Greening Finance: A Roadmap to Sustainable Investing October 2021 Greening Finance: A Roadmap to Sustainable Investing October 2021 © Crown copyright 2021 This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government- licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: psi@nationalarchives.gsi.gov.uk. Where we have identified any third-party copyright information you will need to obtain permission from the copyright holders concerned. Any enquiries regarding this publication should be sent to us at: public.enquiries@hmtreasury.gov.uk Contents Foreword2 Introduction6 Chapter 1: Getting the right information to market participants 9 Chapter 2: Defining what counts as green 20 Chapter 3: Being a responsible steward of capital 29 Chapter 4: Leading international efforts to green finance 33 Chapter 5: Next steps 36 Annex A: Sectoral implementation  38 Annex B: Green Technical Advisory Group work plan 40 Glossary  41 1 Foreword The Rt Hon Rishi Sunak MP, But we should aim to go further. Investors and businesses must have the information Chancellor of the Exchequer they need to understand the full range of In the year of our COP26 Presidency, the UK environmental risks they face and create. is leading by example by putting the world’s That information should be a key component most ambitious climate-change targets into of every investment decision and the law and setting out policies to kick-start strategy of every business. Climate and a green industrial revolution. That is why environmental considerations should be greening the financial system is an integral central to the decision-making process of part of my plans for the future of the UK’s every UK board and every investor’s risk and financial services. return calculations. Ensuring the financial sector is equipped The measures set out in this Roadmap are to play its part is vital. Aligning the financial a step in that direction. They will put UK system with a sustainable future will bring real businesses in a better position to withstand benefits for the environment and society. It is climate-related risks and further seize the an opportunity to boost economic growth, opportunities presented by the transition to create jobs, and level up the UK regions. net zero. In doing so, they will increase the UK’s competitiveness as a global financial We are making significant progress. centre and bolster the stability of the financial In November 2020, the UK became the first system we all rely on. country in the world to commit to making climate-risk disclosures fully mandatory I am proud of the UK’s global leadership in this across the economy. In September 2021, the space and urge the private sector to treat this UK Government raised £10 billion for green Roadmap as a further call to action, cementing projects through the sale of the first green the UK’s status as the best place in the world gilt, the largest inaugural green bond issuance for green and sustainable investment. by any sovereign. 2 The Rt Hon Kwasi Kwarteng MP, Secretary The Rt Hon Thérèse Coffey MP, Secretary of of State for Business, Energy, and State for Work and Pensions Industrial Strategy On 1 October 2021, Regulations requiring This Roadmap demonstrates the UK’s trustees of certain occupational pension continuing world leadership in moving schemes to embed climate change risk towards a net-zero economy, underpinned by into their governance, strategy, and risk green finance, that will build upon our ongoing management processes, came into force. progress to make reporting in line with the My department’s ground-breaking legislation Task Force on Climate-Related Financial represents a key milestone on the path set Disclosures' recommendations mandatory. out by the UK’s Joint Government-Regulator This recognises the vital roles of the corporate TCFD Taskforce, tasked with implementing and financial sectors in delivering the UK’s the recommendations of the G20’s Financial climate objectives. Stability Board’s Task Force on Climate- Related Financial Disclosures. But we are I welcome the publication of this Roadmap committed to going further. and am pleased that the Department for Business, Energy, and Industrial Strategy I am delighted to welcome this Roadmap, is working closely with our partners on which sets out plans for sustainability- the development of sustainability-related related disclosures that will take forward the disclosures, including with advice from our government’s commitment to a sustainable Green Taxonomy Energy Working Group and financial system. This will go beyond Company Law Working Group. I look forward existing disclosures to require publication to consulting in due course on the proposals of information relating to sustainability- for corporate sustainability disclosures. related risks, opportunities, and impacts. It will empower pension schemes and savers to weigh these factors in all their financial decisions. It will also help tackle ‘greenwashing’ – misleading investors on how sustainable a product is – something that has no place in our economy’s collective efforts to reach net zero. 3 John Glen MP, Economic Secretary to the The Rt Hon George Eustice MP, Treasury and City Minister, HM Treasury Secretary of State for Environment, Food and Rural Affairs With this Roadmap, the government continues to blaze a trail in green finance, setting an I welcome the publication of this Roadmap. example ahead of COP26 in Glasgow. I am To meet our ambitions to mitigate and proud to put my name to a publication that is adapt to the impacts of climate change and both forward-leaning and pragmatic. tackle biodiversity loss, we need to realign the way our economy interacts with the These new disclosure requirements will set natural environment. the record straight on what is sustainable, and which companies are competently managing These new disclosure requirements build on the transition to a sustainable economy. I look the ambition of the Green Finance Strategy to forward to working closely with industry to develop a world-class international centre for turn this vision into reality. green finance in the UK. 4 Nikhil Rathi, CEO, Financial Andrew Bailey, Governor of the Conduct Authority Bank of England Society is increasingly looking to the financial I welcome the publication of this Roadmap sector to help deliver a more sustainable for implementing Sustainability Disclosure future. To achieve this, it is essential that there Requirements (SDR). The Bank has been a is high-quality, reliable, and internationally strong advocate for disclosing climate-related comparable information on material financial risks in a timely and decision-relevant environmental, social and governance factors manner, and the Task Force on Climate- right along the value chain – from corporates, Related Financial Disclosures framework is to financial services firms, and onward to the ideal standard. SDR represents a huge clients and consumers. step towards making this happen. While initially focussed on climate risks, SDR will Better information will not only improve also require disclosure on the extent to decision-making, but also help to build which economic activities are sustainable trust and combat potential ‘greenwashing’. and, in doing so, will highlight the associated Consumers also need an intuitive way of financial risks. understanding how responsible different investment products are. Working closely with The transition to net zero will generate government and our regulatory partners, the both challenges and opportunities for the FCA will help address these challenges by UK economy. As we enter this period of playing our part in implementing elements of change, SDR will support the transition, the Sustainability Disclosure Requirements will better allow the economy to realise across the economy and a sustainable opportunities, and will help firms and investors labelling system for investment products. manage the risks. 5 Introduction In 2019, the UK became the first major This shift is well underway. The market for economy to commit in law to net zero Environment, Social and Governance (ESG) greenhouse gas emissions by 2050. In 2021, investments in the UK has grown dramatically. the government went further, setting in law Businesses and financial institutions are the world’s most ambitious climate change responding to the challenge and impetus target to cut emissions by 78% by 2035 to grow in responsible, sustainable ways. compared to 1990 levels. To achieve this, The demand for sustainable products is the whole economy will have to transform. high: 70% of the UK public want their money The Intergovernmental Panel on Climate to go towards making a positive difference Change (IPCC) is clear that immediate, rapid, to people or planet.1 And the market is and large-scale reductions in greenhouse responding: data from the Investment gas emissions are needed. This transition Association finds that 49% of the £9.4 trillion cannot be achieved without a significant shift in UK assets were integrating ESG in their of investment into sustainable projects and investment processes in 2020, up from 37% in green technology. The financial system is 2019 (see Figure D).2 therefore critical to achieving net zero and protecting the UK’s natural environment. Box 1: What is sustainability? Responding to widespread investor and consumer demand, organisations are increasingly reporting sustainability information. Whilst there is no single definition of ‘sustainability’, voluntary reporting is often framed around three key factors – Environment, Social and Governance: Environment: This covers how organisations impact and are impacted by climate change and broader environmental issues, like biodiversity. Reporting on climate change is rapidly becoming mainstream. Global reporting standards are emerging that are underpinned by international agreements on underlying climate policy. Beyond climate, the data needed to drive wider environmental objectives is less developed – although this is changing through initiatives like the Task Force on Nature-related Financial Disclosures (TNFD). Social: This includes factors ranging from modern slavery to international development. Investors have long considered these matters in their investment decisions and many engage actively with investee companies on these topics. Globally agreed reporting standards may take longer to emerge, but there are existing frameworks which may provide a basis for future global standard setting. Governance: Covers the means by which a company is controlled and directed, most usually through a Board of Directors. It is the longest established area for investor engagement and extensive disclosure is already provided by companies through existing company law and other requirements. 