Robust transition plans are now essential for UK businesses
Written by Tim Greenhalgh
The net-zero juggernaut is picking up pace – all large businesses and public enterprises in the UK will have to fully develop climate transition plans by the end of next year.
The Transition Plan Taskforce (TPT) set up by the Treasury is overseeing the development of a “gold standard” for climate transition plans, fulfilling a pledge made by Rishi Sunak, as Chancellor, at COP26 in Glasgow. The TPT is informing and building on international disclosure standards.
What does this mean for UK businesses and what additional stresses will they be under?
Comprehensive and best-quality transition plans are essential if the UK is to succeed in moving to a low-carbon economy. The UK has to halve carbon emissions by 2030 and a time-bound action plan is absolutely crucial to place businesses on a trajectory that aligns with the latest and most ambitious climate science recommendations, limiting global warming to 1.5°C.
While the first focus is on larger entities, the effects will have an associated impact on SMEs in the supply chains and in the medium term all enterprises will need to develop coherent and sustainable transition plans.
Plausible plans enhance transparency and accountability for both companies and financial institutions in the quest for net-zero emissions, while they give potential investors vital information on climate-risk management.
And the TPT framework should help to reduce the complexities and confusion created by the current array of regulatory requirements and standards.
An effective transition plan goes way beyond simple tick-in-the-box compliance. Climate inaction could mean a company losing up to 30% of its value over the next five years, with significant decline in revenues.
Consumers will increasingly move to brands that keep their environmental pledges – over half of people in the UK (56%) are less likely to buy from organisations with a weak sustainability record, according to a survey by professional services company GHD.
With clearer guidance, struggling companies will be able to compete with those that already have robust plans in place.
CEOs navigating a huge range of challenges
But the necessary move has come at a time when UK companies are wrestling with a host of issues. A UN-backed global survey of more than 2,600 chief executive officers just published shows that 93% are guiding their business through 10 or more simultaneous challenges, with rising energy and resource prices dominant.
Climate change is the fourth largest challenge, behind inflation and price volatility, sourcing skilled staff, and the geopolitical environment. A third of the CEOs advised that there is already high impact from climate change, from physical risks across the value chain or the need to shift business models to embrace future emissions mitigation and climate adaptation.
At the same time, many CEOs said that the current complex set of pressures meant that they were not able to make long-term “resilience building” a priority, with 43% advising that sustainability efforts had been hampered by the geopolitical environment.
The majority of respondents agreed that wider delivery of UN Sustainable Development Goals (SDGs) by the 2030 deadline will be more challenging than first anticipated, due to current challenges and future impacts.
The 2021 CEO study found that business leaders were severely off track to deliver on their sustainability and climate goals – and the study authors say the situation is now even more tenuous. Business leaders are reporting heightened frustration and uncertainty in preparing for what will happen next.
More guidance set to arrive through the Disclosure Framework
Against this febrile backdrop, the Transition Plan Taskforce is aiming to deliver on the Sunak promises and give companies the clearest guidance for what will be the most challenging and complex set of structural changes.
In November, the TPT published the draft Disclosure Framework and Implementation Guidance for public consultation. It sets the bar high, stressing the need for concrete, near-term action and evaluation against a business’s financial plan.
The consultation on the framework and guidance phase ends next month. The first set of sector-specific guidance will be released in spring/summer with Final Disclosure Framework and Implementation Guidance following in the summer, and Final Sector Guidance in the autumn or winter.
Allied to this there will be regulatory updates with the Financial Conduct Authority (FCA) consulting on changes to Listing Rules in order to reference International Sustainability Standards Board (ISSB) standards which the UK expects to adopt when finalised.
The FCA will also view TPT outputs as a basis to strengthen its transition-plan disclosure expectations of listed companies, asset managers and FCA-regulated asset owners.
This financial strand amplifies the government’s “Greening Finance: A Roadmap to Sustainable Investing” that mandates all firms offering financial products to publicly disclose the environmental impact of all activities they finance and justify any sustainability claims made.
Currently, the FCA’s listing rules call on companies to produce a transition plan in accordance with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations from 2023 on a “comply or explain” basis. TPT final outputs will substantially increase disclosure expectations for listed companies, asset managers and regulated asset owners.
The TPT advocates a strategic and rounded approach focusing on ambition, action, and accountability. It urges organisations to “consider the full range of levers at their disposal to contribute to and prepare for an economy-wide transition to net zero” that will help to avoid potential unintended consequences such as “paper decarbonisation” hampering any real impact.
It recommends publication of separate transition plans at least every three years, and sooner when there are significant changes to the plan.
Four key TPT points
The taskforce recommends that any plan should cover four key points:
- High-level ambitions to mitigate, manage and respond to the changing climate and to leverage opportunities of the transition to a low greenhouse gas (GHG) and climate-resilient economy, with reduction targets.
- Short, medium and long-term actions to achieve strategic ambition, with details on how these will be financed.
- Governance and accountability mechanisms that support plan delivery and robust periodic reporting.
- Measures to address material risks to, the natural environment and stakeholders such as the workforce, supply chains, communities or customers arising from these actions – and exploit opportunities.
Transition plans should reflect the urgency to act and take into account national commitments and the latest international agreement on climate change, as well as commitments such as Nationally Determined Contributions submitted under the Paris Agreement.
The TPT advises that progress against any plan as well as material updates should be reported annually as part of any TCFD or ISSB-aligned disclosures in general purpose financial reporting.
Next steps on climate risk
Former Governor of the Bank of England, Mark Carney, has emphasised the importance of accountability mechanisms for transition plans. He said:
“As an increasing number of firms disclose their assessment of climate risks, investors should have the opportunity to opine on the quality of these disclosures and so called ‘transition plans’. As with ‘say on pay’ there are growing calls for investors to have a ‘say on transition’: a vote on the adequacy of a company’s preparedness for the transition to a net-zero world. This mechanism would embed the critical link between responsibility and accountability.”
And as the G7 have pledged to follow the UK in mandating climate risk reporting from large businesses, the transition plan mandate may well go global.
Companies can sign up for access to the TPT Sandbox that tests the Framework and Guidance to help users and preparers create their own transition plans. The online sandbox is for companies who have prepared part, or all, of their transition plan using the Disclosure Framework and Implementation Guidance.
SaveMoneyCutCarbon supports companies of any size in their transition planning – as a first step you can have a free 30-minute consultation call with one of our IMEI carbon mentors.