Greening Finance: Treasury outlines major sustainability disclosures plan to crack down on greenwashing
HM Treasury has released details on a package of new sustainability-related disclosure requirements, designed to tackle greenwashing in the financial space and encourage corporates to front-load their transitions to net-zero.
The package, entitled ‘Greening Finance: A Roadmap to Sustainable Investing’, aims to make the UK a world leader in sustainability-related reporting standards.
One of the key measures included is a new mandate for all firms offering financial products – they will be required to publicly disclose the environmental impact of all activities it finances. They will also need to justify any sustainability claims made about the product and disclose how the product fits into broader investment strategies.
These measures are being introduced at a time when, according to a poll of investors with more than $25.9trn in assets under management, greenwashing is considered the biggest challenge to investing sustainably.
As for corporates on the receiving end of private investment, the Treasury has stated that it will consult on the introduction of mandatory net-zero transition plans for businesses of certain sizes and in certain sectors. Transition plans set out how a business plans to change investments, approaches to skills, which facilities they operate and, potentially, the new business models they will adopt. They also usually include information about how workers and local communities will be supported.
“While there is not yet a commonly agreed standard or ‘template’ for what a good quality transition plan looks like, this is rapidly changing,” the Roadmap states, noting that guidance is being developed by organisations including the Institutional Investors Group on Climate Change (IIGCC), the Climate Action 100+, the Task Force on Climate-Related Financial Disclosures (TCFD) and the Glasgow Financial Alliance for Net-Zero (GFANZ).
“As standards for transition plans emerge, the Government and regulators will look to incorporate these into UK regulation and strengthen disclosure requirements as appropriate. This will encourage consistency and comparability in published plans and support more widespread adoption.”
Green Finance Taxonomy
The Roadmap also sets out more details on the UK’s Green Finance Taxonomy – a set of rules which will determine which economic activities can be determined ‘green’ for government investment. Specific activities have not yet been bookmarked for inclusion or exclusion at this stage. Instead, the Treasury has stated that all eligible activities must make a “substantial” contribution to one of six environmental objectives: mitigating climate change, assisting climate change adaptation, contributing to a circular economy, promoting the sustainable use and protection of water, preventing pollution and protecting and restoring biodiversity.
Activities must also “do no significant harm” in areas relating to any of these objectives. Additionally, minimum standards for human rights and non-corruption must be met.
As has been the case with the EU’s Taxonomy, the framework is likely to also be adopted by many businesses. Indeed, some large businesses in high-emitting industries, and providers of financial products, will be required to report on their impact against the UK Green Taxonomy in the future.
Further specifications on reporting requirements, including scope, timing and detail, will be developed following public consultation. The report confirms that the Treasury is set to publish a broader Green Finance Strategy in 2022.
Green economy reaction
Commenting on the new Roadmap, WWF’s executive director of advocacy and campaigns Katie White called it “a significant milestone that will help cement the UK’s leading position as a green finance hub and make a major contribution to delivering the Government’s net-zero promise”.
White said: “Legislating firms to publish credible transition plans that align with net-zero is a big step forward, but there is no time to waste. We need to see a clear timeframe set for mandatory implementation by all large firms by 2023 at the very latest.”
The UK Sustainable Investment and Finance Association’s (UKSIF) chief executive James Alexander said: “We welcome the ambition shown in today’s roadmap from the Government, which provides further crucial clarity for the sector on the development of the UK’s ‘green taxonomy’ and other areas of our new regulatory environment.
“UKSIF will continue to prioritise helping the UK deliver a world-leading ‘green taxonomy’ that learns some of the lessons of Europe’s experience. This includes the taxonomy setting out clear use-cases from the onset, remaining strictly based in science, being decision-useful for investors, and considering in future how to better support transitional economic activities.
“We look forward to considering with government how the upcoming Sustainability Disclosure Requirements regime can take the whole economy further in responding to sustainability risks, and be compatible with the EU’s approach to ensure its effective operation for the sector in the years ahead.”
E3G’s associate director of sustainable finance, Kate Levick, said: “As these exciting new policies are developed in detail, it will be crucial that they remain aligned with scientific advice and send clear market signals of the urgency and scale of the required shift in investments. The 2022 Green Finance Strategy will be key to the UK’s future success as an international hub for green investment and green finance expertise.”
E3G policy advisor Iskander Erzini Vernoit said: “The commitment to require transition plans marks a step change in approaches to greening finance and corporate activity. It is world-leading action from this year’s UK COP Presidency, although more will be needed to re-align investments away from a catastrophic climate future—the move to mandatory disclosures must be underpinned by clear sector-specific guidance on aligning with 1.5C.”
The Aldersgate Group’s senior policy officer Josie Murdoch said: “We welcome the Government’s plans for greening the financial sector and embedding climate and the environment into decision-making for financial institutions and corporates, as well as into investment products.
“Three elements of the new Roadmap are particularly welcome. Firstly, the plan to integrate different disclosure frameworks within the Sustainability Disclosure Requirements (SDR) integrated framework, which will be based on the Taskforce for Climate-Related Financial Disclosures (TCFD) framework. This will reduce the reporting burden for businesses. Secondly, the SDR requirement for firms to publish transition plans that align with the government’s net-zero commitment, on a comply or explain basis. Thirdly, requiring companies to disclose which proportion of their activities are aligned with the new UK Green Taxonomy will help to prevent greenwashing.”
“Looking ahead, the government must ensure that the UK SDR and its taxonomy are aligned with other international frameworks, such as the EU’s Sustainable Finance Disclosure Regulation (SFDR). This will simplify the reporting process and ensure that businesses operating in several jurisdictions are not subject to multiple reporting requirements that may be incompatible. A timeline setting out when the different elements of this new regulation will be introduced would also help businesses prepare for these new reporting standards.
“Finally, a further commitment on requirements for businesses to publish net-zero transition plans ahead of COP26 would be welcome. By making it mandatory for large businesses to publish plans on how they will ensure their operations and investments are aligned to the UK’s net-zero target, the Government will send a clear signal on green finance and demonstrate leadership at the international level.”
Accounting for Sustainability’s (A4S) executive chair Jessica Fries said: “Putting in place sustainability reporting requirements for companies and investors is essential if we are to tackle the climate crisis and address other pressing social and environmental issues.
“As demonstrated by our work with CFOs, investors and pension funds, without the right information available, decisions are made in the dark and act as a significant barrier to achieving net-zero and wider sustainability goals. Additionally, organizations that fail to manage their climate-related risks increasingly present financial risks to individuals and investors. Standards have an important role to play in making sure that information is presented in a comparable and consistent way by different organisations, reducing the risk of greenwashing or a failure to report performance in a transparent way.
“The announcement by the Chancellor… has the potential to address the current data gaps which are preventing action on climate change at the pace and scale needed. Importantly, the proposals recognise the need for an economy-wide framework, joining the dots along each link in the investment chain from individual savers and investors through asset owners and asset managers to companies.
“As a global centre of finance, it will be essential that the recommendations align with emerging requirements globally, consistent with the role that the UK has played in the development of the TCFD upon which the proposals build – a point acknowledged in the report. Also, key is the statement that the SDR will not only require information on how an organization or fund’s performance is affected by the environment, but also how that firm impacts the environment. This approach is consistent with the way leading entities already report on sustainability issues. It also recognizes that an organisation’s impact on the world can quickly ‘bite back’ to hit financial performance if not addressed.”