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UK Could Leapfrog EU by Including Transition in Taxonomy

Long-overdue framework considered vital to the UK’s sustainability agenda and future as global transition finance hub. 

Incorporating transition-focused economic activities into a UK taxonomy could help ensure the UK’s emission reduction goals are met by providing the right incentives for moving away from carbon-intensive industries, say experts. This could see the UK introduce transition planning into its taxonomy ahead of the EU. 

“Given that both transition finance and the UK taxonomy are in their infancy, there is an opportunity for the UK to develop its own technical screening criteria (TSC) that supports the mobilisation of transition finance,” Caroline Bush, Associate Director in the Environment Team at international legal practice Osborne Clarke, told ESG Investor 

“If this approach is taken, then the UK taxonomy could help support transitional activities and unlock transition finance, which could in turn support UK government initiatives and help catalyse the green finance industry. This would create a virtuous circle, where more green finance drives more innovation – for example in emerging low-carbon technologies.” 

Rachel Reeves, the UK’s Chancellor of the Exchequer, announced the long-awaited consultation as part of her Mansion House speech in November. 

As well as defining economic activities that can be considered sustainable by investors, the consultation has asked respondents whether a taxonomy could support the mobilisation of capital into sectors “critical for the transition”. 

“It may also be possible for firms and investors to assess capital expenditure against a taxonomy as an indication of transition, or to use a taxonomy as an input to transition plans, but this needs further consideration,” the consultation said. 

Examples of activities that could be labelled as transitional under a UK taxonomy include the production, use and disposal of building materials, the agricultural sector, and tackling food waste, Bush suggested. 

There are currently almost 50 taxonomies in operation globally – the majority of which do not yet account for transitional activities.  

Singapore has developed a ‘traffic light’ approach to categorising transitional and sustainable activities with its taxonomy. Similarly, Australia’s voluntary taxonomy includes a methodology identifying sustainable versus transitional activities.  

Meanwhile, the EU is in the process of expanding its taxonomy to include transitional activities.  

Clarity on transition 

Bush said that, if the UK government chooses to include transitional activities from the outset, there needs to be a clear distinction between transition finance and pure sustainable finance to avoid any potential greenwashing claims. 

“To mobilise capital at the pace and scale required, the market needs more than disclosure requirements. An economy-wide transition plan is essential to provide the support needed to the market,” added Kate Levick, Associate Director of Finance and Resilience at E3G and Co-head of the Transition Plan Taskforce (TPT) Secretariat.  

As such, a UK taxonomy could help to guide transition-focused investments at the activity level and, with relevant disclosure requirements linked to transition planning, the entity level, she said. 

However, a transition taxonomy alone is unlikely to deliver the scale of investment needed to meet the Paris goals, Levick warned.  

“The government’s priority should be a national framework with clear sectoral targets and investment plans to guide private capital,” she said.  

“Transition taxonomies may struggle to keep pace with evolving technologies, so – as recommended by the Transition Finance Market Review – a principles-based approach could better meet market needs, while providing much-needed clarity.” 

The original remit of the TPT was to create a universal ‘gold standard’ transition plan, with its guidance and recommendations designed to be applied in multiple jurisdictions.   

Learning from past mistakes 

To ensure interoperability and consistency for investors, experts agreed that a UK taxonomy could largely mirror the existing EU model.  

There would be “distinct benefits to aligning closely with the EU iteration […] considering the government’s intention to introduce other UK versions of EU ESG legislation, such as a CBAM [Carbon Border Adjustment Mechanism] or the SRS [Sustainability Reporting Standards],” said Osborne Clarke’s Bush.  

Such benefits include the facilitation of cross-border investments, easier data comparability, and reduced market fragmentation, she said.  

As well as alignment, a UK taxonomy also has the opportunity to learn from the mistakes of the EU and other jurisdictions that have developed taxonomies. 

“The UK has a clear opportunity to address some of the issues, particularly around do no significant harm (DNSH), that the EU taxonomy faced in its implementation,” said E3G’s Levick. 

Earlier this month, the EU’s Platform on Sustainable Finance (PSF) published a consultation suggesting revisions to the TSC falling under the EU Taxonomy’s Regulation’s Climate Delegated Act. This includes simpler DNSH and alterations to TSC for transitional activities. 

The UK consultation follows non-binding guidance provided by the Green Technical Advisory Group (GTAG) – an expert group chaired by the Green Finance Institute – and is open to feedback until 6 February. 

“The announcement of a consultation on the use cases and value of a taxonomy represented, in effect, a further delay in the UK’s policy approach and we want to see clarity outlined as soon as possible, especially as other jurisdictions continue to develop and implement their own taxonomies,” said Oscar Warwick Thompson, Head of Policy and Regulatory Affairs at the UK Sustainable Investment and Finance Association (UKSIF).

The post UK Could Leapfrog EU by Including Transition in Taxonomy appeared first on ESG Investor.

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