UK green taxonomy
The taxonomy will require funds to state the extent of fund investments in ‘green’ activities. These include pollution prevention and control; protection and restoration of biodiversity and ecosystems; sustainable use and protection of water; circular economy; climate change mitigation; and climate change adaptation.
In addition, activities will not count as green unless they also qualify as doing "no significant harm". It is important to note that all funds will be required to report on their exposure to green activities regardless of whether they are labelled as sustainable or not.
Stewardship is defined as the “responsible allocation, management and oversight of capital to create long-term values for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society” (Financial Reporting Council, UK Stewardship Code 2020).
Most asset managers already engage in activities commensurate with their responsibilities as stewards of capital. This roadmap, however, outlines ongoing expectations and additional requirements, such as increased transparency and a greater emphasis on the transition to net zero.
Although the roadmap states that HM Treasury and the FCA are exploring how sustainability-related requirements for financial advisers can be introduced, and how sustainability is considered in the investment advice and suitability process, this is subject to further consideration. Therefore, the immediate direct impact on advisers and fund buyers is limited. But the roadmap gives a clear indication of legislative intent bringing major implications for advisers.
It is clear that the ability to understand and explain the new reporting to clients, and to incorporate it into their decision-making will be of critical importance for advisers. According to the roadmap, 70 per cent of the public want their money to go towards making a positive difference to people or the planet. Investors will look to their advisers for guidance on these sorts of investments and so being able to provide positive, informed advice will be crucial in the years ahead. Furthermore, when the sustainability investment labelling regime is imposed, advisers will need to be able to understand the function of different types of sustainable investments and how they relate to the needs of investors.
The coming months will see a raft of consultation papers on the regulation and requirements outlined in the roadmap. For now at least, advisers and fund buyers have time to reflect on how to ready themselves for upcoming legislation, based on the initial guidance this report offers.
Steve Kenny is chief distribution officer at Square Mile Investment Consulting and Research