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An overview of the Green Finance Institute’s UK Green Taxonomy
The Green Taxonomy is a classification system for investments based on sustainability measures. Overseen by the Green Finance Institute, this taxonomy is part of a larger Green Finance Roadmap in the UK.
It will be introduced in order to help meet specific goals around carbon dioxide emissions.
Background to the UK’s Green Finance Roadmap
In late 2021, the UK government introduced a proposed timeline to implement and streamline sustainable finance. The primary purpose of this roadmap is to help meet the green targets set at COP summits: the UK would reduce its CO2 emissions by 78% by 2035, and reach net zero by 2050.
However, the green finance roadmap also aims to make the UK the best place in the world for investing in sustainability and environmental projects. As part of this roadmap, the Green Taxonomy will help investors be informed when making decisions, and provide a framework for green product standards.
Of course, one of the overarching themes with all of the UK’s green finance roadmap functions is to eliminate greenwashing. Similar to social taxonomy best practices, the classification system may provide comparable ratings for sustainable activities. So that investors can compare renewable energy projects with nuclear power or green bonds, for example.
The green taxonomy will be used as a classification system for investments to show how environmentally friendly they are. A panel of 18 experts, known as the Green Technical Advisory Group (GTAG), was established in June 2021 in order to advise on the taxonomy.
The GTAG decided on three factors for creating the green taxonomy to hit each sustainable development goal:
- Robust and evidence-based approach
- It must be accessible
- Built for the UK to support a global transition towards green investing
While the finished framework has not yet been released, initial recommendations from the panel were published in October 2022. They suggested an ‘adopt and revise’ approach based on the original European Commission green taxonomy, which the UK could not use due to Brexit.
Each part of the EU green taxonomy focuses on one of six sustainable economic activity objectives:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine life
- Transition towards a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity
Creating the UK’s taxonomy with international comparability would allow it to be cost-effective, but with added benefits of the EU taxonomy. This is why GTAG suggests a ‘adopt and revise’ approach.
Moreover, it’s been suggested that the primary use case for the UK’s green taxonomy will be as a corporate green investment reporting tool. This should work to reduce greenwashing across the UK’s investment scene.
Who must comply?
The same groups are likely to have to comply with the UK’s green finance taxonomy as those regulated under the entire green finance roadmap. These include corporations, asset managers or owners and investment product creators. Already, climate-related disclosures have been implemented towards these groups.
We expect the green taxonomy to be regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). As far as investors go, we expect a welcome response towards holding corporations accountable and increasing transparency around investments and economic activity.
Financial institutions should expect increasing taxonomy regulation over the coming years, as well as an emphasis on prudential governance. As such, companies may think about budgeting for more resource allocation towards compliance.
Compliance with national and global organizations
It’s normal to feel overwhelmed by the constant onslaught of new regulations and updates to compliance rules. Not to mention if your corporation operates internationally, and will be subject to different green taxonomies. Fortunately, CUBE has your back.
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