COP27

UK Takes Next Step to Mandatory Transition Rules

The Transition Plan Taskforce’s ‘gold standard’ framework aligns with international norms.  

One year since it was first established, the UK’s Transition Plan Taskforce (TPT) has published its draft transition plan framework at COP27 in Sharm El Sheikh.  

The proposed implementation guidance and the disclosure framework both build on the Glasgow Financial Alliance for Net Zero (GFANZ) transition plan framework, as well as the Taskforce on Climate-related Financial Disclosure (TCFD) and International Sustainability Standards Board (ISSB) sustainability reporting standards. 

The taskforce has further launched a ‘sandbox’ to help users draw on the framework and guidance when creating their transition plans. 

“If we are going to stay on course for limiting global temperature rises to 1.5°C, a key challenge for businesses is to figure out how to reach their net zero goals with a clear implementation plan that stacks up,” said Bridget Beals, Co-Head of Climate Risk and Decarbonisation Strategy at KPMG.  

“Many UK businesses will be impacted by this latest development as we expect to see the outputs of the TPT’s work integrated into climate disclosure listing rules, enabling investors and other stakeholders to hold businesses to account to ensure real climate action is taking place.” 

The TPT has outlined what a ‘gold standard’ transition plan for UK-based companies and financial institutions should include: high-level decarbonisation targets that mitigate the effects of climate change, short- to long-term actions to achieve these targets (such as planned capital expenditure), governance and accountability mechanisms, and measures to address material risks and leverage opportunities.  

The disclosure framework and implementation guidance are open for public consultation until 28 February, 2023. The TPT will then review the feedback and finalise both frameworks, including additional case studies and examples of good practice for implementation. 

Later in 2023, the TPT will also publish sectoral guidance, including an overview of sector-specific metrics from existing guidance that can supplement the TPT’s disclosure framework.  

“The decision to make transition plan disclosures mandatory across the economy is a major step towards achieving the UK’s net zero target,” said David Schwimmer, CEO of the London Stock Exchange Group (LSEG).  

“Financial markets can only play a central role in decarbonising our economy with access to high quality, consistent and comparable data.  As other countries consider mandatory transition plans, this work could inform similar regulatory approaches around the world.” 

It is currently unclear when transition plans will become mandatory. 

Building blocks 

By building on existing frameworks and guidance, the TPT is contributing to efforts to improve interoperability and comparability across jurisdictions.  

GFANZ’s recently released framework includes ten core transition plan components grouped into foundations, implementation strategy, engagement strategy, metrics and targets, and governance. 

The TPT framework mirrors these five overarching themes, but recommends disclosures across 19 sub-elements, including carbon credits, incentives and remuneration, and financial planning. The disclosure framework document then outlines the specific information needed under each sub-element.  

If an entity is using carbon credits to achieve the targets outlined in its transition plan, it will need to explain why carbon credits are being used and to what extent. The TPT has also asked entities to specify the type of credits being used (carbon removal or emissions avoidance) and whether they are subject to third-party verification. 

“To maximise alignment, an entity should apply the same corporate reporting norms to its transition plan disclosures as it would to its wider general purpose corporate reporting disclosures,” the taskforce said, referring to the TCFD guidelines and ISSB general sustainability standard (ISSB S1).  

It has outlined five key corporate reporting norms from TCFD and ISSB S1 and the implications for transition plan disclosures, including reporting on materiality, links between climate-related disclosures and financial statements, and treatment of uncertainty, estimates and assumptions. 

Broader strategy 

The establishment of the TPT and its subsequent work developing a transition plan framework is one part of the UK’s broader sustainable finance strategy. 

As one of the first countries to mandate TCFD-aligned reporting, then-Chancellor and now-Prime Minister Rishi Sunak unveiled the UK’s ambition to become the world’s first net zero financial centre at COP26 last November, with the intention to mandate transition plans as the first step. 

Last month, the Financial Conduct Authority (FCA) published a consultation outlining measures to tackle greenwashing as part of the UK’s Sustainability Disclosure Requirements (SDRs) – its counterpart to the EU’s Sustainable Finance Disclosure Regulation (SFDR). 

The consultation proposed three new fund labels: ‘sustainable focus’ (funds investing in sustainable assets), ‘sustainable improver’ (funds investing in assets that are transitioning to be more sustainable over time), and ‘sustainable impact’ (funds targeting sustainable solutions). The UK financial markets watchdog also plans to regulate providers of ESG data and scores. 

“The FCA has been actively involved in the development and drafting of [the TPT’s] initial outputs,” according to Sacha Sadan, the FCA’s ESG Director. The taskforce’s work will inform the regulator’s transition plan disclosure expectations of listed companies and regulated firms.  

HM Treasury is also expected to shortly unveil proposals for a UK-specific ‘green taxonomy’ to categorise environmentally sustainable activities. 

“For investors, this new proposal – alongside the recent release of the SDR consultation by the FCA – is a positive step towards delivering on the pledge for the UK to be the world’s first net-zero aligned financial centre and provides needed clarity on companies’ proposed actions to the market,” said Eliette Riera, Head of UK Policy at the UN-convened Principles for Responsible Investment. 

“As the COP baton passes over to Egypt, the swift implementation of concrete policies to support short and medium-term climate targets remains an area where the UK government has an opportunity to demonstrate strong leadership.” 

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