The Green Technical Advisory Group (GTAG) has launched a report looking at the treatment of existing green financial products under the planned UK Green Taxonomy.

The UK Green Taxonomy (the taxonomy) will be an important tool to encourage capital flows into sustainable economic activities and ensure high standards for green investments.

The objectives of the paper are:

• to outline the UK approach so that the market understands how existing green products are affected by the taxonomy; and
• to look at how financial products developed using the taxonomy will be treated in the future.

This will support the use of the taxonomy and a strong sustainable UK finance market.

Report recommendations

1. Government must provide clarity prior to the taxonomy’s implementation on how existing green products will be treated when the taxonomy comes into effect, and how taxonomy-aligned products will be treated as the taxonomy evolves over time.
   Existing green products can still be referred to as such, but if they do not meet the taxonomy’s technical screening criteria, they cannot be referred to as taxonomy-aligned. As the taxonomy evolves over time, some products that were previously taxonomy-aligned may no longer meet the criteria. For both equity and debt, implementing a “grandfathering” clause with clear conditions is necessary to ensure there is certainty in the market about how products will be treated, and reduce potential negative impact on the development and issuance of taxonomy-aligned products.
2. To support the above, implement a “grandfathering” clause which provides a set time period for green debt issuers that will enable most green bonds and loans that are “green” or taxonomy-aligned at their time of issuance to remain aligned until maturity, and reduce lock-in risk for longer-term investments, if the criteria they are aligned to change.
   The condition will support use of the taxonomy as a guide for sustainable investments, while minimizing the opportunity for lock-in of carbon-intensive activity. The clause should apply only to issued debt and not new issuances, which must align with the taxonomy criteria at their time of issuance. The clause will need to outline any exceptions that are necessary, such as long-term infrastructure projects which will require investment but may operate over much longer timeframes and therefore have longer-dated debt, to ensure the risk of greenwashing is minimised. Such exceptions should be considered on a case-by-case basis. There must also be a distinction between allocated and unallocated proceeds.
3. For equity, GTAG agrees that the “grandfathering” clause should outline a set time period within which alignment to the taxonomy’s criteria must be met if criteria change.
   The time period should include providing an extension for certain projects (such as long-term infrastructure projects) to not limit investment in necessary activities, but GTAG recommends that government consult on whether the market agrees with the timings within the EU’s legislation, or if another time limit is more suitable.
4. If existing green debt is refinanced, assessment should be made against the taxonomy for the latest, current criteria at the time of refinancing.
   This would align with the EU’s legislation but also recommendation 2 above, as the refinancing is treated as new debt. Therefore, any refinancing of a product would override any existing “grandfathering” grace period. This will not place additional burden on business as it is to be expected that refinancing would involve review of the conditions, terms, and alignment with any green standards or objectives it is intended to meet.
5. Government must work closely with the FCA to agree a consistent approach to green and sustainability bonds, including updating FCA guidance to support taxonomy alignment.
   Decisions made on “grandfathering” in relation to the taxonomy should be consistent with the FCA’s guidance, which currently involves encouraging issuers of green bonds to consider voluntarily applying or adopting industry standards such as those developed by the International Capital Market Association (ICMA) for green, social and sustainability bonds. GTAG has recommended the announcement of a voluntary Green Bond Standard aligning use of proceeds to the UK Green Taxonomy, building on the green gilt framework. The FCA should update this to the UK Green Taxonomy once it enters law in the UK.
6. Government should publish additional supporting guidance, including a suggested methodology and detailed case studies, to explain how to assess complex green investments and projects against the UK Green Taxonomy.
   Other GTAG recommendations to increase usability of the taxonomy, in particular by streamlining ‘do no significant harm’ (DNSH) criteria will help, but better guidance in this area will promote the use of the taxonomy as a tool for bond issuers and therefore the usefulness of the taxonomy to the market.