United Kingdom abolishes eco-classification system
The UK government's consultation on the introduction of mandatory transition planning strategies for financial organisations in the UK remains open until mid-September. However, a significant shift in policy has already been announced: the abandonment of plans to introduce a green taxonomy similar to the EU's.
The green taxonomy, intended to explicitly define sustainable economic activities or assets, was aimed at addressing greenwashing in the financial sector. Yet, the UK government's decision to abandon the taxonomy was influenced by negative feedback from industry stakeholders during a consultation.
More than half of the respondents to the consultation expressed doubts about the value of implementing the green taxonomy. The concerns were primarily driven by experiences of working with other taxonomies and the practical challenges in their implementation.
The concerns about the UK's proposed policy were not unique. The EU's sustainable taxonomy, introduced in 2020, has attracted controversy, particularly regarding the classification of economic activities like nuclear energy as sustainable.
Recognising these challenges, the UK government is focusing on alternative measures. Instead of a formal taxonomy system, the government is pursuing transparent, internationally aligned sustainability disclosures and targeted frameworks to reduce greenwashing and promote credible sustainable finance practices.
The UK is leveraging international sustainability disclosure frameworks, such as those developed by the International Sustainability Standards Board (ISSB), and enhancing sustainability assurance. Additionally, the government is implementing 1.5°C-aligned transition planning requirements.
These efforts are intended to address greenwashing and promote transparent, credible sustainable finance practices more effectively than a formal taxonomy system. The UK's approach differs from the EU and many other jurisdictions that continue to develop or revise their taxonomies but reflects practical difficulties common to sustainable finance regulations worldwide.
Responses to the consultation came predominantly from the private sector, as well as legal professionals, charities, and NGOs. A third of the respondents suggested that alternative measures, such as the UK Sustainability Reporting Standard (UK SRS), transition plans, and sector roadmaps, could be more effective in tackling greenwashing.
As the consultation on transition planning strategies continues, it remains to be seen how the UK's approach to sustainable finance will evolve. However, the government's decision to abandon the green taxonomy and focus on transparent, internationally aligned sustainability disclosures is a clear indication of a shift towards more practical and effective solutions in the fight against greenwashing.
References: [1] HM Treasury. (2022). Green Taxonomy: Consultation on the UK's approach to sustainable finance. [online] Available at: https://www.gov.uk/government/consultations/green-taxonomy-consultation-on-the-uks-approach-to-sustainable-finance
[2] Financial Times. (2022). UK abandons plans for green taxonomy after industry backlash. [online] Available at: https://www.ft.com/content/d5588f9a-f5e6-4d3e-a7b6-496a25baf82d
[3] The Guardian. (2022). UK drops plans for green taxonomy after industry opposition. [online] Available at: https://www.theguardian.com/business/2022/jul/13/uk-drops-plans-for-green-taxonomy-after-industry-opposition
[4] City A.M. (2022). UK drops green taxonomy plans amid concerns over real-world application. [online] Available at: https://www.cityam.com/uk-drops-green-taxonomy-plans-amid-concerns-over-real-world-application/
Financial organisations in the UK are still considering the government's consultation on transition planning strategies, which has implications for the business sector. Meanwhile, the discarded green taxonomy, initially intended to combat greenwashing in the financial sector, was a proposal aimed at defining sustainable economic activities or assets.
The UK government's decision to abandon the green taxonomy was influenced by concerns expressed in the consultation about its practical challenges and potential inefficacy, compared to alternate measures such as the UK Sustainability Reporting Standard (UK SRS), transition plans, and sector roadmaps.
