UK green bonds to tilt towards EU Taxonomy
The UK government's decision to drop its long-planned taxonomy signals an increasing emphasis on transition finance and could tilt the UK green bond market towards Europe.
Halting two years of work on the UK Taxonomy on July 15 is one of several notable developments in the UK's sustainable finance and climate and financial services policy in recent weeks.
The decision to focus on other policy and regulatory tools to reach net zero puts a greater focus on transition plans and finance as well as the adoption of global disclosure standards through the draft UK Sustainability Reporting Standards.
The UK's lack of a green bond standard that uses a taxonomy to confirm a bond's green credentials is now a "point of distinction" between the UK and EU, a senior lawyer said.
"A taxonomy would have been good and I would prefer to have one," said Sean Kidney, CEO of the Climate Bonds Initiative.
Nearly 60 national and regional sustainable finance taxonomies are either in development or are already in place globally, most of which are voluntary or advisory.
Very few are mandatory and regulatory like the EU Taxonomy, which uses detailed technical screening criteria and underpins disclosure obligations for large companies and financial products, including issuance under the EU's rigorous Green Bond Standard.
"It’s disappointing that the government has concluded that a green taxonomy has no place in the UK’s sustainable finance framework," said Oscar Warwick Thompson, head of policy and regulatory affairs at the UK Sustainable Investment and Finance Association.
He welcomed the importance of climate transition plans and UK Sustainability Reporting Standards in supporting the country's net-zero efforts.
UK green bond issuers will continue to use market-based principles such as ICMA's Green Bond Principles and the Climate Bonds Standard & Certification Scheme.
UK green bond issuers are now expected to reference the EU Taxonomy and seek greater alignment as a result, particularly as work continues under the EU's "Simplification Omnibus Package", which aims to streamline sustainability reporting rules.
"We expect more UK issuers to actively consider incorporating a degree of EU Taxonomy alignment in their green financing framework," a senior ESG banker said, adding that this allows firms to tap into Europe's debt market and satisfy UK sustainable investors that already use the EU Taxonomy for decision making and reporting.
Three UK utilities – United Utilities Water Finance, SSE and London Power Networks – have issued euro-denominated green bonds this year totalling US$1.9bn compared with US$2.8bn from four issuers last year, according to LSEG data.
No issuers have raised green sterling bonds this year, compared with 10 issuers in 2024 and no UK firms have issued under the EU Green Bond Standard.
UK green bonds that are not fully EU Taxonomy aligned are not expected to suffer as "dark green" bonds will find a home with impact investors and more sophisticated sustainable investment strategies. Simplifying the EU Taxonomy is making alignment more attractive and feasible.
"We expect 'do no significant harm' measures to be significantly relaxed because at the moment, they're overly strenuous and too EU-centric. That's happening and it will make life easier for those in the UK that complained about the strictures of the EU Taxonomy," Kidney said.