HM Treasury Publishes Its UK Sustainable Finance Roadmap

In a significant development in the UK government’s drive towards “greening” the financial system, as part of the transition to a net zero carbon economy, HM Treasury published, on 18 October 2021, a policy paper entitled “Greening Finance: A Roadmap to Sustainable Investing” (the “Roadmap“).  The Government’s Green Finance Strategy envisages three phases:

1. Informing investors and consumers: Ensuring that decision-useful information on sustainability is available to financial decision-makers;
2. Acting on the information: Mainstreaming sustainability considerations into business and financial decisions; and
3. Shifting financial flows: Shifting capital to align with a net zero and nature positive economy.

The Roadmap focusses on delivering the first phase through the introduction of economy-wide Sustainable Disclosure Requirements (SDRs).  The SDRs aim to bring together existing and new sustainability disclosure requirements under one integrated framework for corporates, asset managers and asset owners, and creators of investment products.

But what obligations will these organisations be subject to under the new SDRs, and how can they best prepare themselves to comply with such obligations?

The SDRs in brief

To ensure consistency with emerging global reporting standards, the SDRs will be structured around the four thematic areas of the Task Force on Climate-related Financial Disclosure (TCFD) Recommendations (discussed in our TCFD Recommendations: An Update on Climate Disclosures blog post).  The specific disclosure requirements under the SDRs will differ between corporates, asset managers and asset owners, and creators of investment products, although the following requirements will apply to all:

1. Governance: Disclosing the organisation’s governance around sustainability-related risks, opportunities, and impacts;
2. Strategy: Disclosing the actual and potential implications of sustainability-related risks, opportunities and impacts for the organisation’s strategy;
3. Risk Management: Disclosing the processes used by the organisation to identify, assess, and manage sustainability-related risks, opportunities, and impacts; and
4. Metrics and Targets: Disclosing the metrics and targets used by the organisation to assess and manage relevant sustainability-related risks, opportunities, and impacts, as well as disclosing the organisation’s performance against these targets and alignment with the new UK Green Taxonomy (which the UK government plans to introduce by the end of 2022).

These requirements extend beyond the TCFD Recommendations, since they will require corporates, asset managers and asset owners, and creators of investment products to disclose their environmental impacts.  This means that asset managers and asset owners will have to disclose how they account for sustainability impacts across their portfolios.  Similarly, creators of investment products will have to report on their products’ sustainability impact, for example.  Ensuring compliance with the SDRs may, therefore, have a significant impact on existing disclosure practices; it is, of course, important that subject organisations are sufficiently prepared for their introduction.

Preparing for the introduction of the SDRs

Despite the fact that the Roadmap does not set formal timeframes for the implementation of the SDRs, it does indicate that the UK government intends to implement the SDRs incrementally as new regulatory and legislative measures come into force.  Moreover, the Roadmap confirms that the UK Government will update its Green Finance Strategy in 2022 by setting out an indicative sectoral transition pathway to 2050 to align the financial system with its net zero commitment.

Given the importance of ensuring adequate, and timely, preparation for the introduction of the SDRs, organisations may wish to commence that process in early course, including by way of:

1. Evaluating the potential impact of the introduction of the SDRs on existing disclosure practices;
2. Familiarising themselves with the types of disclosures that will be required under the SDRs;
3. Reviewing the processes in place for gathering the information required to be disclosed under the SDRs; and
4. Keeping the implementation dates of, and other developments with regard to, the SDRs, under close review.

Early preparatory measures will assist organisations in being well-positioned to comply with the SDRs when they are implemented.

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