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The UK Treasury has released details on a package of new sustainability-related disclosure requirements, designed to reduce the risk of greenwashing in the financial space and push firms to ramp up their transition to net-zero.
The government’s report on “Greening Finance”, published on Monday, comes just ten days ahead of the COP26 meeting in Glasgow, where world leaders will discuss the path to their climate commitments. It details requirements for firms to disclose the impact of their business on the environment, which should further the understanding of both investors and consumers on whether their investments are aligned with net zero targets or not.
The new disclosures are expected to be implemented by 2022 and will equally apply to asset managers, insurers, pension schemes, financial advisers and investment products – on top of the corporate universe targeted by the financial sector.
Following the release of the report, Chancellor Rishi Sunak said: “We want sustainability to be a key component of investment decisions, and our plans will arm investors with the right information to make more environmentally-led decisions.”
“The rules will set new global standards for sustainability that will boost the economy, protect the planet and support our net zero goals,” he added.
The aim is to combat the increasing risk of greenwashing, whereby firms make misleading claims about their net-zero commitments.
In the past few years, firms have been under added pressure to disclose ESG data to meet investors’ non-financial reporting requirements – which has in turn raised the risk of false or inaccurate reporting.
Last month, ShareAction found that while 20 of Europe’s 25 largest banks have pledged to zero out emissions from their portfolios by 2050 at the latest, only three banks have committed to halve their financed emissions by 2030 to ensure they are on track to meet their 2050 target.
High-profile figures from both the official sector and the industry have recently stepped up calls on the broader financial sector to integrate sustainability into its business models and to act responsibly on its use of ESG and net zero labels.
Along similar lines, the government warned that the more thorough information laid out in the report will only be “impactful” if businesses and investors make use of it, and urged the pension and investment sector to “help shift their financial flows to align with a net-zero, nature-positive economy.”
Roadmap to greening finance
The newly released roadmap identifies three phases – informing investors and consumers, acting on the provided information, and shifting financial flows – and aims to focus on the first by laying out the framework for the implementation of Sustainability Disclosure Requirements (SDR).
Information generated by the SDR should then be used by the financial sector to start shifting investment flows towards zero-emission activities, the report said.
Companies’ data reporting will be required to be “consumer-focused,” showing the sustainability impact, risks and opportunities of the activities they finance.
“This will be accompanied by a consumer-facing label developed by the Financial Conduct Authority (FCA) so that consumers can make informed investment decisions that take sustainability into account,” the UK government said.
Further, the data reporting needs to be “credible,” “robust” and in line with upcoming international standards for sustainability reporting, the government said.
“SDR will use the same framework and metrics across the economy to ensure a clear and direct link from investors, through the financial system to the businesses they are invested in and their relationship with the environment.
Bolstering commitment to global standards
“Metrics will be drawn from international standards, where they exist, to support international compatibility,” it said.
The UK will in fact participate in the upcoming International Sustainability Standards Board (ISSB), recently unveiled by the International Financial Reporting Standard (IFRS) and tasked with developing global baseline sustainability-related reporting standards.
These future standards will in turn build on the Financial Stability Board’s Task force on Climate-related Financial Disclosures (TCFD), whose guidelines the Uk had already committed to make fully mandatory through all domestic economic sectors by 2025. In December last year, for example, the FCA published final TCFD-aligned disclosures for UK premium-listed companies.
“The ISSB will provide comprehensive and granular corporate reporting standards […] focused on information which is material to investors,” the report said, adding the government expects the Board to be established by the end of the year and start consultations on a draft climate-related standard by early 2022, “before expanding its standard-setting to broader environmental and sustainability factors.”
While the proposed “overarching framework” will be subject to consultation, ISSB standards will overall “form a core component of the SDR framework, and the backbone of its corporate reporting element,” the report stated.
“To deliver this, the government will create a mechanism to adopt and endorse ISSB-issued standards for use in the UK.”
Regulatory change implementing the new framework “will ensure that UK reporting under the ISSB standards is consistent with both existing and forthcoming disclosure requirements so that companies are not required to report the same information twice.”
Meanwhile, the roadmap also revealed more details on the UK’s Green Finance Taxonomy – a set of rules which will determine which economic activities can be labelled as “green” for government investment.
The report stated that the eligible economic activities must make a “substantial” contribution to one of six environmental objectives: mitigating climate change, assisting climate change adaptation, contributing to a circular economy, promoting the sustainable use and protection of water, preventing pollution and protecting and restoring biodiversity.
“Each of the environmental objectives will be underpinned by a set of detailed standards, known as Technical Screening Criteria (TSC). There will be an individual TSC for each economic activity included in the Taxonomy, which identifies how that activity can make a substantial contribution to the environmental objective,” the report said.
Additional reporting by Anna Brunetti
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