Some thoughts on whether or not the UK needs a Green Taxonomy

Yesterday I submitted an – albeit rather rushed – response to the Treasury’s consultation which essentially asked ‘whether or not the UK should have a Green Taxonomy – and if so, what might it look like?’

I did so with a slightly heavy heart, being well aware that the sustainability related regulatory burden on companies, as well as the investment industry, is now massive – and risks becoming counterproductive.

My other core concern was that opinions are split on this. There are people and groups I know and respect who have very different opinions. Some say a UK green taxonomy is vital; others say it is not needed.  As a result, I focused my feedback on what I know best – the retail investment fund area, responding along the lines of the following:

• Done well, a (relatively) simple, client, adviser, wealth manager and FCA friendly taxonomy could be very helpful.
• Alignment with other taxonomies We should seek to ensure a UK taxonomy aligns to others, particularly the EU’s, where possible.  Borrowing the industry’s deeply ‘un-client friendly’ terminology – interoperability matters also. Investors operate internationally, so international alignment should be sought.
• Context matters. A UK taxonomy should not duplicate work that’s already done elsewhere (locally or internationally) – although information gathered elsewhere could (should) feed into a UK taxonomy, where possible.
• SDR remains ‘a good thing’ however the implementation of sustainable fund labelling is not working as intended. The FCA implementation team’s processes appear to be based on an inadequate understanding of how sustainability and financial issues combine, real world commercials, and a poor understanding of what clients might find useful – so they need help.
• Creating a simple, brief, adviser, wealth manager, client – and all other areas of retail – friendly taxonomy could also help the FCA. It could open up access to real world business information that labelling decisions, as well as financial advice, and portfolio decisions might be on.  In doing so, it might help guard against greenwash, which can be unintentional if based on inadequate or overly complex data.
• The need for simplicity also aligns to what I believe should be happening with SDR labelling. The FCA team in charge of that area needs to refocus on information clients understand and can sensibly base decisions on (think Consumer Duty).  Their current prescriptive, data industry-centric approach is in stark contrast to SDR’s initial aims – and the information relevant fund managers are now required to produce will not be read.  If clients are to be happy with both sustainability strategies and financial returns (both are essential) we need to get back to SDR’s core purpose, which was widely applauded. (I also recommend they reconvene their industry advisory group – DLAG).
• A client friendly taxonomy could also help address one of today’s most pressing (notably post SDR) sustainability challenges – greenhushing. Alongside labelled funds we need to reinvigorate the ‘middle market’ of investors. We need to reinvigorate funds that significantly integrate (but do not focus on) sustainability issues. We need them to start talking about sustainability again – without fear.  We classify those funds as ‘ESG Plus’ and ‘Sustainability Tilt’ on Fund EcoMarket.  ‘Transitioning’.  Without the support of investors of that kind it is hard to see how sufficient capital might sensibly be reallocated – which is what is required if we are to make a real difference.

What might a UK Green Taxonomy look like? Starter for ten…

• UK green taxonomy might sensibly focus on say, 20 to 50 core activity-based metrics that are relevant to almost all investors, as well as our personal lives (energy, water etc)
• Each data point might have positive and negative features (eg does / does not)
• Activities (or involvement in certain named areas) could be displayed with a traffic light system, for ease of understanding.
• The metrics should be as simple as possible, focused on what matters most in the real world. Client friendly, reliable, very basic information could help people to think and invest differently (Fund managers would not rely on this information alone – other sources would remain important.)
• Information should be published by all companies of ‘significant’ size. (Ideally repurposing information used elsewhere.)
• Different measurement methods might be needed for different activities, but measuring turnover would typically make sense (% and/or absolute).
• Include a version of ‘do no significant harm’ – where both negative and positive activities are reported.  (Wouldn’t it be useful if everyone had access to information on which companies are causing harm and/or solving problems – and compound that information into fund and portfolio strategies!?)
• A taxonomy such as this would need to be supported with a clear narrative – explaining what the data means, with necessary caveats. This is because in the real world this information is not binary, opinions vary – and people read data in different ways.

And a final thought…these are my opinions, not anyone else’s.  They are based on my experience – based on c30 years of in retail sustainable investment.  In recent years this has included being a DLAG member  (supporting the development of SDR) – and drafting the BSI sustainable fund standard PAS 7342 (to be published soon). I have also put much time into the drafting of the Adviser Sustainability Group report, which will also be shared with the FCA and published in the not too distant future.   Overall my view is that we need to get back to basics if we are to mover forward. My sense is that a simple taxonomy could be very exciting – if done well. (Which I would of course be happy to help with support).

The consultation can be found at: https://www.gov.uk/government/consultations/uk-green-taxonomy