Under the headline of 'Mobilising Green Investment', the UK Government has published a revised Green Finance Strategy (PDF 26.9 MB), aimed at supporting the delivery of the transition to net zero. The strategy has been developed by HM Treasury (HMT), the new Department for Energy Security and Net Zero and the Department for Environment, Food and Rural Affairs. It refreshes the original (PDF 12.2 MB) strategy, set out in 2019, and moves forward some of the initiatives announced in the 2021 Roadmap to Sustainable Investing (PDF 2.03 MB) (see our article here).
The updated strategy is underpinned by five key objectives which aim to 'reinforce and expand the UK's position as a world leader on green finance and investment':
- UK financial services growth and competitiveness.
- Investment in the green economy.
- Financial stability.
- Incorporation of nature and adaptation.
- Alignment of global financial flows with climate and nature objectives.
The document is in three sections. Chapter 1, 'Foundations', looks at the UK's approach to green finance. Chapter 2, Align', focuses on enabling the market to align with UK climate and environmental goals. And Chapter 3, 'Invest', considers how to mobilise and create opportunities for green investment.
From a regulatory perspective, the key areas of interest are in Chapter 2 — these include the development of the UK Green Taxonomy, next steps for the Government's Sustainability Disclosure Requirements (SDR) framework, transition plans, product labels and alignment with international disclosure standards. Alongside the main strategy document (and among many other publications), the Government has also issued a consultation on ESG Ratings providers (for more see here), a Nature Markets Framework and its response to the January 2023 Independent Review of Net Zero (PDF 6.58 MB).
Implications for FS regulation
Overall, there is more regulatory content in the strategy than perhaps we expected. There is still much work to be done to define detailed policy and requirements, but the Government reiterates its previous commitments and goes some of the way to clarifying timelines and direction of travel.
Key regulatory takeaways:
Decision on whether to endorse International Sustainability Standards Board (ISSB) standards will be made within 12 months of publication of final versions (publication expected end-June 2023).
Consultation on UK Green Taxonomy in autumn 2023 — disclosures will be voluntary for at least two years.
Further detail on a wider SDR framework for business and financial services expected in summer 2023. The FCA has already delayed publication of its Policy Statement on SDR and investment labels, which is targeted mainly at asset managers, from Q2 to Q3 2023.
Transition Plan Taskforce guidance to be published in summer. Phase two work will focus on nature recovery, climate adaptation and social impact.
HMT consulting until 30 June on bringing ESG ratings providers within the regulatory perimeter.
Adoption of international standards
Interoperable and harmonised disclosure standards across jurisdictions are a key priority, to maximise the efficient flow of capital across borders and reduce burdens for firms. The Government has committed to launching a 'formal assessment mechanism' as soon as the ISSB's first two standards are published. If this mechanism finds that the standards are appropriate for use by UK companies, they will be used to form the basis of future disclosure obligations within company law and FCA requirements for listed companies.
Two new advisory committees will be set up to consider how the ISSB standards sit alongside existing reporting requirements — one Government-led and the other supported by the Financial Reporting Council (FRC). A decision on whether to endorse the standards will be made within 12 months (or possibly sooner) of the final versions being published — expected at the end of June 2023.
The UK Green Taxonomy
After a period of some uncertainty, the Government has reaffirmed its commitment to delivering a UK Green Taxonomy. As in the EU, this will provide investors with definitions of economic activities that should be labelled as green and will support the quality of standards, labels and disclosures used in green finance activity.
Consultation on the Taxonomy will take place in Autumn 2023. The Government will:
- Continue to work through the Green Taxonomy Advisory Group (GTAG) in advance of the consultation.
- Seek to include nuclear — subject to consultation — in its capacity as a key technology within the pathways to net zero.
- Consider lessons learned from taxonomy development in other jurisdictions — this includes consideration of whether to pursue a 'Transition Taxonomy' as recommended in the Independent Review of Net Zero or to include certain transitional activities in a single Taxonomy.
- Work with international partners to maximise interoperability and harmonisation.
- Develop proposals 'with proportionality in mind' to avoid placing undue burden on companies whose size or scale makes the disclosure of taxonomy-related information unreasonable.
