GTAG Advice on the Development of a UK Green Taxonomy

On 1 October, the Green Technical Advisory Group ("GTAG") published its eagerly awaited advice to the UK government on the development of the UK Green Taxonomy. Whilst not binding, it gives a likely indication as to what the UK Green Taxonomy may look like and how it might differ from the EU Taxonomy (hint: not much).

Prior to Brexit, the UK onshored part of the EU Taxonomy Regulation creating a binding obligation on the UK government to implement its own environmental Taxonomy at some point. Importantly, the UK did not onshore the EU Taxonomy Delegated Acts, which include the technical screening criteria ("TSC") for significant contribution and "do no significant harm", as they were published post-Brexit.

This is significant, as it has left the UK Government with a choice to make: does it double down on Brexit and develop a Taxonomy completely divergent from the EU, or does it opt to align closely with the EU TSC by selecting a different set of activities to qualify as "sustainable" along with different criteria?

The GTAG has addressed this question in its recent advice and, whilst not binding, the GTAG suggest an 'adopt some and revise some' approach. It remains to be seen whether this will be the best of both worlds or an unsatisfactory but practical solution to a Brexit problem?

What is GTAG?

GTA was established in June 2021 by the UK Government to provide independent advice on the development and implementation of a UK Green Taxonomy. It is formed of a range of industry experts, NGOs, Taxonomy-users and leading academics.

While GTAG's advice is not binding, it provides a useful indication of the potential direction of travel for the UK Green Taxonomy and the issues facing policy makers relating to implementation. In essence, it is more than likely that the UK Government will largely follow GTAG advice.

The Brexit Issue

Ultimately, the key issue underlying the GTAG report is the tension between the UK Government's political impulse to pursue divergence from the EU regulatory regime on the one hand, against its stated desire to cut "red tape" and simplify the UK regulatory regime, across both financial services and the wider economy.

The problem with this is that these two political objectives are at loggerheads when it comes to the implementation of the UK Green Taxonomy. On the one hand, the UK Government could opt to double-down on the Brexit dividend rhetoric, rip-up the EU Taxonomy TSC and start afresh. This would have the benefit of ensuring the integrity of the UK Green Taxonomy is aligned with other UK (sectoral) policies, respond to changing scientific and market information and reflect the UK's (rather than the EU's) 2030 and 2035 targets and carbon budgets. Such approach would also address some of the (many) flaws in the EU TSC.

Yet this would undoubtedly increase the regulatory burden on UK firms, many of which are already subject to the EU Taxonomy. Indeed, many firms are already struggling with what is a complex piece of regulation, requiring the accumulation and processing of large amounts of data. Not only would firms be required to comply with the EU Taxonomy they would also need to comply with a parallel UK regime. It would also potentially risk the loss of market influence in the event of competition between different jurisdictional standards.

GTAG has looked to carefully walk this political tight-rope, advocating a (quite uninspiringly named) policy of "adopt some and revise some".

The GTAG Recommendation

The approach of "adopt some and revise some" is fairly self-explanatory. It involves adopting the majority of the EU TSC and revising the remainder where they are deemed unsuitable.

The GTAG report puts forward that the primary focus of the UK Green Taxonomy should be on investors and financial market participants and, as many UK financial market participants will also be subject to the EU Taxonomy, the UK should ensure "close alignment with the EU TSC [so as to] limit divergence and market fragmentation". GTAG advises that the majority of the EU TSC are onshored as soon as possible, subject to the substitution of equivalent UK legal and regulatory reference points.

However, GTAG recognises that a small part of the EU TSC should be revised prior to adoption for a number of reasons:

• Activities where EU thresholds are inconsistent with the UK's net zero objectives (including renovation of buildings, shipping, forestry, bioenergy, manufacture of hydrogen and restoration of wetlands).
• Activities where the EU legislation in the EU TSC does not have a corresponding equivalent in the UK (for example, the chemicals sector, agriculture, fisheries).
• The Climate Change Adaptation EU TSC in general are focussed on processes rather than outcomes – GTAG recommends that the UK Government sets goal and targets in relation to climate change adaptation such that the TSC can be measured in relation these goals and targets.

When making changes to the EU TSC for the purposes of the UK Green Taxonomy, GTAG has advised that the following principles be applied in order of priority:

• Avoid greenwashing and support economic transition;
• Simplicity and usability; and
• International relevance and consistency.

What this means is, if the GTAG advice is adopted, the UK Green Taxonomy should align with the EU Taxonomy, except where doing so impact the simplicity or usability of the activity classification system or increases the risk of greenwashing. In reality, what amounts to being simple and usable is highly subjective and arguments could fairly be made that the majority of the EU TSC falls foul of this.

How does this GTAG advice impact firms?

The GTAG advice is non-binding and so does not immediately impact firms directly. However, as the official advisor to the UK Government on the UK Green Taxonomy, its advice may be indicative of the likely policy direction of the UK.

In our view, although the "adopt some and revise some" policy indicates that usability takes precedence over international regulatory alignment, the suggested approach seems to be to make fairly minimal changes to the complex processes relating to "substantial contribution" and "Do Not Significant Harm" and only makes changes where straight onshoring of the EU TSC would not operate as a matter of law or there is a direct policy conflict. The GTAG signals that further consultation will be published on DNSH, but clarity over the likely direction would have been useful.

However, this leaves us with potentially the worst of both worlds from a compliance perspective: a UK Green Taxonomy with an overly complex methodology in the TSC for determining "substantial contribution" and "Do Not Significant Harm" but also a significant divergence from the EU Taxonomy which means that it will not be a cut and paste compliance job for firms. The sheer number of references in the EU TSC to EU-specific regulations and legislation means a significant proportion of the EU TSC will need to be amended to be implemented in the UK regardless of approach.

In our view, the best approach would be to strip back the complex Do No Significant Harm criteria in the EU TSC to make them more manageable for firms. While the UK could implement different TSCs, it should try where possible to keep the data for any one activity the same or similar. This would allow at least some dove-tailing with the EU Taxonomy, by allowing firms to re-use data they are already required to collect.

Next Steps

The GTAG advice suggests that the "adopt some and revise some" approach is intended as an immediate stop-gap. However, in the long-term GTAG recognises that there may be benefits to further revisions to the TSC, primarily to streamline the Do No Significant Harm process (which is currently overly complex) and optimise the UK Green Taxonomy to fit both within the UK's wider net zero strategy but also to ensure international interoperability as more countries introduce their own environmental taxonomies.

There is also to be a UK Green Taxonomy consultation, which will seek to address a number of issues, such as clearly defining environmentally sustainable investments and economic activities. The group believes that the UK Government should ask a number of important questions, on which they will continue to advise, for instance:

• "How can international interoperability be embedded in the UK Green Taxonomy, and how can taxonomy international interoperability be promoted more widely?
• How can the application of the UK Green Taxonomy be expanded to increase coverage of the UK economy?
• How should the UK approach the development of TSC for the remaining environmental objectives in the UK-specific context?
• How can the UK Green Taxonomy support the development of transition plans?"

It will likely place particular emphasis on the concept of "do no significant harm", on which GTAG has advised the UK Government, regarding minimum and international standards, difficulties in terms of international assets, and other taxonomies' approach to the concept.

Firms should look out for further advice from the GTAG as well as confirmation from the UK government as to their response to the GTAG's advice.

Co-author: Henry Glasford