UK Green Taxonomy Dies As Sustainability Regulations Face Global Pushback
On July 15, HM Treasury announced that the United Kingdom will be abandoning plans to create a UK Green Taxonomy. The move shocked sustainability advocates and comes at a time when the European Union and other jurisdictions reexamine existing sustainability regulations aimed at reducing greenhouse gas emissions and shifting towards net zero.
In October 2024, the UK government published a green paper setting net zero transition and green energy as a priority. The consultation on the need for a UK Green Taxonomy followed in November. The consultation stated that the UK aims to be the world leader in sustainable finance, including 'delivering a regulatory framework to support sustainable growth and enable the private sector to realise the opportunities of the transition.'
The consultation defined a taxonomy as "a classification tool which provides its users with a common framework to define which economic activities support climate, environmental or wider sustainability objectives. The purpose of developing a taxonomy for sustainable activities is typically to facilitate an increase in sustainable investment, and/or to reduce greenwashing, including by providing a reference point for other policies.'
The consultation closed in February. On July 15, HM Treasury released the UK Green Taxonomy Consultation Response, outlining the results and ending the drive to the creation of the regulation.
The first sentence of the response demonstrated the political shift within the UK on this issue. 'Growth is the number one mission of this government and sustainable finance can be a key driver of that growth.' This is different from the language of the consultation that called sustainability 'essential for long-term economic growth.' While the change may be subtle, it is significant.
HM Treasury received only 150 responses to the consultation. 45% of the respondents were in favor of a taxonomy, while 55% were opposed or mixed. 'The concern largely centred around the real-world application of this policy, primarily driven out of experience of working with other taxonomies, and concerns on the extent to which taxonomies were delivering on desired objectives.'
This observation relating to other taxonomies is not only timely, as the European Commission is working on reducing the EU Taxonomy for Sustainable Activities, but is also reflective of the larger pushback on the effectiveness of sustainability regulations. As the effects and cost of these new regulations become real, business interests are resisting the proposals. Even climate activists are questioning their effectiveness, as reporting standards disclose information without requiring actual action to reduce GHG emissions.
The consultation looked at two main areas of focus. The first addressed whether a taxonomy could help channel money into the net zero transition. 'The hypothesis behind many taxonomies is that it is difficult to identify credible, sustainable investment opportunities and that a UK Taxonomy could improve clarity about what activities are 'green' so that investors could confidently compare financial products and deploy capital towards sustainable goals.'
The responses were split by industry, with representatives of the energy, nuclear, and waste sectors saying that the taxonomy would help reach this goal. Respondents from the 'real economy' disagreed and "viewed a UK Taxonomy as a classification tool that could serve as an additional data point among various factors considered when making investment decisions. However, it was unlikely to have a material impact on final investment decisions."
The second area of focus looked at greenwashing, or misleading claims made by companies so they look more environmentally friendly. The taxonomy was aimed at reducing greenwashing "based on the hypothesis that activity level data could help to verify green and sustainability claims in the absence of a clear framework, and that a taxonomy could be the solution by definitively setting out what activities are 'green'.'
However, respondents disagreed and felt that the creation of a UK Taxonomy would lead to more fragmentation and confusion. It was argued that this is best handled through existing regulators, like the Competition Markets Authority and the Advertising Standards Authority. This is the approach recently adopted in Canada. Additionally, the creation of sustainability reporting standards through the FCA Sustainability Disclosure Requirements and UK Sustainability Reporting Standards will address those claims made in financial documents.
While the UK Green Taxonomy is dead, the creation of the UK SRS moves forward. The Department for Business and Trade released a draft of sustainability reporting standards for the UK on June 25. The consultation period is open until September 17, with the final requirements set to be published by December.
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