Ahead of the anticipated UK government consultation on its Green Taxonomy this autumn, the Green Technical Advisory Group (GTAG) has published two further independent advice papers with advice to the UK government on a number of issues related to the development of a UK Green Taxonomy. In particular on:
- the scope, coverage and reporting considerations; and
- implementing an effective reporting regime for the UK Green Taxonomy.
This follows on from an independent advice paper earlier this summer on streamlining and increasing the usability of the Do No Significant Harm (DNSH) criteria.
Recommendations: points of interest
- An extended taxonomy?
GTAG does not recommend the implementation of an extended taxonomy (to cover transition and/or harmful activities) at this time. GTAG advises that the UK government should instead prioritise first delivering and implementing a UK taxonomy that clearly defines ‘green’ economic activities and is viewed as a credible, robust and usable tool for the market in the near term.
The first taxonomy review (expected after 3 years) could provide the right opportunity to reassess whether other policies and tools have effectively addressed the extended taxonomy use case – or whether further clarification by way of an extended taxonomy is needed by the market.
The focus at this stage should be on increasing transparency over economic activities which can make substantial contributions to environmental objectives, and encourage investment in such activities – this also avoids the further complexity of developing and requiring reporting against an extended taxonomy at a time when customers and investors are already navigating a wide range of incoming regulatory requirements.
- An expanded taxonomy?
GTAG highlights that expanding the UK Taxonomy to cover other sectors/industries in the UK could be beneficial – but spelling out the rationale is important.
GTAG considered the question from two broad perspectives: (i) whether the EU’s coverage works well for the UK economy as it is (based on gross value added (GVA)); and (ii) whether it fits well with the UK’s emissions data and additional investments by government as set out in the Net Zero Strategy.
GTAG concludes that from a purely emissions perspective, the sectoral coverage of the EU Taxonomy is a good fit for the UK’s emissions profile and supports the climate change mitigation objective for the UK Green Taxonomy. There seems to be limited benefit for major divergence based on emissions only.
Having said that, for some sectors there are no EU technical screening criteria (TSC) covering their activity even though a relatively large proportion of UK company turnover is within that sector – GTAG sees this as a missed opportunity and sees value in expanding the UK Taxonomy to cover more economic activities, prioritised based on contribution to UK GVA, starting with a focus on expansion in the following sectors: wholesale and retail trade, manufacturing, agriculture and, potentially, financial and advisory services.
- Scope of reporting requirements
The current UK approach to reporting is for a single integrated disclosures framework, expected to cover corporates, asset managers and asset owners, as well as investment product disclosures (the Sustainability Disclosure Requirements or SDRs). Of course, at the moment it is not known how widely the SDR regime will apply and how far taxonomy reporting obligations will extend.
GTAG advises that initially taxonomy reporting should apply to companies subject to mandatory TCFD reporting. This makes sense on the basis that both frameworks will be integrated under the UK’s SDR regime. In time, scope could be extended to a wider range of companies – subject to the principle of proportionality.
To help businesses adjust to the complexity of taxonomy TSC, GTAG advises that companies should initially be required to report on taxonomy eligibility, and only then report on taxonomy alignment.
Learning from the EU experience – which highlighted that financial service firms are dependent on adequate and timely corporate reporting to measure taxonomy eligibility and alignment, GTAG recommends that financial institutions be allowed to delay reporting their taxonomy alignment.
- non-financial companies should report on taxonomy eligibility in year 1;
- reports on taxonomy eligibility by financial institutions and taxonomy alignment by non-financial services companies should follow in year 2; and
- taxonomy alignment by financial institutions should follow in year 3.
- Taxonomy KPIs
GTAG highlights the opportunity for the UK to learn from the challenges that reporting entities have faced in reporting against EU taxonomy KPIs – and in particular recommends that for non-financial firms, the Department for Business and Trade should consult on limiting mandatory reporting to turnover and capex, whilst making opex reporting optional, without requiring a materiality assessment, reducing the burden on companies while still allowing them to voluntarily disclose opex information if they believe it is beneficial.
Recognising that adjustments will be required to the taxonomy KPIs for financial institutions to reflect the specific nature of activities undertaken by banks, asset managers and insurers, GTAG highlights that sufficient time will need to be devoted to developing and consulting on the right metrics – learning where possible from the EU’s experience. GTAG provides further advice on KPIs in its second report.
The international applicability of taxonomy KPIs (including for financial institutions) must be considered. GTAG recommends that the UK government consult on including voluntary reporting on foreign assets and activities, which could support use of the framework beyond the UK’s borders and increase the quality of available information while limiting the burden on businesses.
- Streamlining DNSH criteria
Recognising market support for a DNSH concept, but also identifying that the implementation of DNSH criteria as drafted in the EU has been challenging (due to a number of criteria being inconsistent, overly repetitive, and difficult to measure and understand due to ambiguity in drafting), GTAG recommends keeping the concept of DNSH within the UK framework, but taking steps to condense or streamline criteria, while ensuring being science-based and ambitious remains central to all criteria.
To provide the market with further valuable information, and act as a spur to remediative action, GTAG also recommends moving beyond the “binary approach to DNSH reporting that is currently the norm” and adopt an approach to reporting that would enable companies with activities that are not fully taxonomy aligned, but meet the substantial contribution and some DNSH criteria, to disclose the extent to which they meet the DNSH criteria.
The government is due to consult on the UK Taxonomy this autumn, following repeated delays having prevented it from meeting its earlier aim of having a taxonomy in place by the beginning of this year.
Background and materials
Click the links below for access to the GTAG advice papers:
- Developing a UK taxonomy adapted to the UK’s needs in the short and medium term: Scope, coverage and reporting considerations
- Getting KPIs Right: Implementing an effective reporting regime for the UK Green Taxonomy
- Streamlining and increasing the usability of the DNSH criteria within the UK Green Taxonomy