The UK government’s announcement of a further ‘pause’ to delivering the green taxonomy has led to a vocal reaction from several industry groups and wider stakeholders. This is because of considerable delays we have seen already this year to the publication of the consultation on the taxonomy, and the suggestion too in the ministerial statement that government could adopt an entirely new strategy. This leaves a number of unanswered questions for the market, which has been eagerly waiting clarity on the taxonomy’s progress since the start of this year.
The UK had been legally required to put into law by 1 January next year, the technical screening criteria for the taxonomy’s climate change objectives. In a brief written statement last week, the government announced it would miss this deadline and while the delay has come as no great surprise, given the lack of movement for many, many months, it is nonetheless a huge disappointment.
There are a number of reasons why we and many sustainable investors are disappointed by the latest delays. For one, it sends negative signals on the UK’s international leadership and commitment, especially with research from the Green Technical Advisory Group showing that more than 30 taxonomies across the world are being developed or implemented. This includes not only the EU, but also Canada, Australia, Japan, Singapore, Russia and Mongolia.
The UK should not risk being left at a relative competitive disadvantage behind other jurisdictions well ahead of us in implementing a taxonomy framework – already from earlier this year, the EU taxonomy’s climate change mitigation and adaptation requirements have come into force. Should we stay the course, drawing on the experiences of other countries’ taxonomies in our upcoming work, we could have an opportunity to build a robust framework while proactively shaping taxonomy approaches elsewhere. This could be done through participation in international fora such as the Conference of the Parties and International Platform on Sustainable Finance, promoting global alignment where possible.
Distraction from other pressing challenges
For investors, the delays are reflective of wider uncertainty we have seen in the UK’s policy landscape this year. A clear and consistent policy environment, for the real economy and financial services, continues to be critical to unlock investors’ capital for the clean energy transition. Swift implementation of a usable and science-based taxonomy, with natural gas activities excluded, would give investors greater transparency over those economic activities supporting the UK’s climate objectives.
In its absence, the market could need to look elsewhere in the near term to demonstrate to clients and others that underlying portfolios are shifting towards net zero. Despite the taxonomy’s imperfections, there are question marks over what other credible, science-based tools could be relied on to address ‘greenwashing’ risks for consumers.
The taxonomy also underpins other components of the UK’s sustainable finance regulatory framework. This includes the UK’s Sustainability Disclosure Requirements regime and investment labels, which will be invaluable for consumers to navigate the diverse range of sustainable funds currently in the market. It is linked to the important work of the UK’s Transition Plan Taskforce, tasked with creating a ‘gold-standard’ for climate transition plans, by providing an objective measure of green alignment at the activity-level for companies.
Finally, the continual delays we have seen this year have distracted policymakers and industry from other pressing challenges on the sustainable finance policy agenda.
This includes meaningfully addressing the role played by ‘transitional’ economic activities, encouraging the substantial part of the UK economy that is not ‘green’ today towards more sustainable practices. Too much time has already been taken in defining a small sliver of the economy, and not considering harder-to-abate sectors. Real economy measures for investors to drive sustainable investing have similarly been neglected. The UK may be left behind countries such as the US that have set out clearer roadmaps and incentives for private finance, such as clean energy tax credits and grants, to provide certainty.
We encourage policymakers to quickly restate the UK’s intention to deliver a credible, science-based taxonomy, and clear timeline for its full implementation, fulfilling a key pillar of last year’s ‘Greening Finance Roadmap’.
