The roadmap introduces sustainability disclosure requirements for UK companies and reveals further developments in relation to a UK Green Taxonomy.
By David Berman, Paul A. Davies, Nicola Higgs, Michael D. Green, Anne Mainwaring, and James Bee
On 18 October 2021, the UK government released a report titled “Greening Finance: Roadmap to Sustainable Investing” (the Roadmap), which is intended to encourage UK businesses and investors to have regard to climate and other environmental, social, and governance (ESG) considerations in their decision-making processes. The Roadmap follows the government’s 2019 Green Finance Strategy, which set out a suite of policies to assist in aligning UK financial flows with a low-carbon planet.
The government states that it views the task of “greening the financial system” as composed of three fundamental phases. The Roadmap addresses the first phase: informing investors and consumers and addressing the information gap in relation to environmental and sustainability issues between corporates and investors. Notably, the Roadmap also introduces sustainability disclosure requirements (SDR) for UK companies and reveals further developments in relation to the UK Green Taxonomy (Taxonomy). In addition, the Roadmap identifies proposed timeframes for further developments on each of these topics.
Sustainability Disclosure Requirements
The Roadmap describes SDR as a regime that will bring together existing sustainability-related disclosure requirements under one integrated framework building on both existing and future global standards and best practices. SDR was initially announced by Chancellor of the Exchequer Rishi Sunak in July 2021, and will cover three types of sustainability disclosure:
- Corporate disclosure. Subject to consultation, corporate disclosure will involve reporting under ISSB standards (see below) and reporting the Taxonomy alignment of companies (see below), and will build on previously announced disclosure requirements for UK listed companies and large private companies.
- Asset manager and asset owner disclosure. Asset managers and asset owners will face new requirements to disclose how they take sustainability into account when making investment decisions.
- Investment product disclosure. Creators of investment products will face new requirements to report on sustainability impacts, risks, and opportunities, which will form the basis of a sustainability labelling regime.
The ISSB and Beyond
The proposed SDR incorporates the standards of the International Sustainability Standards Board (ISSB), an organisation that is still being formed by the International Financial Reporting Standards (IFRS) Foundation. The ISSB intends to develop a global reporting standard for sustainability, building on the Taskforce for Climate-related Financial Disclosure (TCFD) recommendations and other voluntary international standards currently popular in the market. The government states that the IFRS Foundation’s status as a preeminent global standard setter (most notably in relation to the IFRS accounting standards), combined with its stated intention to build on the TCFD recommendations (SDR intends to adopt the four pillars of the TCFD recommendations), makes it the right organisation to develop internationally aligned standards in this area.
Whilst the ISSB standards will primarily focus on mandating disclosures that are material to investors in the traditional sense (i.e., having a direct impact on the value of the disclosing company), SDR plans on going further and requiring wider information on how firms impact the environment and/or society (often known as “double materiality”). This will include requiring disclosure against the Taxonomy, as discussed below. SDR will also require the following:
- Verification of ESG claims. Asset managers, asset owners, and investment products will be required to substantiate any ESG and sustainability claims they make in relation to their offerings in a way that is easily digestible for consumers.
- Disclosures will be required to be made against the minimum safeguards introduced under the Taxonomy and any related metrics.
The Roadmap also notes that the ISSB standards are likely to initially only focus on climate issues and not the wider range of ESG topics. Companies are encouraged to continue to report in line with voluntary standards on wider ESG issues until the ISSB expands its scope accordingly. The Roadmap provides a timetable that shows when measures are expected to enter into effect. Mandatory disclosure requirements in line with the Taxonomy and ISSB that are expected for most economically significant companies will likely enter into effect in 2023/24.
The Taxonomy is a set of criteria that can be used as a common reference point to ascertain whether an economic activity may count as “sustainable” in the UK. The Taxonomy follows a similar approach to the EU’s Sustainable Finance Taxonomy (EU Taxonomy), which entered into force in 2020, and aims to combat greenwashing by providing a common approach for companies and investors to use in relation to sustainable characteristics.
The Taxonomy includes six environmental objectives, which are identical to those found in the EU Taxonomy. These are:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems
The Green Technical Advisory Group, an independent body established in June 2021, will develop a set of technical screening criteria (TSC) that will underline each of the six environmental objectives. TSC for objectives 1 and 2 will be subject to consultation in Q1 2022, ahead of the government’s plan to table legislation later in 2022, whilst the remaining four TSC are scheduled for consultation in Q1 2023. This follows the approach of the EU Taxonomy, which released TSC for climate change mitigation and climate change adaptation in advance of the other four objectives.
In order for an activity to be considered Taxonomy-aligned, the activity must meet three tests, which are similar in substance to those required under the EU Taxonomy:
- Make a substantial contribution to at least one of the six environmental objectives listed above.
- Do no significant harm to the other environmental objectives.
- Meet a set of minimum safeguards, including alignment with the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.
The Taxonomy (as outlined in the Roadmap) also replicates the EU Taxonomy in its acceptance of so-called Transitional Activities and Enabling Activities. Transitional Activities are those in which technological constraints do not permit completion of the process in a net zero-aligned way. In these instances, the TSC will set the criteria to be Taxonomy-aligned at a best-in-sector level subject to not locking in carbon-intensive activities (the manufacture of cement is one example of this). Enabling Activities are those that enable other activities to make a substantial contribution to one of the Taxonomy’s environmental objectives (whilst not actually being sustainable themselves). The Roadmap uses the manufacture of components for wind turbines as an example.
Other Areas Covered by the Roadmap
The Roadmap contains a section outlining the government’s expectations and aspirations in relation to investor stewardship and international action on green finance. The government expects that the UK pensions and investment sectors will:
- Apply to become a signatory of the UK Stewardship Code 2020
- Take into account the information eventually generated by SDR when allocating capital
- Actively monitor and challenge companies that they have invested in to promote sustainable value generation
- Be transparent about their own and their service providers’ engagement and voting
- Provide leadership, for example by joining a Race to Zero-accredited net zero initiative for the financial sector, and back up this commitment by publishing a transition plan by the end of 2022
The Roadmap also contains a summary of the international action that the UK has taken in recent years in relation to green finance, and the government’s plans ahead of COP26 in November 2021.
The Roadmap provides a great deal of information about the UK’s plans in relation to sustainable finance. However, assessing its impact is difficult at this stage because a number of the measures (including SDR and the Taxonomy) will be consulted on before implementation, and the ISSB standards upon which SDR relies have not been promulgated. Another unknown is to what extent the TSC under the Taxonomy will diverge from the TSC for the EU Taxonomy — both initially and over time, given the similarity of the regulatory regimes that each TSC underpins.
Importantly, the government has promised to update its Green Finance Strategy in 2022, which will go beyond the timetable in the Roadmap and set out an indicative sectoral transition pathway to 2050.
Latham & Watkins will continue to monitor developments in this area.
 Alongside “financing green”, “greening finance” was one of the two pillars of the 2019 Green Finance Strategy.
 The other two phases are (1) acting on the information, and (2) shifting financial flows.
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