Another ESG regulation

SFDR, CSRD, EU Taxonomy, FCA’s SDR - the alphabet soup of ESG regulations landing on private equity firms is overwhelming to say the least. This deluge of rules has hit the industry at rapid pace in recent years.

And thanks to Brexit, divergence from EU rules means there’s another ESG-related rule coming down to the line for managers to deal with. This time in the shape of a UK Green Taxonomy, part of the UK Government’s roadmap on sustainable finance, which was first published in October 2021.

Background

Last June, the FCA consulted on proposals for climate-related disclosures, now known as Sustainable Disclosure Regulation (SDR), with the view to publish a policy statement in late 2021.

On 17 December 2021, the FCA stated it was going ahead with its SDR proposals, and they came into effect from 1 January 2022. “Asset managers and asset owners will have a phased implementation, with the rules initially applying to the largest firms and coming into effect for smaller firms one year later,” stated the regulator at the time.

Where does the UK Green Taxonomy fit?

While the UK Green Taxonomy is technically a separate regulation, asset owners and managers will be required to report on it, as part of their adherence to SDR.

According to the Government’s Greening Finance: A Roadmap to Sustainable Investing report, a UK Green Taxonomy would “provide a shared understanding of which economic activities count as green.” It aims to do this by setting out the criteria specific economic activities must meet to be considered environmentally sustainable, and in the government’s eyes, “Taxonomy aligned”.

On one hand, this nods to the idea of creating harmonisation across the industry, while also mitigating greenwashing; something the EU SFDR and Taxonomy Regulation also aim to achieve. On the other hand, while the UK Taxonomy would in theory achieve a level of harmonisation for the UK, it’s still a divergence away from the EU rules, simply because it’s a separate regulation.

UK Green Taxonomy

Similar to the current ESG-related regulations, namely SFDR and the EU Taxonomy, the UK Green Taxonomy features both entity and product level disclosures, which will need to be reported on.

It features six environmental objectives, leveraging off the EU Taxonomy. These are:

• Climate change mitigation
• Climate change adaptation
• Sustainable use and protection of water and marine resources
• Transition to a circular economy
• Pollution prevention and control
• Protection and restoration of biodiversity and ecosystems

Each of these objectives will be underpinned by a set of detailed standards, known as Technical Screening Criteria (TSCs).

Beg, borrow or steal

Given the advanced stages of the EU’s ESG-related regulation, while post-Brexit UK needs to create its own set of rules, it’s clear they are piggy-backing off the EU.

Indeed, the EU Taxonomy is due on 13 July 2022, and every three years thereafter. Meanwhile, for the UK Green Taxonomy, more consultation is required and legislation is expected to come into force by the end of 2022.

All about the E-sg

Taking a wider view on existing and incoming ESG rules in the UK, it's clear the focus is on the E, rather than the S or G. And the Green Taxonomy only furthers this case. On top of that, the SDR’s alignment with Taskforce on Climate-related Financial Disclosures (TCFD) framework, as well as the introduction of beta versions of the upcoming Taskforce on Nature-related Financial Disclosures (TNFD) framework, which is expected to contain some similarities to TCFD, highlight the environmental focus on these rules.

For now, all managers need to do is keep up to date with the UK’s Taxonomy related consultations, with the knowledge that rules will likely come into play towards the end of this year.

For more on ESG rules and private equity - check out all the articles we’ve written here.