Society responds to UK Green Taxonomy consultation

• Share

The Society's overall concern is to avoid the complexity and confusion that would result if the UK were to introduce a taxonomy to support investor decision making, stewardship and engagement without very strong alignment with the EU Taxonomy.

The Investor Relations Society

Birchin Court, 20 Birchin Lane

London EC3V 9DU

HM Treasury

By email: taxonomyconsultation@hmtreasury.gov.uk

6th February 2025

Dear Sirs,

Re: HM Treasury (HMT) Consultation on UK Green Taxonomy

Thank you for giving us the opportunity to comment on your consultation on a UK Green Taxonomy, which would aim to provide a framework for defining sustainable economic activities and for facilitating green investments. This response is made on behalf of the UK’s Investor Relations Society (‘the Society’).

The IR Society represents Members working for publicly listed companies and investor relations focused service providers, to assist them in the development of effective two-way communication with the markets. It has approaching 800 Members, drawn mainly from the UK, including the majority of the UK FTSE 100, many of the FTSE 250 constituents and some from companies listed overseas.

The IR Society’s mission is to promote best practice in investor relations; to support the professional development of its Members; to represent their views to regulatory bodies, the investment community and Government; and to act as a forum for issuers and the investment community. As such, our response has been primarily constructed through the lens of a corporate issuer, and as such reflects the views of those very much at the ‘coal face’ of data gathering, reporting, and investor engagement, which continues to increase in complexity and resource burden.

We set out below our general comments on the aspects of most relevance to our Members, together with the two specific issues of Frequency of Review (Q13) and DNSH principle (Q12), and we then use those views to answer some of the specific questions.

General comments

The Society’s overall concern is to avoid the complexity and confusion that would result if the UK were to introduce a taxonomy to support investor decision making, stewardship and engagement without very strong alignment with the EU Taxonomy.  Many UK listed companies have European operations which means that they fall within the scope of the EU reporting regulations, and are currently considering whether to report at entity or group level – we believe many will choose to adopt a group-wide approach precisely to reduce the internal challenges of differing internal systems and metrics.  These issuers are (or are preparing to start) aligning their activities and reporting in line with the EU Taxonomy Regulation categorisations, and introducing a different UK-specific taxonomy would add undue and significant complexity and confusion for both issuers and their investors, both at launch and on an ongoing basis.

In particular, in such circumstances if UK issuers were required to report against a UK taxonomy, those issuers that are also subject to the EU Taxonomy would have a different proportion of their activities considered ‘green’ in the UK vs the EU, and be required to make two different taxonomy disclosures.  This would include Annual Report disclosures and management teams needing to explain any such differences and adjudicate which taxonomy categorisation/disclosure more reliably represents the issuer’s activities.  

The impacts in terms of cost, resource and confusion should not be underestimated, and the challenge for company auditors as well would be significant. Issuers have experienced the impact of similar confusion where there hasn’t been alignment – for instance UK GAAP and IFRS, SASB and GRI and the Gender Pay Gap which is limited to certain geographies. 

The consequence is that it can render the information very unhelpful for broad international businesses – and would no doubt have similar challenges for global investment managers looking to report on a comparable and aggregated basis. We would be happy to discuss examples from Members of where this has historically caused significant reporting challenges.

We can see certain instances where a lighter-touch framework might provide an attractive route for smaller UK issuers whose activities would not be classified under the EU regime.  This might also be for private finance, or sustainability-focused financial products supporting the UK net zero goals.  In each instance we would strongly advocate both interoperability with the EU taxonomy (which would importantly need to include structure, naming and metrics), and that there would be no requirement for issuers to report separately under both UK and EU regimes.

However, we do note that very few financial and non-financial reporting regimes are created to be “UK only”, and indeed, the UK has often aligned to internationally accepted standards, and we question whether any potential benefits of making a UK-specific taxonomy available for smaller issuers/private finance would outweigh the additional complexity of running any such parallel UK alternative taxonomy.  It would also provide a significant challenge for UK companies looking to grow within the EU.

We acknowledge the EU Taxonomy is one of a number in existence, but is the one most directly impacting our Members.  There are inconsistencies already in place for issuers with global activities/investors, and UK issuers will also have to deal with any inconsistencies between the impending UK SRS and the EU Taxonomy. However, given the UK SRS will be based on ISSB standards (that are designed to be internationally interoperable, with joint interoperability guidance issued with EFRAG), and also in light of the potential changes to the EU Taxonomy under the proposed EU Omnibus (see below), such inconsistencies with the EU taxonomy are hopefully workable, and adding an additional alternative (UK) taxonomy would exacerbate complexity and confusion.

