One of the biggest challenges in the ESG sphere is the "alphabet soup" of sustainability disclosure reporting requirements. Without clear standards outlining what “green” or “sustainable” looks like, how do investors and consumers seeking to “invest green” or “purchase sustainably” develop the required trust in business? How can companies set targets, metrics and reports, so that they will not face greenwashing claims?
Some clarity is starting to emerge. The publication of the Government's Sustainable Investing Roadmap is a welcome development. Set out in an HM Treasury paper Greening Finance: A Roadmap to Sustainable Investing (Roadmap), the Government proposes to implement "economy-wide Sustainability Disclosure Requirements" (SDRs) and a UK Green Taxonomy (Taxonomy).
In 2019, the Government made a legal commitment to having an economy with net zero greenhouse gas emissions by 2050. It has made no secret of the fact that it views the role of business and the financial system in general as key to delivering this target. Since the publication of the Green Finance Strategy in 2019, there have been a series of proposed reforms including proposals to mandate climate-related financial disclosures by publicly quoted companies, large private companies and LLPs. The Roadmap sets out the next steps. How will it apply to companies?
Disclosure requirements
The proposal is for the SDR to bring together existing sustainability disclosure requirements for companies,asset managers and owners, to create one single integrated framework. The disclosures will cover:
- Corporate Disclosures – for companies to make sustainability disclosures based on the international standards being developed by the International Sustainability Standards Board (ISSB) and on the Taxonomy (see below).
- Asset manager and asset owner disclosure – for asset managers and asset owners to disclose how they take sustainability into account.
- Investment product disclosure – for creators of investment products to report the products' sustainability impact and relevant financial risks and opportunities.
The SDR will also require certain firms to disclose their "transition" plans to reach net zero greenhouse gas emissions by 2050, or explain why they have not done so. It is becoming more common for organisations to make 'net zero' commitments, with some publishing transition plans setting out concrete actions and targets. While there is currently no commonly agreed best practice template on what these transition plans will look like, as standards emerge they will be incorporated in UK regulation.
UK Green Taxonomy
Coupled with the SDRs, the UK Government is looking to create a one-size fits all definition of "green economic activity" so that all businesses can work towards the same standards and definitions. There is potential for consumer harm where a business claims to operate in an environmentally sustainable manner, but in fact may not be operating sustainably (so-called "greenwashing").
The Taxonomy will set out for businesses the specific economic activities they must meet to be considered environmentally sustainable, for the purpose of meeting certain environmental objectives. These environmental objectives will initially be:
- climate change mitigation i.e. the stabilisation of greenhouse gas emissions;
- climate change adaptation i.e. reducing the risk of adverse impact of current or future climate change on an economic activity, people, nature or assets;
- sustainable use and protection of water and marine resources;
- transition to a circular economy i.e. maintaining the value of products, materials and resources for as long as possible, thereby reducing the environmental impacts of their use;
- pollution prevention and control; and
- protection and restoration of biodiversity and ecosystems.
These objectives will be underpinned by certain standards known as Technical Screening Criteria or TSCs. In order to be Taxonomy aligned, an activity must meet certain tests e.g. it must make a substantial contribution to one of the environmental objectives; must not harm one objective in advancing another; and must meet a set of minimum safeguards. The minimum safeguards will operate as a set of minimum standards for doing business, aligning with the OECD Guidelines for Multinational Enterprises, and the UN Guiding Principles on Business and Human Rights.
What are the key dates in the roadmap to implement these changes?
The Government expects to consult on legislation for the SDRs in 2022. The TSCs for the climate change mitigation, and climate change adaptation objectives will be based on those of the EU Taxonomy.The Government expects to consult on UK draft TSCs in the first quarter of 2022, and legislate by the end of 2022. Consultation on the standards for the remaining four environmental objectives and expansion of the first two TSCs will take place in 2023.
Which companies will be required to disclose?
The Roadmap indicates that disclosure in line with the SDRs and the Taxonomy will be mandatory for the "most economically significant companies" within 1-2 years after the relevant legislation has passed in the UK. For other companies disclosure will initially be voluntary but the Government will consult on extending the range of companies for which it is mandatory.
Comment
While we expect that corporate disclosures will initially be mandatory only for the very largest businesses, the Government has made it clear that others can use the framework for voluntary disclosure. Adoption in whole or in part, could be a useful framework for purpose related businesses and for those wishing to attract green investment, consumer preference or sitting in the supply chain of larger businesses making disclosures in line with the regime.
It is also encouraging to see the UK Government planning in principle to align the regime with international disclosure standards such as those of the ISSB and the EU's technical criteria on climate change mitigation and adaptation. The exact details remain to be seen.