Parliamentary briefing: the green taxonomy and how to tackle greenwashing

 

About us 

The APPG on Sustainable Finance supports parliamentarians to understand more about sustainable finance. It brings together policymakers, industry players, academics and practitioners to build political consensus for the changes required in the finance sector to transition to a Net Zero economy by 2050.

We are looking to build consensus for policies which can ensure that the finance sector plays its role in tackling the climate emergency, as well as protecting the UK’s financial stability from potential climate shocks. We create a space for decision-makers to learn more about the potential for sustainable finance in the UK, and in their constituency local economies.  We offer an opportunity for experts from industry and finance, academics and campaigners to contribute to the political conversation about how we finance the Net Zero transition.

The Secretariat of the APPG is provided by UK100, the only network for locally elected leaders who have pledged to meet Net Zero as soon as possible, and by 2045 at the latest.

The Secretariat of the APPG provides quarterly briefings to our member MPs. These reflect key discussion points raised at our events and present an opportunity for our partners to share examples of their sector leading work. This briefing will address the twin issues of greenwashing and the green taxonomy.

 

Greenwashing and the green taxonomy

 

In June, sustainable finance experts Ingrid Holmes, Executive Director at the Green Finance Institute (GFI) and Kate LevickAssociate Director of Sustainable Finance at E3G, met with APPG members to discuss greenwashing, UK green taxonomy and the role of the Green Technical Advisory Group (GTAG), of which Ingrid is Chair and Kate is a member.

Greenwashing in the context of sustainable finance describes attempts by corporations to misrepresent unsustainable investments as environmentally friendly. As hundreds of new sustainable investment funds are entering the market each year, it is difficult for consumers and investors to understand which investments are in line with our Net Zero targets and which are incompatible with the UK’s climate goals.

In June, HM Treasury set up the Green Technical Advisory Group (GTAG), which includes E3G and is chaired by the Green Finance Institute, to provide advice to the Government on developing and delivering a green taxonomy. This is a common framework which sets standards for which economic activities and investments can be defined as environmentally sustainableThere is a legal obligation, under the EU Exit Regulations, for the first two of the six environmental objectives of the green taxonomy (climate change mitigation and climate change adaptation) to be in place by 1 January 2023.

This new independent expert group, made up of academics, NGOs, policy experts and financial experts and financial representatives, will provide independent, non-binding advice to the Government on standards for sustainable investment and on developing and implementing a green taxonomy in the UK context.The green taxonomy is essentially a list of what can be defined as sustainable. A taxonomy defines in detail what is sustainable across every sector of the economy, such as what the upper limit of the carbon footprint of a particular energy generation source or mode of transport is for it to count as a low-carbon activity or investment. This is defined through specific Technical Screening Criteria (TSC) for each activity.

UK is looking at onshoring the TSC used in the EU taxonomy for mitigation and adaptation. There are however some challenges around the adaptation taxonomy as this largely relates to ensuring infrastructure is resilient to a changing climate. This will need to be looked at in more detail for use in a UK context. The mitigation taxonomy is presented in a way more aligned with usual ESG data reporting, and should be a better fit. It currently does not cover transition activities – but this is something the UK could address through including other transition indicators in its taxonomy-related disclosure regime.

Investors want to invest in a sustainable future and need to have assurance that they can do so. Putting a taxonomy in place creates market incentives to generate more sustainable investment opportunities. The UK green taxonomy will help clamp down on greenwashing by providing information to help consumers, investors and businesses to understand how a firm is impacting the environment, support investment in sustainable projects and contribute to tackling climate change.

GTAG agrees that UK taxonomy should not only tackle greenwashing, but also help to mobilise the investment required to meet our Net Zero targets. By defining what is sustainable and identifying how different sectors can reach Net Zero, the taxonomy can help to mobilise investment in low-carbon infrastructure and sectors.

The current data informing the market is not fit for purpose and so we need a taxonomy based upon scientific research to ensure that investment flows are sustainable. The taxonomy may also be used to support new government initiatives such as green gilts and the UK Infrastructure Bank, to enable us to meet the UK’s Net Zero target. HM Treasury has recently confirmed that the expenditures from the first green gilts will be aligned to the taxonomy where possible.

 

What can we learn from the challenges faced by a green taxonomy in the EU, to ensure that the UK green taxonomy is robust and effective?

