The state-of-play for climate transition plans

ISSB guidance, a UK consultation and a legal opinion – all in the past seven days. Sophie Robinson-Tillett takes stock of developments.

Transition plan requirements finally look set to become a reality in the UK, after the government launched a consultation on Wednesday.

First promised back in 2021 by then-chancellor Rishi Sunak, and again last year in a campaign pledge by the Labour Party, until now there has been little real progress on the commitment to make the UK a world leader on transition plan disclosures.

The government wants feedback on options including the introduction of mandatory or comply-or-explain disclosures requirements, as well as whether companies should have to actually deliver on their goals.

The 12-week consultation also puts the scope of the rules back on the table: while Labour originally said they would cover UK-regulated financial institutions and FTSE 100 companies, the document leaves room for the net to be cast wider.

It also explores options for standards and methodologies that could be used as part of transition planning, how to define ‘being aligned with net-zero by 2050’, and how nature and climate adaptation might be addressed.

“The consultation we have launched seeks stakeholder views on a range of approaches to transition plans, including on climate alignment, as part of our commitment to take forward the manifesto commitment in full,” explained a spokesperson for the UK’s department for energy security and net zero.

“This is the first step in shaping a robust, effective approach that supports credible, economy-wide transition planning.”

The government has committed to consulting again before any rules are introduced.

The Financial Conduct Authority (FCA) welcomed the current consultation, as well as a simultaneous one on draft UK Sustainability Reporting Standards (SRS).

“We intend to consult later this year on how listed companies will adopt these standards,” she said.

“This will also include our proposed approach to the disclosure of transition plans.”

EU rules

In Brussels, lawmakers are less bullish, with plans to unpick current transition plan requirements for companies.

The Council of the European Union confirmed this week that it wants to significantly cut the number of issuers covered by the Corporate Sustainability Due Diligence Directive (CS3D) – and therefore the number required to disclose and implement a climate plan.

Firms still in scope should be relieved of the duty to implement their climate plans, Council believes, and they should only ‘contribute to’ net zero, rather than aligning with the goal.

Neither the European Commission or Parliament are likely to counter Council’s position too strongly: indeed, Parliament’s current position goes even further, calling for the deletion of transition plans requirements altogether.

But Tracey Groves, head of sustainability at law firm DWF, says firms aren’t waiting for legislators –many of those with net-zero goals have introduced internal education programmes, she observes.

“It tells us that these larger companies are elevating climate as an enterprise-wide sustainability risk, beyond environment and over and above regulatory or legal requirements, in order to protect the long-term value of the company,” says Groves.

Standards

The UK government’s consultation came on the heels of an update from the IFRS Foundation on how transition strategies should be dealt with in disclosures aligned with the International Sustainability Standards Board (ISSB).

The guidance builds on the materials developed by UK’s Transition Plan Taskforce (TPT), which it assumed responsibility for last year, but doesn’t require the publication of a separate plan.

“This document isn’t the one that board members look at to decide how to understand or commission their transition plan,” explains Ira Poensgen, a strategic advisor to the International Transition Plan Network and former technical lead at the TPT.

“Instead, it gives the reporting teams within the company comfort that if they use the TPT guidance to inform that plan, it can be easily integrated into ISSB-aligned disclosures.”

While Poensgen says ISSB and TPT “work together”, there are differences.

A key one is that TPT’s guidance calls on companies to explain how they’re preparing for and contributing to an economy-wide transition.

As a result, it puts a strong focus on topics like lobbying and collaboration to achieve system-level change.

“For ISSB, that focus on contributing to the wider transition may go beyond its materiality definition,” notes Poensgen.

“So they explain that in the document, and note that there is space for governments and entities to go further if they want to include that.”

Legal protections

If transition plans do become a regulatory requirement, it will have legal implications for companies.

Many are nervous about publishing official long-term plans that rely so heavily on progress being made outside businesses’ direct control, like policy developments and advances in technology.

On Tuesday, a legal opinion was published by barristers in London on whether transition plans bore meaningful liability risk for firms or their directors.

Commissioned by environmental law firm ClientEarth, the document concludes that regulating transition plans is unlikely to result in materially heightened liability risk. 

It added that it was therefore unnecessary to introduce legal safe habours for such disclosures.

Nonetheless, the UK looks set to do so.

Last summer, the FCA suggested in a consultation on its new Public Offers and Admissions to Trading Regulations that it could allow companies to include transition plans in a special category of ‘protected forward-looking statements’.

It will publish its policy statement on the rules over the summer.