Green ambitions for post-Brexit UK financial services

On 9 November, Chancellor of the Exchequer Rishi Sunak set out further developments in the UK Government’s plans for the future of financial services post-Brexit. Alongside updates on approach to matters including equivalence and financial technology, the announcement emphasised the UK’s intention to remain a leader in green finance.

On the green finance aspects in particular, the announcement included plans for a UK Sovereign Green Bond, mandatory climate-related disclosures and the implementation of a green taxonomy, as discussed further below. While further details on these initiatives will be awaited with interest, the announcement shows that green finance remains high on the agenda despite the potential distractions of COVID-19 and Brexit.

UK Sovereign Green Bond 

The Government intends to issue the UK’s first Sovereign Green Bond in 2021 to help meet the UK’s 2050 net-zero target and other environmental objectives. A series of further issuances are expected to follow to meet growing investor demand. This is likely to be welcome news among investors, some of whom have been calling on the UK government to join the growing number of countries issuing such bonds.

Climate-related disclosures 

Mr Sunak announced the intention for the UK to become the first country in the world to make Task Force on Climate-related Financial Disclosures (TCFD)-aligned disclosures “fully mandatory” across the economy, going beyond a comply-or-explain approach, such as that announced by the New Zealand government earlier this year. The TCFD recommendations are intended to provide the market with decision-useful, forward-looking information on how organisations are addressing climate-related risks and opportunities in their activities.

The UK’s TCFD Taskforce has published an interim report with a roadmap setting out an indicative path for implementing the mandatory disclosures for different types of firm by 2025, with many coming into force by 2023. The roadmap captures a significant portion of the economy including listed commercial companies, UK-registered large private companies, banks and building societies, insurance companies, UK-authorised asset managers, FCA-regulated pension schemes and occupational pension schemes. The method of implementing the requirements will be tailored to each type of firm and build on existing initiatives.

For example, following a consultation, the FCA recently confirmed plans to implement TCFD-aligned disclosure rules for commercial companies with a UK premium listing from 1 January 2021. The rules will first be introduced on a comply-or-explain basis, with the expectation that firms will be able to comply. The FCA intends to consult on widening the scope to a broader set of issuers and on moving to mandatory disclosure in the first half of 2021. The FCA also expects to propose TCFD implementation measures for UK-authorised asset managers, life insurers and FCA-regulated pension providers in the first half of 2021.

For banks and insurers, the PRA’s existing supervisory expectations require climate-related financial reporting to be embedded by end-2021. The PRA will perform a review of firms’ published disclosures in 2022, which it will use to inform its decision on whether to introduce further measures to improve quantity, quality or consistency of disclosures, which could include mandatory TCFD disclosures.

Many in-scope PRA- or FCA-authorised firms will also be caught by the incoming and proposed requirements for listed companies and large private companies.

Green taxonomy

The Government also intends to implement a green taxonomy to provide a common framework for determining which activities can be defined as “environmentally sustainable”. This should improve understanding of the impact of firms’ activities and investments on the environment and support the transition to a sustainable economy.

The EU has been leading the way in the development of green taxonomies via the EU Taxonomy Regulation. The framework legislation for the EU’s taxonomy has applied in the UK since July 2020. However, as the disclosure requirements under it will only begin to apply from 1 January 2022, i.e. after the end of the Brexit transition period, there has been speculation around how far the UK would align to the EU approach.

The UK taxonomy will take the scientific metrics in the EU Taxonomy Regulation as its basis and a UK Green Technical Advisory Group will be established to review those metrics to ensure they are right for the UK market. The finer details of the UK's approach are yet to be announced, but this raises the question of whether some level of divergence between UK and EU requirements will result.

 Significant divergence could risk undermining the comparability of definitions across jurisdictions and increasing the burden on firms who offer financial products in both the EU and UK. However, the UK does intend to join the International Platform on Sustainable Finance, of which the EU is also a member, to “support and benefit from the development of common international standards on taxonomies”, suggesting the Government is cognisant of the importance of international comparability. The FCA has also recently announced support for greater international harmonisation of climate reporting standards, including in particular the IFRS’ proposed Sustainability Standards Board (discussed further here by Teresa Ko, an IFRS Foundation Trustee and Freshfields’ China Chairman).