UK must act now to secure role as world’s leading net zero financial centre

With the US and EU raising the stakes through massive green subsidy push, the UK will need to significantly raise its game to attract capital through strengthened global investment credentials

Government’s independent advisory group sets out ten recommendations to support UK leadership in green finance and financial services, and facilitate green investment in UK and abroad

London, 23 February, 2023 – The UK must act now to secure its role as the world’s leading net zero financial centre, according to the Green Technical Advisory Group (GTAG), which advises Government on the design and implementation of a UK Green Taxonomy.

Strengthening the UK’s global investment credentials by setting clear standards in green finance supporting is key to catalysing investment into the green jobs and industries of the future, as recently highlighted in the Rt Hon Chris Skidmore MP’s Independent Review of Net Zero. It will also underpin transition plans and secure the UK’s leadership on green finance and competitiveness, as new initiatives like the US Inflation Reduction Act and the EU Net-Zero Industry Act, attract global capital.

Analysis published today by GTAG, an independent group chaired by the Green Finance Institute, highlights that regulatory proliferation risks making it more difficult and costly for investors to invest in green assets. With over 30 taxonomies now in development or implemented, significant market fragmentation and transparency risks arise where taxonomies are not aligned or interoperable. This undermines efforts to promote cross-border green capital flows and investment in green assets in the UK and elsewhere.

The paper outlines the opportunity for the UK to address this challenge through the development of a UK taxonomy that carefully considers cross-border investing, and seeks routes to international harmonisation where possible. Such an approach would help to channel international capital towards net zero in the UK and elsewhere by providing new rules and guidelines that deliver clarity on what counts as green and sustainable investment.

Ingrid Holmes, Chair, GTAG, and Executive Director, Green Finance Institute said: “Building on its strong track record in world-leading green finance policy, the UK is well placed to help address the challenge of global market fragmentation, while at the same time securing its leadership on green and transition finance through a scientifically robust and usable taxonomy. This is particularly important given the UK’s globally focused financial sector, which has some of the deepest pools of internationally oriented capital, with 7.2% of the global total of foreign listed companies listed in London. But the UK must act now.”

Promoting the International Interoperability of a UK Green Taxonomy sets out ten recommendations for working toward international interoperability without compromising the robustness or science- based nature of a UK Green Taxonomy. This includes recommendations on the opportunity for the UK to globally advocate for harmonisation across taxonomies where possible, and support the development of a list of core green economic activities that can be deemed equivalent to the UK Green Taxonomy through its engagement, membership and influence across sustainable finance- focussed international fora, including the G20 Sustainable Finance Working Group, Network for Greening the Financial System, International Sustainability Standards Board (ISSB), and International Platform on Sustainable Finance.

GTAG recommendations on working toward international interoperability:

1. Adopt the same broad concepts, methodologies and metrics as the EU taxonomy where possible and advocate that other non-taxonomy countries do the same. GTAG has identified a hierarchy for the construction of green taxonomies, that can help with interoperability which include concepts, methodologies, metrics and thresholds.
2. Ensure UK Taxonomy Technical Screening Criteria (TSC) are robust and science-based to show international leadership, and encourage other jurisdictions to adopt ambitious approaches to taxonomy development
3. Conduct 3-yearly reviews that assess the UK Green Taxonomy against the evolving international taxonomy landscape, to assess whether there are any adjustments required to ensure the Taxonomy continues to reflect changes to the real economy, including potential new sectors, technologies, and TSC that should be adopted for inclusion.
4. Streamline language and requirements where useful and appropriate to maximise interoperability with non-EU jurisdictions, including streamlining Do No Significant Harm Criteria to increase the ease and appeal of reporting against the UK Green Taxonomy. Streamlining DNSH will also increase the ease and appeal of reporting against the UK Green Taxonomy.
5. To promote international comparison – if not interoperability – in the short-term, adopt green taxonomy-related rules that cover assets held in as many jurisdictions as possible, regardless of the existence of any local green taxonomy.
6. Develop and publish a list of equivalent units, where needed, in the first instance, to allow for differences in the measurement practices carried out in respective jurisdictions and help with the comparison of data.
7. For non-OECD countries without a green taxonomy, develop general international base principles for reporting.
8. For the USA and non-taxonomy OECD countries, produce guidance to encourage reporting on a voluntary basis against the UK Green Taxonomy, for UK-based corporates and financial institutions that are required to report against the UK Green Taxonomy under SDR.
9. Produce guidance on how (if at all) relevant key performance indicators are applied to activities abroad under the UK reporting regime. In the EU, for example, green taxonomy-aligned activities outside of the EU cannot be included in the Green Asset Ratio (‘GAR’). GTAG recommends exploring deviating from the EU here, allowing international activities to be reported in the UK for relevant KPIs, where a firm may choose to also incorporate its alignment and eligibility figures for a specific jurisdiction.
10. Advocate for harmonisation across taxonomies by working with international fora such as the IPSF, ISSB, and foster/support international cooperation to develop a list of core economic activities that can be deemed equivalent to the UK Green Taxonomy.

In December 2022, UK Government announced it would review its approach to taxonomy development to maximise the effectiveness of our sustainable finance agenda and not make not make secondary legislation under the original timeline (January 2023). While disappointing the deadline has been missed, the priority should be to ensure the design and implementation of such a complex policy instrument is done in a way that maximises its usability and usefulness for the market.

GTAG’s advice is a critical input to the Government’s policy development process around the UK Green Taxonomy, and ensuring international interoperability is key. Done well, the prize of a scientifically rigorous and practical taxonomy will be significant for the UK’s globally focused financial sector.