Government advisors have warned the UK not to repeat the mistakes of the European Union on corporate sustainability reporting, by ensuring that companies disclose against its green taxonomy before financial institutions are expected to do so.
The Green Technical Advisory Group (GTAG), which is helping the UK government decide which elements of the EU taxonomy rules to keep and which to rewrite in its national version, has also suggested changes to the key performance indicators (KPIs) to make the framework more useful and useable.
For similar reasons, GTAG has recommended that the government keeps the taxonomy focussed on clearly defining green economic activities rather than extending to cover transition or harmful activities.
The two reports are the latest pieces of advice from GTAG: last month it published recommendations on the benefits of applying the taxonomy more widely to government decisions and earlier this summer it delivered advice for how the UK’s green taxonomy should approach the concept of ‘Do No Significant Harm’ (DNSH).
In the coming weeks it is due to publish advice to the UK government from its usability and data workstreams.
In its advice on reporting KPIs, GTAG was very clear about the importance of sequencing reporting requirements, saying it “is a key matter to get right” and noting that “financial institutions are dependent on information disclosed by corporate clients and investee companies for their own reporting”.
Not the Green Investment Ratio
In the EU, the sequencing of sustainability-related reporting requirements has been a source of frustration for investors, who have been asked to deliver disclosures about their portfolios before their investee companies.
The GTAG also noted challenges with European taxonomy reporting KPIs for both financial and non-financial companies and said the UK had “an opportunity to design a more effective reporting framework informed by the EU’s experiences with usability issues”.
More specifically, for investor reporting, the expert group has recommended reporting at the fund level and disclosing taxonomy components for each fund instead of using the Green Investment Ratio at the entity level.
“Recognising that a significant proportion of asset managers operate in an agent role and are still bound by existing investment guidelines which limit the percentage of green taxonomy-aligned investments they can direct, a shift to the fund level provides a clearer and more accurate representation of how much of a client’s portfolio aligns with the UK Green Taxonomy,” GTAG said.
The expert group has also recommended requiring fund-level reporting for all funds, regardless of their ESG designation, as this makes it “easier to compare fund performance, reduces the risk of greenwashing, and levels the playing field in terms of data costs for sustainable versus non-designated financial products”.
Stick to green for now
The GTAG has also recommended that the UK government prioritise first delivering a taxonomy that clearly defines ‘green’ economic activities and park a decision about extending it to cover transition and/or harmful activities.
Such a decision should be made “once the suite of relevant sustainable finance policies, such as transition plans and sectoral pathways, have bedded in, so the government can analyse their combined impact,” the expert group said.
As to expanding the taxonomy to cover other economic sectors and industries, the GTAG said this “could be beneficial if the rationale is made clear, with a priority focus on including the highest emitting sectors and industries, followed by developing criteria on the basis of UK gross value added (GVA)”.
Earlier this year, the European Commission published a package of reports aimed at demonstrating why it did not need to expand its EU taxonomy to cover transition-related activities, arguing that there were already numerous ways to assess corporate climate transitions using existing rules, such as the amount of green capital expenditure disclosed under the green taxonomy, and the requirement for transition plans under the EU Green Bond Standard.
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