Frequency of review (Q13)

Our other main concern relates to the proposals around frequency of review. We acknowledge that the criteria for transitioning activities under the EU Taxonomy are revisited every three years, and criteria for new activities also continue to be developed with the same regularity, in order to reflect changing scientific, technological and policy developments on the road to net zero. We are strongly of the view that any UK Taxonomy that is applicable to UK issuers subject to the EU Taxonomy should be updated in line with updates to the EU Taxonomy.  The risk otherwise if they become ‘out of kilter’ is that issuers (and investors) will be left dealing with the significant confusion and practical challenges mentioned above.

If a UK Taxonomy were to be introduced for those issuers not caught under the EU Taxonomy, we can see benefit in allowing the taxonomy to develop and reflect progress through review, but would note that market confidence is not helped by frequent changes in what is considered “sustainable”, which by nature is long-term in outlook and management.

From a practical perspective, less frequent review might be more suitable given the likely data quality/availability issues and the timescale of being able to report on progress/outcomes. Any such review should focus on additions where issues/areas are coming into more focus, rather than changing existing metrics, because of the practical challenges and confusion that would result if metrics kept changing.

We realise any potential EU Omnibus package (due to be published later this month) may alter European requirements, and that the recommendations[1] for simplifying the EU Taxonomy from the Platform on Sustainable Finance (PSF), the expert group set up by the EC to advise on the development of sustainable finance policies, could reduce the Taxonomy reporting burden of (non-financial) corporates by more than a third.  In our view, any UK proposals for a Green taxonomy should await/reflect any such revisions to EU requirements (see also Q7).  

DNSH principle (Q12)

We believe any requirements applicable to UK issuers subject to the EU Taxonomy should be consistent with the EU Taxonomy, and thus should include equivalent DNSH requirements. If there is an alternative UK Taxonomy, while DNSH can be a useful concept in reducing greenwashing, it raises questions around the degree of complexity in incorporating it, especially for companies with fewer resources. As such, detailed guidance would need to be issued around areas such as definitions, sector-specific activities, materiality thresholds and how actions that cause significant harm are monitored.

Answers to specific questions

Consultation questions

1. To what extent, within the wider context of government policy, including sustainability disclosures, transition planning, transition finance and market practices, is a UK Taxonomy distinctly valuable in supporting the goals of channelling capital and preventing greenwashing?

a. Are there other existing or alternative government policies which would better meet these objectives or the needs of stakeholders?

b. How can activity-level standards or data support decision making and complement other government sustainable finance policies and the use of entity-level data (e.g. as provided by ISSB disclosures or transition plans)?

We refer to our general comments above. These outline our main concern, which is to avoid the complexity and confusion that would result if the UK were to introduce a taxonomy to support investor decision making, stewardship and engagement without very strong alignment with the EU Taxonomy.

2. What are the specific use cases for a UK Taxonomy which would contribute to the stated goals? This could include through voluntary use cases or through links to government policy and regulation.

a. What are respondents’ views on the benefits of the proposed use case (paragraph 2.2)?

b. Are there any other use cases respondents have identified?

c. How does each use case identified link to the stated goals?

d. Under these or other use cases, which types of organisations could benefit from a UK Taxonomy?

e. For each use case identified, do respondents have any concerns or views on the practical challenges?

f. What is the role for government within each use case identified, if any (i.e. to provide oversight, responsible for ongoing maintenance, implement legislation, including disclosure requirements)?

We note that paragraph 2.2 in the consultation mentions that a UK taxonomy could support investor decision making, stewardship and engagement, and (as we explain above) the Society’s overall concern is to avoid the complexity and confusion that would result if this was brought in without very strong alignment with the EU Taxonomy.  

This is because many UK listed companies have European operations, which means they fall within the scope of the EU reporting regulations, and are currently considering whether to report at entity or group level – we believe many will choose to adopt a group-wide approach precisely to reduce the internal challenges of differing internal systems and metrics.  These issuers are (or are preparing to start) aligning their activities and reporting in line with the EU Taxonomy Regulation categorisations, and introducing a different UK-specific taxonomy would add undue and significant complexity and confusion for both issuers and their investors, both at launch and on an ongoing basis.

In particular, in such circumstances if HMT required UK issuers to report against a UK taxonomy, those issuers that are also subject to the EU Taxonomy would have a different proportion of their activities considered ‘green’ in the UK vs the EU, and be required to make two different taxonomy disclosures.  This would include Annual Report disclosures and management teams needing to explain any such differences and adjudicate which taxonomy categorisation/disclosure more reliably represents the issuer’s activities. 

The impacts in terms of cost, resource and confusion should not be underestimated, and the challenge for company auditors as well would be significant. Issuers have experienced the impact of similar confusion where there has not been alignment – for instance UK GAAP and IFRS, SASB and GRI and the Gender Pay Gap which is limited to certain geographies. 

The consequence is that it can render the information very unhelpful for broad international businesses – and would no doubt have similar challenges for global investment managers looking to report on a comparable and aggregated basis. We would be happy to discuss examples from Members of where this has historically caused significant reporting challenges.

