Green Finance: A roadmap to Sustainable Investing – What does this mean for business?
In October 2021, the UK Government released Green Finance: A Roadmap to Sustainable Investing, including plans for new Sustainable Disclosure Requirements (SDR).
The aim of the Roadmap is to ensure the financial sector is fully equipped to play its part in transitioning the financial system towards greater sustainability to the benefit of the environment and society. This is by:
Getting the right sustainability information to market participants
Defining what counts as green
Ensuring stewardship of capital is responsible
Leading international efforts to green finance
The SDR aligns with the UK’s Green Taxonomy and is intended to come into place from 2022 with full implementation by 2025.
The Sustainable Disclosure Requirements
Currently UK quoted companies must report on their global energy use and large businesses must disclose their UK annual energy use and greenhouse gas emissions. The government intends to make TCFD-aligned reporting, including the SDR, mandatory across certain organisations in the UK economy by 2025.
The requirements build on the Task Force for Climate related Disclosure (TCFD) framework (mandatory for large corporates from April 2022). Like TCFD the SDR has 4 pillars:
Metrics and Targets
The SDR improves reporting standards from the TCFD framework, requiring greater detail of firms' impact on the environment and include disclosure against the UK Green Taxonomy. The SDR aims to target specific areas: Tackling Green Washing – asset owners and managers will be required to provide evidence to their ESG claims. Companies will also have to take ESG-related matters into their governance strategy.
Creating Comparability – companies will have to report in a way that is comparable between others and accessible to clients and consumers. This will also provide clear consistent information to MPs allowing for informed decision making in the future.
Minimum Safeguards – when applied to the UK Taxonomy minimum safeguards are required for an investment to be deemed sustainable.
The SDR aims to ensure that investee companies provide the information required to lower the barriers to entry and allow effective stewardship, a key step on the roadmap to sustainable investing within the UK.
International Sustainability Standards Board
The International Financial Reporting Standards (IFRS) Foundation, the international body that sets the global accounting standards, launched the International Sustainability Standards Board (ISSB) at COP 26. It is a sister to the International Accounting Standards Board and underscores the aim of IFRS that sustainability reporting is on the same footing as financial reporting.
The UK Green Taxonomy
The UK Green Taxonomy provides a set of six criteria that a company’s economic activity must meet to be considered sustainable.
To be considered ‘Taxonomy Aligned’, economic activity must meet three tests:
Make substantial contribution to at least one of the six criteria.
Do no significant harm to other criteria.
Meet the set of minimum safeguards (Safeguards are aligned with the OECD Guidelines for Multinational Enterprise and the UN Guiding Principe’s on Business and Human Rights).
Transitional activities and investment into companies who are aligned with the taxonomy may also be considered aligned business activities. Additionally, activities which are not yet sustainable themselves but enable substantial contributions to environmental objectives in other sectors may also be aligned.
How does this affect your Business?
The roadmap states intention of closing the information gap for market participants on sustainability, working in partnership with the private sector, from 2022 to 2025.
Key actions include;
Incremental implementation of new sustainability disclosure requirements across the economy.
The introduction of the UK Green Taxonomy
Lowering the barriers of responsible stewardship to investors
Leading international efforts to bring global and systematic change in the financial system.
This creates an ever changing, advancing reporting system within the UK as the government and regulators become more stringent regarding sustainability disclosure. Business must now consider the steps required to build their reporting capabilities and alignment to the new UK Green Taxonomy to manage their exposure to the transitional risk of climate change.
How Governex can help
Governex is an ESG advisory business that helps businesses across all aspects of ESG. We provide ESG validation, assurance and verification services.
We help organisations implement the right shift in focus from a purely financial commitment to include environmental, social and governance commitments. All in the context of meeting business purpose, strategy, integrity and diversity.
For further information, please get in touch.
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