In November 2020, then Chancellor Rishi Sunak set out the UK Government’s ambition for the future of UK financial services, following the UK’s departure from the EU. Measures to support this aim included issuing the UK’s first ever Sovereign Green Bonds, becoming the first country in the world to make Task Force on Climate-Related Financial Disclosures (TCFD) disclosures mandatory and the implementation of a Green Taxonomy alongside the establishment of the UK Green Technical Advisory Group (GTAG) to review these metrics and ensure they are right for the UK market.

The UK Green Taxonomy is a common framework to set clear definitions of the economic activities and investments that can be defined as environmentally sustainable and thus help channel relevant UK-regulated firms’ capital towards net zero-aligned and nature positive investment, as well as addressing greenwashing.

It is anticipated that the consultation will be launched in early 2024.

The UK Green Taxonomy sets out detailed technical specifications of economic activities that can be defined as environmentally sustainable in the UK market. Starting with climate change mitigation and adaptation activities but expected to expand over time, its goal is to create clarity and consistency over what constitutes environmentally sustainable investment for UK-regulated firms.

The UK Taxonomy aims to direct investments towards green activities, encouraging businesses to adopt greener business models to increase taxonomy alignment over time. Additionally, the taxonomy will enhance transparency and comparability in sustainability practices among companies, credit institutions, and investors, helping address the issue of greenwashing and emergent reports of greenhushing.

The UK Taxonomy is expected to define an economic activity as environmentally sustainable when:

1. The economic activity contributes significantly to one or more of the six environmental objectives.
2. The activity does not harm the other environmental objectives.
3. The activity is carried out in compliance with minimum safeguards.

In order to calculate the required KPIs (turnover, capital expenditure, operating expenditure), it is first necessary to determine the Taxonomy-eligible economic activities of the company. Subsequently, it must be examined whether these activities also fulfil the technical screening criteria for Taxonomy-aligned activities. As a result, the Taxonomy-aligned activities are identified, which are included in the calculation of the KPIs, i.e. the proportion of turnover, capital expenditure and operating expenditure associated with environmentally sustainable economic activities.

EU Taxonomy Example: Electricity generation from geothermal energy

The UK Government will set out the UK’s approach in the upcoming consultation.

Executive Summary

This paper provides a summary of the research and analysis undertaken by GTAG in its initial phase of work, including its rationale and the independent, non-binding advice it has provided to the UK Government on the market, regulatory and scientific considerations for developing and implementing a UK Green Taxonomy. Specifically, the paper summarises the first tranche of GTAG’s advice, focusing on four key themes: how to approach onshoring the EU framework; optimising the taxonomy’s international interoperability; streamlining Do No Significant Harm criteria to be usable and useful for reporting entities; and setting out wide range of potential taxonomy use cases.

Summarised Recommendations

1. Government should pursue an ‘adopt some and revise some’ approach to reviewing the EU TSC and should provide clear time-bound expectations for market actors about the development and finalisation of the UK Green Taxonomy, as well as pragmatic implementation guidance to mitigate some of the complexities of the EU TSC.
2. Follow principles for revising TSC to avoid greenwashing, maintain simplicity and usability, and ensure international relevance.
3. Simplify the ‘Do No Significant Harm’ criteria to make the taxonomy more user-friendly, while retaining its sustainability goals.
4. Align the UK Green Taxonomy with international standards to reduce market fragmentation and enhance global green finance flows.
5. Tailor criteria to UK-specific needs in various sectors, such as energy and buildings, to align with the UK’s net-zero targets and policy landscape.
6. Engage with market participants and stakeholders through consultations to refine the taxonomy and address implementation challenges.
7. Develop the taxonomy as a dynamic tool, subject to regular reviews and updates to reflect evolving scientific knowledge and market practices.

Executive Summary

The GTAG report on the international interoperability of the UK Green Taxonomy emphasizes the need for global alignment in green finance. It underlines the importance of harmonising the UK’s sustainable investment framework with international standards to foster green investment and combat greenwashing.

GTAG’s 10 recommendations can be categorised under three broad headings: (1) interoperable Technical Screening Criteria (TSC), (2) interoperable disclosures, and (3) international engagement. These recommendations are intended to guide the UK in aligning its green taxonomy with global practices, ensuring robust and scientific criteria, and facilitating effective international collaboration in green finance.

