As COP27 takes over the recent news cycle, it is a time of reflection of COP26 which was hosted in Glasgow in November 2021. With the world’s eyes firmly on the UK, the then Chancellor of the Exchequer, Rishi Sunak, took the opportunity to announce that the UK was to become the world’s first net zero financial centre by 2050.
To achieve this, the UK government announced that it would:
- require certain entities to have robust firm-level climate transition plans (“Transition Plans”) setting out how they will decarbonise;
- set up a UK Transition Plan Taskforce (“TPT”), which shall formally involve the Financial Conduct Authority (“FCA”), to develop a ‘gold standard’ with respect to producing Transition Plans – the TPT was launched in April 2022; and
- ultimately integrate these standards into a proposed disclosure framework (“Disclosure Framework”), upon which the government intends to legislate to oblige companies to make these disclosures annually in their annual reports.
What is a Transition Plan?
A Transition Plan is an entity-specific plan which sets out how that entity will adapt to and contribute towards the world’s transition towards a low greenhouse gases (“GHG”) emissions economy. In particular, it should include:
- high level ambitions the entity is using to mitigate, manage and respond to climate risk (including any GHG reduction targets);
- interim milestones, with short-, medium- and long-term actions for the entity to achieve those ambitions and how those ;
- actionable steps the organisation plans to take to hit those targets; and
- governance and accountability mechanisms that support delivery of the plan and robust periodic reporting.
While the initial intention of the government was clear, what has been less clear until now was how companies should go about producing a Transition Plan in the interim.
As a move towards setting out what a ‘gold standard’ Transition Plan would look like, the TPT issued their draft recommendations and implementation guidance for the Disclosure Framework on 8 November 2022. While the Disclosure Framework is currently in under consultation until 28 February 2023, it makes clear that Transition Plans should be guided by three guiding ‘A’ principles:
- Ambition: they should outline ambitious objectives for contributing to an economy-wide net zero transition, covering the whole entity and considering the full range options the entity has available;
- Action: they should translate ambitious strategic objectives into concrete steps to be taken in the short- and medium-term. It should be connected to the entity’s business and operations planning and underpinned by resourcing plans and financial accounts; and
- Accountability: they should be supported by robust governance mechanisms, with relevant reporting and accountability structures. These steps should be underpinned by quantified and time-bound metrics and targets which are reported against on an annual basis.
The draft implementation guidance seeks to assist companies by setting out the key steps they might consider when preparing a credible, useful and consistent Transition Plan which aims to be compliant with the future TPT Disclosure Framework.
Who will these measures apply to?
Consumers, employees and now the government apply pressure on entities to consider their environmental impact and ESG credentials. Currently, the TPT Disclosure Framework currently only applies to listed companies and large regulated asset owners. However, entities who are considering listing or becoming regulated entities or who otherwise wish to demonstrate their ESG credentials may consider implementing similar measures.
Similarly, it is not surprising to see the large uptake in the number of companies trying to obtain certifications such as B Corporation or ISO Environmental Certifications or, where relevant, to boost their rankings on lists created by organisations such as Greenpeace.
The TPT intends to publish the final Disclosure Framework and implementation guidance by mid-2023, with detailed sector specific guidance to follow by the end of 2023.
If it is adopted in its proposed form, it is clear that these changes will compel all entities to consider their ESG input and output. Administratively, this will increase the reporting burden and enhance corporate governance requirements and accountability, in a bid for greater corporate transparency:
- Reporting: reporting entities will need to first publish a Transition Plan at least every three years, then report progress against the plan on an annual basis for financial reporting. It is highly likely that the FCA will use this finalised Disclosure Framework to strengthen its disclosure rules on transition plans for listed companies and regulated firms.
- Corporate governance: the need to implement robust governance mechanisms, reporting channels and accountability structures suggests that some companies may need to consider how they would best do this and whether their internal reporting mechanisms are fit for purpose.
While the final Disclosure Framework is awaited, the interim guidance should serve as a useful starting point for companies to prepare their Transition Plans. However, while the TPT continues to consult, what the final Disclosure Framework will look like remains to be seen.
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