1 See “Investing in a better world: understanding the UK public’s demand for opportunities to invest in the Sustainable Development Goals” page 7. 2 The Investment Association Annual Survey, 2021 - https://www.theia.org/sites/default/files/2021-09/IMS%20report%202021.pdf 6 In 2019, the government published the zero commitment and wider environmental Green Finance Strategy. This was a landmark goals. The second was ‘financing green’: document setting out a suite of ambitious mobilising private finance at scale to support policy commitments to help align UK financial clean and resilient growth. It also committed flows with a low-carbon world. It highlighted to capturing the opportunities presented two key lines of effort. The first was by the transition to net zero, cementing UK ‘greening finance’: supporting the financial leadership in green finance and ensuring that services sector to align with the UK’s net businesses can benefit. Box 2: Delivering on the Green Finance Strategy ✓ Committed to making TCFD-aligned disclosures mandatory across the economy ✓ Included an obligation in their remit letters for the financial regulators to have regard to climate ✓ Led G7 discussions on the development of global standards for sustainability disclosure ✓ Committed to implementing a UK Green Taxonomy to provide a shared understanding of which economic activities count as green ✓ Issued a Green Gilt, representing the largest debut transaction size for any sovereign at £10bn and kick-starting a green financing programme ✓ Working to catalyse market-led action on nature-related financial disclosures Over the last two years, the government has Ÿ Phase 3: Shifting financial flows – delivered on the commitments set out in the ensuring that financial flows across Green Finance Strategy (see Box 2). Now the the economy shift to align with the government is building on these successfully UK’s net zero commitment and wider laid foundations and raising our earlier environmental goals. ambitions. Greening the financial system can be seen in three phases: This Roadmap represents the government’s strategy to deliver Phase 1. Central to this are Ÿ Phase 1: Informing investors and new economy-wide Sustainability Disclosure consumers – addressing the information Requirements. These will bring together gap for market participants, ensuring new and existing sustainability reporting a flow of decision-useful information requirements for business, the financial on environmental sustainability sector and investment products. This will from corporates to financial allow sustainability information to flow market participants. from companies in the real economy to the financial sector and its financial products. That Ÿ Phase 2: Acting on the information – information will help empower investors and creating expectations and requirements consumers to make financial decisions which that this sustainability information align with their values (see Figure A). is mainstreamed into business and financial decisions, for example in risk management and investor stewardship. 7 Box 3: What is ‘greenwashing’? ‘Greenwashing’ is when misleading or unsubstantiated claims about environmental performance are made by businesses or investment funds about their products or activities. This can lead to the wrong products being bought – undermining trust in the market and leading to misallocation of capital intended for sustainable investments. Greenwashing was the most frequently cited concern amongst respondents to the 2021 Schroders Institutional Investor Study3, with 60% of ESG investors raising it as a challenge. The FCA has received a growing number of low-quality authorisation applications from ESG‑themed funds, many of whose sustainability claims did not stand up to scrutiny. The steps outlined in this Roadmap will help consumers better judge the sustainability characteristics of products and firms, supporting the continued growth of the market for sustainable finance. This Roadmap will: Ÿ Set out more details on the Sustainability A comprehensive long-term view is also Disclosure Requirements to help needed. The government will therefore businesses prepare for what they will update the Green Finance Strategy in have to report and by when (Chapter 1) 2022. This will go beyond the timescales in this Roadmap and set out an indicative Ÿ Set out more detail on the UK Green sectoral transition pathway out to 2050 to Taxonomy (Chapter 2) align the financial system with the UK’s net Ÿ Highlight the importance of investor zero commitment. The updated strategy stewardship in green finance will assess industry progress on Phases and set out the government’s 1 and 2. It will also consider triggers for expectations (Chapter 3) stronger policy to facilitate Phase 3 and help Ÿ Reiterate the UK's commitment to ensure that the UK meets its climate and international leadership on green finance environmental objectives. 3 Schroders Institutional Investor Study 2021 https://www.schroders.com/en/sysglobalassets/digital/institutional-investor-study-2021/assets/ SIIS_2021_Sustainability.pdf 8 Chapter 1: Getting the right information to market participants 9 Disclosure is the process by which Voluntary sustainability disclosures organisations provide information are widespread but often inconsistent; to customers, investors, and other information from different organisations is stakeholders, for example through their not always comparable. There is a clear Annual Report. Sustainability information is need for an effective government-led increasingly fundamental to investor decision- sustainability disclosures regime which making and informs many businesses’ enables the flow of comparable and decision- strategic direction. useful information on how companies and financial flows impact – and are impacted by – climate, the environment and broader sustainability factors. Box 4: The Task Force on Climate-related Financial Disclosures (TCFD) The Task Force on Climate-Related Financial Disclosures (TCFD) was created in 2015 by the Financial Stability Board. It developed recommendations for companies to disclose how they manage the financial risks and opportunities that climate change poses to their business. The TCFD recommendations have received widespread acceptance and are applied by companies around the world. In November 2020, the Chancellor announced that the UK intends to make TCFD-aligned disclosures fully mandatory across the UK economy by 2025. Since then, the government and regulators have made significant progress towards this ambition: Ÿ In December 2020, the Financial Conduct Authority (FCA) finalised its TCFD-aligned disclosure rules for UK premium-listed companies. Ÿ In March 2021, the Department for Business, Energy, and Industrial Strategy (BEIS) consulted on mandatory climate-related financial disclosure requirements for certain publicly quoted companies, large private companies, and Limited Liability Partnerships. The consultation closed in May. Ÿ In June 2021, the FCA consulted on proposals to extend its TCFD requirements to standard-listed issuers and to require UK-authorised asset managers, life insurers and pension providers to publish client-focused TCFD-aligned disclosures. Ÿ In July 2021, the Department for Work and Pensions (DWP) laid legislation before Parliament requiring a variety of pension schemes to make certain TCFD disclosures and effectively manage climate-related risks and opportunities. Beyond TCFD, the UK has long been a world-leader on embedding sustainability into corporate reporting. Since 2013, the government has required companies to include a Strategic Report in their Annual Report to facilitate the reporting of non-financial information. In 2016, the government added further reporting requirements for large Public Interest Entities (PIEs) - over 500 employees - requiring them to disclose information on their environmental impact, social matters, employees, human rights, and anti-bribery and corruption. And since 2019, the government has required all large UK companies to disclose their greenhouse gas emissions. 