Auteurs
Daniel Hirschfield

Daniel Hirschfield

Senior Counsel – Knowledge

Read More
Charlotte Hill

Charlotte Hill

Associé

Read More
Auteurs
Daniel Hirschfield

Daniel Hirschfield

Senior Counsel – Knowledge

Read More
Charlotte Hill

Charlotte Hill

Associé

Read More

15 février 2023

ESG Collection – 2 de 5 Publications

Supporting a more sustainable future: climate-related transition plans

  • In-depth analysis

This article forms part of a wider series, The ESG Collection, by our cross-sector team covering current themes and topics high up on the ESG agenda for businesses. In part one we will unpick the environmental pillar of ESG, including topics focused on climate change, energy use and efficiency, and nature. This article takes a deeper dive into the UK's framework for robust and credible climate-related 'transition plans'.

High quality and credible transition plans are an essential component of the shift to net zero. As well as enabling companies and financial institutions to meet their net zero commitments, they ensure investors can make better informed decisions about how to allocate capital. 

At COP26 in November 2021 in Glasgow, the UK government announced that the UK will be the first net zero-aligned financial centre in the world and that it will move towards making the publication of transition plans mandatory, focusing first on the financial sector. The government has therefore created a high-level Transition Plan Taskforce (TPT), which formally launched in April 2022. 

The TPT is tasked with establishing a best practice for firm-level transition plans and developing guidance and associated templates, which will include both general and sector-specific disclosures and metrics. E3G, an independent climate change think tank, and the Centre for Greening Finance and Investment (CGFI) act as the secretariat. The FCA is a formal member of the TPT, sitting on its Steering Group and Delivery Group and participating in its workstreams. It has said it will pay close attention to the outcomes of the TPT's work to strengthen the disclosure requirements in this area for listed companies and regulated firms.

In May 2022, the TPT launched a Call for Evidence requesting feedback on the content requirements of a "gold standard" transition plan.

Consultation on sector-neutral transition plans

On 8 November 2022, coinciding with COP27 in Sharm el-Sheikh, the TPT published drafts of the following three documents:

Alongside the Framework, Guidance and Annex, the TPT has produced a one-page summary. It is also running an Online Sandbox for firms to give feedback on using some or all of the Framework or Guidance.

What is a transition plan?

The TPT defines a transition plan as "integral to an entity’s overall strategy, setting out its plan to contribute to and prepare for a rapid global transition towards a low GHG-emissions economy".  

The transition plan should:

  • be consistent with the entity's constitutional documents and the duties of its directors and senior managers
  • "reflect the urgency to act" and therefore take into account and reference national net zero commitments and the latest international agreements on climate change.

The Framework

The Framework is a sector-neutral framework, which provides recommendations to companies and entities to develop gold-standard transition plans. It builds on the existing recommendation to disclose a transition plan in the TCFD Recommendations and associated guidance, and the transition plan disclosure recommendation in the ISSB proposed sustainability-related and climate-related standards.

The Framework is informed by three guiding principles, which were formulated in response to feedback to the Call for Evidence and "emerging literature" on transition planning:

  • ambition
  • action
  • accountability.

It is constructed around five elements:

  • foundation
  • implementation strategy
  • engagement strategy
  • metrics and targets
  • governance.

Guiding principle I: ambition 

The first guiding principle, ambition, means to "contribute to and prepare for a rapid and orderly economy-wide net zero transmission".

A transition plan should: 

  • Outline ambitious objectives and priorities for contributing to and preparing for a rapid and orderly net zero transition.
  • Cover the entire entity, look at the full range of actions that the entity has available, and emphasise those that can be expected to make significant contributions to a transition.
  • Ensure that any emissions reduction target considers Scope 1, 2 and 3 emissions and prioritises decarbonisation with priority given to curbing emissions over the use of carbon credits.
  • Include any transition-relevant actions which are material to the entity's enterprise value.  This means that an entity should probe all 'material interdependencies', including those relating to the natural environment, workforce, supply chain, communities, and consumers.
  • Demonstrate an urgency to act as described above.

Guiding principle II: action

The second guiding principle, action, means to "focus on concrete actions which emphasise the short-term and strive for resilience".

A transition plan should:

  • Determine short- and medium-term concrete steps from its strategic objectives, which requires it to be dovetailed with the entity's business, financial and operational planning.
  • Develop its plan on the basis of defined assumptions and an examination of dependencies and uncertainties and evaluate the sensitivity of the plan to changes in such assumptions, mitigating delivery risks where possible.

Guiding principle III: accountability

The accountability guiding principle means to "enable delivery of the plan through clear governance mechanisms along with consistent comparable and decision-useful reporting and verification".

There should be robust governance arrangements to support the delivery of a transition plan. This includes oversight from the Board and senior management, as well as appropriate incentivisation, reporting and accountability structures. Quantified and timebound metrics and targets, which are reported against on an annual basis, should underpin the actionable steps that are contained in the transition plan. 