Summarised Recommendations

1. Align concepts, methodologies, metrics, and thresholds with the EU Taxonomy where possible.
2. Ensure UK TSC are robust and science-based to demonstrate international leadership.
3. Conduct 3-yearly reviews to assess and adjust the UK Green Taxonomy in line with international developments.
4. Streamline language and requirements to maximise interoperability with non-EU jurisdictions.
5. Adopt taxonomy-related rules for subsidiaries and assets in various global jurisdictions.
6. Develop and publish a list of equivalent units for measurement practices in different jurisdictions.
7. Support the development of international base principles for reporting in non-OECD countries without a green taxonomy.
8. Provide guidance for voluntary reporting against the UK Green Taxonomy in the USA and non-taxonomy OECD countries.
9. Offer guidance on reporting international activities using KPIs under the UK reporting regime.
10. Advocate for harmonisation of taxonomies and international cooperation to develop a list of core economic activities equivalent to the UK Green Taxonomy.

Executive Summary

The report focuses on streamlining and enhancing the usability of the Do No Significant Harm (DNSH) criteria within the UK Green Taxonomy. It was written to address challenges in implementing DNSH criteria from the EU framework, aiming to make them more practical and usable for UK firms, while maintaining their scientific robustness.

Summarised Recommendations

1. HM Government should clarify the purpose, approach, and definition of DNSH in the UK Green Taxonomy.
2. Propose reporting additional information for activities not fully aligned with DNSH criteria.
3. HM Treasury should set parameters for drafting DNSH criteria to enhance consistency and usability.
4. Revise EU DNSH criteria for the UK context to improve usability without compromising scientific integrity.
5. Create comprehensive guidance to support effective implementation of the UK Green Taxonomy.
6. Advocate internationally for this revised approach to DNSH to lead in Green Taxonomy harmonisation.

Executive Summary

The report focuses on expanding the application of the UK Green Taxonomy beyond its initial scope, aiming to guide both public and private investments towards sustainable economic activities. It recognises the taxonomy potential in steering capital towards environmentally sustainable investments and combating greenwashing. The report was written to propose how the UK Green Taxonomy could be integrated into broader fiscal and policy decisions, enhancing investors’ confidence and establishing a clear, unified definition of ‘green’ investments.

Summarised Recommendations

1. UK Infrastructure Bank (UKIB) and British Business Bank (BBB): Use the taxonomy as a screening tool for sustainability and impact of investments.
2. Green Gilts: Align use of proceeds with the taxonomy.
3. Corporate Disclosures: Require disclosures of taxonomy alignment through Sustainable Disclosure Requirements (SDR).
4. Transition Plans: Include taxonomy alignment in transition plans framework.
5. FCA Labels and Disclosure Regime: Integrate taxonomy alignment as a key metric.
6. Net-Zero Test: Ensure public investments align with net-zero targets using the taxonomy as a Budget Tagging Tool.
7. Local Authority Finance: Advise local authorities on using the taxonomy for borrowing and spending; Public Works Loan Board (PWLB) to report lending alignment with the taxonomy.
8. National Infrastructure Commission (NIC) and Infrastructure Projects Authority (IPA): Use the taxonomy to embed net-zero and resilience in advice on infrastructure priorities.
9. Planning and Green Bond Standards: Incentivise taxonomy-aligned activities in planning; develop a Green Bond Standard aligned with the taxonomy.
10. Tracking Green Financial Flows: Use taxonomy for defining ‘green’ in tracking financial flows.
11. Public Procurement and Big Nature Impact Fund: Incentivise taxonomy alignment in procurement and investments.
12. High-Quality Carbon Offsets: Align activities with taxonomy criteria for carbon offset accreditation.

Executive Summary

The reporting focuses on the implementation of an effective reporting regime for the UK Green Taxonomy. GTAG’s recommendations are primarily focused on the key performance indicators (KPIs) that should be used in taxonomy reporting. Recommendations are aimed at streamlining the reporting process, improving transparency, and ensuring the effectiveness of green investments in aligning with sustainable goals.

Summarised Recommendations

Non-Financial Company Recommendations:

1. Maintain EU Taxonomy Regulation’s Article 8 requirements for firms to report on turnover and capital expenditure (capex) as primary green performance indicators.
2. Suggest operational expenditure (opex) reporting to be optional.
3. Call for clear and consistent definitions for turnover, capex, and opex KPIs.
4. Expand the scope of capex category C as set out in the EU’s Disclosures Delegated Act to encompass additional environmental objectives.