10 Sustainability Disclosure 2. Asset manager and asset owner Requirements disclosure: New requirements for asset managers and asset owners that manage The Chancellor announced new Sustainability or administer assets on behalf of clients Disclosure Requirements (SDR) at his and consumers (including occupational Mansion House speech in July 2021. SDR pension schemes) to disclose how they will create an integrated framework for take sustainability into account. These decision-useful disclosures on sustainability will help consumers determine whether across the economy. It will, for the first time, their assets are managed according to bring together existing sustainability-related their sustainability preferences. disclosure requirements under one integrated 3. Investment product disclosure: New framework – building on leading global requirements for creators of investment standards and best practice – and go further products to report on the products’ with new requirements. sustainability impact and relevant financial risks and opportunities. This SDR builds on the UK’s TCFD implementation information will form the basis of a new and will cover three types of disclosure (see sustainable investment labelling regime Figure B and Annex A for further details): that will make it easier for consumers to navigate the range of investment 1. Corporate disclosure: New requirements products available to them (see Box 6). for companies – including in the financial services sector – to make sustainability SDR will use the same framework and metrics disclosures. This will, subject to across the economy to ensure a clear and consultation, comprise reporting under direct link from investors, through the financial proposed international standards (see system to the businesses they are invested in Box 5) and reporting of environmental and their relationship with the environment. impact using the UK Green Taxonomy Metrics will be drawn from international (see Chapter 2). standards, where they exist, to support international compatibility. Figure A: How information and capital flows through the economy Capital Environment Companies Financial Financial Investors Sector Products Information 11 Box 5: Towards a global baseline corporate reporting standard for sustainability For every investor globally to embed climate and sustainability into their decision making, markets need consistent and accurate information. This can only be achieved through a global standard which all companies report against. The International Financial Reporting Standards (IFRS) Foundation is the international body that governs the setting of global accounting standards, adopted by the UK and over 140 other jurisdictions around the world. It is now establishing an International Sustainability Standards Board (ISSB) to develop global baseline reporting standards for sustainability, building on the work of the TCFD and other voluntary standard setters. The ISSB will provide comprehensive and granular corporate reporting standards for sustainability, focused on information which is material to investors. The government expects the Board to be established later this year, and, in early 2022, for the Board to consult on a draft climate- related standard, before expanding its standard-setting to broader environmental and sustainability factors. The UK is a strong supporter of the IFRS Foundation and is proud that the Foundation has been based in London for the last twenty years. As an established international standard- setter with a transparent and robust governance structure, it is the right organisation to develop international standards in this area. The government expects that ISSB standards will form a core component of the SDR framework, and the backbone of its corporate reporting element. To deliver this, the government will create a mechanism to adopt and endorse ISSB- issued standards for use in the UK. The proposed overarching framework will be subject to consultation. Regulatory changes will ensure that UK reporting under the ISSB standards is consistent with both existing and forthcoming disclosure requirements so that companies are not required to report the same information twice. 12 A consistent structure Ÿ Minimum safeguards: The UK’s Green Taxonomy requires sustainable The TCFD recommendations set a framework investments to satisfy minimum for climate-related financial disclosure based safeguards relating to basic good on four pillars: Strategy, Governance, Risk business practice. The SDR will require Management, and Metrics and Targets. disclosure against these minimum The government expects that the standards safeguards and any related metrics developed by the ISSB will build on the four (see Chapter 2). pillars of the TCFD recommendations. SDR will integrate these global standards and will Over time, the ISSB standards will expand similarly adopt the four pillars of the TCFD beyond climate to cover broader sustainability recommendations (see Figure B). issues. In the meantime, the government and regulators encourage disclosure against Beyond financial risks and established voluntary standards. opportunities The ISSB’s standards, building on the work Box 6: Sustainable investment of the TCFD, will focus on information which is material to investors. SDR will go further, labelling regime requiring wider information on how firms The FCA is working closely with HM impact the environment. This includes Treasury on the development of a requiring disclosure against the UK’s Green sustainable investment labelling regime. Taxonomy (see Chapter 2). The labels will help consumers select investment products based on their A robust ESG market sustainability characteristics and will be supported by the underlying SDR The market for sustainable investments is disclosures. It is envisaged that the complex and evolving. Some ESG factors will labelling regime will cover the spectrum not be covered by the UK Green Taxonomy of investment products, classifying them or ISSB standards but may nevertheless be objectively against specified sustainability the subject of firms’ claims to consumers. criteria, and considering a) products’ The FCA has already set out its expectations objectives, policies, and strategies, and regarding design, delivery and disclosure of b) how their investments are allocated. ESG and sustainable investment funds. SDR The FCA intends to publish further detail will go further in two areas: in an Autumn 2021 Discussion Paper and will set up an advisory forum to help Ÿ Substantiate sustainability claims: inform the work. Building on the FCA’s existing expectations, asset managers/owners and investment products will be required to substantiate ESG claims they make in a way that is comparable between products and is accessible to clients and consumers. They will also need to disclose whether and how they take ESG-related matters into account in their governance arrangements, and in their investment policies and strategies. 13 Figure B: The framework of the UK Sustainability Disclosure Requirements (SDR) SDR is based on an economy-wide framework covering corporates, asset managers, asset owners, and investment products. Figure B outlines what firms will be required to disclose. The government intends to implement the framework through legislation, and relevant government departments and regulators will set out sector-specific requirements through their usual rule- making processes. Asset Managers and Corporates Investment Products Asset Owners Governance around Governance around Governance around sustainability-related risks, sustainability-related risks, sustainability-related risks, opportunities, and impacts opportunities and impacts, opportunities and impacts, Governance and the implications and the implications for for investment policies, investment products strategies and outcomes Actual and potential Actual and potential Actual and potential implications of implications of sustainability- implications of sustainability- sustainability-related risks, related risks, opportunities related risks, opportunities Strategy opportunities and impacts and impacts for the and impacts for for the organisation’s organisation’s investment investment outcomes businesses, strategy, and policies, strategies, financial planning and outcomes Processes used to identify, Processes used to identify, Processes used to identify, assess, and manage assess, and manage assess, and manage sustainability-related risks, sustainability-related risks, sustainability-related risks, opportunities, and impacts opportunities and impacts, opportunities and impacts at Risk Management and the implications for the product level organisation’s investment policies, strategies, and outcomes Metrics and targets used to Metrics and targets used to Product-level metrics and assess and manage relevant assess and manage relevant performance indicators on sustainability-related risks, sustainability-related risks, sustainability-related risks, opportunities, and impacts opportunities and impacts, opportunities, and impacts and implications for the Performance against targets Performance against targets organisation’s investment (where relevant) Taxonomy alignment policies, strategies, Metrics and and relevant and outcomes Product-level Taxonomy Targets supporting information alignment and Performance against targets relevant supporting (where relevant) information based on Taxonomy alignment underlying investments and relevant supporting information based on underlying investments 14 15 Transition plans While there is not yet a commonly agreed standard or ‘template’ for what a good quality An increasing number of organisations transition plan looks like, this is rapidly are making commitments to reach net changing. The TCFD has finalised guidance on zero emissions. Many organisations transition plans4, and groups such as Climate publish transition plans to support these Action 100+ and the Institutional Investors commitments, setting out concrete actions Group on Climate Change have undertaken and targets to achieve their ambition. Against relevant work. The Glasgow Financial Alliance the backdrop of its legislative commitment for Net Zero (GFANZ) is also working to to achieve net zero emissions by 2050, develop best practice guidance for financial the government would like to support and sector transition strategies that is applicable encourage organisations in this process. across financial sub-sectors and jurisdictions. Detailed, credible transition plans that SDR will require disclosures on transition are integrated with other disclosures and plans. Initially, certain firms will be required incorporate interim milestones and targets, to publish transition plans that align with can support markets in monitoring progress the government’s net zero commitment towards a net-zero economy. They are also or provide an explanation if they have not essential for the effective exercise of market done so. As standards for transition plans discipline, and investors’ ability to hold emerge, the government and regulators will investee company boards and management to look to incorporate these into UK regulation account. The government therefore expects to and strengthen disclosure requirements as see the publication of transition plans become appropriate. This will encourage consistency the norm across the economy. and comparability in published plans and support more widespread adoption. 