The Transition Plan Taskforce (TPT) has published, for consultation, a sector-neutral disclosure framework and accompanying guidance with recommendations for companies and financial institutions in the UK on how to develop credible and robust climate transition plans – see here. The consultation closes on 28 February 2023 (see “Next steps” below).
Credible transition plans create transparency and accountability for companies and financial institutions to meet their net zero targets. This will enable investors to make better informed capital allocation decisions and will support the UK’s transition to net zero. Many organisations currently find it challenging to develop climate transition plans, given the lack of available guidance. The TPT framework and other initiatives discussed below are intended to help corporates and financial institutions develop rigorous transition plans to support their net zero commitments.
What is the TPT?
The TPT was launched by the UK government in April 2022 to develop a “gold standard” for climate transition plans in the UK (see our previous blog post). The aim is to help companies and the financial sector produce science-based climate transition plans that are credible and robust.
The TPT is co-chaired by Andrew Griffith MP (Economic Secretary to the Treasury) and Amanda Blanc (Chief Executive of Aviva) and involves a steering group including the FCA, other relevant regulators and corporates, among others. The TPT has significant private sector backing and includes high level representatives from LGIM, NatWest, LSEG, Unilever, Orsted UK, Nest, ICAEW, WWF, GFANZ, FCA, the Bank of England and the ISSB.
The requirement to publish climate transition plans will form part of the wider Sustainability Disclosure Requirements (SDR) outlined in the government’s Greening Finance Roadmap in October 2021 (see our previous blog post). The government had said it is committed to making this a mandatory requirement for certain financial sector firms and listed companies.
TPT recommendations – key takeaways
In essence, a transition plan should translate ambitious strategic climate objectives into concrete steps to be taken in the short- and medium-term, setting out how a company or financial institution plans to contribute to and prepare for a rapid global transition towards a low-carbon/net zero economy. The TPT recommends that any emissions reduction target should consider Scope 1, 2, and 3 emissions and should prioritise decarbonisation through direct abatement over purchasing carbon credits.
The TPTs’ recommendations are based on three key principles (ambition, action and accountability) and five key pillars:
- Foundation – which includes objectives and priorities
- Implementation Strategy – which includes business planning and operations, policies
- Engagement Strategy – which includes engagement with the value chain, as well as with industry and government
- Metrics & Targets – see carbon offsets commentary below
- Governance – which includes board oversight and reporting, skills, competencies and training, and incentives and remuneration
The TPT recommends that a good practice transition plan should cover:
- an entity’s high-level ambitions to mitigate, manage and respond to the changing climate and to leverage opportunities of the transition to a low GHG and climate resilient economy. This includes GHG reduction targets (e.g. a net zero commitment);
- short, medium and long-term actions the entity plans to take to achieve its strategic ambition, alongside details on how those steps will be financed;
- governance and accountability mechanisms that support delivery of the plan and robust periodic reporting; and
- measures to address material risks and leverage opportunities.
The TPT recommends that entities publish standalone transition plans at least every three years, and sooner when there are significant changes to the plan. Progress against the plan and material updates should be reported annually as part of TCFD- or ISSB-aligned disclosures in general purpose financial reporting (e.g. the Annual Financial Report). If an entity produces a long-form TCFD or sustainability report, the transition plan must be clearly separable (e.g. as an appendix or separate document).
The TPT recommends that entities should approach materiality in the same way as they do in their general purpose financial reporting. This means that they should disclose any information that, if omitted, misstated, or obscured, could reasonably be expected to influence decisions that the primary users of general purpose financial reporting make on the basis of that reporting.
If an entity obtains assurance or verification of sustainability information, transition plan disclosure or wider sustainability reporting, the TPT would expect to see the following information disclosed:
- the level of assurance or verification obtained;
- the scope of the engagement;
- the professional standard(s) against which the engagement was performed;
- who the assurance provider is; and
- the outcome of the engagement (e.g. whether the assurance provider’s conclusion is unqualified or modified).
The TPT recommends that Scope 3 emissions be disclosed, including upstream and downstream emissions. If the entity excludes categories of Scope 3 emissions from its metrics and targets, it should state the reason for omitting them, and any steps it is taking to improve monitoring and reporting systems and enable target setting for relevant Scope 3 emission categories. Scope 3 emissions are an important aspect given these account for a considerable proportion of most companies’ emissions. However, there are a number of challenges in setting targets and reporting on Scope 3 emissions – for example because of the degree of control and influence a company has over such emissions, the use of estimates and calculation methodologies, and the current difficulties in establishing accurate and reliable Scope 3 data.
