Investors are in disagreement over the need for a UK Green Taxonomy, with some saying it’s a necessary step to direct more capital toward sustainable investments, and others concerned it’ll add unnecessary complexity to an already bloated regulatory landscape.
In November, chancellor Rachel Reeves announced the government would launch a consultation on the value and use case of the UK Green Taxonomy, which closed on 6 February. First proposed in November 2020, the Taxonomy is meant to support investment into activities aligned with sustainability goals and to mitigate greenwashing. However, its implementation has been delayed multiple times, and this latest consultation is a response to “mixed feedback” on the value of taxonomies at large.
In an online article addressing the question of whether the UK needs a green taxonomy, Julia Dreblow, director of SRI services, acknowledged one of her core concerns is the sustainability-related regulatory burden on companies and the investment industry being “massive”, risking becoming counterproductive. She also shared concerns about opinions being split on the subject.
“There are people and groups I know and respect who have very different opinions. Some say a green taxonomy in the UK is vital; others say it is not needed,” she said.
In a recent webinar, Macfarlanes’ head of ESG, Rachel Richardson, also noted concern about the proliferation of global taxonomies. Portfolio managers “could be forced to disclose against multiple taxonomies”, she said, resulting in increased cost, market fragmentation, and investor confusion with a mix of definitions for the same sustainable activities. “Reducing the number of taxonomies globally mitigates this risk,” she concluded.
Given this, PA Future asked investment industry experts for their thoughts on whether the UK needs a Green Taxonomy, finding a similarly mixed response.
UKSIF consultation response
The UK Sustainable Investment and Finance Association (UKSIF) published their consultation response in full, in which they urge the government to proceed with the delivery of “a science-based and as usable as possible Green Taxonomy”, based largely on the EU taxonomy’s overall framework and metrics. It further suggests the Taxonomy should apply a voluntary approach to related disclosures in line with the UK’s commitments in last year’s Green Finance Strategy.
UKSIF also advised the government to prioritise consultation with stakeholders on the design of the climate mitigation and adaptation objectives of the taxonomy- versus the broader four objectives; proactively contribute to ongoing discussions around taxonomies at international fora; and, while acknowledging the challenges, facilitating a consistent, high-level approach to a single standard for green taxonomies, mirroring standardised approaches with regards to corporate sustainability-related disclosures, such as through ISSB adoption.
“We believe a taxonomy could play an important, additive role as part of the government’s broader ambitions to enhance the UK’s existing global leadership on sustainable finance and position as a ‘clean energy superpower’,” the response concluded.
“We would also agree with previous commitments outlined on the UK’s taxonomy in ‘Financing Growth: Labour’s Plan For Financial Services’ – including the need to ensure the taxonomy is ‘science-based and interoperable with international standards, and user-friendly for business’, and we would very much welcome plans from government to signal the retaining of this commitment.”
‘Providing much-needed clarity for investors’
Hyewon Kong, sustainable investment director, Gresham House:
“The development of a UK Green Taxonomy acts as a necessary and critical step toward enhancing transparency, tackling greenwashing and directing capital towards sustainable investments. A well-defined taxonomy will provide much-needed clarity for investors, ensuring consistency in sustainability assessments across financial markets.
“To be effective, the UK Green Taxonomy must align with global standards to prevent market fragmentation and avoid unnecessary complexity for investors operating across international markets. Interoperability with frameworks such as the EU Taxonomy and other jurisdictions is essential for the UK to achieve its ambition of becoming a world leader in sustainable finance. Any divergence should be minimised unless there is a strong rationale for UK-specific criteria, as global investors require comparability and streamlined implementation across regions. Additionally, the UK framework should be clear, practical and science-based, avoiding excessive complexity that could hinder adoption.
“Given the UK’s leadership in natural capital and biodiversity markets, the taxonomy should integrate nature-based solutions, including sustainable forestry, regenerative agriculture and ecosystem services.
“Crucially, the taxonomy must not be static. It should be subject to regular review, maintenance, and updates to ensure it evolves in line with the latest scientific developments, market practices, and policy changes. A dynamic approach will help maintain its relevance and effectiveness over time.”
‘Risks adding complexity and cost without a clear benefit’
Paul Scaping, public policy specialist, Investment Association:
“When it was first announced in November 2020, the use case for a UK green taxonomy was clearer. However, since then, the UK government has made significant progress towards an established framework – the Sustainability Disclosure Requirements (SDR) – to channel capital into environmentally sustainable outcomes and prevent greenwashing. This has included developing guidance on transition planning, integrating the recommendations from the Taskforce for Climate-related Financial Disclosures and introducing International Sustainability Standards in the UK.
“Today, many in the UK investment management industry are also already using EU taxonomy and other international standards. The introduction of a UK-specific taxonomy therefore risks adding complexity and costs without clear benefits – instead, we would suggest that the government focuses on developing clear sectoral policies and supporting the transition planning framework to better channel capital to sustainable activities.
“We remain committed to working with the government to achieve our shared goals of environmental sustainability and effective capital allocation. There would be a stronger case for a green taxonomy in the future if the UK’s body of real-economy transition pathways are more developed, comprehensive and include clear policy incentives.”