We can see certain instances where a lighter-touch framework might provide an attractive route for smaller UK issuers whose activities would not be classified under the EU regime.  This might also be for private finance, or sustainability-focused financial products supporting the UK net zero goals.  In each instance we would strongly advocate both interoperability with the EU taxonomy (which would importantly need to include structure, naming and metrics), and that there would be no requirement for issuers to report separately under both UK and EU regimes.

However, we do note that very few financial and non-financial reporting regimes are created to be “UK only”, and indeed, the UK has often aligned to internationally accepted standards, and we question whether any potential benefits of making a UK-specific taxonomy available for smaller issuers/private finance would outweigh the additional complexity of running any such parallel UK alternative taxonomy.  It would also provide a significant challenge for UK companies looking to grow within the EU.

We acknowledge the EU Taxonomy is one of a number in existence, but is the one most directly impacting our Members.  There are inconsistencies already in place for issuers with global activities/investors, and UK issuers will also have to deal with any inconsistencies between the impending UK SRS and the EU Taxonomy. However, given the UK SRS will be based on ISSB standards (that are designed to be internationally interoperable, with joint interoperability guidance issued with EFRAG), and also in light of the potential changes to the EU Taxonomy under the proposed EU Omnibus (see Q7 below), such inconsistencies with the EU taxonomy are hopefully workable, and adding an additional alternative (UK) taxonomy would exacerbate complexity and confusion.

3. Is a UK Taxonomy a useful tool in supporting the allocation of transition finance alongside transition planning? If so, explain how, with reference to any specific design features which can facilitate this.

No comment, beyond our general comments set out above.

4. How could the success of a UK Taxonomy be evaluated? What measurable key performance indicators could show that a UK Taxonomy is achieving its goals?

No comment, beyond our general comments set out above.

5. There are already several sustainable taxonomies in operation in other jurisdictions that UK based companies may interact with. How do respondents currently use different taxonomies (both jurisdictional and internal/market-led) to inform decision making?

No comment, beyond our general comments set out above.

6. In which areas of the design of a UK Taxonomy would interoperability with these existing taxonomies be most helpful? These could include format, structure and naming, or thresholds and metrics.

As mentioned at Q2 above, we acknowledge the EU Taxonomy is one of a number in existence, but is the one most directly impacting our Members.  There are inconsistencies already in place for issuers with global activities/investors, and UK issuers will also have to deal with any inconsistencies between the impending UK SRS and the EU Taxonomy. However, given the UK SRS will be based on ISSB standards (that are designed to be internationally interoperable, with joint interoperability guidance issued with EFRAG), and also in light of the potential changes to the EU Taxonomy under the proposed EU Omnibus (see below), such inconsistencies between UK SRS and the EU taxonomy will hopefully be workable, and adding an additional alternative (UK) taxonomy would exacerbate complexity and confusion.

We can see certain instances where a lighter-touch taxonomy framework might provide an attractive route for smaller UK issuers whose activities would not be classified under the EU regime.  This might also be for private finance, or sustainability-focused financial products supporting the UK net zero goals.  In each instance we would strongly advocate both interoperability with the EU taxonomy (which would importantly need to include structure, naming and metrics), and that there would be no requirement for issuers to report separately under both UK and EU regimes.

We realise any potential EU Omnibus package (due to be published later this month) may alter European requirements, and that the recommendations for simplifying the EU Taxonomy from the Platform on Sustainable Finance (PSF), the expert group set up by the EC to advise on the development of sustainable finance policies, could reduce the Taxonomy reporting burden of corporates by more than a third.   In our view, any UK proposals for a Green taxonomy should await/reflect any such revisions to EU requirements.  

Our members have experience of working under multiple different standards, for instance UK GAAP and IFRS, SASB and GRI and the Gender Pay Gap which is limited to certain geographies, (see Q2 above), which can render the information very unhelpful for broad international businesses, and we would be happy to discuss examples from Members of where this has historically caused significant reporting challenges. No doubt similar challenges would arise for global investment managers looking to report on a comparable and aggregated basis.

7. Are there any lessons learned, or best practice from other jurisdictional taxonomies that a potential UK Taxonomy could be informed by?

Whilst we acknowledge the EU Taxonomy is one of a number in existence, it is the one most directly impacting our Members.  There are inconsistencies already in place for issuers with global activities/investors, and UK issuers will also have to deal with any inconsistencies between the impending UK SRS and the EU Taxonomy. However, given the UK SRS will be based on ISSB standards (that are designed to be internationally interoperable, with joint interoperability guidance issued with EFRAG), and also in light of the potential changes to the EU Taxonomy under the proposed EU Omnibus (see paragraph below), such inconsistencies between UK SRS and the EU taxonomy will hopefully be workable, and adding an additional alternative (UK) taxonomy would exacerbate complexity and confusion.