Credit Institution Recommendations:

1. Reassess the approach to the Green Asset Ratio (GAR).
2. Consider two approaches: exclude non-relevant activities/investments from GAR or limit GAR calculation to the bank’s lending book.
3. Propose setting up a working group to design TSC for financial services.

Investor Recommendations:

1. Recommend fund-level reporting and disclosing taxonomy components for each fund instead of using the Green Investment Ratio (GIR) at the entity level.
2. Apply fund-level reporting to all funds, irrespective of ESG labelling.
3. Differentiate between insurers’ proprietary investments and their unit-linked or with-profit businesses.
4. Explore TSC for financial services related to insurance premium discounts and adaptation measures.

Executive Summary

The report explores the adaptation of the UK Green Taxonomy, focusing on its expansion, to better address the UK’s economic needs, drawing on EU and other jurisdictions’ experiences.

Summarised Recommendations

1. Prioritise the development of a credible, robust, usable green taxonomy before considering the expansion to cover other activities.
2. Focus on policy cohesion and develop transition plan guidance and sector-specific roadmaps.
3. Utilise existing taxonomy design features that factor in transition.
4. Consider the expansion of taxonomy coverage to sectors like wholesale and retail trade, manufacturing, agriculture, and potentially financial and advisory services.
5. Apply taxonomy reporting to companies subject to mandatory TCFD reporting.
6. Consult on limiting mandatory reporting to turnover and capex, with optional opex reporting.
7. Assess the international landscape of extended taxonomies for best practices and potential implementation challenges.
8. Promote the UK’s transition rationale and approach internationally.

Executive Summary

The report focuses on operational considerations for taxonomy reporting, specifically addressing data gaps and the use of proxies in the UK Green Taxonomy. The advice paper provides recommendations on minimising data gaps and ensuring robust, decision-useful taxonomy disclosures without overburdening businesses. It also covers the use of proxies and estimates in taxonomy reporting.

Summarised Recommendations

1. Learn from other taxonomies and sequence mandatory disclosures to ensure sufficient information availability.
2. Implement GTAG’s recommendations to enhance the usability of the UK Green Taxonomy.
3. Provide comprehensive guidance for voluntary disclosure of taxonomy alignment, including start-to-finish examples of assessment against the taxonomy.
4. Create a forum for stakeholders to raise data issues, challenges, and questions during the voluntary period.
5. Be mindful of global companies’ data requirements, considering international applicability.
6. Support the use of estimates during the voluntary reporting period, providing clear instructions for their use in disclosures.
7. Develop a reporting template for consistent disclosures during the voluntary period.

Executive Summary

The report aims to provide clarity on how existing and future green financial products should be treated as the taxonomy criteria evolve. This is crucial for maintaining market confidence and minimising risks of greenwashing. GTAG suggests a balanced approach, emphasizing the need for clear and consistent regulations and guidance.

Summarised Recommendations

1. HM Government (HMG) should clarify the treatment of existing and future green products in relation to the evolving taxonomy.
2. Implement a ‘grandfathering’ clause for green debt issuers, allowing most green bonds and loans to remain aligned until maturity, even if criteria change.
3. For equity, establish a set time period for taxonomy alignment, considering exceptions for long-term infrastructure projects.
4. Assess refinanced green debt against the latest taxonomy criteria, overriding existing grandfathering periods.
5. The Government and Financial Conduct Authority (FCA) should align their approaches to green and sustainability bonds.
6. Additional guidance, including methodology and case studies, should be published to assess complex green investments against the UK Green Taxonomy.

Executive Summary

The report explores the establishment of an institutional home for the UK Green Taxonomy. It emphasizes the need for enduring governance and a robust framework to guide the taxonomy’s development and implementation, ensuring it remains effective and relevant. The paper outlines various options for the institutional structure, assessing their suitability based on the UK’s commitment to implementing a Green Taxonomy and the need for transparency, integrity, and adaptability in its governance.

Summarised Recommendations

1. Establish an Advisory Body to guide the initial implementation and development of the taxonomy.
2. Utilise Executive action to allocate necessary funding and resourcing for this body.
3. In the medium-term, initiate legislation for a long-term statutory decision-making body.
4. Consider the Financial Reporting Council/Audit Reporting and Governance Authority (FRC/ARGA) as a potential candidate for this role, subject to funding and resource availability.
5. Consult with relevant bodies, like the Climate Change Committee, to ensure scientific rigor in the taxonomy’s development.
6. Draft new legislation or amend existing laws to empower the chosen body with necessary authority and funding.