HM Treasury has published its latest policy paper setting out a further roadmap on sustainable investing: Greening Finance: A Roadmap to Sustainable Investing.
Urging the private sector to treat this roadmap as a further call to action, Rishi Sunak MP explains that, "Ensuring the financial sector is equipped to play its part is vital. Aligning the financial system with a sustainable future will bring real benefits for the environment and society. It is an opportunity to boost economic growth, create jobs, and level up the UK regions."
Key issues covered by the policy paper include:
- Creating an integrated framework for disclosures on sustainability across the economy – the Sustainability Disclosures Requirements (SDR). This will build on the UK's TCFD implementation and impact corporate disclosures, asset manager and asset owner disclosures, and investment product disclosures (including for products not making sustainability claims). In November 2021, the FCA will publish discussion papers on (i) consumer-facing product-level SDR disclosures, and (ii) a sustainable investment labelling regime. HM Treasury and the FCA are also exploring how best to introduce sustainability-related requirements for financial advisors.
- The government's expectation that the International Sustainability Standards Board (ISSB), being established by the International Financial Reporting Standards (IFRS) Foundation, is the right organisation to develop international corporate reporting standards in this area. Once developed, these will form a core component of the SDR framework.
- The SDR will require disclosures on transition plans by certain firms on a comply or explain basis. As standards for transition plans emerge, the government and regulators will look to incorporate these into UK regulation and to strengthen the disclosure requirements as appropriate.
- The importance of ESG data and ratings providers. The government is considering bringing these firms into the scope of FCA authorisation and regulation. The government will set out further detail in 2022. Government and regulators are also considering their approach to digitisation of sustainability data, including the value of a centralised register for ESG data.
- Implementing a UK Green Taxonomy to define which economic activities count as environmentally sustainable (and are, therefore "taxonomy aligned"). The Green Technical Advisory Group (GTAG) will advise on implementation. Reporting against the taxonomy will form part of the SDR. While the structure of the taxonomy draws on the EU approach, the government will take an approach that is suitable for the UK market and consistent with UK government policy. "There will also be a clear focus on the benefits of coherence and compatibility with other international frameworks." Transitional activities will be recognised, but will be subject to the three-yearly review of the taxonomy's effectiveness.
- Technical Screening Criteria (TSC) will be consulted on and made through statutory instruments. The TSC for the climate change mitigation and climate change adaption criteria will be based on those of the EU Taxonomy. It also aims to consult on these in Q1 2022 ahead of legislating by the end of 2022. The government aims to consult on the expansion of climate TSCs and standards for the remaining four environmental objectives during Q1 2023.
- The government's expectations of asset managers and asset owners as responsible stewards of capital. The government will assess progress in relation to its expectations detailed in the report at the end of 2023.
- The government and financial regulators aim to lead international efforts to bring about green finance after COP26 and ensure the UK's domestic regulation represents best international standards.
Industry will welcome the indicative timeline (roadmap) for the steps set out in Figure C (pages 18-19) of the report. However, much of the detail is yet to come in future consultations.
What is clear, is that ESG issues will continue to grow as a priority for corporate boards, investors, the government and regulators. Alongside that growth will come opportunities and challenges, so it is critical that in-house teams prepare accordingly.