What just happened on climate transition plans?
Three bodies recently published guidelines on how to develop credible net zero strategies. Here's a quick look at what's been happening.
Just like everything else in sustainable finance, it never rains but it pours. Reporting rules, taxonomies, climate metrics - they’ve all seen competing standards being developed in the past couple of years. Now, there’s been a flurry of guidance on how to develop credible climate transition plans. Here’s an overview of what has come out in the past couple of weeks:
The Glasgow Financial Alliance for Net Zero is the umbrella organisation for insurers, financial service providers, lenders and investors committed to net zero. It released a paper last week that explained how members could use its existing guidance, released over the summer, to create climate transition plans. That guidance includes recommendations around the early retirement of polluting assets and aligning investment portfolios with climate pledges.
Hot on the heels of GFANZ came the UN, which released its guidance on what climate transition plans should look like for ‘non state actors’ - cities, regions, companies and financial institutions.
UN Secretary General Antonio Guterres announced plans for the guidance at COP26, warning that greenwashing was becoming a problem - an accusation notably timed to coincide with the formal launch of GFANZ at the climate summit. It’s unsurprising, then, that the guidelines claim to be the gold standard for transition plans. They are certainly the ones with the highest bar in terms of ideals: they expect transition plans to be written to get to 1.5℃ with no or limited overshoot, with targets based on absolute emissions reductions not carbon intensity (the latter is often considered more appropriate for financial institutions, but is harder to map against the real economy). And Scope 3 emissions must be covered, with an explanation of any gaps.
Because it’s a UN project, there is no obvious home for the guidelines - no regulator or standard setter has agreed to adopt them. But the UN’s clout in the climate world means they’ll be taken seriously by many, and regulators may well choose to take them up in some form.
On the same day as the UN unveiled its recommendations, a Transition Plan Taskforce set up by the UK Treasury released its own guidance. Just like the UN, the UK claimed to have set the new gold standard for transition plans, although the focus here is on achieving the most thorough and credible disclosures, not ensuring the highest climate ideals. It’s very detailed about what companies should report on (staffing, pay, R&D, changes to products and services, engagement strategies etc) but it leaves more wiggle room on the climate approach, suggesting Scope 3 should be comply-or-explain, and companies can choose absolute emissions or emissions intensity, for example.
Crucially, these recommendations do have a place to land: they’ve been commissioned by the UK Treasury with a view to informing the incipient Sustainability Disclosures Regulation and the rules that the Financial Conduct Authority is rolling out around climate reporting. They’re open for consultation until February, during which time there will be a ‘sandboxing’ period where the recommendations can be tested by market practitioners to see if they work.
The EU’s suite of climate finance regulation may be sweeping, but at the moment there are no rules dedicated to transition strategies. The proposed Corporate Sustainability Due Diligence Directive does suggest that major companies should “adopt a plan to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement”. The Corporate Sustainability Reporting Directive, agreed this week, calls for the disclosure of transition plans, too.
A second iteration of the Platform on Sustainable Finance (the group of experts that advises the European Commission) is currently being appointed and will be asked to think about transition plans, as well as banking and insurance regulation, as part of its mandate.
Having multiple transition guidelines all launched at the same time is likely to be viewed as unhelpful for companies navigating an already complicated set of disclosure rules. But consensus seems to be that it’s more effective for different organisations with different values and stakeholders to design their own plans - and then, importantly, to see those various approaches converge over time - than to get all the players around the table to design one single approach upfront.