Consultation on Green Taxonomy
The HM Treasury releases a consultation on UK green taxonomy, aimed at soliciting market participants’ opinions on green taxonomy and evaluating the impact of implementing green taxonomy on sustainable investment decisions.
The HM Treasury believes that the green taxonomy can define which economic activities support sustainable development goals such as climate and environment, and promote sustainable investment while reducing greenwashing behavior. Currently, about 20 jurisdictions worldwide have implemented their taxonomies, and about 30 jurisdictions are developing taxonomies.
Related Post: Introduction to Global Sustainable Finance Taxonomy
Green Taxonomy and Sustainable Finance Policies
Green taxonomy is an important policy tool in sustainable finance field, which can provide users with sustainable information on economic activities. The UK has developed extensive sustainable financial policies aimed at achieving climate adaptive and nature friendly economic transition. The currently announced sustainable finance policies include:
- Sustainable disclosure requirements: The UK government plans to require economically influential companies to use the UK Sustainability Reporting Standards for information disclosure, which will be based on the disclosure standards published by the International Sustainability Standards Board (ISSB). The Financial Conduct Authority (FCA) in the UK will develop an information disclosure consultation to strengthen the management of sustainable risks and opportunities by businesses, and support investors’ sustainable asset allocation actions.
- Transition plan: The UK has developed a transition plan disclosure framework through the Transition Plan Taskforce (TPT) to support net zero transition of businesses. The International Financial Reporting Standards Foundation (IFRS Foundation) has included the Transition Plan Taskforce as part of its sustainable disclosure standards. UK plans to become a global hub for transition financing, and ensure that its regulatory framework is internationally competitive.
- Sustainable disclosure and investment labeling: The UK Financial Supervisory Authority has released a sustainable disclosure and investment labeling system aimed at helping investors find sustainable financial products and reduce the risk of greenwashing.
- ESG rating regulations: The HM Treasury has released a consultation for ESG rating suppliers, planning to regulate ESG rating products, improve information transparency, and meet investor requirements.
Design and Use of Green Taxonomy
The HM Treasury plans to attract capital inflows into key areas of transition through green taxonomy and reduce market greenwashing risks. The uses of green taxonomy include providing consistent comparisons, supporting investors in engagement and stewardship, and disclosing sustainable product development. The HM Treasury is referring to Singapore’s traffic light taxonomy method and the EU’s threshold taxonomy method to try to include transition activities in the taxonomy system, in order to help companies raise funds. The Climate Change Committee predicts that the UK will need an additional £ 50 billion in transition investment annually by 2030.
The HM Treasury believes that international interoperability is an important factor in the UK Green Taxonomy, which will use internationally recognized concepts and methods and include scientific indicators to maintain consistency with other existing taxonomies. Currently, most taxonomies focus on environmental indicators such as climate change, biodiversity, circular economy, and water resources. In the controversial field of nuclear energy, the UK plans to classify it as green energy.
With the development of the UK’s net zero transition, the taxonomy system may adjust some basic standards of economic activities to keep pace with scientific, technological, and policy developments in global. Most jurisdictions plan to update their taxonomies every three years, while the UK plans to update its taxonomy within a similar time frame, adding new economic activities or industry standards. The HM Treasury plans to solicit stakeholders’ opinions on the design and use of green taxonomy from November this year to February next year, and lists a list of questions for response.
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