On 6 February 2025, the Loan Markets Association (LMA) shared their thoughts on the UK’s Green Taxonomy Consultation, which started in November 2024. The goal of this taxonomy is to create a system that clearly defines which economic activities are environmentally friendly.
What does the UK Taxonomy aim to do?
The UK Taxonomy has two main goals:
- ensure market integrity and prevent misleading claims about being green (greenwashing); and
- encourage investment in sectors that are important for a sustainable future.
LMA’s main points
The LMA pointed out that creating a taxonomy can be complex, expensive, and difficult to use, which might limit its effectiveness. They also mentioned that there are already market-driven initiatives supported by regulatory frameworks that help companies avoid greenwashing. The bigger challenge, according to the LMA, is identifying credible strategies for transitioning to net-zero emissions and making sure no sectors are left behind.
The LMA also noted that since the definition of ‘green’ is constantly evolving, taxonomies that need regular updates might not provide the long-term policy certainty needed for significant investments. Additionally, they warned that a UK taxonomy, if not designed well, could increase compliance burdens without delivering meaningful real-world benefits.
What is the LMA suggesting?
The LMA recommends that the UK Government focuses on boosting the transition finance market, which involves financial activities that help the entire economy move towards net-zero emissions. They believe there are three key ways to do this:
- support transition finance products, like transition loans, and develop national transition plans aimed at sector-specific decarbonisation;
- help small and medium enterprises (SMEs) with sustainability reporting and transition planning; and
- work with industries to take advantage of public-private investments that support the transition of critical sectors.
Using different taxonomies in the loan market
The LMA suggested that using various taxonomies in the loan market could also help achieve a net-zero future. There are already sustainable taxonomies with voluntary classifications guiding investment decisions, but their impact has been limited by high standards, like those in the EU Taxonomy, which many investments can’t meet.
For reporting to be effective, the LMA stressed that Key Performance Indicators (KPIs) need to be developed collaboratively with industries, financial institutions, and investors to ensure they provide relevant and measurable information.
Our view
We have observed the challenges lenders and borrowers face in identifying suitable KPIs for green and sustainability-linked loans. These KPIs need to be industry-specific, easily measurable, and show genuine improvements.
To reduce the compliance burden, we agree that the UK Government should prioritise consulting on UK Sustainability Reporting Standards, including transition plan reporting. These standards should align with those developed by the International Sustainability Standards Board and offer companies the guidance and support they need. This approach will help reduce compliance burdens, increase productivity, and enhance UK corporates’ ability to compete globally.