Green finance – A roadmap to sustainable investing

The UK Government published a report yesterday evening, “Greening Finance – A Roadmap for Sustainable Investing“, setting out how it intends to green the financial system and meet its commitment to achieving net zero emissions by 2050.

With less than two weeks to go before the start of the global climate change conference COP26, the Government has begun to make a series of high-profile policy announcements, which will profoundly change the ways in which we live and how business is undertaken. Today the Government unveiled its long-awaited Heat and Buildings Strategy and the UK’s Net Zero Roadmap. More on these in a subsequent blog.

The green finance roadmap

The Government advises that there will be three phases to greening the financial system:

1. Informing – whereby investors and stakeholders are able to get useful information regarding sustainability issues;
2. Acting – ensuring that the information becomes mainstream and forms part of all business decision-making; and
3. Shifting – during which the financial world will shift to a net-zero, nature-positive economy.

The Green Finance Roadmap is focussed on the “Informing” phase. In his foreword to the roadmap, the Chancellor of the Exchequer, Rishi Sunak MP, explained that “climate and environmental considerations should be central to the decision-making process of every UK board and every investor’s risk and return calculations” and expressed his hope that the measures described in the roadmap “will put UK businesses in a better position to withstand climate-related risks and further seize the opportunities presented by the transition to net zero. In doing so, they will increase the UK’s competitiveness as a global financial centre and bolster the stability of the financial system we all rely on”.

Sustainability Disclosure Requirements

The Government will deliver its aims through new economy-wide Sustainability Disclosure Requirements (SDR) – these will bring together new and existing sustainability reporting requirements for business, the financial sector and investment products.

SDR will build upon the work of the Task Force on Climate-related Financial Disclosure (TCFD) and will require:

• Corporate disclosure – new requirements for companies to make sustainability disclosures. This is likely to comprise reporting under proposed international standards and reporting of environmental impact using the UK Green Taxonomy;
• Asset manager and asset owner disclosure – new requirements for asset managers and asset owners that manage or administer assets on behalf of clients and consumers to disclose how they take sustainability into account; and
• Investment product disclosure – new requirements for creators of investment products to report on the products’ sustainability impact and relevant financial risks and opportunities. It is expected that this information will form the basis of a new sustainable investment labelling regime.

Transition plans

Since the Government legislated for net zero emissions by 2050, a large number of businesses, institutions and organisations have made pledges to meet that target – in many cases, much earlier than the Government’s target.

A number of those who have committed to net zero have published transition plans, with milestones and interim targets to be monitored. Although voluntary guidelines are beginning to emerge in relation to transition plans, best practice has not yet fully crystallised. SDR will require disclosure on transition plans – requiring certain firms to publish transition plans or an explanation as to why they don’t have one.

UK Green Taxonomy

The Green Finance Roadmap advises that a lack of common sustainability definitions means that businesses and their investors often struggle to clearly understand the environmental impact of their decisions and consumer harms like greenwashing can arise. The Government is therefore going to implement the UK Green Taxonomy that will set out the criteria against which specific economic activities must meet to be considered environmentally sustainable and therefore be ‘Taxonomy-aligned’.

The Taxonomy will have six objectives:

• Climate change mitigation
• Climate change adaptation
• Sustainable use and protection of water and marine resources
• Transition to a circular economy
• Pollution prevention and control
• Protection and restoration of biodiversity and ecosystems

If a product is to be Taxonomy-aligned, an activity must:

• Make a substantial contribution to one of the six objectives;
• Do no significant harms to the other objectives
• Meet a set of minimum safeguards

Responsible stewardship and international finance

In addition to the SDR and the Green Taxonomy, the roadmap sets out plans to encourage responsible stewardship of capital principles, and aspirations for the UK to lead international cooperation in green finance matters.

COP26 and green finance

The subject of green finance will be one of a number of key focus areas of discussion at COP26 and there will be important takeaways for businesses and the public sector alike. Our ESG experts will be following the news and developments closely and sharing updates over the course of the two-week summit.