The Green Technical Advisory Group, which is guiding the UK government’s implementation of a UK Green Taxonomy, has issued detailed advice for the upcoming legislation.

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

In September 2023, the Green Technical Advisory Group (GTAG), chaired by the Green Finance Institute, has released four reports offering technical advice to HM Treasury on the development of a UK Green Taxonomy:

1. “Developing a UK Taxonomy Adapted to the UK’s Needs” — assesses short- and medium-term priorities for establishing a usable taxonomy
2. “Getting KPIs Right: Implementing an Effective Reporting Regime for the UK Green Taxonomy” — outlines issues in European taxonomy reporting Key Performance Indicators (KPIs)
3. “Treatment of green financial products under an evolving UK Green Taxonomy” — reviews how the UK Green Taxonomy affects previously considered “green” activities
4. “Operational considerations for taxonomy reporting” — provides recommendations for minimising data gaps in disclosures and guidance on the use of proxies

GTAG’s latest guidance seeks to provide a roadmap for the UK Green Taxonomy. While it draws on many elements of the EU taxonomy, GTAG has stated that it has looked to adapt the UK Green Taxonomy to provide a “more effective reporting framework” for both disclosing businesses and investors within the UK context.

GTAG comprises financial market experts and subject matter specialists who offer independent advice to the UK government for the practical establishment of a UK Green Taxonomy (see this blog post for more on the UK Green Taxonomy). These latest papers build on a GTAG publication in August 2023 which aimed to simplify the usability of the Do No Significant Harm (DNSH) criteria, as well as on GTAG recommendations in October 2022 regarding the practical implementation of the EU framework for onshoring.

GTAG’s Guidance — Headline Recommendations

While GTAG’s advice is detailed and wide ranging, some of the key recommendations outlined in the guidance documents include the following.

• Prioritisation: Given the delays in producing a UK Green Taxonomy (initially intended for regulation by 1 January, 2023), GTAG stresses that the UK government should prioritise the delivery of a usable tool above a complex extended taxonomy.
• Review: The UK Green Taxonomy is set to be reviewed every three years, which provides an opportunity to assess whether other policies and tools have adequately addressed the expanded UK Green Taxonomy’s requirements and whether the market still requires additional clarification from an extended taxonomy.
• Challenges of the EU Taxonomy: GTAG notes that significant difficulties surrounding the KPIs used for EU taxonomy reporting and the complexity of the EU rules has led to certain usability issues. GTAG suggests that this presents an opportunity to create a more efficient reporting framework based on the lessons learned from the EU.
• Comparable Reporting: The UK government should ensure meaningful and comparable reporting across different accounting frameworks, for example by streamlining definitions of terms such as “turnover” and “revenue” which carry different meanings in legal and accounting standards.
• Operational Considerations: Focus should be on producing robust and helpful disclosures while not overburdening businesses. GTAG highlights challenges that global companies face in complying with existing taxonomies and stresses the importance of ensuring an achievable data collection standard.
• Reporting Template and Stakeholder Forum: Providing companies with a reporting template would facilitate consistent disclosures and provide a comparable metric for investors which could be road-tested during the voluntary period. A forum could be provided for stakeholders during this period to raise any challenges or questions (a provision the European Commission intends to make under the EU taxonomy).
• Taxonomy-alignment: A transition period under which existing “green” products can continue to be labelled as such but cannot be referred to as “taxonomy-aligned” would provide clarity on what falls under the taxonomy. In addition, as the taxonomy evolves it should involve a “grandfathering” clause to enable green bonds and loans that are UK Green Taxonomy-aligned at their time of issuance to remain taxonomy-aligned if the taxonomy is updated.
• FCA Cooperation: The UK Green Taxonomy should seek to align with FCA guidance. The UK government and the FCA should work together to ensure a consistent approach, in particular to green and sustainability bonds. The FCA should update its guidance when necessary to provide consistency with the UK government.

Next Steps

The UK government will consult on the UK Green Taxonomy later this year, following delays which prevented it from meeting its goal of producing a taxonomy by January 2023. This consultation is set to take place in Autumn 2023. Once the UK Green Taxonomy is implemented, a two-year period is expected to follow, during which voluntary reporting would be encouraged before transitioning to a mandatory reporting requirement.

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