The strategy notes the Government's continuing ambition to mandate Taxonomy-related disclosures but recognises the potential usability challenges. Therefore, there will be a test period of voluntary disclosures for at least two years before the introduction of any mandatory obligations.
Sustainability Disclosure Requirements (SDR)
The FCA's October 2022 consultation on SDR proposed various disclosure requirements for asset managers (including at product and entity level), investment labels, and marketing rules, as well as an anti-greenwashing rule across all sectors. The updated strategy reaffirms the Government's commitment to working with the FCA on its SDR proposals and also commits to the implementation of a broader SDR framework for business and the financial sector. Further detail on this framework will be set out in summer 2023 and will reflect international progress in the development of disclosure standards.
The Government will also conduct a review of the UK's non-financial reporting framework, examining the wider legal landscape in which sustainability disclosures will be made. The aim of the review is to ensure that SDR complements the UK's wider framework and minimises duplication. There is no detail yet on when the review will begin, but stakeholders are encouraged to respond when the first stage, a call for evidence, is published.
The Transition Plan Taskforce (TPT) is expected to issue its guidance for transition plans in the summer. The updated strategy notes that phase two of the TPT's work will focus on nature recovery, climate adaptation and social impacts, with the taskforce considering how these can be incorporated into firms' transition plans.
The Government has also committed to launching a consultation in autumn/winter 2023 on introducing transition plan disclosure requirements for the UK's largest companies. This would ensure parity between those firms already captured by the FCA's existing rules (i.e. asset managers, asset owners and listed firms), and private companies that do not currently need to disclose their transition plans. To maintain consistency, the Government is keen to align its consultation closely with existing FCA requirements.
Carbon and nature-related markets
The Government is considering whether to make enhancements to the UK regulatory regime to support the effective functioning of voluntary carbon markets (VCM). As transition planning disclosure requirements grow and firms reduce their financed greenhouse gas (GHG) emissions, action may be needed to ensure the integrity of VCMs and ensure that they do not incentivise carbon credit trading over actual reduction of GHG emissions. The Government is awaiting reports from stakeholder groups convened during COP26 before taking action.
The UK Emissions Trading Scheme (ETS) is also to be reviewed, to determine how the removal of GHGs from the atmosphere could be integrated into the existing system. A feedback statement following consultation on extending the scope of the UK ETS is expected shortly.
The Government has also published its first Nature Markets Framework, setting out principles for the development of mechanisms to channel investment into nature-positive projects. Future initiatives could include markets for trading standardised credits representing units of nature-positive outcomes — for example a defined amount of biodiversity on a mandatory or voluntary basis — much in the same way as carbon credits are currently traded.
ESG ratings and benchmarks
ESG-related benchmarks are already subject to supervision under the existing UK Benchmarks Regulation. Future development of the UK Taxonomy and the SDR may require further reform of the regime for ESG-related benchmarks, but the exact nature of this potential reform is not yet clear.
Alongside the Green Finance Strategy, HMT is consulting on bringing ESG ratings providers within the FCA's regulatory perimeter. The potential scope of ratings products that could be captured is broad, including all products which assess an environmental, social or governance factor, even if the product is not labelled as an ESG product. The proposals would target firms providing these products to institutional and retail clients in the UK, regardless of the location of the providing firm. The consultation will close on 30 June 2023.
In addition to the above, the Government will explore possible actions through which financial markets can support businesses to grow as part of a 'net zero, resilient and nature positive economy', including:
- Supporting the implementation of Solvency UK, which creates the potential for over £100 billion of productive investments from insurers in the next ten years, while maintaining high standards of policyholder protection.
- Reviewing the regulatory framework for effective stewardship, including the operation of the UK Stewardship Code, working with the FCA, FRC and TPR.
- Working closely with financial regulators to ensure that the UK's regulatory framework supports the growth of green finance.
- Collaborating with international partners to accelerate the alignment of global financial flows with a net zero, resilient and nature positive global economy.
- Building partnerships with emerging markets and developing economies to support the growth and alignment of their finance sectors, including actions to enhance sharing of lessons from green finance implementation in the UK.