The Green Technical Advisory Group (GTAG), the independent expert group set up in June 2021 to advise the UK government on the design and implementation of the UK Green Taxonomy, has published two reports, one on operational considerations for taxonomy reporting and the other on the treatment of green financial products under an evolving UK green taxonomy. For more on the UK Green Taxonomy, see our previous posts here and here.
Published on 7 September 2023, GTAG’s reports are products of its workstream 2, the focus of which is to develop recommendations to the government on ways to enhance usability of the UK Green Taxonomy while also ensuring alignment with other disclosure regimes.
The first report is geared toward minimising data gaps to make way for reliable, consistent and decision-useful taxonomy reporting that also seeks to avoid undue burdens being placed on businesses. To this end, the paper makes several recommendations to the government, including as follows:
- Learn from the experience of other taxonomies and sequence mandatory disclosures so that sufficient information is available to those making taxonomy disclosures (ie, non-financial companies to make disclosures ahead of financial companies);
- Implement GTAG’s recommendations to enhance usability of the UK Green Taxonomy and, in particular, to streamline the widely debated do no significant harm (DNSH) criteria under the EU Taxonomy. In practice, this would mean reducing the subjective nature of certain criteria, which GTAG says is likely to improve the reliability of data as companies would not have to make as many judgement calls in respect of reporting requirements;
- Prepare and make available adequate templates, guidance and best practice for those reporting in the voluntary disclosure period which, according to the 2023 Green Finance Strategy, will last for at least the first two years before mandatory obligations are introduced;
- Support the use of estimates during the voluntary reporting period when data may be limited or insufficient, and to do so by providing clear instructions to the market as to where and how estimates can be used in disclosures and encouraging transparency on their methodology; and
- Consider the use of a reporting template to aid consistent disclosures during the voluntary period.
GTAG’s second report considers how activities previously considered “environmentally sustainable” may be impacted with the implementation of the UK Green Taxonomy. It also considers the treatment of taxonomy-aligned activities, products and investments as the taxonomy evolves over time. Against this context, suggestions are put forward to the government, such as:
- Before implementation of the taxonomy, clarify how existing green products will be dealt with when the taxonomy comes into effect, as well as how taxonomy-aligned products will be dealt with as the taxonomy develops. GTAG recommends the use of a “grandfathering” clause for both debt and equity so that certain conditions continue to apply for a specified period of time (ie, in the case of debt, products deemed to be “green” at the point of issue will continue to be deemed green until maturity even if taxonomy standards and criteria change). This will give confidence to the market that there is predictability in the development and issuance of taxonomy-aligned products;
- Work in tandem with the FCA to agree a consistent approach to green and sustainability debt instruments and green equity investments, including updating FCA guidance to support taxonomy alignment. This is especially pertinent given the FCA’s role in delivering the UK Sustainability Disclosure Requirements, as well as its ongoing work on environmental, social and governance integration and investment labels; and
- Publish additional supporting guidance to the market, including a suggested methodology and detailed case studies, to explain how to assess complex green investments and projects against the UK Green Taxonomy.
Consultation on a UK green taxonomy has been promised since October 2021 when the government published its Roadmap to Sustainable Investing. Nearly two years on, there is certainly a good deal of anticipation around what the proposed taxonomy will look like, how it will sit in the global landscape of disclosure regimes, and what lessons have been learned from these regimes.