UK must develop ‘gold standard’ taxonomy to attract green finance, say government advisers

March 15, 2023|Written by

A panel of advisors has called on the UK government to develop a “gold standard” taxonomy for green finance to improve its competitive edge and avoid falling behind its international rivals in attracting net-zero investment opportunities.

The Green Technical Advisory Group (GTAG), an independent panel producing recommendations for a UK green taxonomy, has said that without a credible green taxonomy which clarifies which investments can be classed as sustainable, the UK will lag behind other jurisdictions.

Instead, by publishing a practical and science-based taxonomy the UK could clarify fragmented sustainability criteria and incentivise nations without a green taxonomy, such as the US, to report against it as an emerging international standard.

To make the taxonomy work for the UK’s globally-focused financial sector, GTAG’s recent report recommends keeping screening criteria and reporting requirements broadly consistent with those of the EU. This will enable interoperability and reduce cross-border investment costs as, according to the report, two-thirds of national taxonomies currently use the EU’s framework as a benchmark.

GTAG also identifies areas for improvement on the EU taxonomy and recommends an “adopt some, revise some” approach, which builds on the EU framework but deviates from it when needed. For instance, the UK could include international investments or classify activities in line with climate science.

GTAG argues that the UK should lead a “second wave” of green taxonomy development by promoting screening criteria based on climate science. The report highlights that some elements of the EU’s taxonomy, such as the classification of natural gas as a transitional activity, have been challenged for “not being scientifically rigorous”.

Calls from the sustainable investment community for greater clarity on the UK’s net-zero strategy have increased since the government missed its original deadline of producing a green taxonomy by the end of 2022.

James Alexander, CEO of the UK Sustainable Investment and Finance Association, described the delay as “hugely disappointing”, and in an article for Positive Money, Mick McAteer, co-director of the Financial Inclusion Centre, said the UK is “well behind the EU on developing a sustainable label” for investors.

In light of the rapid intensification by the US and EU of their financial and regulatory support for pro-green businesses, GTAG recommends that the UK position itself at the forefront of global taxonomy harmonisation efforts. The UK should, the group argues, use its seat at international tables to facilitate the creation of a commonly accepted list which could be deemed equivalent with a UK green taxonomy.

To enable cross-border capital flows and cover assets in as many jurisdictions as possible, GTAG also recommends that the government develop international base principles for reporting that can be used to include international investments in emerging economies without green taxonomies.

This page was last updated March 15, 2023

Share this article