UK green taxonomy has chance to get ‘do no harm’ principle right

GTAG says user issues with DNSH in the EU taxonomy can be improved

The UK government’s Green Technical Advisory Group (GTAG) has set out several recommendations designed to ensure that ‘do no significant harm’ (DNSH) assessments can be executed effectively and improve the ability of the UK taxonomy to stimulate sustainable investment.

DNSH is considered a key component of the UK green taxonomy, ensuring that economic activities support one environmental objective and do not have an adverse impact on others.

There is currently no clear timeframe on when the UK taxonomy will be implemented, after the government failed to fulfil its obligation to put the climate element of its green taxonomy into law by the end of 2022. An update is expected before the end of 2023.

According to GTAG, usability issues experienced with DNSH in the EU taxonomy, including inconsistent and ambiguous criteria, lack of clarity on definitions and inflexible disclosure, could be improved on in the UK, given the second mover advantage.

In addition, requirements are currently difficult to navigate, given that there are more than 700 individual DNSH criteria, which could be streamlined without weakening standards.

“The UK has the opportunity to benefit from its fast-follower status on taxonomy development, given that it is clear that there are significant usability issues with the EU taxonomy’s approach to devising ‘do no significant harm’ criteria,” said Ingrid Holmes, chair of GTAG and executive director of the Green Finance Institute.

“GTAG has set out a roadmap to iterating and improving on the foundations laid by the EU that the UK can adopt to create a taxonomy that works effectively for the market, going further and faster on stimulating investment in the climate transition while safeguard nature and wider environmental objectives.”

James Alexander, CEO of the UK Sustainable Investment and Finance Association and ESG Clarity EU Committee member, agreed “the UK should seek to take advantage of its fast-follower status behind the EU in terms of taxonomy development” and urged the government to follow through on its commitment made in the recent Green Finance Strategy update, and publish its consultation on the taxonomy in the coming months.

GTAG recommendations

Among the key recommendations in GTAG’s report is for the Treasury to prioritise quantitative thresholds for DNSH criteria, and provide detailed justifications for the use of qualitative criteria.

GTAG also suggests that the government should move beyond the binary approach to DNSH reporting that is currently the norm and adopt an approach to reporting that would enable companies with activities that are not fully taxonomy aligned, but meet the substantial contribution and some DNSH criteria, to disclose the extent to which they meet it.

By adopting a revised approach to drafting DNSH criteria, GTAG asserts that levels of identifiable taxonomy alignment can be improved and enable the UK to set a new approach, offering a route for other jurisdictions facing challenges with the implementation of DNSH and reinforcing the UK’s role as a world leader in green finance.

“This is an important stepping stone for sustainable investors, as it recognises the need to improve the integration of business realities into the UK’s emerging taxonomy,” said Julia Dreblow, founding director of SRI Services and ESG Clarity EU Committee member.

“The increased focus on DNSH builds on the initial purpose of avoiding harmful activities while supporting and helping to expand beneficial business practices. The fact taxonomies exist, and appear to be improving over time, is a welcome reflection of the fact that no company is entirely black or white. 

“Information flow is crucial. Getting this right will help both investment analysts and end investors, as it should aid both the investment selection and communication processes.”