4 Guidance on Metrics, Targets, and Transition Plans https://assets.bbhub.io/company/sites/60/2021/07/2021-Metrics_Targets_Guidance-1.pdf 16 Box 7: ESG Data ESG data and ratings providers As the market for sustainable financial products and services grows, firms and consumers increasingly rely on providers of ESG-related services, including ratings, data, and verification. This market is expected to continue to grow strongly over the next few years and could reach the $1 billion mark by end of 2021 for ESG data alone, according to research by Optimas. ESG ratings are becoming increasingly important to the investment process. However, different ESG ratings agencies provide opinions on different aspects of sustainability performance and their assessments may not always be comparable. There are also typically more data gaps and assumptions made in producing ESG ratings than, for example, credit ratings. It is important that providers deliver ESG data and ratings transparently, and that they have strong governance and management of conflicts of interests. The government is therefore considering bringing these firms into the scope of FCA authorisation and regulation. The government will set out further detail next year. Digitisation of reported information As the importance of sustainability disclosures has increased, so has the demand for this information to be easily read and analysed electronically. The International Organization of Securities Commissions (IOSCO) recently published a report on issuers’ sustainability disclosures. In it, some asset managers called for enhanced digitisation and storage of sustainability information to support machine readability. The government and regulators are considering how to deliver an approach to digitisation of sustainability data that builds on the UK’s existing digital infrastructure for reporting. This includes assessing the value of a centralised register for ESG data. Delivering Sustainability Disclosure the intended regulatory approach for each type of organisation and product. Requirements The government’s aim is for SDR to be a HM Treasury will co-ordinate the sectoral fully integrated regime that works smoothly approaches centrally to ensure that the across all sectors of the economy. Within right information is made available across that, relevant regulators and government the investment chain – from corporates, to departments will determine the precise scope financial services firms, to end-investors. and timing of requirements, and the reporting Initial steps, like introducing TCFD- detail, subject to relevant consultation aligned disclosure requirements, have processes and other statutory requirements. already been taken. Figure C sets out an indicative path towards Given the indicative pathways, organisations integrated economy-wide disclosure should consider taking the necessary steps requirements under the SDR framework. now to build their capabilities and refine their It illustrates how disclosures could be data and the resulting disclosures. introduced coherently and systematically as new regulatory and legislative measures come into force, subject to consultation processes and other statutory requirements. Annex A outlines sectoral pathways and summarises 17 Figure C: A Roadmap for sustainable finance regulation Requirements in place by 2022 Requirements in place Scope by 2022 TCFD for certain companies (subject a) UK-registered companies, including to Parliamentary approval) See BEIS relevant financial services firms (e.g. consultation on p.10 banks and insurance companies) Consultation on SDR Framework 1. Corporate for companies Disclosure TCFD for premium-listed issuers b) UK-listed companies TCFD for certain standard-listed issuers TCFD via FCA Rules a) Asset managers, life insurers providing investment products and Discussion paper on SDR disclosure 2. Asset FCA-regulated pension schemes requirements to be launched in Manager November 2021 and Asset Owner Disclosure b) O  ccupational pension schemes TCFD via DWP regulations TCFD via FCA rules a) Investment products – Disclosure Discussion paper on consumer-facing product-level SDR 3. disclosures in November 2021 Investment Product Disclosure and Labelling Discussion paper seeking feedback on b) Investment products – Labelling the sustainable investment labelling regime in November 2021 4. Financial a) Financial advisors Advisors 18 Plan for implementing new requirements after Royal Assent of primary legislation + 1 - 2 years + 2 - 3 years + 3 Years Mandatory disclosure requirements in Annual Reports incorporating UK Green Taxonomy and ISSB- Mandatory a) issued standards for most disclosure economically significant requirements in companies Annual Reports incorporating 1. Voluntary disclosure for Taxonomy and other companies ISSB-issued standards for other Consultation on mandatory companies subject to b) disclosure requirements in consultation Annual Reports incorporating UK Green Taxonomy and ISSB- issued standards Subject to 2022 consultation, potential a) mandatory SDR disclosure requirements Consultation on potential Mandatory disclosure requirements 2. mandatory SDR disclosure incorporating taxonomy disclosures to be requirements presented in a sustainability report referenced b) within the Annual Report. For: funds ≥ £5 billion For: funds ≥ £1 billion Consultation on potential Subject to consultation in 2022, potential mandatory consumer- mandatory consumer-facing and more a) facing and more detailed detailed product-level SDR disclosure product-level SDR disclosure requirements requirements 3. Subject to Consultation on potential consultation, mandatory sustainability- potential mandatory b) related labels for investment sustainability-related products labels for investment products Subject to consultation, potential requirements including on how sustainability 4. matters are taken into account in investment advice. 19 Chapter 2: Defining what counts as green 20 A large and growing number of financial consumer harms like greenwashing. This risks products are marketed as supporting climate limiting the flow of capital into sustainable or environmental objectives. Similarly, an investments and ultimately slowing the UK’s increasing number of companies are eager to progress to tackle climate change and other highlight their sustainable business practices. environmental challenges. However, there is not an accepted definition of which economic activities count as To address this, the government is environmental sustainability. implementing the UK Green Taxonomy ('the Taxonomy'). This will clearly set out the criteria The lack of common definitions makes which specific economic activities must meet it difficult for companies and investors to be considered environmentally sustainable to clearly understand the environmental and therefore 'Taxonomy-aligned'. impact of their decisions and can lead to Figure D: Growth of the sustainable finance market Responsible and Sustainable Assets Under Management in the UK 2019 2020 60% 50% 40% 30% 20% 10% 0% ESG Integration Exclusions Sustainability Impact For definitions of the separate categories of ESG investing, see Glossary. Source: Investment Association 21 Aims Approach Reporting against the Taxonomy will form The structure of the Taxonomy draws on the part of SDR. Certain companies will be EU approach which the UK helped design as required to disclose which proportion of their a former Member State. The government’s activities are Taxonomy-aligned. Providers of implementation process will be guided by investment funds and products will have to do three core principles: the same for the assets that they invest in. The Taxonomy aims to: 1. Robust and evidence-based: The Taxonomy will take an objective and 1. Create clarity and consistency for science-based approach to assessing investors: Investors will be able to easily sustainability. To support this, the compare the environmental performance government has created a Green and impact of companies and investment Technical Advisory Group (see Box 8) to funds to inform their financial decisions. provide advice on implementation. 2. Improve understanding of 2. Accessible: The government intends companies’ environmental impact: both for the Taxonomy to be useful Taxonomy disclosures will facilitate to investors and for disclosure an understanding of companies’ requirements not to place a contribution to environmental disproportionate burden on business. sustainability. The government will take a co-ordinated and consultative approach to developing 3. Provide a reference point for the Taxonomy, incorporating learning companies: The Taxonomy will from other taxonomies developed provide companies with an informative internationally. performance target. For example, they can also, on a voluntary basis, use the 3. Built for the UK to support a global Taxonomy to develop and communicate transition: The government will take their net zero transition and capital an approach that is suitable for the investment plans. UK market and consistent with UK government policy. There will also be a clear focus on the benefits of coherence and compatibility with other international frameworks. 