In the run-up to the United Nations Climate Change Conference or COP26 in Glasgow, Scotland, UK, in November 2021, the UK government released a document called Greening Finance: Roadmap to Sustainable Investing.
The document details a strategy to implement new sustainability disclosure requirements (SDRs) in the UK that will merge new and existing disclosure mechanisms under one integrated framework.
The new roadmap is meant to build on the success of the UK’s 2019 Green Finance Strategy, in accordance with which the government has made commitments to make TCFD-aligned disclosures mandatory across the economy by 2025 and implement a UK Green Taxonomy that defines the criteria for economic activities to be classified as sustainable or otherwise. TCFD stands for Task Force on Climate-Related Financial Disclosures.
At the heart of the Greening Finance Roadmap and the Green Finance Strategy is a long-term plan to align the UK’s economy with the country’s ambitious net-zero greenhouse gas emissions target by 2050, and a pledge to cut the emissions by 78% by 2035 compared to 1990 levels.
The new Sustainability Disclosure Requirements (SDRs)
‘Greening finance’ or the process of aligning the UK’s financial system with its emissions targets consists of three phases:
Informing investors and consumers – The flow of decision-useful sustainability information from corporates to financial market participants.
Acting on the information – Ensuring that the sustainability information is mainstreamed into business and financial decision-making.
Shifting financial flows – Ensuring that financial flows across the UK economy are aligned with the country’s emissions targets.
The new SDRs essentially fit into the first phase mentioned above — informing investors and consumers.
The SDRs will employ the global baseline standards that the newly established International Sustainability Standards Board (ISSB) will develop by building on the work of the Task Force on Climate-Related Financial Disclosures (TCFD) and other standard-setting bodies.
While the ISSB standards will facilitate the collection of information that is material to investors, the SDRs will go further to examine the impact of the reporting firms’ activities on the environment — requiring disclosures that employ the UK Green Taxonomy (more on this later).
Three types of disclosure under the SDRs
Corporate disclosure
Companies, including those in the financial services sector, will have to make sustainability disclosures under ‘proposed international standards as well as the UK Green Taxonomy. There will be a consultation on this disclosure requirement.
Asset manager and asset owner disclosure
Asset managers and asset owners who manage assets on behalf of clients and consumers (including occupational pension schemes) will have to disclose how they take sustainability into account. These disclosures will help consumers to understand whether their assets are managed according to their sustainability preferences.
Investment product disclosure
Creators of investment products will have to report on the products’ sustainability impact and the financial risks and opportunities they bring. Such information will be the basis of a new sustainable investment labeling regime that will make it easier for investors to choose from a range of investment products available to them.
Compliance timelines for the new SDRs
TCFD reporting for some premium-listed issuers, standard listed issuers as well as some financial companies will begin in 2022.
For the most “economically significant” companies, mandatory disclosures in annual reports using the ISSB standards and the UK Green Taxonomy will begin within the next 1-2 years, and for other companies within the next 2-3 years.
For funds over £5 billion, sustainability reports will be required in 2-3 years, while for those over £1 billion, the reports will be subject to future consultations on the requirements.
[Source: ESG Today]
What is the UK Green Taxonomy?
Due to the rapid rise in sustainable investing, organizations are increasingly trying to showcase their activities as sustainable or having been carried out in the best interests of the environment. Similarly, a number of financial products are being marketed as being environment-friendly. However, there are no common definitions in place to determine which activities qualify as sustainable and which ones do not.
The UK Green Taxonomy will set out the criteria that any business activity should meet in order to be considered environmentally sustainable.
Corporate disclosures — whether financial or non-financial are increasingly being made in the digital (XBRL or Inline XBRL) format and the new SDRs may also have to conform. Most companies in the UK are already filing Inline XBRL or iXBRL reports with the HMRC and the FCA (ESEF or UKSEF filings).
Companies would do well to prepare well in advance for the new reporting requirements that are coming up.