On the use of carbon offsets, the TPT recommends that the entity should disclose information including:
- why the entity is employing carbon credits and how the use of carbon credits supports achieving the entity’s climate objectives and priorities;
- what third-party verification or certification scheme or schemes the credits are subject to;
- the type of carbon credit (e.g. whether the credits are generated from carbon removal vs. emissions avoidance projects, or whether they are based on natural carbon removals vs. technological carbon removals); and
- any other significant factors necessary for users to understand the credibility and integrity of carbon credits intended to be used by the entity.
The TPT consultation closes on 28 February 2023. The TPT will then reflect on feedback received with a view to finalising the sector-neutral framework and accompanying guidance in summer 2023.
The TPT has launched a sandbox to work with preparers and users to road test the TPT’s outputs and gather practical feedback from the market. Companies who are preparing a transition plan (or are planning to do so) can sign up to the online sandbox. This will enable preparers to provide first-hand experiences on any challenges they encountered when disclosing against certain elements of the plan, and flag areas where additional guidance is needed.
The TPT plans to publish in 2023 a range of sector guidance, including guidance for financial institutions and the real economy.
The UK government and regulators have committed to take the TPT’s work into account when developing future reporting requirements under the forthcoming SDR regime. However, at this stage, it is not yet clear when exactly the government plans to consult on the disclosure aspects of the SDR regime. A consultation was expected before the end of the 2022 but the recent changes in government have delayed those plans. Consultations are, however, already underway on the other aspects of the SDR regime, in particular the UK green taxonomy (see our previous blog post) and the FCA’s proposed investment labels (i.e. the UK’s answer to the EU SFDR) (see our previous blog post).
Other initiatives: UN Expert Group and GFANZ
Although the TPT’s recommendations are aimed at the private sector in the UK, the hope is that other countries will be inspired to follow a similar model. Other organisations across the globe are also developing their own recommendations for credible transition plans.
On the same day that the UK TPT launched their consultation, the UN High-Level Expert Group on the Net Zero Emissions Commitments of Non-state Entities also published a report with 10 key recommendations on environmental integrity, credibility, accountability and the role of governments. The report makes it clear that:
- A net zero pledge should contain interim targets (including targets for 2025, 2030 and 2035) and plans to reach net zero in line with IPCC or IEA net zero greenhouse gas emissions modelled pathways that limit warming to 1.5°C with no or limited overshoot, and with global emissions declining by at least 50% by 2030, reaching net zero by 2050 or sooner.
- Non‑state actors cannot claim to be net zero while continuing to build or invest in new fossil fuel supply. Coal, oil and gas account for over 75% of global greenhouse gas emissions. Net zero is entirely incompatible with continued investment in fossil fuels. Similarly, deforestation and other environmentally destructive activities are disqualifying.
- Non-state actors cannot buy cheap credits that often lack integrity instead of immediately cutting their own emissions across their value chain. As guidelines emerge for a high-integrity voluntary credit market, credits can be used above and beyond efforts to achieve 1.5°C aligned interim targets to increase financial flows into underinvested areas, including to help decarbonise developing countries.
- Non-state actors cannot focus on reducing the intensity of their emissions rather than their absolute emissions or tackling only a part of their emissions rather than their full value chain (scopes 1, 2 and 3).
- Non-state actors cannot lobby to undermine ambitious government climate policies either directly or through trade associations or other bodies. Instead they must align their advocacy, as well as their governance and business strategies with their climate commitments. This includes aligning capital expenditures with net zero targets and meaningfully linking executive compensation to climate action and demonstrated results.
And in October 2022, the Glasgow Financial Alliance for Net Zero (GFANZ) published a report on what financial institutions expect to see in companies’ climate transition plans (see our previous blog post). The GFANZ report highlights that companies’ access to financial products and services may be increasingly dependent on their climate targets and strategies and on the progress made against those targets.
The UK TPT is building on the global baseline provided by the International Sustainability Standards Board (ISSB) and is aligning with recommendations on transition plans from GFANZ. The TPT Technical Annex included in the consultation pack maps the TPT Disclosure Framework to relevant recommendations from the TCFD and the draft climate disclosure standard published by the ISSB.
Credible and robust transition plans allow investors and other key stakeholders to hold company leadership to account, and support investors’ decisions on how to best allocate capital to support the net zero transition. With COP27 currently underway, the pressure is on everyone to show that they are “walking the talk” on their climate pledges. All of these recommendations are basically seeking to show what “good” looks like when it comes to setting climate targets and action plans. And although these are voluntary recommendations, following best practice guidance can help companies reduce the risk of litigation and combat allegations of greenwashing.
Join us for a webinar on 23 November where Vanessa Havard-Williams, the Linklaters global head of ESG and a member of the UK TPT Delivery Group, will discuss the TPT’s recommendations as well as other similar initiatives on producing credible and robust transition plans. Click here to register.