22 How it works The Taxonomy has six environmental objectives: Figure E: First two Taxonomy environmental objectives. Criteria are subject to consultation Figure Figure in Q1 D: Taxomony D: Taxomony set2022 to be adopted by Q4 2022 set to be adopted by Q4 2022 Climate Climate Climate Climate change change change change mitigation mitigation adaptation adaptation Stabilisation of greenhouse gas Reducing the risk of adverse Stabilisation of greenhouse gas Reducing the risk of adverse emissions consistent with the Paris impact of current or future climate emissions consistent with the Paris impact of current or future climate Agreement and net zero by 2050 change on an economic activity, Agreement and net zero by 2050 change on an economic activity, people, nature, or assets people, nature, or assets Figure E: Taxomony set to be adopted in the future FigureE:F: Figure Remaining Taxomony set to four Taxonomy be adopted environmental objectives in the future Sustainable Sustainable use use and and Transition Transition protection of water to protection of water to a a circular circular and and marine marine resources resources economy economy Contribution to the good Maintaining the value of products, Contribution to the good Maintaining the value of products, environmental status of bodies materials and resources for as long as environmental status of bodies materials and resources for as long as of water or marine resources possible, thereby reducing the envi- of water or marine resources possible, thereby reducing the envi- or preventing their deterioration ronmental impacts of their use or preventing their deterioration ronmental impacts of their use Pollution Pollution Protection Protection prevention and prevention and restoration restoration and and control control of biodiversity of biodiversity Including preventing and and and ecosystems ecosystems Including preventing and reducing emissions or adverse Protecting, conserving, or restoring reducing emissions or adverse Protecting, conserving, or restoring impacts on health, improving biodiversity or to achieving the good impacts on health, improving biodiversity or to achieving the good levels of air water and soil quality condition of ecosystems, or preventing levels of air water and soil quality condition of ecosystems, or preventing their deterioration their deterioration 23 Each of the environmental objectives will be 2. Do no significant harm to the other underpinned by a set of detailed standards, objectives: This is also defined for known as Technical Screening Criteria each activity in the TSCs. This aims to (TSC). There will be an individual TSC for ensure that activities which support each economic activity included in the one objective, such as climate change Taxonomy, which identifies how that activity mitigation, do not have a significant can make a substantial contribution to the adverse impact on another, such environmental objective. as biodiversity. 3. Meet a set of minimum safeguards: To be considered Taxonomy-aligned, an These are minimum standards for doing activity must meet three tests: business, constituting alignment with 1. Make a substantial contribution to the OECD Guidelines for Multinational one of six environmental objectives Enterprises, and the UN Guiding (listed above): The criteria for making a Principles on Business and Human Rights. substantial contribution are set out in the TSC for the activity in question. 24 Figure G: Taxonomy alignment of revenue for an example company What economic Generating Generating Manufacture activities energy from energy from of Cement does the Wind Power Coal company do? Is there a TSC for this activity? Example portfolio of company’s existing Wind farm Coal power Best-in-class Other cement projects plant cement plants plants Does the activity meet the TSC thresholds? Does the activity meet the Do No Significant Harm criteria? Does the company meet the minimum safeguards Revenue from these activities 40% 10% 20% 30% 60% of company revenue Taxonomy-aligned 25 Taxonomy and transition Disclosure against the Taxonomy is not a replacement for robust science-based Taxonomy-alignment focuses on reported targets. The UK has set out standards for data, rather than projections. This provides UK Climate Transition Benchmarks, which a clear snapshot of the areas in which a support investors in reducing the emissions company is currently making a substantial they fund over time.5 In future, providers of contribution to environmental objectives. In financial products may choose to supplement the case of the climate change mitigation Taxonomy disclosures with Portfolio Alignment objective, that is whether or not an activity Tools to estimate funds’ emissions trajectories. contributes to the reduction of greenhouse gas emissions, consistent with the UK's net Using the information zero commitment and commitments under the Paris Agreement. Under SDR (see Chapter 1), certain companies will be required to disclose the percentage However, the Taxonomy also recognises of their capital expenditure, operational companies which are working to expenditure and turnover that relates to meet environmental objectives in the Taxonomy-aligned activities. These corporate future in two ways: disclosures will provide investors and consumers with an indicator of a company’s 1. Transitional activities: Due to current environmental performance, as well as technological constraints, some its investment in sustainable activities. economic activities cannot currently be conducted in a way which is aligned Informed by reliable data from corporate with net zero-ambitions. For a number disclosures, providers of investment products of these activities, the TSCs will set the will then disclose the extent to which those threshold for Taxonomy alignment at the products are Taxonomy-aligned, based on best-in-sector emissions level (subject to their constituent assets.6 This will enable not locking in carbon-intensive activities). investors to identify the investment products The manufacture of cement is one which are making a substantial contribution to example of this. environmental objectives. 2. Investment: Companies will report the proportion of their capital expenditure which is Taxonomy-aligned. This will enable companies to demonstrate their investment in producing green activities in the future. The Taxonomy will also include Enabling Activities. This recognises activities which currently support the transition by enabling substantial contributions to environmental objectives in other sectors, but which are not yet sustainable themselves. This will include, for example, the manufacture of components for wind turbines. 5 https://www.gov.uk/eu-withdrawal-act-2018-statutory-instruments/markets-in-financial-instruments-benchmarks-and-financial-promotions- amendment-eu-exit-regulations-2021 A UK Climate Transition Benchmark incorporates specific objectives related to emission reductions and the transition to a low-carbon economy (based on the scientific evidence of the Intergovernmental Panel on Climate Change). It does so through the selection and weighting of underlying constituent assets. At least a 30% reduction in carbon versus the investable universe is required, followed by a 7% year-on-year “decarbonisation trajectory” in order to qualify for the benchmark, which works as a sustainability label. 6 Companies that do not fall under the scope of SDR mandatory reporting requirements, but which do conduct activities included in the taxonomy may voluntarily report their alignment. 26 This will be complemented by ongoing Box 8: Green Technical Advisory policy work, including on adaptation. Group (GTAG) Ÿ Disclosure requirements for corporates will come into force prior to those In June 2021, the government launched for investment products, enabling the Green Technical Advisory Group the former to feed into the latter. (GTAG) to provide independent advice This is in line with the sequenced on market, regulatory and scientific approach of SDR. considerations around developing and implementing the Taxonomy. Chaired by Ÿ The government plans to focus on the Green Finance Institute, the GTAG first delivering the Taxonomy and ensuring met in June and has since established that it has been road-tested by the a workplan and structure in line with its market before considering any changes Terms of Reference (see annex B). The or an extension to its scope. This Terms of Reference and Membership includes identifying activities which List are available on the government cause significant harm, or adding further website, and more information is transitional activities. available on the Green Finance Institute’s Taxonomy webpage.7,8 Taken together, the above will ensure that the Taxonomy is implemented and built to deliver for the needs of UK business and investors and is robust enough to support the UK’s net- The development and zero commitment. implementation process The UK will implement TSCs for each of the Climate change mitigation and Taxonomy’s objectives, ensuring that these climate change adaptation are evidence-based, accessible and built for TSCs for the climate change mitigation, and the UK market. This means that: climate change adaptation objectives will Ÿ The government will ensure that TSC be based on those of the EU Taxonomy, development is clearly signposted to which the UK supported the development of business. Companies will have adequate whilst still a Member State. The Government notice before becoming subject to is currently reviewing these and expects to disclosure requirements. consult on UK draft TSCs in the first quarter of 2022, ahead of legislating by the end of Ÿ TSCs will be subject to public 2022. These TSCs will focus on economic consultation to ensure that they activities which can make the most significant take a rigorous approach that works contributions to tackling climate change. for the UK market. Ÿ TSCs will be made through statutory instruments.9 This ensures Parliamentary scrutiny and should further reassure stakeholders that the TSCs will not be amended without due notice. Ÿ The government will use regulatory guidance and develop presentational tools to increase ease of application. 