Today, the Green Technical Advisory Group (GTAG), led by the Green Finance Institute, has released its latest recommendations aimed at strengthening and enhancing the usability of the “do no significant harm” (DNSH) criteria within the UK Green Taxonomy.
In this report, GTAG explores the concept of DNSH, identifies current challenges, and proposes practical solutions to improve the accessibility and impact of DNSH in guiding investment decisions.
EU regulators introduced the DNSH concept of avoiding significant harm under both the Sustainable Financial Disclosure Regulation (SFDR) and the Taxonomy Regulation. The Taxonomy Regulation establishes six environmental objectives. To be considered environmentally sustainable, economic activity must meet three criteria: a) Contribute to one or more of the environmental objectives and comply with technical screening criteria. b) DNSH to other environmental objectives and comply with technical screening criteria. c) Be carried out in compliance with minimum safeguards. DNSH is one of the tests that economic activity must meet in order to be considered environmentally sustainable, causing no significant harm to the six environmental objectives established under the EU Taxonomy.
One of the primary objectives set by the UK Government for the Green Technical Advisory Group was to devise a UK Taxonomy that is practical and user-friendly for both financial and non-financial firms. During GTAG’s discussions, issues arose regarding the usability of the DNSH elements of the EU’s instrument. Analysis from previous GTAG publications in October 2022 highlighted the potential challenges with the EU Taxonomy Substantial Contribution criteria, which would significantly reduce the number of eligible entities if DNSH criteria were also incorporated.
GTAG’s analysis further reveals key factors contributing to these low figures, including inconsistent, repetitive, and ambiguous drafting of DNSH criteria, along with a lack of clarity surrounding essential definitions such as “significant harm.” Despite these challenges, GTAG’s market engagement indicates strong support for the DNSH concept, underscoring the need for better execution to ensure the overall effectiveness of the UK Green Taxonomy. The third report from GTAG lays out a practical roadmap to achieve this goal while promoting net zero-aligned investment and safeguarding nature and broader environmental objectives.
Among the recommendations, GTAG proposes clarifying the context, purpose, approach, and definition of DNSH in the UK Green Taxonomy. This shift would move beyond mere compliance with existing environmental laws and regulations, which, as a condition of doing business, are expected to be followed and adhered to, providing limited additional value for data users and preparers alike. Practical revisions are also suggested, such as establishing functional design parameters for drafting DNSH criteria to enhance consistency and usability and streamlining the text to improve the overall usability of DNSH reporting requirements and the taxonomy as a whole.
In the pursuit of better data, GTAG recommends greater transparency by moving away from the current binary approach to DNSH reporting and adopting an approach that allows companies to disclose the extent to which they meet DNSH criteria, even if they are not entirely taxonomy aligned but meet substantial contribution and some DNSH criteria. This disclosure would provide valuable insights into the market and encourage remedial actions where possible.
Finally, recognizing the multitude of taxonomies being developed globally and the near-global adoption of DNSH, GTAG advises promoting this approach to encourage international interoperability between taxonomies. The UK’s membership in the International Platform on Sustainable Finance and the International Organisation of Securities Commissions offers an opportunity for the country to lead the way in global Green Taxonomy harmonization, leveraging its fast-follower status on taxonomy development. Reforming DNSH represents a significant step in making a meaningful impact in this regard.
