Background
In October 2021, the UK Government committed to taking action to align UK financial flows with the net zero economy, publishing the “Greening Finance Roadmap”. A month later at COP26 in Glasgow, the UK committed to move towards making publication of transition plans mandatory for listed companies as part of its plan to make the UK the world’s first net zero financial centre and set up the Transition Plan Taskforce (TPT).
At the end of 2021 the Financial Conduct Authority (FCA) introduced climate-related disclosure requirements for UK listed firms in line with the TCFD’s recommendations on a comply or explain basis. As part of the TCFD guidance, companies are expected to describe their plans for how they will transition to a low carbon economy. At the same time, FCA regulated asset managers and owners are required to align their disclosures to the TCFD. Indeed, the FCA went further, and the guidance encourages listed companies, asset managers and owners that operated in countries that have made a commitment to a net zero economy to consider that commitment in developing their transition plans.
In the 2023 Green Finance Strategy, the UK government committed to consulting on introducing requirements for the UK’s largest companies to disclose their transition plans if they have them. This will complement the FCA’s requirements and is expected to align with the recently introduced ISSB standards.
In August 2023, the FCA said it would consult on the content of listed companies’ transition plans, looking to align disclosures with the TPT Framework and the ISSB standards. This consultation will happen during 2024 and will provide clarity on what we can expect in UK regulations regarding transition plans.
The Transition Plan Taskforce
The formation of the Transition Plan Taskforce was announced at COP26 to signal how serious the UK was in ensuring companies started to plan for a net zero economy. The mandate given to the taskforce was “to establish the gold standard for transition plans”. Members were drawn from companies, financial institutions, regulators, policymakers, civil society, and academia.
The terms of reference of the taskforce state:
Transition plans are also essential for the effective exercise of market discipline, and investors’ ability to hold investee company boards and management to account. The government therefore expects to see the publication of firm-level transition plans become the norm across the UK economy.
The taskforce was given two years to develop “appropriately detailed sectoral transition plan templates, alongside associated guidance on metrics and targets”. Originally due to finish at the end of February 2024, the deadline was extended to the end of July 2024 to allow the TPT to contribute to the Transition Finance Market Review.
The TPT has now delivered the final TPT Disclosure Framework, along with draft Sector Guidance for Asset Owners, Asset Managers, Banks, Food & Beverage, Electric Utilities & Power Generators, Metals & Mining, and Oil & Gas sectors. In addition, a wealth of supporting material has been produced to help with implementation and to provide mapping to other standards, notably from the ISSB and TCFD.
What does the TPT “Gold Standard” look like?
Underpinning the framework are three principles:
Ambition – Contribute to and prepare for a rapid and orderly economy-wide net zero transition.
Action – Focus on concrete actions which emphasise the short-term and strive for resilience.
Accountability – Enable delivery of the plan through clear governance mechanisms along with consistent, comparable and decision-useful reporting and verification.
The guidance then breaks down into 5 sections: Foundations, Implementation Strategy, Engagement Strategy, Metrics & Targets, and Governance. A good practice transition plan should include high-level ambitions to mitigate, manage and respond to the changing climate and to leverage opportunities of the transition to a low GHG (Greenhouse Gas) and climate resilient economy. This should include GHG reductions targets and planned short-, medium-, and long-term actions to achieve the strategic ambition, with details on how those steps will be financed. Governance and accountability mechanisms to support delivery of the plan and robust periodic reporting should be outlined, and measures to address material risks to and leverage opportunities for various stakeholders should be outlined.
Source: The TPT Disclosure Framework | Transition Plan Taskforce (transitiontaskforce.net)
It is intended as an overall plan that assesses the impacts of the transition on a company’s strategy and as such it is more than just a list of planned specific emission reduction activities, although that is of course at its core. It can be thought of as sitting above TCFD and ISSB reporting and will draw on material already available for those disclosures.
It is not expected that companies will have everything in place by day one. It is quite a detailed framework. However, companies are encouraged to report against the key aspects of their plan, building the plan as they develop and progress over subsequent years. It is intended that a full plan is published only on a three-year cycle, with interim annual updates giving an update on progress with other content in the plan that is deemed to be material to investors reported as part of annual TCFD- or ISSB aligned disclosures.
Why, Where and When to Start?
To some this will feel like yet another set of guidance / potential regulation that must be met: more boxes to tick. But step back and you’ll see that the TPT guidance provides a consistent structure for putting together and communicating a plan that is both necessary for internal planning and for communicating to external stakeholders. Some stakeholders will already be asking for what your plans are, many will not. But the pressure will increase with major investors such as pension funds guided to consider climate change as a financial factor as part of their fiduciary duties and required to produce TCFD reports on their investments.
Even without the external pressure, the TPT standard is worth adopting for internal planning. Instead of starting from a blank piece of paper, it provides a well thought through process to identify all aspects necessary to put together and successfully implement a transition plan. As a result, companies can spend the time on the content and not thinking about the requirements or the process – that hard work has already been done for you. Indeed, even with the content, you have a head start as the guidance builds on material that will already be in your TCFD disclosures.
Some will only want to act when required to do so, and indeed the number of corporate transition plans disclosed is still relatively small, despite the comply or explain requirement. It may be that companies have plans but are “greenhushing” in the hope that they will avoid scrutiny. However, we think this is a mistake. Companies will get more credit for being open that they do not have all the answers and that they cannot make the transition on their own. For instance, anyone who has electricity as a major part of their emissions footprint in their own operations or in their value chain needs governments to ensure grids are being rapidly decarbonised and other sector specific policy certainty will often be needed. Being open about this can collectively create the pressure for the change needed and therefore reduce risk in the long term.
How we can help
CEN-ESG can help your business put together your transition plan in line with TPT guidance. We have extensive experience in helping clients from diverse industries identify, analyse, quantify and report the significant climate-related risks and opportunities facing their business. Our expertise extends beyond compliance, offering a strategic approach to help your business fully understand and respond to its salient climate risks and opportunities. We have written transition plans for our clients following the TPT guidance and understand how to link the plan to other disclosure requirements such as TCFD and science-based targets, minimising the work required to satisfy multiple needs. In addition, we will help make this a useful internal plan, not just something to satisfy external disclosure requirements.
Contact us
CEN-ESG helps businesses maximise their sustainability potential, performance, and ESG disclosure.
For more information about the process for setting and disclosing a transition plan against the TPT guidance, please contact us via email and our team would be more than happy to help.
Jasper Crone, Director
Roger Johnston, Director
For more information about our Sustainability Consultancy, Investor Relations, or CEN Data services and expertise, please click on Services above or go to https://www.cengroupholdings.com.
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