7 https://www.gov.uk/government/publications/independent-expert-group-appointed-to-advise-government-on-standards-for-green- investment 8 https://www.greenfinanceinstitute.co.uk/uk-taxonomy/ 9 UK Statutory Instruments, 2020 No. 1385, PART 6, Regulation 78 https://www.legislation.gov.uk/uksi/2020/1385/regulation/78/made 27 Box 9: Approach to energy sector – the Energy Working Group Reliable and affordable power and heat are an essential foundation of a modern economy and crucial to the potential future electrification of a range of sectors such as transport and industry as the UK transitions to net zero. It is therefore vital that the UK Green Taxonomy assist investors in identifying energy-related activities that will support the net-zero transition. When developing the Taxonomy’s energy criteria, the government’s approach will be science-based, accessible and aligned with its net-zero policy. The government has established an Energy Working Group (EWG), chaired by the Chief Scientific Advisor to BEIS, to advise on the development of TSCs in the energy sector. Members are independent of the government, with membership drawn from academia and expert organisations. The EWG will advise on key energy system issues such as hydrogen, carbon capture, utilisation and storage, and nuclear energy. The government has asked the EWG to prioritise considering nuclear power’s role in the UK Taxonomy. Nuclear power – as a low-carbon technology – represents a crucial element of the government’s plans to reach net zero. It has a clear basis for making a ‘substantial contribution’ to the Taxonomy’s objective of climate change mitigation. The EWG is therefore considering evidence to support its inclusion in the Taxonomy, including the requirement to ensure that its activities meet the wider eligibility criteria to ‘do no significant harm’ to the other Taxonomy objectives. The EWG’s advice will inform the government’s decisions regarding nuclear and the Taxonomy, and support TSC development ahead of a public consultation. Development of Further Technical Over time, the government may update the TSCs or expand them to new sectors, Screening Criteria following the same process of consultation The government intends for the Taxonomy and legislation. The government expects to be a tool for the long term. To limit the to consult on the expansion of the climate need for revision, the Taxonomy will focus on TSCs and standards for the remaining the outcomes of economic activities, rather four environmental objectives during the than technologies used. The government first quarter of 2023 in advance of laying will review the Taxonomy Regulation’s legislation before Parliament. effectiveness every three years. This review will also consider whether enabling or transitional activities remain in line with the relevant Taxonomy objectives. 28 Chapter 3: Being a responsible steward of capital 29 “ Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society. ” Financial Reporting Council (FRC) ‘The UK Stewardship Code 2020 What is investor stewardship and across all asset classes and markets. For example, engaging with investee companies why is it important? in high-carbon sectors, and working with them By effectively engaging in stewardship to successfully transition to net zero, will help activities, investors can improve investment protect investments against the systemic risks returns by encouraging and supporting of climate change. behaviours and practices that ensure long- term value for clients and savers.10 Effective In practice, this means that – as the owners stewardship by both asset owners and and primary allocators of capital – the asset managers is crucial to the successful pensions and investment sectors should seek management of risks, opportunities to integrate ESG considerations into: and impacts presented by climate and Ÿ Investment decision-making: When environmental change. Stewardship can be a deciding where to allocate capital and powerful vehicle to hold companies to account which companies to invest in. for the feasibility and credibility of their net-zero commitments, and their transition Ÿ Monitoring and engagement strategies: strategies to align their business models with When challenging investee companies’ a net-zero economy. Investors also decide boards and management on their how capital is allocated, for example to strategies to generate long-term companies and technologies that contribute to sustainable value; and when setting these ambitions. clear expectations and monitoring the investment managers, intermediaries The UK’s pensions and investment sectors – and those that support stewardship and namely asset owners, asset managers, and operate on their behalf. the service providers that support them – Ÿ Escalation and collaboration: By have an important role to play in responsibly collaborating with other investors, firms allocating capital and making use of their can amplify their stewardship, especially ownership rights and influence over investee for smaller investors and pension funds. companies, whilst fulfilling their fiduciary responsibilities. The government expects the Ÿ Voting practices: When exercising pensions and investment sectors to use the their shareholder rights; this includes information generated by SDR to deliver on being ready to vote against directors, their responsibilities as stewards of capital corporate actions, or other resolutions. 10 Asset Management Taskforce, “Investing with Purpose: placing stewardship at the heart of sustainable growth” (November 2020), page 17 30 Government and regulator action will further enhance the UK’s stewardship to support investment stewardship framework and practice. The government has already taken forward several of these to date recommendations, in particular by launching the Occupational Pension Stewardship As well as being a centre of financial services Council13 in July 2021. The Council represents excellence, the UK is also a world-leader over £570 billion of assets, and provides a in stewardship standards. The government forum for schemes to collaborate, develop a strongly supports this agenda and is stronger voice for trustees and drive higher working hard to further improve and embed standards of stewardship. stewardship standards. Industry is progressing several other The UK Stewardship Code 2020 recommendations from Investing The UK Stewardship Code 202011 sets With Purpose, notably guidance stewardship and reporting standards for asset on improving stewardship in fixed owners, asset managers and the service income and on overcoming barriers to providers that support them. The FRC is the requisitioning resolutions. first regulator to require investors to evidence their commitment to effective stewardship The Taskforce on Pension Scheme Voting by reporting on an annual basis. The FRC and Implementation’s report (TPSVI) published the first list of successful signatories Launched in December 2020, the TPSVI to the new Code in September 2021, covering issued its independent report in September £20 trillion assets under management. 2021. This aims to strengthen the use of The FRC will continue to encourage the voting throughout the investment chain. It development of a market for effective suggested measures to improve pension stewardship and high-quality disclosure. scheme trustees’ focus on stewardship and In November 2021, the FRC will publish a enhance asset manager reporting standards review of reporting to highlight effective and accommodation of trustees’ voting examples and communicate its expectations preferences. DWP has welcomed the report for 2022. By the end of 2022 the FRC will and will respond soon. communicate an approach to differentiating or tiering signatories based on the quality of FCA priorities on investor stewardship their reporting. The FCA considers stewardship to be The Asset Management Taskforce’s integral to asset managers delivering good Stewardship Report outcomes for clients and consumers. The FCA Handbook requires firms to disclose In November 2020, the Economic Secretary to their commitment to the FRC’s Stewardship the Treasury’s Asset Management Taskforce Code, or alternative strategy. The FCA also published Investing With Purpose12. This report introduced rules in 2019 implementing the was produced by a wide range of industry, Shareholder Rights Directive II, requiring asset regulator, and government representatives. It managers and life insurers to disclose their rigorously analyses the tools available to help engagement policies. The FCA is scoping asset managers act on behalf of savers and work to realise the regulatory outcomes hold investee companies to account. prioritised in its Business Plan 2021/22. This includes active investor stewardship that The report also makes clear recommendations positively influences companies’ sustainability to government, regulators, and industry, which strategies, supporting a market-led transition apply across the investment chain. These to a more sustainable future. 11 https://www.frc.org.uk/getattachment/5aae591d-d9d3-4cf4-814a-d14e156a1d87/Stewardship-Code_Dec-19-Final-Corrected.pdf 12 Established in October 2017 and chaired by the Economic Secretary, the Asset Management Taskforce regularly convenes senior leaders in the asset management sector, stakeholder organisations and the Financial Conduct Authority to discuss the opportunities and challenges facing the sector. 13 https://www.gov.uk/government/groups/occupational-pensions-stewardship-council 31 Government expectations 4. Be transparent about their own and their service providers’ engagement and The UK’s pensions and investment sectors voting, including by publishing easily have made clear that, in order to effectively accessible, high-quality quantitative and target and engage with firms on climate narrative reporting. change and act as responsible stewards, 5. Provide leadership, for example by investee companies must disclose decision- joining a Race to Zero-accredited net relevant information. SDR will ensure that zero initiative for the financial sector, investee companies disclose that information, and thereby joining GFANZ. They should and government and industry’s stewardship back up this commitment by publishing initiatives will lower the barriers to investors by the end of 2022 a high-quality acting as effective stewards. transition plan. This should include near- Therefore, it is the government’s expectation term science-based targets and set out that, as this information becomes available their organisation’s pathway to net zero and develops over time, the UK’s pensions financed emissions. and investment sectors – asset managers, The government will assess progress in asset owners and the service providers that these sectors on the above five points at support them – will have the data to act as the end of 2023. effective and responsible stewards of capital. In particular, the government expects the UK’s pensions and investment sectors to: 1. Progress work on stewardship within their organisation; apply to become a signatory of the UK Stewardship Code 2020; and encourage or require their service providers to sign up to the Code. 2. Take into account the information generated by SDR when allocating capital. 