The UK's bid to lead the world on climate transition plans
Before he became the UK’s Prime Minister, Rishi Sunak made a pledge to “rewire the entire global financial system for net zero”.
Speaking at COP26 in 2021, the then-Chancellor told audiences that this would mean a “move towards making it mandatory for firms to publish a clear, deliverable plan… setting out how they will decarbonise and transition to net zero”.
A few weeks later – in response to an update to the Taskforce on Climate-related Financial Disclosures (TCFD), rather than Sunak’s promise – the Financial Conduct Authority made transition plans part of its climate disclosure requirements.
That means that premium and standard listed firms now need to produce a transition plan based on the latest TCFD guidance, or explain why they haven’t done so. The same applies to regulated asset managers and asset owners in the country.
But those requirements are comply-or-explain, and the TCFD doesn’t give much detail about what should be disclosed as part of a climate transition plan.
“At the moment, there is a variety of voluntary and mandatory transition plan requirements across a number of jurisdictions,” says Jacques Morris, head of policy at the UK’s Centre for Greening Finance & Investment. “We need to see internationally-aligned regulations coming in to support companies and enable the allocation of capital required [to achieve the transition to net zero].”
Transition Plan Taskforce
To drive that process, the UK Treasury has appointed more than 30 experts - including representatives from Unilever, Orsted, the London Stock Exchange Group and a slew of investment houses, law firms and non-profit bodies - to a Transition Plan Taskforce (TPT).
Its job has been to develop guidance on what should be disclosed under ‘gold standard’ climate transition plans. While that guidance will be aimed primarily at helping UK regulators set their expectations, it is clear that the UK is hoping to take the global lead in this area, and the government is openly encouraging other jurisdictions to adopt TPT’s approach too.
The initial proposals were unveiled last year, and a final version is due out early next month.
Much more granular than anything coming out of the EU, TPT says companies should disclose across five areas: foundation, implementation strategy, engagement strategy, targets and metrics, and governance.
These are the same pillars used in guidance from the Glasgow Financial Alliance for Net Zero, but the TPT goes into more detail about what each section should address, with its draft guidelines covering everything from changes to products and services, capital expenditure, lobbying activity, engagement with peers, remuneration packages and the use of carbon offsets.
There will be revisions in the final recommendations, but no fundamental changes are expected.
TPT plans to develop sector-specific guidance for finance and six other industries in coming months.
Later this year, the FCA is expected to consult on plans to overhaul the climate disclosure requirements within its listing rules, with a view to swapping the references to the TCFD recommendations with references to standards from the International Sustainability Standards Board, and pointing to the TPT’s guidance when it comes to transition plans.
An update to the rules for asset managers and asset owners will come further down the line.
But it will take more than the FCA to fulfil the government’s pledge to mandate transition plans throughout the economy: the Companies Act would need to be updated, for example, to ensure that unlisted firms were captured by similar rules.
In its recently-published Green Finance Strategy, the UK government committed to “consulting on the introduction of requirements for the UK’s largest companies to disclose their transition plans if they have them”.
“This will complement existing requirements in place from the FCA, and as such will ensure parity between listed and private companies, and ensure requirements are consistent and comparable across the economy,” the strategy explains.
It adds that the government is conscious of not overburdening small companies with reporting requirements, so “any future obligations will only apply to the UK’s most economically significant entities – the vast majority of companies will not have additional burdens placed on them by these proposals”.