The government published a new document outlining its existing and proposed objectives to develop the UK’s sustainable economy.

By Paul A. Davies, Michael D. Green, and James Bee

On 30 March 2023, the UK government published an updated version of its Green Finance Strategy (the Strategy), titled “Mobilising Green Investment”. The Strategy is part of the UK government’s series of announcements for its Green Day (see this blog post for more on the broader Green Day announcements).

The Strategy contains a number of updated proposals that have previously been announced. It also sets out five objectives which are part of the overall goal of ensuring that the UK can meet its legally binding target of net zero greenhouse gas (GHG) emissions by 2050:

1. Improving UK financial services growth and competitiveness as part of the transitioning global economy
2. Channeling private investment into the green economy
3. Ensuring financial stability in light of physical and transition climate risks
4. Incorporation of nature and adaptation goals into the UK government’s green finance policy framework
5. Alignment of global financial flows with climate and nature objectives

The Strategy is broadly divided into two “pillars” which are key areas in which the UK government feels it should develop its approach. These pillars are titled “align”, focused on enabling the market to align with UK climate and environmental goals, and “invest”, focused on mobilizing and creating opportunities for green investment in the UK. Below is a brief synthesis of some of the key updates that the Strategy provides in relation to these pillars.

Align

Sustainability Disclosure Requirements (SDR)

The SDR are the UK’s proposed framework for sustainability-related disclosures for corporates and financial institutions. The SDR will combine existing and new sustainability reporting requirements for UK companies, with a view to ensuring that investors across the economy have access to high-quality and comparable sustainability information.

The UK already has, in comparison to most jurisdictions, a developed sustainability reporting regime in relation to climate issues. Disclosure requirements based on the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) are required for listed companies, large asset owners, and large private companies.

The Strategy highlights the UK government’s plans to further develop these existing requirements into one overarching SDR framework, incorporating not only the TCFD-aligned existing disclosure requirements but also considering additional disclosures, including leveraging the work of the International Sustainability Standards Board (ISSB), which is expected to publish its first two standards in Q2 2023.[1]

Transition Plans

The Strategy also highlights the UK government’s continued work in seeking to ensure that companies, including financial institutions, develop transition plans, providing detailed insight into how companies should plan on aligning their business models with a transition to a net zero economy.

In April 2022, the UK government launched a Transition Plan Taskforce, which is developing a Disclosure Framework and Implementation Guidance that will provide an insight into what a “best practice” transition plan looks like. This framework and guidance are expected to be published in the summer of 2023, and the Strategy outlines how the UK government will use such documents as the basis of a consultation on the introduction of requirements for large UK companies to disclose their transition plans. Such a consultation will leverage current regulation introduced by the Financial Conduct Authority, which requires listed UK companies to disclose transition plans on a “comply or explain” basis.

UK Taxonomy

The Strategy notes the UK government’s commitment to introducing a UK Green Taxonomy. Acknowledging that developing an appropriate taxonomy is a challenging task, the Strategy identifies overseas jurisdictions, including the EU, that have already made considerable progress in this area, and notes that a number of key technical and strategic decisions need to be made in developing a taxonomy (e.g., whether to include a “Transition Taxonomy”, which is a recommendation of the UK government’s Net Zero Review).

In the longer term, mandatory disclosures against a future UK Taxonomy may be introduced. However, the introduction of any such mandatory taxonomy-related requirements will likely follow a period of voluntary disclosures, acknowledging that other taxonomies adopted around the world have faced challenges with usability in their immediate effective period.

Invest

Investment Priorities

The Strategy further outlines the UK government’s investment priorities, which will seek to contribute to maximizing the effectiveness of the UK’s net zero transition. These priorities include a focus on net zero and energy security nature and climate adaptations and resilience, with interim targets and spending goals introduced in each of these areas.

In addition, the UK government is focused on ensuring that adequate public and private investment is channeled to industries and technologies that must be scaled to commercial level in order to successfully effectuate the transition. On this basis, the Strategy discusses some of the key business models, finding sources and policy initiatives that the UK government has and intends to utilize to further develop these industries and technologies, such as carbon capture, usage and storage (CCUS) projects (see our previous Latham blog post for more information in this regard).

Summary

The Strategy is a long document, which sets out a number of existing and proposed aims of the UK government. In conjunction with the other initiatives announced during Green Day, the UK government has indicated that it hopes that, once implemented, these initiatives will lead to a material increase in investment in and development of the UK’s sustainable economy.

In terms of next steps, many of the items identified in the Strategy will require public consultations and/or other engagement with relevant stakeholders before any draft legislation is announced. Therefore, the remainder of 2023 will likely involve key developments as the ultimate aims of the UK’s Green Day efforts and sustainable economy initiatives continue to unfold.

Latham & Watkins will continue to monitor developments in this area.

Endnote

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[1] https://www.ifrs.org/news-and-events/news/2023/04/issb-decides-to-prioritise-climate-related-disclosures-to-support-initial-application/