3. Actively monitor, encourage, and challenge companies by using their rights and direct/indirect influence to promote long-term, sustainable value generation. In some cases, the exercise of stewardship discipline may eventually escalate to withholding capital or divestment. For example, where a company is not taking appropriate action to transition to net zero. 32 Chapter 4: Leading international efforts to green finance 33 Tackling climate change and other The government is also working to support environmental challenges needs more Emerging Market and Developing Economies than just domestic action. That is why the (EMDEs) to benefit from the global green government has made green finance an transition. There are huge economic international priority, using our influential development, adaptation and resilience position to drive progress in both bilateral opportunities, but if not well managed, it and multilateral fora. This year is a particularly could have negative consequences such important one in the international calendar, as divestment or capital flight. The UK will with the UK holding both the G7 presidency continue to support the EDMEs through and hosting COP26. technical assistance and targeted investments to mobilise greater flows of green capital. The As part of the G7, the government brought government will also press for developing climate and environmental issues to the countries to be represented in international forefront of policy discussions between decision-making, including the shaping finance ministries. This was the first time of international disclosures standards on these challenges featured prominently in sustainability. the Finance Track. The government worked closely with the Bank of England to secure The Bank of England and the FCA are active ambitious commitments from G7 members in multilateral fora, such as the Network for on sustainability reporting. This included Greening the Financial System (NGFS) – a agreement to move towards mandatory group of Central Banks and Supervisors, climate disclosures, to support the IFRS of which the Bank is a founding member – Foundation’s programme of work to develop a and the Financial Stability Board (FSB). The baseline global corporate reporting standard FCA has also engaged closely with the IFRS for sustainability, and to promote consistency Foundation in its work to establish the ISSB. in impact reporting standards. COP26 is the next international milestone Many of these issues were subsequently taken in sustainable finance. Under the Paris up in the G20, particularly by the Sustainable Agreement, Parties committed to making Finance Working Group (SFWG), of which finance flows consistent with a pathway the UK is an active member. The SFWG towards low greenhouse gas emissions and has driven progress against sustainability climate-resilient development. To do so, the reporting and discussed approaches to align entire financial system needs to transform, to investments with sustainability goals. The lock financial flows irreversibly into a pathway UK is also a member of the International to net zero.14 Ahead of COP, the UK is working Platform on Sustainable Finance (IPSF), which closely with international partners to galvanise aims to foster consistency in environmental global action: impact reporting. Ÿ Ensuring that market participants have During the UK G7 presidency, the government the information they need to factor also announced an Impact Investment climate-change into every investment Taskforce, to bring together the impact decision – via disclosure of climate investing industry. The taskforce will impact, risks and opportunities. make recommendations on harmonising Ÿ Ensuring that the financial system can and streamlining measurements of social measure and manage climate-related or environmental impacts of financial risks, including through climate scenario investments simply, transparently and in a analysis and improved climate capture in globally consistent way. This will make it surveillance work. easier for all investors to invest based on impact as well as financial return. 14 In 2020, the UK published our COP26 goals on Finance: Building a Private Finance System For Net Zero which set out our private finance priorities for COP26 and Priorities for Public Climate Finance in the Year Ahead which set out our public finance priorities for COP26 34 Ÿ Measuring how investment is aligned to the transition to net-zero, by developing more sophisticated, transparent, and consumer-friendly metrics. Ÿ Driving firms’ longer-term net-zero commitments by setting out credible transition plans (which include near- term decarbonisation targets), requiring regular progress reporting, and providing supervisory oversight and accountability. The government, financial regulators, and the UK financial sector are working in close partnership to make this ambition a reality. For example in April 2021 GFANZ launched as a global alliance that brings together existing and new net zero finance initiatives into one sector-wide strategic forum. The UK wants to ensure that its domestic regulation represents international best practice. This strong domestic action, coupled with international influencing, will ensure that the UK remains a global leader in green finance after COP26 and help to move the world towards delivering the global commitments in the Paris Agreement. 35 Chapter 5: Next steps This Roadmap outlines the actions the UK government and regulators are taking - working in partnership with the private sector - to close the information gap for market participants on sustainability by: Ÿ Implementing Sustainability Disclosure Requirements (SDR) across the economy – introducing disclosures incrementally as new regulatory or legislative measures come into force Ÿ Delivering a UK Green Taxonomy and ensuring it has been road-tested in the market as a useful investment tool. Ÿ Lowering the barriers to investors acting as effective and responsible stewards of capital Ÿ Leading international efforts to bring about global and systemic change in the financial system With clarity on the indicative path towards economy-wide disclosures, businesses and financial firms must now consider the steps they need to take to build their capabilities to produce disclosures, and to act on the information they provide. Working together, the government and industry can make the UK the best place in the world for green and sustainable investment. 36 istockphoto-491317220-1024x1024 37 Annex A: Sectoral implementation The sectoral pathways in this annex summarise the regulatory approach to each type of entity and product. 1. CORPORATE DISCLOSURE Certain UK-registered companies and listed issuers, including financial services firms, will disclose information about how they identify, assess, and manage sustainability factors arising from their global operations in their Annual Reports. a. UK-registered companies Certain companies – including relevant financial services firms – will disclose information using the proposed ISSB-issued standards and appropriate metrics to explain the level of alignment of their activities with the UK Green Taxonomy, including minimum safeguards, in their Annual Report. The scope and timing of requirements for companies, and the reporting detail, will be determined following consultation. b. UK-listed companies Certain UK-listed companies will disclose information using the proposed ISSB-issued standards, and appropriate metrics to explain the level of alignment of their activities with the UK Green Taxonomy, including minimum safeguards, in their Annual Report. The scope and timing of requirements for issuers, and the reporting detail, will be determined following consultation. Interim measures may be considered – e.g. referencing relevant voluntary frameworks – to ensure appropriate coverage of sustainability topics pending the introduction of relevant international standards. 2. ASSET MANAGER AND ASSET OWNER DISCLOSURE Financial services firms that manage or administer money for investors will disclose the sustainability-related information that clients (e.g. pension scheme trustees, employers, corporate investors) and end-consumers (e.g. pension scheme members, retail investors) need to make informed decisions about their investments. This information will relate to how firms manage and administer money. a. Asset managers and asset owners (asset managers, life insurers providing investment products and FCA-regulated pension schemes) Asset managers and asset owners will disclose, at entity level, how they are managing their sustainability risks, opportunities and impacts and how they take sustainability into account in managing or administering investments on behalf of clients and consumers. This information will be directed towards their clients and consumers. The disclosure requirements will build on TCFD requirements and support disclosures against the UK Green Taxonomy. The exact location, scope and timing, and the detail of disclosure requirements, will be determined following consultation. 38 b. Occupational pension schemes Certain UK pension schemes will disclose their sustainability-related risks, opportunities and impacts in a way that enables clear communication with savers. Subject to consultation, information will be combined with TCFD reporting on climate-related risks and opportunities, and will stand separate from, but linked to, the annual report and accounts. The scope and timing of requirements for pension schemes, and the reporting detail, will be determined following consultation. 