The investment industry has welcomed the UK Treasury’s latest green finance report, which sets out its Sustainability Disclosure Requirements (SDR), and gives more details about the Task Force on Climate-related Financial Disclosures (TCFD) requirements.
Greening Finance: A Roadmap to Sustainable Investing lays out the UK government’s roadmap towards sustainable financing in three phases: informing investors and consumers, creating expectations and requirements and shifting financial flows.
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It expands on the government’s SDR announced in July 2021, which build on TCFD requirements, and focus on three types of disclosure – corporate disclosure, asset manager and asset owner disclosure and investment product disclosure – all of which have new requirements.
Requirements for asset managers and investment products include TCFD implementation via Financial Conduct Authority rules by 2022, and discussion papers on SDR disclosures in November 2021. UK registered companies should adopt TCFD by 2022 and expect a consultation on SDR Framework for companies, and UK-listed companies should adopt TCFD the same year if they are premium-listed issuers or certain standard-listed issuers.
“Investors and businesses must have the information they need to understand the full range of environmental risks they face and create,” chancellor Rishi Sunak said in the foreword to the report.
SDR also requires reporting on plans for net-zero transitions. “Initially, certain firms will be required to publish transition plans that align with the government’s net-zero commitments or provide an explanation if they have not done so,” the report said.
The government said it is also consulting on a mechanism to enable International Sustainability Standards Board adoption in the UK.
“We look forward to considering with government how the upcoming Sustainability Disclosure Requirements regime can take the whole economy further in responding to sustainability risks, and be compatible with the EU’s approach to ensure its effective operation for the sector in the years ahead,” said James Alexander, CEO of the Sustainable Investment and Finance Association and ESG Clarity editorial panellist.
Leonard Ng, co-head of law firm Sidley Austin’s UK/EU Financial Services Regulatory group, also mentioned aligning SDR with EU and other international regimes.
“There are some tentative indications the UK rules could go beyond the current EU disclosure framework, particularly for those firms that do not actively promote ESG products; for example, the report notes that asset managers will be required to disclose their approach to the integration of sustainability-related risks, opportunities, and impacts, and to disclose alignment with the UK’s Green Taxonomy, before separately addressing the need for firms that promote ESG to substantiate their ‘green’ claims,” he said.
“The report also emphasises the importance of transition plans, in response to the TCFD’s recent finalised guidance, which is an aspect that is absent from the EU rules.”
Green taxonomy and stewardship
The Treasury’s report also provides further detail on the UK Green Taxonomy, which was confirmed in March this year. To be taxonomy-aligned an activity must make a substantial contribution to one of six environmental objectives, do no significant harm to other objectives and meet a set of minimum safeguards.
However, the report said the taxonomy would also make allowances for transitional activity – companies supporting the transition to net zero but which are not sustainable yet themselves, for example.
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Finally, the report set out its expectation for good stewardship, which include applying for the UK Stewardship Code, taking SDR into account, actively monitoring companies on sustainability, being transparent about their own activities, and providing leadership by joining alliances.
Chris Cummings, CEO of the Investment Association, said: “We are encouraged to see the emphasis on addressing the data gaps and the flow of sustainability information from investee companies through to investment managers and to consumers. This supports the responsible allocation of capital and ensures that savers have clarity, confidence, and choice when investing. We are also pleased to see the emphasis on investors’ role as stewards of their clients capital in achieving this ambitious but critical green finance agenda.”