‘Act now’ on Green Finance Taxonomy or risk losing investment overseas, UK Government told

The taxonomy, which will set out which financial activities in the private and public sectors can be classed as ‘green’, was due to be finalised by the start of 2023, but the Government announced a pause in December 2022. It cited continuing challenges with the design of the EU’s own taxonomy, plus the need for more time to consider the “complexities” of the taxonomy – especially after two consecutive changes in Prime Minister.

Today (23 February), the Green Technical Advisory Group (GTAG) has issued its latest advice to the Government on the design of the taxonomy, with the chief recommendation being the avoidance of further delay. The GTAG is chaired by the Green Finance Institute and was set up in 2021 to advise the government on the development of the taxonomy and related standards and frameworks.

“With the race to secure green investment on – and more than 30 taxonomies in development globally – the time to act is now,” GTAG chair Ingrid Holmes states in the Group’s advice paper.

Holmes notes that, in addition to developing green taxonomies, many economies are increasing their financial incentives designed to attract investors in low-carbon sectors. The paper mentions the US’s Inflation Reduction Act, which passed last year including $369bn of subsidies for climate action. The EU is readying a new Green Deal Industrial Plan in response, proposing a new bridging solution of around €250bn as a starting point.

The paper states that while the delay was “disappointing”, the priority now should be designing this “complex policy instrument” well.

Where to align, where to diverge

The GTAG is calling on the UK to play a leadership role in overcoming the “significant fragmentation and transparency risks” of the proliferation of so many green finance taxonomies globally – many of which are not interoperable. It recommends harmonisation with the EU taxonomy, as far as possible, so as not to discourage cross-border investment flows. The EU’s ‘Do No Significant Harm’ principle is flagged as a definite point of alignment.

The GTAG has not drawn a hard line on whether the UK should include any activities relating to nuclear power or gas-fired power in its taxonomy, as the EU did, in a move which proved extremely controversial with environmental groups and with member states in staunch opposition of nuclear, like Germany. The EU has not dubbed these activities ‘green’, but rather, some can be ‘transition’ activities.

However, the GTAG implores the UK Government to set “science-based” standards on what should and should not be classed as ‘green’. It notes that many other markets will be looking for leadership from the UK and, if others follow its approach, the emissions impact could be significant.

One way in which the GTAG would like to see the UK’s green taxonomy differing from the EU’s is in the way it covers investment overseas. Under the EU’s taxonomy, aligned activities financed outside of the EU cannot be included. The GTAG recommends deviation here.

It is not just the EU that the UK will need to broadly align its taxonomy with, the paper emphasises. It recommends that the UK works with international organisations like the International Sustainability Standards Board (ISSB) to develop and promote a list of core economic activities for all green taxonomies globally. Many major markets are without a taxonomy at present but may look to develop one in the coming years, such as the US.

Holmes summarised: “Building on its strong track record in world-leading green finance policy, the UK is well placed to help address the challenge of global market fragmentation, while at the same time securing its leadership on green finance through a scientifically robust and usable taxonomy. This is particularly important given the UK’s globally focused financial sector, which has some of the deepest pools of internationally oriented capital, with 7.2% of the global total of foreign listed companies listed in London. But the UK must act now.”

edie contacted HM Treasury for a response to the GTAG paper. A spokesperson said: “Our ambition is for the UK to be the best place in the world for sustainable finance and as such we are grateful for the GTAG’s contribution.

“It is important we take the time to get the UK Green Taxonomy absolutely right, particularly given the challenges faced in Europe. That’s why we’re continuing to work closely with and consider the advice of the GTAG as we proceed with Taxonomy development.”

There is not yet a new set deadline for the UK to finalise its green taxonomy. This is expected to be confirmed by the Government in the first half of this year.