We realise any potential EU Omnibus package (due to be published later this month) may alter European requirements, and that the recommendations for simplifying the EU Taxonomy from the Platform on Sustainable Finance (PSF), the expert group set up by the EC to advise on the development of sustainable finance policies, could reduce the Taxonomy reporting burden of corporates by more than a third.   In our view, any UK proposals for a Green taxonomy should await/reflect any such revisions to EU requirements.  

Our members have experience of working under multiple different standards, for instance UK GAAP and IFRS, SASB and GRI and the Gender Pay Gap which is limited to certain geographies, (see Q2 above), which can render the information very unhelpful for broad international businesses, and we would be happy to discuss examples from Members of where this has historically caused significant reporting challenges. No doubt similar challenges would arise for global investment managers looking to report on a comparable and aggregated basis.

8. What is the preferred scope of a UK Taxonomy in terms of sectors?

No comment, beyond our general comments set out above.

9. What environmental objectives should a UK taxonomy focus on (examples listed in paragraph 3.3)? How should these be prioritised?

No comment, beyond our general comments set out above.

10. When developing these objectives, what are the key metrics which could be used for companies to demonstrate alignment with a UK Taxonomy?

No comment, beyond our general comments set out above.

11. What are the key design features and characteristics which would maximise the potential of a UK Taxonomy to contribute to the stated goals? Please consider usability both for investors and those seeking investment. This may include but not be limited to the level of detail in the criteria and the type of threshold (e.g. quantitative, qualitative, legislative).

No comment, beyond our general comments set out above.

12. What are respondents’ views on how to incorporate a Do No Significant Harm principle, and how this could work?

We believe any requirements applicable to UK issuers subject to the EU Taxonomy should be consistent with the EU Taxonomy, and thus should include equivalent DNSH requirements. If there is an alternative UK Taxonomy, while DNSH can be a useful concept in reducing greenwashing, it raises questions around the degree of complexity in incorporating it, especially for companies with fewer resources. As such, detailed guidance would need to be issued around areas such as definitions, sector-specific activities, materiality thresholds and how actions that cause significant harm are monitored.

13. It is likely a UK Taxonomy would need regular updates, potentially as often as every three years.

a. Do you agree with this regularity?

b. Would this pose any practical challenges to users of a UK Taxonomy?

c. Would this timeframe be appropriate for transition plans?

As mentioned in our general comments above, we are concerned by the proposals around frequency of review. We acknowledge that the criteria for transitioning activities under the EU Taxonomy are revisited every three years, and criteria for new activities also continue to be developed with the same regularity, in order to reflect changing scientific, technological and policy developments on the road to net zero. We are strongly of the view that any UK Taxonomy that is applicable to UK issuers subject to the EU Taxonomy should be updated in line with updates to the EU Taxonomy.  The risk otherwise if they become ‘out of kilter’ is that issuers (and investors) will be left dealing with the significant confusion and practical challenges mentioned above.

If a UK Taxonomy were to be introduced for those issuers not caught under the EU Taxonomy, we can see benefit in allowing the taxonomy to develop and reflect progress through review, but would note that market confidence is not helped by frequent changes in what is considered “sustainable”, which by nature is long-term in outlook and management.

From a practical perspective, less frequent review might be more suitable given the likely data quality/availability issues and the timescale of being able to report on progress/outcomes. Any such review should focus on additions where issues/areas are coming into more focus, rather than changing existing metrics, because of the practical challenges and confusion that would result if metrics kept changing.

As mentioned at Q7 above, we realise the potential EU Omnibus package (due to be published later this month) may alter European requirements, and that the recommendations for simplifying the EU Taxonomy from the Platform on Sustainable Finance (PSF) - the expert group set up by the EC to advise on the development of sustainable finance policies - could reduce the EU Taxonomy reporting burden of corporates by more than a third.   In our view any UK proposals for a Green taxonomy should await/reflect any such revisions to EU requirements.

14. What governance and oversight arrangements should be put in place for ongoing maintenance and updates to accompany a UK Taxonomy?

No comment, beyond our general comments set out above.

We hope you find these comments useful. Please do not hesitate to make contact if you have any questions.

Your sincerely,

Liz Cole

Head of Policy and Communications

Investor Relations Society

(Email: enquiries@irsociety.org.uk, Tel: + 44 (0) 20 3978 1980)

Laura Hayter

Chief Executive Officer of the Investor Relations Society

(Email: enquiries@irsociety.org.uk, Tel: + 44 (0) 20 3978 1980)

Ross Hawley

Chair of the Investor Relations Society’s Policy Committee

(Email: enquiries@irsociety.org.uk, Tel: + 44 (0) 20 3978 1980)

Published 6 February, 2025