UK’s green taxonomy delayed indefinitely 

This week’s announcement from the UK government confirming the delay of green taxonomy legislation, with no expansion on a timeline for its development, is very disappointing for the financial services industry. 

2021’s ‘Greening Finance: A Roadmap to Sustainable Investing’ promised “ambition to make the UK the best place in the world for green and sustainable investment”, yet this essential part in the journey to sustainable finance and reaching net zero targets seems to have been kicked further along the road. This leaves the UK further behind the EU and other jurisdictions in its leadership on green finance.

Initially, the government had indicated it would base the UK taxonomy on the year-old EU counterpart and legislate by the end of 2022. But Britain’s financial services minister, Andrew Griffith, has published a written statement on behalf of Baroness Penn explaining that developing a UK taxonomy was a complex exercise linked to multiple sectors of the economy.

“Therefore, the government will not make secondary legislation under the Taxonomy Regulations this year,” Griffith said.

Instead, it will use powers under its financial services and markets bill being approved in parliament to repeal an obligation on Britain to make taxonomy related rules by January. The government will then decide whether to change its approach to taxonomies, with an update in early 2023.

What is green taxonomy?

Green taxonomy is a classification system that provides investors with clarity when it comes to choosing sustainable investment options. By assessing activities and assets against key climate, social, or green objectives using identified thresholds and/or targets as reference points – green taxonomies offer sought-after consistency across the globe for companies engaging in sustainable practices. 

With multiple governments having created their own directive on this matter, including the EU, China, Mexico, Canada, and Russia, there are questions around how these taxonomies will interact, and how global companies and investors should expect to deal with these overlapping standards.

A green taxonomy for the UK

Ingrid Holmes, Executive Director, Green Finance Institute and Chair, Green Technical Advisory Group (GTAG), wrote a letter to the Financial Times last month explaining that, as part of a suite of tools, the UK needs “a highly usable, science-based UK green taxonomy which will play a critical role in helping to accelerate the transition to net zero by clarifying to the market where capital needs to be deployed.” 

However, for now, the UK will restate EU law around the taxonomy and take another year to decide on an approach.

Scheduled to take effect Jan. 1, the EU ‘s expanded taxonomy has certainly come under fire, from both investor and environmental perspectives. Concerns include credibility and usability, and the sustainable labelling of bioenergy, bio-based plastics, chemicals used to make plastics. Through the subsequent Complementary Delegated Act (CDA), fossil gas and nuclear power achieved sustainable labelling. 

Arguing that the initiative was unfit; becoming a tool for the very thing it aimed to tackle – greenwashing – a number of activists, environmental organisations, and even countries have taken legal action to have the CDA repealed.

We hope the extra time necessary for development means the UK taxonomy better fulfils its purpose, with easy adoption, as a vital part of the UK’s sustainable finance framework. We hope for more information at the start of 2023!

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