A cornerstone of the European Union’s sustainable finance package should be streamlined by the UK to make it more useful to the market, according to the expert panel advising the government.
The EU rule that stipulates a sustainable investment should “do no significant harm” has unclear definitions and binary disclosure requirements, the Green Technical Advisory Group said in a statement Wednesday. Adopting it as it stands would lead to market dissatisfaction and undermine the nation’s green finance agenda, it said.
Instead of the “all-or-nothing” approach taken by the EU, the UK should enable companies with activities that meet some do-no-significant-harm criteria to disclose the extent to which they meet them, GTAG said. The UK is due to consult on its list of sustainable economic activities, known as a taxonomy, in the autumn.
“It is clear that there are significant usability issues with the EU taxonomy’s approach to devising Do No Significant Harm criteria,” said Ingrid Holmes, chair of the GTAG. “The UK has the opportunity to benefit from its fast-follower status on taxonomy development.”
Britain is playing catch up with the EU, where the bloc has built an ESG regulatory framework that’s widely seen as a global benchmark. The GTAG was set up in 2021 to provide non-binding independent advice to the government on its taxonomy, which has been delayed. The UK’s Financial Conduct Authority is separately developing anti-greenwashing rules for investors, which is also delayed.
Under EU rules, a fund manager needs to show that a sustainable investment does no significant harm to any of the bloc’s environmental or social goals. Its stringent nature has sparked concerns that many ESG funds’ investments don’t meet the criteria, with some saying the rule may help inflate a clean-tech bubble.
GTAG said the UK should combine similar DNSH criteria, simplify the language used and provide guidance on how best to report. It also found that stakeholders have divergent views on what constitutes “significant harm” highlighting the need for a clearer definition.
An unnamed asset manager told GTAG it was unable to comply with the DNSH criteria on one of its investments due to the “granularity of the data point resulting in low data availability,” the report said.
“The stakeholder’s main thought in relation to this is that every company causes a certain level of harm in some aspect, at what point is the line of ‘significance’ drawn, and at what point is a data point too granular?” the report said. Relevant government departments should “provide a clear definition of what is meant by the ‘significant harm’ principle, and how this applies across environmental objectives.”
(Adds detail on UK ESG regulation delays in fifth paragraph.)