Ahead of COP26, which takes place in Glasgow from October 31 to November 12, the UK Government has announced a raft of new policies to tackle the climate crisis.

One the most ambitious of these measures is The Roadmap to Sustainable Investing, a multi-faceted plan designed to kick-start a green industrial revolution.

It will bring about a monumental shift in the way UK businesses and investors across all sectors of the economy work in relation to environmental issues, tightening the rules on disclosures to eradicate greenwashing, supporting the UK’s asset management industry and helping investors build portfolios aligned with net zero.

Most significantly, this new reporting regime places the UK as a leader in facilitating a global standard as opposed to following EU legislation. In the past, the UK has been bound by European Union (EU) rules on financial reporting relating to environmental issues, with the Roadmap to Sustainable Investing representing the biggest change to ESG disclosure for UK companies since the introduction of the Non-Financial Reporting Directive from the EU, which came into effect in 2018.

green finance

The Roadmap will help deliver Phase 1* of the UK’s Green Finance Strategy, which was published in 2019, with its key measures aiming to…

  • Provide details for Sustainability Disclosure Requirements
  • Set out more detail on the UK Green Taxonomy
  • Highlight the importance of investor stewardship in green finance and set out the Government’s expectations
  • Reiterate the UK’s commitment to international leadership on green finance

 

Sustainability Disclosure Requirements (SDR)

SDR will apply to large companies, pension schemes, investment products, asset managers and owners and is designed to create a more robust regulatory framework for the UK’s sustainable investment market.

In order to foster a global baseline for comparability, the UK government will create a mechanism for adopting standards developed by the International Sustainability Standards Board (ISSB), an organisation being established by the UK-endorsed International Financial Reporting Standards (IFRS).

These standards will build on the four pillars of the Task Force on Climate-related Disclosures (TCFD) – governance, strategy, risk management, metrics and targets – which offer guidance on how to make effective disclosures on climate-related risks, strategies and opportunities.

This four-pillar approach is also being mirrored by the EU in the development of its own standards, and by the Taskforce for Nature-related Financial Disclosures.

SDR will introduce the following important changes to disclosure regulation:

  • Stringent requirements for corporate sustainability disclosures will be established
  • Asset managers and owners will have to disclose how they take sustainability into account in every area of their business
  • Issuers of investment products must report on their products’ sustainability impact, financial risks and opportunities

SDR and transition

SDR will also require parties to make disclosures on their transition plans towards a net zero economy. Initially this will involve publishing detailed information on changes they are making to their operations or provide compelling explanations as to why they are yet to commit to sustainability.

The disclosure requirements will evolve as Government and regulators seek to incorporate them into UK regulation.

In place by 2022 1 -2 years 2 – 3 years 3+ years
TCFD for all premium and certain listed issuers, asset managers and pension schemes. Mandatory ISSB and Green Taxonomy aligned disclosure for ‘economically significant companies’ and consultation for other entities. Pending consultation, mandatory disclosure requirements for occupational pension schemes >£5bn and asset managers. Pension funds >£1bn and other companies (inc. private) subject to consultation.

 

UK Green Taxonomy: What counts as green?

The UK Green Taxonomy (‘the Taxonomy’) sets out a clear set of rules which will determine which economic activities can be deemed ‘green’, and has established the following six environmental objectives:

  1. Climate change mitigation
  2. Climate change adaptation
  3. Sustainable use and protection of water and marine resources
  4. Transition to a circular economy
  5. Pollution prevention and control
  6. Protection and restoration of biodiversity ecosystems

For each of the environmental objectives, a set of detailed standards, the Technical Screening Criteria (TSCs*), will be developed. An economic activity will be defined as green only if it fulfils all three criteria:  green finance sustainable investing

    1. Make a substantial contribution to one of six environmental objectives: The criteria for making a substantial contribution are set out in the TSC for the activity in question.
    2. Do no significant harm to the other objectives: This is also defined for each activity in the TSCs. This aims to ensure that activities which support one objective, such as climate change mitigation, do not have a significant adverse impact on another, such as biodiversity.
    3. Meet a set of minimum safeguards: These are minimum standards for doing business, constituting alignment with the OECD Guidelines for Multinational Enterprises, and the UN Guiding Principles on Business and Human Rights.

 

Investor stewardship

The investment sector is expected to make good use of the information generated by SDR and deliver on its responsibilities as a steward of capital.

Investors will have to integrate ESG considerations into investment decision-making, monitoring and engagement strategies, escalation and collaboration and voting practices.

greening finance sustainable investing

The UK Government expects that the investment sector:

  • Improves stewardship within its own organisations
  • Considers SDR information in capital allocation
  • Actively monitors, encourages and challenges companies to promote long term sustainable value generation
  • Is transparent about its engagement and voting by publishing easily accessible information
  • Commits to joining a Race to Zero-accredited net zero initiative for the financial sector and thereby joining the Glasgow Financial Alliance for Net Zero (GFANZ)*

Progress made towards these expectations will be assessed by the UK Government at the end of 2023.

What this means for you

It is likely your company is already or soon to be falling under the regulatory requirements of the TCFD.

Ensuring compliance with each of its four pillars is a complex and time-consuming process, but, when done correctly, presents a multitude of benefits to do with risk management, creating business opportunities and more.

Following the UK Government’s recent announcements, it is also clear that meeting TCFD requirements now will act as a future proofing mechanism for SDR compliance when it comes into force in the next few years.

Separate to this, the UK Green Taxonomy is likely to shine a light on the sustainability of a company’s business model. This takes significant time to adjust to, especially in an economy that is striving to become a world leader in climate change and green finance, and will be packed with investors demanding the highest standards on sustainability from its investees.

For more information on The Roadmap to Sustainable Investing and what this means for your business, speak to a member of the Financial and Professional Services Team

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