The United Kingdom (UK) must align its sustainable finance regulations with the European Union (EU) where possible or risk losing capital, according to a report by the UK Sustainable Investment and Finance Association (UKSIF).
The report argues that if the UK does not align its sustainable finance regulations with the EU, it could face barriers to investment from EU-based investors who would prefer to invest in jurisdictions with similar regulatory frameworks. The report states that this could have negative consequences for the UK’s economy, as investment from EU-based investors is significant.
Legislation was passed by parliament in June 2019, mandating the UK government to achieve a 100% reduction in net greenhouse gas emissions by 2050 compared to 1990 levels. This would result in the UK becoming a ‘net zero’ emitter. Previously, the UK had committed to reducing net greenhouse gas emissions by a minimum of 80% of their 1990 levels, also by 2050. However, the report argues that the UK’s departure from the EU means that it risks falling behind on sustainable finance regulation and missing out on investment opportunities.
The UK government has already taken some steps to align its sustainable finance regulations with the EU, such as adopting the EU’s sustainable finance taxonomy in its Green Finance Strategy. However, the UK has also introduced its own sustainable finance regulations, such as the Green Finance Institute’s Green Finance Taxonomy, which could create divergence from EU regulations.
The Green Technical Advisory Group (GTAG) is an impartial body that offers advisory services to the Government regarding the creation and execution of a Green Taxonomy in the UK. The taxonomy will establish a standard outline for environmentally sustainable investments, curbing fraudulent ‘greenwashing,’ improving comprehension of ecological impacts to aid companies and investors in making knowledgeable green decisions, promoting investments in sustainable projects, and intensifying efforts to combat climate change.
Further, the UK’s decision to diverge from EU regulations has already had consequences for the financial sector, with the EU refusing to grant equivalence to UK financial services. This has meant that UK-based financial firms have faced barriers to doing business with EU-based clients.
To avoid additional negative consequences, the UK must continue to align its sustainable finance regulations with the EU, where possible. This will ensure that the UK remains an attractive destination for investment from EU-based investors and can continue to lead on sustainable finance.