An entity should be clear to what extent its transition plan is subject to external verification or assurance and it should request and take into account stakeholder feedback on an ongoing basis.

Five elements

The five elements track the five themes recommended by the Glasgow Financial Alliance for Net Zero. The elements are further divided into a total of 19 sub-elements as follows:

Foundation

Objectives and priorities

Business model implications

Implementation strategy

Business planning and operations

Products and services

Policies and conditions

Financial planning

Sensitivity analysis

Engagement strategy

Engagement with value chain

Engagement with industry

Engagement with government

Public sector and civil society

Metrics and targets

Governance, business, and operational metrics and targets

Financial metrics and targets

GHG emissions metrics and targets

Carbon credits

Governance

Board oversight and reporting

Roles, responsibility and accountability

Culture

Incentives and remuneration

Skills, competencies and training

The TPT provides a recommended disclosure for each of the sub-elements, taking an approach that is very similar to the TCFD Recommendations. For example, in relation to Board oversight and reporting, an entity is expected to describe its arrangements for Board-level review and approval of the transition plan and its processes for the oversight of monitoring and reporting of progress against it. This includes: 

  • Whether and how the arrangements and processes for the Board's approval of the transition plan are reflected in the terms of reference for the entity, Board mandates and other related policies.
  • Whether and how often the transition plan is reviewed by the Board and/or a Board sub-committee.
  • A description of how the Board looks at transition plan elements in its wider strategy, risk management and decision making on resource allocation.

The Guidance

The Guidance document accompanies the Framework and is intended to assist both preparers and users of transition plans.  

Preparing a transition plan

At the outset, the Guidance sets out the four key stages of the strategic thinking required by an entity's Board and management when creating and adapting its strategy to meet its climate targets:

Baseline current position

Assessment of climate related-risks and opportunities

Decarbonisation levers assessment

Analysing interdependencies

Emissions footprinting

Setting ambition

Setting objectives and priorities

Setting GHG reduction targets

Developing a carbonisation prioritisation

Developing an action plan

Designing a strategic roadmap

Designing a change-management programme

Responding to changing climate

Considering material interdependencies

Financial planning and sensitivity analysis

Engagement programme

Ensuring accountability for delivery

Monitoring and reporting on outcomes

Assessing approach to internal and external assurance

Reviewing and improving monitoring processes

Defining roles and responsibilities

Building awareness and capacity to deliver the transition

With this guidance in mind, the overall structure of the Framework may be summarised in this diagram.

Interpreting the Framework

The Guidance provides a commentary on the disclosures recommended to be made under the sub-elements. This is organised under each of the recommended disclosures into two sections:

  • Detail in the relevant disclosure that goes beyond what is required by the TCFD Recommendations.
  • Interpretative guidance on what an entity should include in its disclosures in order to satisfy the disclosure recommendations of each sub-element.

Where and when should disclosures be made

The Guidance recommends that disclosures against the Framework should be integrated with other climate-related disclosures in the entity's financial reports (such as a UK listed company's annual report) and should also be published on a stand-alone basis as this will allow users to compare plans across entities. The TPT further recommends that entities update their stand-alone transition plan periodically either in the event of significant changes to the plan or, at the latest, every three years. In year one and year two, TCFD- or ISSB-aligned disclosures should include progress against the plan that is considered material to investors.

Users

The Guidance closes with a review of the various user groups that may make use of an entity's transition plan. These include a range of entity types such as preparing entities themselves, financial services firms, real economy entities, governments, regulators, central banks, data providers, non-governmental organisations, and consumers.

The Annex

The Annex shows how the TPT's recommendations map across to wider corporate reporting norms, as well as the relevant disclosure recommendations provided by the TCFD and the ISSB respectively.

What's next?

Responses to the draft Framework and Guidance should be made by 28 February 2023 through the TPT website. The TPT will consider the feedback it receives and aims to finalise the framework in 2023.

The final version will contain additional guidance such as case studies and examples of good practice. A range of sector guidance will also be published in 2023. The results of the Online Sandbox will inform the final version of the Framework, Guidance and sector guidance. The TFT plans to update the Annex when the Framework is finalised and following the release of the finalised IFRS S2 Standard from the ISSB.

During 2023 and 2024, the FCA will use the outputs of the TPT to build on its current transition plan disclosure expectations of listed companies, asset managers and FCA-regulated asset owners.

Help is at hand

If you have any questions about the TPT's consultation on climate-related transition plans, please contact our experts.

Dans cette série

Environmental, social & governance (ESG)

The ESG Collection: part one

15 February 2023

Environmental, social & governance (ESG)

Building a net zero future in real estate: green leases explained

1 March 2023

par Clare Harman Clark

Environmental, social & governance (ESG)

The risks of making environmental advertising claims

Timothy Pinto looks at recent ASA decisions on greenwashing in the context of the UK's regulatory framework.

3 April 2023

par Timothy Pinto

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