ESG: Developing a UK Green Taxonomy – GTAG’s advice to the Government

On 7 October 2022, the UK Green Technical Advisory Group (GTAG), an independent expert group which advises the UK government on the design and development of a UK green taxonomy (the Taxonomy), published a report, “GTAG: Advice on the development of a UK Green Taxonomy” (the Report).

What topics does the Report cover?

The Report summarises the first tranche of the GTAG’s advice and focuses on four key themes.

• how to approach onshoring the EU framework, on which the Taxonomy is based
• optimising the Taxonomy's international interoperability
• streamlining the provisions around “Do No Significant Harm” so they are usable and useful for reporting entities; and
• setting out a wide range of potential taxonomy use cases.

What does the Report recommend?

Looking at the key findings of the Report in respect of each topic:

(a) Advice on onshoring the EU framework

The Report notes that

• the EU and UK “have similar but different greenhouse gas emission reduction trajectories” and
• that some of the EU Taxonomy Climate Technical Screening Criteria (TSC) – including detailed criteria for significant contribution and do no significant harm for climate - were not on-shored as the UK had already left the EU when the relevant Delegated Acts were introduced and these may not be fit for purpose in the UK.

The UK Government, then, has a choice as to whether it should adopt the EU TSC in the short-term, revising them later for consistency with UK policy, or undertake a thorough revise-first process and only adopt the TSC subsequent to that revision process.

The GTAG recommends a middle path of ‘adopt some and revise some’. This approach includes the following elements:

• most of the EU TSC should be on-shored as soon as possible and adopted (subject to the substitution of equivalent UK legal and regulatory reference points)
• a ‘small number’, which stakeholders have identified as being problematic, should be revised prior to adoption.
• this two-track approach should be accompanied by the publication of a timetable for the onshoring process, setting out a date by which all UK TSC will have been specified, along with a clear implementation roadmap.

The priority focus of taxonomy use should be on investors and financial market participants and close alignment with the EU TSC would limit divergence and market fragmentation.

The GTAG has further recommended a set of ‘top-line’ principles be used to guide the UK’s TSC revision process in the near-term and for ongoing future review needs. The TSC, then, should be designed to:

• avoid greenwashing and support economy-wide transition
• be simple and usable and
• be internationally relevant and consistent.

This order represents a hierarchy so that, in the event of a clash, it is clear which principle dominates and should be followed.

(b) Do no significant harm

The Taxonomy is designed to ensure that, as well as providing a substantial contribution to an environmental objective, taxonomy-aligned activities also ‘do no significant harm’ (DNSH) to the other environmental objectives.

The EU TSC contain over 700 DNSH criteria, many of which reference EU laws. This could cause problems as to how they would apply in the UK’s taxonomy.

The GTAG has looked at whether these DNSH requirements should be reviewed and revised to improve their usability - under this option, each DNSH TSC would be examined and then amended or streamlined if needed.

The approach would allow the Taxonomy to delete extraneous text, shorten the TSC and simplify criteria that are currently vague.

By way of next steps, the GTAG has submitted advice to the UK Government ahead of its anticipated consultation on the Taxonomy, suggesting how the consultation could gather market views on DNSH in relation to challenges with international assets; minimum safeguards; international standards; and the approach to DNSH taken by other taxonomies.

The GTAG’s detailed advice on the rationale for potentially streamlining DNSH (and best way to achieve this) will be published “in due course”.

(c) International operability

Given the globalisation of capital, the GTAG has analysed the international taxonomy landscape and summarised the lessons which the UK Government can learn from other taxonomies.

It has recently provided updated advice on how the UK Government can ensure maximum international interoperability, without sacrificing science-based robustness or adding disproportionate costs.

The GTAG’s landscape analysis and advice will be published later this year.

As the UK Government plans to consult on international interoperability as part of its anticipated taxonomy consultation, the GTAG has offered advice on the questions that the Government needs to ask as part of this process.

Later this year, the GTAG plans to publish further advice on specific ways to promote international interoperability through TSC, reporting and international discussions.

(d) Taxonomy use cases

In providing its advice to the UK Government, the GTAG looked at the following question: whose investment decisions should the Taxonomy aim to influence, as a priority, in order to close the investment gap for achieving climate change and wider environmental targets?

The GTAG concluded that there were three possible answers to this question, all of which were deemed in scope of the potential use cases:

1. investment decisions by capital markets investors, including end (retail) investors

2. real economy company capital and operational expenditure

3. public investment / fiscal decisions.

The Report sets out a summary list of Taxonomy use cases, marked high, medium and low priority.

Noting the UK Government’s view that the Taxonomy’s aims are to:

• create clarity and consistency for investors
• improve understanding of companies’ environmental impact and
• provide a reference point for companies,

the GTAG has advised that a priority focus should be on public and private companies, as well as limited liability partnerships, which would include financial institutions. Note that GTAG’s advice relates to large undertakings in the first instance but it recommended that the extent and means by which this should be extended to SMEs should also be explored.

Requiring such firms to report (as part of the wider mandatory TCFD reporting) their alignment with the Taxonomy at a company level “would help address the issue of data gaps for financial market participants that are required to deal with greenwashing concerns and to create a better understanding of climate and sustainability risks and opportunities in the real economy”.

The GTAG noted that the obligations to report in line with the UK Green Taxonomy could be introduced via the following five options

• the new integrated Sustainability Disclosure Requirements (previously referenced in the UK Government’s Greening Finance: A Roadmap to Sustainable Investing - see our summary of the Roadmap here)
• changes to the Companies Act 2006
• amendments to the Listing Rules or the FCA’s Disclosure Guidance and Transparency Rules
• the introduction of the new ISSB standards – see our summary of ESMA’s comments on the exposure drafts here
• updates to voluntary initiatives or codes

In addition, the GTAG has advised that UK financial market participants offering products and their regulators should also be prioritised as a use-case to help standardise information provided to investors and enable easier comparison by users. GTAG envisaged that this could potentially be introduced through three possible routes:

• the introduction of new sustainability-related disclosure rules
• amendments to the FCA Handbook (specifically the ESG and MIFIDPRU sourcebooks)
• amendments to the Stewardship Code 2020 or FRC/Industry Guidance on climate reporting.

What is the GTAG?

Established in 2021, the GTAG is an expert group – made up of key financial market stakeholders and subject matter experts and chaired by the Green Finance Institute – which provides independent, non-binding advice to Government on the design and implementation of a UK Green Taxonomy.

What is the UK Green Taxonomy?

The Taxonomy is intended to provide a common framework for investments which can be defined as environmentally sustainable, helping to tackle ‘greenwashing’ and improving the understanding of environmental impact so companies and investors are able to make informed green choices.

It builds on existing international taxonomies (including the EU’s) and will focus on accelerating green finance and supporting the UK’s transition to a net zero economy.

The Taxonomy’s implementation process will be guided by three core principles, outlined by the UK Government’s Greening Finance Roadmap, i.e., it must be

• robust and evidence-based
• accessible and
• built for the UK to support a global transition.

Next steps

The UK Government is expected to consult on the TSC for the first two (of six) environmental objectives included in the Taxonomy. Ahead of this, the GTAG will continue to provide independent, non-binding advice on the key questions on which it believes the UK Government should seek input before it finalises its legislative proposal.

The GTAG will also be publishing further advice which it has already provided.

The GTAG’s current mandate to provide advice to the UK Government on topics related to developing the UK Green Taxonomy lasts for two years.

After this, the UK Government can either extend the mandate or to appoint new members. In the interim, the GTAG will continue to draft workstream-specific documentation and recommendations.