The United Kingdom (UK) environmental, social, and governance (ESG) investment market has grown dramatically. Businesses and financial institutions are responding to the challenge and the impetus to grow responsibly and sustainably. Recently, the HM Treasury published the report “Greening Finance,” which shows how sustainable finance and investment has been approached in the UK and gives a clear idea about the development structure in sustainable finance. Currently, the COP26 Summit is undergoing and the conclusions would mark our future. Here you’ll find some considerations.
In 2019, the UK became the first major economy to commit in law to net-zero greenhouse gas emissions by 2050. In 2021, the government went further, setting in law the world’s most ambitious climate change target to cut emissions by 78% by 2035 compared to 1990 levels. To achieve this, the whole economy will have to transform.
Greening the financial system can be seen in three phases. Phase 1: Informing investors and consumers, ensuring a flow of decision-useful information on environmental sustainability from corporates to financial market participants; Phase 2: Acting on the data, creating expectations and requirements that this sustainability information is mainstreamed into business and financial decisions, for example in risk management and investor stewardship; and Phase 3: Shifting financial flows, ensuring that financial flows across the economy shift to align with the UK’s net-zero commitment and broader environmental goals.
Getting the correct information to market participants
There is a clear need for an effective government ‒led sustainability disclosures regime that enables the flow of comparable and decision‒ useful information on how companies and financial flows impact and are impacted by climate, the environment, and broader sustainability factors. To address this issue, the UK considered the following elements:
The Task Force on Climate-related Financial Disclosures (TCFD). The Task Force was created in 2015 by the Financial Stability Board. It developed recommendations for companies to disclose how they manage the financial risks and opportunities that climate change poses to their business. The TCFD recommendations have received widespread acceptance and are applied by companies around the world. In November 2020, the Chancellor announced that the UK intends to make TCFD-aligned disclosures fully mandatory across the UK economy by 2025.
Sustainability Disclosure Requirements. The Chancellor of the UK announced the new Sustainability Disclosure Requirements (SDR) at his speech in July 2021. For the first time, it will bring together existing sustainability-related disclosure requirements under one integrated framework, building on leading global standards and best practices, and go further with new requirements. SDR makes on the UK’s TCFD implementation and will cover three types of disclosure: corporate, asset manager, asset owner, and investment product.
Baseline corporate reporting standard for sustainability. The International Financial Reporting Standards (IFRS) Foundation is the international body that governs the setting of global accounting standards adopted by the UK and over 140 other jurisdictions worldwide. It is now establishing an International Sustainability Standards Board (ISSB) to develop global baseline reporting standards for sustainability, building on the work of the TCFD and other voluntary standard setters. The ISSB will provide comprehensive and granular corporate reporting standards for sustainability-focused material information to investors. The government expects the Board to be established later this year and in early 2022.
A consistent structure. The TCFD recommendations set a framework for climate-related financial disclosure based on four pillars: Strategy, Governance, Risk Management, and Metrics and Targets. The government expects that the standards developed by the ISSB will build on the four pillars of the TCFD recommendations.
Beyond financial risks and opportunities. The ISSB’s standards, building on the work of the TCFD, will focus on material information to investors. SDR will go further, requiring more exhaustive information on how firms impact the environment. This includes requiring disclosure against the UK’s Green Taxonomy.
Transition plans. While there is not yet a commonly agreed standard or ‘template’ for what a good quality transition plan looks like, this is rapidly changing. The TCFD has finalized guidance on transition plans, and groups such as Climate Action 100+ and the Institutional Investors Group on Climate Change have undertaken relevant work. The Glasgow Financial Alliance for Net Zero (GFANZ) is also developing best practice guidance for financial sector transition strategies applicable across economic sub-sectors and jurisdictions.
Defining what counts as green; a UK Green Taxonomy
The government is implementing the UK Green Taxonomy (‘the Taxonomy’). This will set out the criteria that specific economic activities must meet to be considered environmentally sustainable and therefore ‘Taxonomy-aligned.’ The aim is to report against the Taxonomy will form part of SDR. Certain companies will be required to disclose which proportion of their activities are Taxonomy-aligned.
The structure of the Taxonomy draws on the EU approach, which the UK helped design as a former Member State. Three core principles will guide the government’s implementation process: 1) Robust and evidence-based; 2) Accessible; 3) Built for the UK to support a global transition: The government will take an approach that is suitable for the UK market and consistent with UK government policy. Each environmental objective will be underpinned by a set of detailed standards, known as Technical Screening Criteria (TSC). There will be an individual TSC for each economic activity included in the Taxonomy, which identifies how that activity can make a substantial contribution to the environmental objective.
Taxonomy and transition. In the case of the climate change mitigation objective, whether or not an activity contributes to reducing greenhouse gas emissions, consistent with the UK’s net-zero commitment and commitments under the Paris Agreement. However, the Taxonomy also recognizes companies that are working to meet environmental objectives in the future in two ways:
1. Transitional activities: Due to technological constraints, some economic activities cannot currently be conducted aligned with net zero-ambitions. For a number of these activities, the TSCs will set the threshold for Taxonomy alignment at the best-in-sector emissions level (subject to not locking in carbon-intensive activities). The manufacture of cement is one example of this.
2. Investment: Companies will report the proportion of their capital expenditure, which is Taxonomy-aligned. This will enable companies to demonstrate their investment in producing green activities in the future.
How can we contribute to a greener world?
Since 2015, world leaders have come together and mobilized the 2030 Agenda: a set of 17 goals for sustainable development, which are simple actions that can be taken to stay on the path to a prosperous planet. We must wake up and implement measures to stop, prevent, mitigate, and reverse these challenges. The objectives range from eliminating poverty to the fight against climate change, education, equality for women, the defense of the environment, or the design of our cities. We can change through these actions, as these goals are universal and leave no one behind. It is also essential to understand that these goals are interconnected; we cannot separate poverty from hunger, education from women’s empowerment, etc. If we can understand this, we will be closer to understanding the needs that need to be met, and, in turn, we will be closer to achieving all 17 goals. It is time to give back to the planet what the planet has given us. It is simple and has no cost.
The world has changed how they conduct their investment efforts, as climate change and environmental problems are becoming a matter of concern, as environmental risk is increasingly latent. Even though governments and countries have made a great effort on this issue, certain aspects should be further developed and strengthened, such as: informing investors and consumers, ensuring a flow of decision-useful information on environmental sustainability from corporates to the financial market participant. Acting on the data, creating expectations and requirements that this sustainability information mainstreamed into business and financial decisions, for example, in risk management and investor stewardship; and Shifting financial flows, ensuring that financial flows across the economy change to align with the UK’s net-zero commitment and broader environmental goals.
HM Treasury, Greening Finance: A Roadmap to Sustainable Investing, October 2021.
ONU, 170 acciones diarias para transformar nuestro mundo, September 2015.