Key takeaways 

• The expansion of the green finance agenda has continued to accelerate globally, with more and more jurisdictions developing taxonomies, sustainability reporting requirements and green product labels. The scope is also expanding beyond carbon emissions and into nature and biodiversity.  
• The UK has ambitions to be a global leader following the relative success at COP26. Its Greening Finance Roadmap delivers rapid adoption of corporate disclosure, alignment with global standards and a leading position on transition for London’s financial markets. Separately, the International Sustainability Standards Board (ISSB) has a new mandate to craft a longer-term global approach on disclosures. 
• The ambitious EU agenda is encountering political turbulence as regulators have broadened their scope to non-financial corporates. The Commission’s proposal to include nuclear and natural gas in the EU taxonomy raised eyebrows and the debate will remain live in the coming months. There has also been significant pushback on including SMEs in mandatory sustainability reporting proposals and on tougher disclosures requirements for EU firms than for their third country competitors.
• Businesses across many different sectors will need to take a view on global regulatory strategy, standards and possible arbitrage between different geographies and ownership models. This should include an approach to transition planning. Beyond regulation, governments are keen to partner with financial institutions on new investment opportunities into high-growth, high-emission emerging markets.

State of play: UK and EU 

UK 

The Government is keen to maintain momentum in the aftermath of COP26. The Greening Finance Roadmap sets out an approach of early adoption and alignment with global standards. The UK has enthusiastically signed up to the Task Force on Climate-Related Financial Disclosures (TCFD) and the ISSB process for global sustainability standards. As regulation expands to cover nature and biodiversity, it is more than likely the UK will move quickly to implement recommendations from the Taskforce on Nature-Related Financial Disclosure (TNFD). 

The UK is breaking new ground with its approach to transition. Making London the world’s first net-zero financial centre could yet be a much needed legacy issue from COP26. All listed companies will be required to submit transition plans, with standards defined by the Transition Plan Taskforce, demonstrating that the UK is not afraid to go further and ‘green-plate’ sustainable finance regulation.  

The push on ‘financing green’ will also continue in 2022, following the interest generated in emerging market vehicles at COP26. As holder of the COP Presidency until November, the Government will want to crowd in private finance to deliver initiatives announced at COP such as the Clean Green Initiative. A heightened profile for the soon to be rebranded CDC (to British International Investment) will provide more blended finance opportunities for private investors.  

EU  

While the EU has historically been the first mover on sustainable finance, political tensions have increased as the Commission continues to table the legislation needed to deliver on its climate action ambitions (including finance). The recently proposed Corporate Sustainability Reporting Directive has exposed concerns about global competitiveness, and costs and administrative burdens for SMEs. A much-delayed Sustainable Corporate Governance initiative, including both supply chain due diligence and directors’ responsibilities, is now expected from the Commission in February.  

The implementation of the EU green taxonomy squeaked past its first hurdle, with the first Delegated Acts clearing the co-legislative scrutiny process. But the inclusion of nuclear and natural gas in the taxonomy has generated strong criticism from some Member States. Environmentalists lobbying to exclude ‘fossil gas’ in particular are threatening legal action if the Commission fails to live up to its own legislated ambitions. This comes as asset managers have already begun to move away from such investments. Also, the proposed expansion of the EU’s emissions trading scheme to transport and buildings has also set political hares running around the risk of a rerun of the gilet jaunes protests and the difficulties of delivering a ‘just transition.’

Finally, climate issues are also moving quickly into the trade space, with the Commission’s Carbon Border Adjustment Mechanism (CBAM) proposal becoming a top priority for the French Presidency of the EU.  

Global backdrop 

International alignment on climate disclosures remains a long way off. This is despite the world inching closer to a global baseline for corporate reporting standards at COP26 with the creation of the ISSB. The UK and US support the initiative but questions around US implementation and the Commission’s insistence on EU-specific standards will make global convergence challenging.  

The long-term future of the Glasgow Financial Alliance for Net-Zero (GFANZ) is also still to be defined – a wall of money is committed to net zero, but there remains a gap between commitments and mobilisation. This is particularly the case when it comes to new opportunities in emerging markets. There are also a number of competing global infrastructure platforms that aim to finance green projects, including the Belt and Road Initiative (which has its own green standards), the Build Back Better World initiative (B3W), and the EU’s Global Gateway.  

At COP26, the Advisory Board of the global Taskforce for Scaling Voluntary Carbon Markets (TSVCM) also announced the composition of the new, independent governance body for the voluntary carbon markets (VCMs). This will provide more certainty for investment in carbon markets. Carbon pricing however, remains controversial, with NGOs criticising its distributional impacts. The substantial increases in the price of EU-ETS allowances over the past year has had a significant impact on exposed industries.  

The disclosure of nature risks remains a nascent area, driven by the TNFD. The TNFD framework is expected to be launched during the second half of 2023 for global dissemination and initial uptake. Impact on biodiversity is likely to be the new frontier for corporate disclosure after carbon emissions.  

Finally, there is a continuing mismatch between the focus of the discussion in developed markets on disclosure and carbon pricing, and the acute capital needs of developing markets. This is manifested in differing approaches on taxonomies, transition and the lack of ‘primary mobilisation’ into new projects in the Global South.  

Implications for business 

Investors expect a clear approach to managing sustainability risk across an uneven public policy landscape. This is becoming more, not less, challenging as the regulatory perimeter is being extended, albeit in different ways across different geographies. Alongside the possible onset of global standards, businesses are presented with the challenge of whether to move first and risk being overtaken by policy-driven events, or wait and see with the risk of appearing to be a laggard.  

There also remains material risk in the UK that public markets become less competitive in jurisdictions where the burden of sustainability disclosure falls unequally on them. This is evidenced by the new Transition Plan Taskforce in the UK which, initially at least, will only look at public markets, an approach that is also expected in the United States. 

To find out more about how Flint can help you navigate these developments’ risks and opportunities, get in touch.   

Author

Josh Buckland, Partner leads Flint’s work on energy, sustainability and environmental issues. Prior to joining Flint, Josh was Energy Adviser to the Secretary of State for Business, Energy and Industrial Strategy. Josh wrote this piece with input from Flint Partner Fiona Wright and Flint Director Simon Horner.