In 2019, the UK became the first major economy to commit to net zero greenhouse gas emissions by 2050. As part of that commitment, the Chancellor announced the Sustainability Disclosure Requirements (SDR) in July 2021.
The UK Greening Finance: A Roadmap to Sustainable Investing policy paper has just been published ahead of the 2021 UN Climate Change Conference (COP26) taking place in Glasgow later this month. This new policy paper sets out long-term proposals to green the financial system, bringing together existing sustainability-related disclosure requirements under one framework and setting out a number of new requirements.
Disclosure of information
The SDR builds on the implementation of the UK’s Task Force for Climate-related Disclosures and will cover three types of disclosure:
- Corporate disclosure: new requirements will be introduced for companies to make mandatory sustainability disclosures. This will include reporting under proposed international standards and reporting of environmental impact using the UK Green Taxonomy (a framework which will determine whether investments can be defined as environmentally sustainable).
- Asset manager and asset owner disclosure: new requirements for asset managers and assets owners will be introduced to reveal how they take sustainability into account. The information will support consumers in deciding if their assets are managed according to their sustainability preferences.
- Investment product disclosure: new requirements for creators of all investment products will be introduced to report on the products’ sustainability impact, relevant financial risks and opportunities.
The current sustainability reporting system lacks consistency across different sectors, which creates the potential for ‘greenwashing’ and confusion around how sustainable products and services really are. The SDR will use the same framework and metrics across the economy to provide a clear and direct link from investors to the businesses they are invested in, and their relationship with the environment. Metrics will be drawn from international standards (where they exist) to make sure that the standards are internationally compatible.
The Green Taxonomy and investment activities
All companies providing investment services will be required to disclose which proportion of their activities are Taxonomy-aligned as part of the SDR. The Taxonomy has six environmental objectives, including climate change mitigation, sustainable use of water, and the protection and restoration of biodiversity. The Taxonomy aims to create clarity and consistency for investors; improve the understanding of companies’ environmental impact, and provide a reference point for companies. The UK Taxonomy is broadly based on the EU Taxonomy. Any investment activity must:
- Comply with Technical Screening Criteria (TSC);
- Substantially contribute to one of six environmental objectives;
- Not significantly harm the other objectives; and
- Meet minimum safeguards aligned with the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.
Taxonomy-alignment focuses on reported data, rather than projections. It will therefore provide a clear view of the areas in which a company is currently making a substantial contribution to environmental objectives.
The Taxonomy is intended to be a long-term tool and it will focus on the outcomes of economic activities, rather than technologies used. The Regulations will be reviewed every three years.
Sustainability is a major international topic and climate change is a key government priority. The UK wants to ensure that domestic regulations mirror international regulations and provide clear guidelines to confirm the UK’s role as a global leader in green finance. The Roadmap outlines actions to be taken to implement the new requirements and deliver the UK Green Taxonomy. Ultimately, however, whether these new reporting requirements will have the intended impact of encouraging greener finance will depend upon the utilisation of this information and subsequent investment in products and services which align with the government’s net-zero ambitions.