The first taxonomies (Chinese and European), enforced 5 years ago in 2020 are still undergoing changes including a current ongoing Consultation in Europe. In the UK, the project of developing a Green Taxonomy is aligned with the country’s ambitious plan to position itself as a sustainable finance and industrial growth leader.
WeeFin has taken part in Taxonomy conversations for years, having most of our clients complying with the one implemented in the EU. Being at the forefront of our financial clients and data providers' challenges and concerns helps us understand what is at stake when introducing a UK Taxonomy.
Given this unique point of view, we wanted to respond to how a UK Taxonomy would be valuable, and share our suggestions to avoid past encountered pitfalls.
The UK government is considering a Green Taxonomy to direct investments towards sustainable activities and reduce greenwashing. This consultation seeks feedback on whether it would complement existing sustainable finance policies and help investors make informed decisions on maximising its usability.
The respondents had 12 weeks to answer (from November 14th to 6th February) 26 settled questions (4 mandatory and 22 optional) around the 8 following themes: Taxonomy purposes, Use cases, Transition finance, International interoperability, Environmental objectives and sectoral scope, DNSH, Updates over time and Governance & oversight.
WeeFin supports the sustainability journey of financial institutions standing for innovation, transparency and responsibility. Our ESG expertise allowed us to build the most comprehensive ESG operating system, which helped us develop an opinion on the benefits of a UK Taxonomy:
For instance, our platform allows us to observe how taxonomy figures are used by sourcing our clients’ data from various private providers. Research showed that it is mostly used for reporting matters and in ESG scoring.
We were also able to conduct two revealing studies to provide further broader insights dedicated to all financial institutions:
- An annual Barometer on Sustainable Finance, based on SFDR disclosures of 50 funds (2024 analysis on 2023 SFDR periodic annexes), disclosing taxonomy figures, and;
- A study based on 50 entities’ Article 29 LEC 2023 reports (on the 2022 exercise) in which a section is dedicated to Taxonomy and Fossil Fuels (the 5th).
WeeFin strongly believes that a UK Taxonomy would be valuable in supporting both goals of channelling capital and preventing greenwashing
In the UK, no such tool exists. A Taxonomy provides a common definition, establishes a methodological framework, and sets thresholds, whereas the existing initiatives are more focused on providing essential reporting standards. In the particular context of SDR which recently changed the UK regulatory landscape, we assume that a robust, science-based, activity-level regulation could enhance it. A field of the fund-level disclosures should concern taxonomy requirements and would also provide a possible comparison between all products. All the existing initiatives and the potential Green Taxonomy will then need to coexist in the UK.
We also believe in the importance of coherency. The use of very different taxonomies in parallel can prove to be very difficult in practice. We recommend seeking coherency with the European one, within its format, structure, naming and metrics.
Activity-level-based taxonomy figures provide more granularity to entity-level ones as they limit the “black box” effect. By emphasising on the different “shades of green”, intermediate levels help to identify where investment, adjustment, transformation, or divestment is required. A Taxonomy allows for a better understanding of the specific performance of a company’s particular area, offering a more detailed and actionable view than overall indicators. WeeFin believes all funds should report on taxonomy alignment regardless of their label or classification.
Yet, these indicators should not be interpreted on their own; they must be corroborated with quantitative and qualitative indicators to provide a more in-depth and refined analysis.
Among the 5 use cases identified by the government, WeeFin would see a Taxonomy answering the following ones as well:
- It could strengthen risk assessment by providing a structured approach to identifying, measuring, and mitigating environmental and sustainability-related risks;
- At every stage of dialogue with companies, Taxonomy KPIs can bring much benefits to investors;
- It could potentially set a framework for the concept of transition (ensuring coherency with the Transition Plan Taskforce Disclosure Framework);
- A green taxonomy can provide a consistent framework for measuring and tracking the environmental impact of investments.
Our studies have confirmed the fact that the EU Taxonomy’s potential has not yet been fully exploited (although some improvement is noticeable), here are suggestions for a successful implementation:
- Secure the criteria to gain a unanimous agreement of a quorum of stakeholders for them to endorse it and for the Taxonomy to be used properly avoiding slow processes;
- Implementing a rule that applies first to corporations so they can report, and then require financial actors to report;
- Push the inclusion of all E, S & G pillars (via the DNSH mostly), especially putting more emphasis on the Social (S) one;
- Guarantee more pedagogy, as educational tools are necessary.
Our research shows that taxonomy figures are used mostly for reporting matters and ESG scoring occasionally. It is also observed that coverage levels are still low, and a great percentage of the data is estimated.
To guarantee that financial institutions will be able to calculate these figures using credible sources and have the ability to optimise data quality, investors must equip themselves with technological tools and establish a clear and transparent operational framework for data.
The best way to achieve this is by using a dedicated external tool, ensuring greater speed and scalability, such as WeeFin's ESG Operating System. By getting into the habit of monitoring it, we believe taxonomy figures will become more widely used over time.
In short, WeeFin believes a UK Green Taxonomy will be beneficial, answering several use cases, if closely aligned with the European version and if the government stresses the importance of avoiding difficulties encountered first by other geographies implementing such a tool. More broadly, taxonomy figures must be used not only for reporting matters but also as decision-making resources. By constantly monitoring taxonomy figures via a third-party solution like WeeFin, financial institutions will be able to more easily grasp the benefits over time.
To read our full response to the consultation, click here.
