Since Brexit, the UK Government has made it clear that it would forge its own path in sustainable finance by developing its own taxonomy, stating in the Greening Finance Roadmap that it would be a leader in sustainable development and appointing the Green Technical Advisory Group (GTAG), an independent expert group to provide non-binding advice on the implementation of the UK Green Taxonomy. For the UK to fulfil this role as the world’s first Net-Zero-aligned Financial Centre, adequate financial expertise and capital investment are crucial. These ambitions have invoked extensive challenges, however, including delays in releasing its own taxonomy as well as lagging behind the EU in this increasingly competitive race to secure investment.

While the UK has sustained the majority of the EU taxonomy regulation, it has announced the repeal of the Taxonomy Regulation underpinned by EU law. This move removes the obligation to make and adopt Technical Screening Criteria (TSC) that mirrors the structure of the EU taxonomy, determining whether an activity qualifies as Taxonomy-aligned. This sets the stage for Downing Street to form the taxonomy based on the UK’s sustainability priorities, independently of the EU.

Now that the Government can re-assess the direction of Green Taxonomy, the UK should leverage their novel legislative autonomy and rectify issues prevalent within the EU taxonomy, whilst also evaluating which elements best suit the UK market. Consistency with the EU’s existing taxonomy, however, remains important to reduce costs for firms that are subject to both jurisdictions. The ‘do no significant harm’ (DNSH) principle as a cornerstone of the EU’s framework, for instance, requires an economic activity to do no significant harm to the other five environmental objectives to which the activity does not contribute to be classed as sustainable. However, the DNSH criteria is limited as it does not provide a solid framework preventing negative environmental impact with 88% of EU’s DNSH criteria featuring inadequate or nonexistent quantitative or process-based thresholds.

Therefore, it is imperative for the UK’s taxonomy to rectify this information by incorporating ambitious measurable requirements beyond compliance, to distinguish sustainable investments from those that are merely accepted as it holds significant value for investors and could negatively affect the allocation of capital both within the UK and abroad. 

The UK’s taxonomy should also focus on interoperability with other taxonomies given that there has been a lack of consistency hindering the deployment of climate capital. Moreover, it can mitigate greenwashing risks and promote the integrity of net-zero transitions by providing standardised criteria to identify sustainable activities. Despite the need for the UK’s taxonomy to remain consistent with EU standards, this should not act as an impediment to potential plans for a more ambitious taxonomy for the UK; a prerequisite for prospective global leaders within sustainable finance. The UK should also consider replicating The Common Ground Taxonomy to improve the comparability and interoperability of EU and UK taxonomies. This would involve embracing the differences between taxonomies without compromising transition costs and increasing market confidence when investors have a consistent understanding of sustainable investments across taxonomies. 

Additionally, while the UK green taxonomy is being perfected to ensure clarity and usability, there is no current deadline in sight, meaning that the UK risks eroding industry confidence. The UK must promptly reaffirm its dedication to achieving net-zero by 2050. This becomes more significant given No 10’s announcement of 100 new drilling licences, aiming to extract as much oil and gas from the North Sea as possible. While No 10 claims that this decision is consistent with the UK’s plans to achieve net zero, it is evident that it will damage the UK’s climate commitments at a time when they aim to attract more capital investment to their transition plans. Coupled with an ambiguous timeline for the release of the taxonomy, the UK is at high risk of losing out on investments that are critical to supporting the clean energy transition. Investor reluctance may stem from the Government’s commitment to fossil fuel expansion, potentially diverting funding from renewable projects as well as undermining the UK’s international standing in green finance. 

The UK also faces stiff competition from the US, which recently introduced the Inflation Reduction Act (IRA), allocating over $400 billion in tax credits to renewable industries and other nations’ strategies for private funding. The IRA acts as a potential ‘investment magnet’, encouraging direct investment in the US to qualify for subsidies, limiting the UK’s competitiveness.

Confidence in the UK will continue to diminish as the government is unable to allocate large sums of money to match the US’ IRA due to multiple downside risks in the UK’s economy, including uncertainty that surrounds the rapid rise of interest rates and geopolitical tensions. It is vital that policymakers provide certainty that green investment opportunities are growing in the UK and move from stick to carrot in order to attract more investors. 

Ultimately, the UK should leverage its novel legislative autonomy and address issues prevalent within the EU taxonomy. Simultaneously, it should evaluate which elements best suit the UK market and aspire to be as ambitious in its coverage as the EU or other significant international taxonomies. Consistency with the EU’s existing taxonomy and minimising deviations that require different IT systems remains important to reduce costs for firms that are subject to both jurisdictions. It is imperative for the UK to reflect on the insights from the development and implementation of the EU taxonomy. The time horizon for the UK government to release further guidelines is crucial to prevent firms from operating without clear guidance and for the UK’s sustainability regime to be perceived as less advanced and transparent than that of the EU.