3. INVESTMENT PRODUCT DISCLOSURE Firms will disclose, at product level, the sustainability-related information that consumers need to make informed decisions about their investments. Disclosures will be consumer-friendly, with more detailed disclosures required for sophisticated investors. a. Investment products Firms will disclose the sustainability attributes of the investment products and portfolios they offer. This will include their sustainability risks, opportunities and impacts, a core set of product- level climate-related metrics, and their Taxonomy alignment, including minimum safeguards. Both products marketed as sustainable and those not making sustainability claims will be required to disclose information about their sustainability performance. Investment products that make claims about the sustainability of their product will be required to substantiate those claims, for example with information about their sustainable investment strategy and performance against their sustainability targets. The FCA intends to consult on the detail of the disclosure requirements, including content, scope, format, and location. Sustainable investment labelling regime The FCA is working with the government to develop and implement a sustainable investment labelling system for investment products. The labels will provide a classification system for investment products supported by the information provided in their sustainability disclosures. These labels will help consumers intuitively navigate the sustainability characteristics of different products, both those that are marketed as sustainable, and those that are not. The key design elements of the labels and classification will be determined following a discussion paper and subsequent consultation, as well as input from an advisory group that will be established in due course. 4. FINANCIAL ADVISORS HM Treasury and the FCA are exploring how best to introduce sustainability-related requirements for financial advisors. A key aim will be to ensure that they take sustainability matters into account in their investment advice and understand investors’ sustainability preferences to ensure suitability of advice. Details of the proposals are subject to further consideration and will be set out on a different timescale to proposals for financial market participants. The proposals will be subject to consultation and cost benefit analysis. 39 Annex B: Green Technical Advisory Group work plan Chaired by the Green Finance Institute, the Green Technical Advisory Group (GTAG) has established a workplan and structure in line with its Terms of Reference Chair: Ingrid Holmes (GFI) 18 Members plus HMG, FCA, PRA observers Appointed members from a range of sectors, including finance, business, academia and NGOs Workstream 1 Workstream 3 Workstream 2 Addressing UK-specific needs Policy links Usability and data To provide stragtegic advice to Exploring how the taxonomy can To provide advice to HMG on government on next steps with be best used to support the UK’s how to optimise the usability of UK taxonomy development, transition to net zero as well as the taxonomy through design including advice on approaching exploring how the taxonomy can and application of related overlaying UK-specific transition be used to support the delivery disclosures regimes; considering and adaptation pathways when of wider HMG policy. interpoperability with other assessing EU TSCs and ensuring international regimes – including coverage is UK-appropriate methodological equivalence; and reviewing approaches to DNSH. Assessing the risk of data gaps and need to develop mitigants will have primacy. Workstream 4 Workstream 5 Fully realised taxonomy International Interoperability To set out how best To assess the conditions to provide market certainty now necessary for interoperability and and in the future. To determine explore avenues for influencing the value case for, and potential international taxonomy scope and uses for, a fully development in a realised taxonomy. “race to the top”. To analyse implications of and remedies for risks of international fragmentation. Future Workstreams Further workstreams will be developed as the GTAG evolves and via the monitoring of EU taxonomy updates. 40 Glossary CFA Institute – a global, not-for-profit Greenwashing – misleading or exaggerated organization that provides investment sustainability claims made by firms. professionals with finance education. International Financial Reporting Standards Climate change – The change of climate (IFRS) Foundation – a not-for-profit, public which is attributed directly or indirectly to interest organisation established to develop human activity that alters the composition a single set of high-quality, understandable, of the global atmosphere and which is in enforceable, and globally accepted accounting addition to natural climate variability observed standards—IFRS Standards—and to promote over comparable time periods. and facilitate adoption of the standards. Climate-related risks – divided into two major International Organization of Securities categories: (1) financial risks related to the Commissions (IOSCO) – the international transition to a lower-carbon economy and (2) body that brings together the world’s financial risks related to the physical impacts securities regulators and recognized as the of climate change. global standard setter for the securities sector. IOSCO develops, implements, and promotes Financial Reporting Council – an adherence to internationally recognized independent regulator in the UK, responsible standards for securities regulation. It works for regulating auditors, accountants, and with the G20 and the Financial Stability Board actuaries, and setting the UK’s Corporate (FSB) on the global regulatory reform agenda. Governance and Stewardship Codes. Intergovernmental Panel on Climate Glasgow Financial Alliance for Net Zero – Change (IPCC) – the United Nations chaired by Mark Carney, UN Special Envoy body for assessing the science related to on Climate Action and Finance, the Alliance climate change. The IPCC provides regular brings together over 160 firms (together assessments of the scientific basis of climate responsible for assets in excess of $70 trillion) change, its impacts and future risks, and from the leading net zero initiatives across the options for adaptation and mitigation. financial system to accelerate the transition to net zero emissions by 2050. 41 International Sustainability Standards Board atmosphere, as opposed to only avoiding (ISSB) – proposed body being established emissions elsewhere which is allowed in the by the IFRS Foundation to develop global specification for carbon neutral. There is not sustainability reporting standards. yet an agreed standard on what constitutes Net Zero Carbon for an organisation, product, Nature positive – enhancing the resilience or country, although there are multiple of our planet and societies to halt and organisations with working definitions, for reverse nature loss. example, the Science Based Targets Initiative. Net Zero emissions – Sometimes known Task Force for Climate-Related Financial as Net Zero Carbon or just Net Zero, this Disclosures (TCFD) – a private sector led describes a state where any CO2 and group convened by the Financial Stability Greenhouse Gas (GHG) emissions left Board in 2015 to “develop voluntary, over after decarbonisation are offset by consistent climate-related financial disclosures negative emissions of an equivalent amount that would be useful to investors, lenders of CO2 from the atmosphere, resulting in and insurance underwriters in understanding no net GHG impact. The offsets need to material risks”. actively remove carbon dioxide from the Categories of ESG Investing (as referenced in Figure D): Impact Investing – Investments made with Exclusions – Exclusions prohibit certain the intention to generate positive, measurable investments from a firm, fund or portfolio. social and environmental impact alongside a Exclusions may be applied on a variety financial return. There are four key elements: 1. of issues, including to align with client Intentionality: Impact investments intentionally expectations. They may be applied at the contribute to social and environmental level of Sector, Business activity, products or solutions. This differentiates them from other revenue stream, A company or Jurisdictions/ strategies such as ESG investing, Responsible countries. Exclusions determine that a fund Investing, and screening strategies. 2. or mandate does NOT invest in certain Financial Returns: Impact investments seek a things. It does not constitute an approach financial return on capital that can range from that is characterised by proactively allocating below market rate to risk-adjusted market rate. capital to specific assets. It may involve This distinguishes them from philanthropy. 3. excluding investments from a certain Range of Asset Classes: Impact investments sector or investments that derive a portion can be made across asset classes. 4. Impact of their income from the sale of certain Measurement: A hallmark of impact investing specified products. is the commitment of the investor to measure and report the social and environmental ESG Integration – The systematic and performance of underlying investments. explicit inclusion of material ESG factors into investment analysis and investment decisions. Sustainability Focused – Investment ESG Integration alone does not prohibit any approaches that select and include investments. Such strategies could invest in investments on the basis of their fulfilling any business, sector or geography as long certain sustainability criteria and/or delivering as the ESG risks of such investments are on specific and measurable sustainability identified and taken into account. outcome(s). Investments are chosen on the basis of their economic activities (what they produce/what services they deliver) and on their business conduct (how they deliver their products and services). 42 43