not proposing to roll out a massive package of financial incentives akin to the United States’ $369 billion green incentives regime under the Inflation Reduction Act (IRA). The Chancellor Jeremy Hunt has said that the UK would not go “toe-to-toe...in some distortive global subsidy race” with the US and EU green subsidy measures. The government said it would invest £30 billion in kick-starting industries, including up to £20 billion for carbon capture, usage and storage (CCUS), and that it would leverage billions more in private capital. It is planning to publish in 2023 a series of net zero investment roadmaps, as well as a nature investment roadmap, to help the private sector identify key areas for green investment. It is also planning to commission an industry-led Transition Finance Market Review – which will no doubt be of interest to many corporates looking to attract the necessary capital for their decarbonisation. It has also set up a new Net Zero Business & Investment Group to work with key business and finance leaders to identify key market barriers and where key policy support is needed, with the first meeting expected in Q2. In terms of which sectors the government sees as the key enablers of the net zero transition in the UK, there are no surprises there with renewables (mainly offshore wind), CCUS, nuclear and hydrogen still firm favourites.

For more information on the wider package of Green Day announcements, see the following Linklaters materials:

• UK Green Day: key takeaways on net zero
• Mobilising Green Investment: The UK Government’s 2023 Green Finance Strategy
• HM Treasury consults on regulating ESG ratings providers
• Powering Up Britain – the future of UK energy