 

The first Delegated Acts for the EU taxonomy were introduced in 2021 after a long process of deliberation. While the original scientific research underpinning the recommendations on the EU taxonomy made by the Technical Expert Group on Sustainable Finance (TEG) was robust, disagreements between member states over certain sectors such as nuclear and gas and political pressure and lobbying from vested interest groups led to certain sectors being altered, and in some instances even excluded from the first set of Delegated Acts on the taxonomy.  

The UK should learn from this politicised process. GTAG is looking at the practical implications of these debates and how to address them in the UK context – while also ensuring the UK taxonomy will not create an undue burden on companies. The UK taxonomy should be based on impartial scientific research rather than shaped by political pressure and lobbying interests. High level details on the GTAG work plan can be found here.

GTAG are looking at the existing research underpinning the EU taxonomy and assessing whether this is ambitious enough and applicable to the UK, in order to inform the UK green taxonomy. One difference is that the EU taxonomy focuses on infrastructure and its associated carbon emissions, but the UK is largely a service-based economy and our taxonomy may need to differ in that respect.

The UK has the opportunity to be more ambitious than the EU. For example, the threshold for the energy efficiency in buildings TSC has been set very low in the EU, this could be much higher in the UK to drive a rapid transition to low-carbon homes, which can tackle fuel poverty and climate change at the same time.

 

Recommendations from the APPG’s expert advisors GFI and E3G

 

  1. Harmonisation – There has been a proliferation of taxonomies globally, including in major emerging economies like India and China. It would aid global trade and investment to have international harmonisation on key standards in taxonomies, but there is also concern that harmonisation could lead to the bar being set based upon the least ambitious countries to enable agreementIt is possible for the UK taxonomy to harmonise on certain points with other taxonomies, but to also set certain levels which are more ambitious. An international forum called the International Platform on Sustainable Finance (IPSF) has been developed which the UK has joined – there is a working group on taxonomies led by the US and China, and work is ongoing to create a ‘common ground’ taxonomy. International Financial reporting Standards could also be used to address the need to develop one framework based upon the agreed common grounds between different taxonomies.
  2. Bridging the gap – The UK should act as a bridge between the EU and the US on setting international common standards, due to its unique position in international relations with both the EU and US.
  3. Public finance – Although seen primarily as a private finance tool, MPs should also expect to see it used for public finance (e.g. green gilts, UK Infrastructure Bank, and potentially even procurement and grant decisions). Supporting smaller actors in the economy in transitioning and accessing finance requires the UK to publish its own clear plan for how it intends to meet this target e.g. Net Zero Financing Strategy, landing in BEIS’s Net Zero Strategy in late 2021. Only then will private capital be sent the right signals about what is sustainable to invest in to allow it to crowd in at scale.

 

What can parliamentarians do to ensure the taxonomy is effective, robust, and widely applied?

 

  • In the short-term, parliamentarians can scrutinise the taxonomy process being run by HM Treasury, including whether there is a robust consultation process, by posing questions to the relevant ministers in parliament.
  • Parliamentarians can make the case for the UK taxonomy to be applied widely once it is developed to assess the sustainability of all policy decisions across government departments, for example overseas aid, green sovereign bonds, and the UK Infrastructure Bank’s investment.
  • Parliamentarians can pose parliamentary questions relating to how the taxonomy will be used, and push for the taxonomy to be used to inform government decisions and HM Treasury spending and to support reaching our Net Zero and adaptation goals.
  • Parliamentarians can also push for the taxonomy to be used broadly in terms of being applied to corporate reporting and disclosures and being used by company boards to develop transition plans.
  • Parliamentarians could make the case for the Government to assign a clear role for the CCC and the Environment Agency in providing climate and environmental data to inform the development of the green taxonomy.
  • Parliamentarians could also push for the Government to put in place a whole of economy approach to financing the transition within the Net Zero Strategy. Only then, in combination with a robust green taxonomy, will private finance be unlocked at scale for the transition.

Keeping in touch

To find out more about the green taxonomy or to become a member of the APPG, please contact UK100’s APPG assistant Zoe Roberts at zoe.roberts@uk100.org.

You can keep up with our work through Twitter or our website and sign up to our weekly newsletter to receive the latest news, updates and events relating to sustainable finance .

The APPG on Sustainable Finance is chaired by Ed Davey MP. The APPG Secretariat is provided by UK100 in partnership with ShareAction and the Green Finance Institute. With thanks to HSBC, WWF, Aldersgate Group, NatWest Group, Aviva, Lux Nova and E3G for their support.