Financial Services

Finance goes green: UK plans roadmap to sustainable investing

Published on 1st Dec 2021

The government has issued a further call to action to the financial sector, aiming to put climate and environmental considerations at the heart of decision-making in the industry

The UK government has published its long-awaited policy paper on "Greening Finance: A Roadmap to Sustainable Investing" (18 October), which sets out a three-phase plan to cement the UK's status as a world leader in green and sustainable investment. 

The roadmap focuses on the first phase, ensuring that the information exists to enable every financial decision to factor in climate change and the environment. It combines new developments with further detail on several pre-existing workstreams.    

The UK Sustainability Disclosure Requirements 

As announced by the UK chancellor, Rishi Sunak, in his Mansion House speech back in July 2021, firms will be subject to new requirements to report on their products’ sustainability impact and relevant financial risks and opportunities. The intention is that this information will form the basis of a new sustainable investment labelling regime that will make it easier for consumers to navigate the investment products available to them.  

The UK Sustainability Disclosure Requirements (SDR) will create an integrated framework for disclosures on sustainability that will apply across sectors.  This will be done by maintaining the same framework and metrics across the whole economy, which will be based on the Task Force for Climate-related Disclosures (TCFD)-aligned framework. The SDR covers three types of disclosure, relating to the following:

  • Corporates. The roadmap confirms that, subject to consultation, certain UK-registered companies and financial services firms and certain UK-listed issuers will be required to adhere to new requirements that will include reporting under proposed international sustainability standards and reporting of environmental impact using the UK Green Taxonomy. 
  • Asset managers and asset owners. Asset managers and owners will be required to disclose how they take sustainability into account to help consumers make clear choices in determining whether their assets are managed according to their sustainability preferences. Asset managers, life insurers providing investment products and Financial Conduct Authority (FCA)-regulated pension schemes will all be required to introduce these new sustainability disclosures. 
  • Investment products. Creators of investment products will have to report on their products’ sustainability impact and relevant financial risks and opportunities. This information will form the basis of a new sustainable investment labelling regime to assist consumers to navigate the range of available investment products and to help them make more informed choices about the sustainability impact of their investment choices. 

The government expects that the global baseline reporting standards for sustainability being developed by the International Sustainability Standards Board will form a "core component" of the SDR framework

UK Green Taxonomy

As part of the roadmap, the government will be implementing the UK Green Taxonomy, which sets out the criteria specific economic activities must meet to be considered environmentally sustainable. The taxonomy is based on six environmental objectives: 

  • climate change mitigation;
  • climate change adaptation;
  • sustainable use and protection of water and marine resources;
  • transition to a circular economy;
  • pollution prevention and control; and
  • protection and restoration of biodiversity and ecosystem.

Each of these objectives will be underpinned by a set of detailed technical screening criteria (TSC), which are currently being developed to be "evidence-based, accessible and built for the UK market".  To be considered taxonomy-aligned, an activity must meet three tests:

  • make a substantial contribution to one of the six environmental objectives, which will be measured against the TSC for the activity in question;
  • do no significant harm to the other objectives (this is also defined for each activity in the TSCs); and 
  • meet a set of minimum safeguards, which will be aligned with the Organisation for Economic Co-operation and Development Guidelines for Multinational Enterprises, and the United Nations Guiding Principles on Business and Human Rights.

Alignment with the taxonomy will first and foremost be based on reported data, rather than future projections. The purpose of this is to provide a current picture of a company's environmental impact, to help investors make informed decisions based on present sustainability information.  

However, the taxonomy will also include transitional and enabling activities that contribute to environmental objectives in other sectors, but which do not yet meet the sustainability threshold (with the roadmap citing the manufacture of components for wind turbines as an example).  This is intended to support the UK's net zero and Paris Agreement commitments.       

Stewardship

The roadmap also touches on stewardship. The UK Stewardship Code 2020 describes this as "the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society." The roadmap focuses on the UK’s pensions and investment sectors, and expects entities within these sectors to act as responsible stewards of capital, including by: 

  • progressing work on stewardship internally, signing up to the code and encouraging their service providers to do the same;
  • factoring the data generated from the SDR into their investment decisions; 
  • actively monitoring, encouraging, and challenging companies by using their rights and direct/indirect influence to promote long-term and sustainable value generation (including, where necessary, by withholding capital or divesting);
  • being transparent on their own and service providers' engagement and voting, including through clear and transparent reporting; and
  • providing leadership (for example, by joining the Glasgow Financial Alliance for Net Zero) and publishing their transition plans, setting out the organisation's pathway to net zero. 

The road ahead

The roadmap lays out a plan of action for the next three years and beyond, including:  

First quarter of 2022
  • Consultation on two of the TSCs (for climate change mitigation and climate change adaptation).
Throughout 2022
  • Consultations on potential mandatory sustainability-related disclosures, mandatory consumer facing and more detailed product-level sustainability-related disclosure and sustainability related labels for investment products. 
  • Further details on ESG data and ratings providers being brought within the FCA regulatory perimeter.
By the end of 2022
  • Legislation regarding the climate change mitigation and climate change adaptation TSCs. 
  • The expectation for firms in the UK’s pensions and investment sectors to have published high-quality transition plans.
First quarter of 2023
  • Consultation on the remaining four TSCs and their possible expansion.
By the end of 2023
  • The government's review of the UK pensions and investment sectors performance against the five stewardship expectations (set out above).

Osborne Clarke comment

The greening finance roadmap covers a lot of ground, building on existing trends and initiatives. Along with the SDR, the taxonomy, stewardship, and net-zero transition plans, the FCA is considering bringing ESG data and ratings providers within its regulatory perimeter, as well as how to deliver an approach to digitisation of sustainability data that leverages the UK’s existing digital infrastructure for reporting. 

There is also a lot more detail needed to put flesh on the bones of the proposals. (We take a look at what we know about the SDR so far in a separate article.) The breadth of the proposals may add complexity for firms seeking to navigate this area.

Moreover, this is only the beginning. The roadmap focuses on the first of three planned phases, uncovering the right information to facilitate sustainable investment choices. The second phase will concentrate on integrating the information into business and financial decision-making, while the third phase will look at ensuring financial flows shift to align with the UK’s net-zero commitment and environmental goals.
 

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