The UK government has recently released an updated version of its 2019 Green Finance Strategy, outlining its roadmap for the upcoming year. But what are the key takeaways for UK companies?
In July 2019, the UK government unveiled its Green Finance Strategy, with the aim of using the nation’s financial services industry to support its climate and environmental goals. The strategy sought to promote greener finance by encouraging the financial sector to align with the UK’s net zero commitment, adapt to climate change, and support the recovery of the natural environment.
The strategy also aimed to mobilise private investment to bolster clean and resilient growth, while enabling financial services to capitalise on the opportunities presented by the transition to a net zero economy.
In March, the government updated its 2019 strategy with the release of the ‘Mobilising Green Investment: 2023‘. While most of the measures remain unchanged, the update provides further details on timing and next steps that may affect UK companies.
Adoption of the International Sustainability Standards Board’s reporting standards
The update reaffirms the government’s support for the International Sustainability Standards Board (ISSB) and its global sustainability reporting standards, which seeks to provide investors and other market participants with reliable and consistent information about the risks and opportunities of companies, to help them make informed decisions.
The government will now establish a framework for assessing these standards to determine their suitability for adoption in the UK once the final details are released (expected in the summer of 2023). After the final standards are published, the goal is to endorse a decision within 12 months.
Requiring companies to publish climate transition plans
Currently the Financial Conduct Authority (FCA) together with the Transition Plan Taskforce (TPT) requires listed companies, large asset owners, and managers to disclose their transition plans on a ‘comply or explain’ basis.
The update to the Green Finance Strategy demonstrates that the government wants to build on this, pledging to look for input on new requirements for the largest private companies in the country to also reveal their transition plans, should they have them.
In order to maintain fairness and ensure that requirements are comparable, the government plans to consult closely with the FCA, including potentially using the same ‘comply or explain’ approach.
‘We welcome this updated Green Finance Strategy, which represents an important milestone, building on collective efforts to date and setting out a clear plan for the future.” said Nikhil Rathi, chief executive officer of the FCA. “We’re playing our part in delivering a world-leading framework for transition plan disclosures through our collaboration with the UK Transition Plan Taskforce.”
The consultation process is anticipated to take place in the upcoming Autumn/Winter 2023, following the finalisation of the TPT framework.
Issuing a call for evidence for scope 3 emissions
The government also announced it will be introducing a call for evidence on Scope 3 greenhouse gas (GHG) emissions reporting, in order to gain a better understanding of the advantages and drawbacks related to producing and utilising scope 3 data.
Scope 3 emissions represent all the indirect emissions that occur in a company’s value chain, outside its own operations, and can account for over 70% of businesses total emissions.
Additionally, the Environmental Reporting Guidelines, which offer voluntary guidance for UK organisations, including Streamlined Energy and Carbon Reporting, will be revised and updated accordingly.
Consulting for the UK Green Taxonomy
The UK government plans to deliver its UK Green Taxonomy, a tool designed to provide clear definitions of what economic activities qualify as green. This move is similar to the taxonomy being developed by the European Union and is intended to improve the quality of standards, labels, and disclosures used within the green finance industry. The Taxonomy is expected to be open for consultation in Autumn 2023.
Nuclear energy, which is a key, but controversial technology for achieving net zero emissions, is proposed to be included in the UK’s Green Taxonomy, subject to consultation. Following its finalisation, companies will be encouraged to voluntarily report against it for at least two years before the government explores mandating disclosures.
The government recognises that companies may face disproportionate burdens in disclosing taxonomy-related information based on their size or scale. To address this, proposals will be developed with relative size in mind, ensuring that the requirements are appropriate and feasible for each company.
The future of ESG regulations
As part of the Edinburgh reforms in December 2022, Chancellor Jeremy Hunt announced government plans to ensure improved transparency and good conduct in the ESG ratings market.
To achieve this, HM Treasury has released a consultation paper titled “Future Regulatory Regime for ESG Ratings Providers.” The paper proposes bringing ESG ratings providers within the regulator perimeter or the FCA and is looking for feedback on this proposal.
The consultation period began on 30 March 2023 and will conclude on 30 June 2023, after which the government will analyse the responses to decide on their next steps.
For quite some time, the ESG ratings market has confounded many, with several issues raised about their reliability and usefulness. Currently, different methodologies and data sources can lead to different rankings for the same company, and due to differences, ratings may not reflect a company’s true sustainability efforts.
The UK is not alone in its plans to regulate ESG ratings. In fact, regulators, and lawmakers in various regions, including India, the US, the EU, and other parts of the world, are also contemplating this matter.
You can find the full strategy here.
