On 8 November 2022, the third day of COP27, the UK’s Transition Plan Taskforce (TPT) published its draft recommendations for a transition plan Disclosure Framework (the draft Recommendations), along with draft implementation guidance for consultation.
The TPT was established in April 2022 by the UK Treasury. It was given a remit to develop the gold standard for private sector climate transition plans, applicable to the UK but globally transferable. These draft Recommendations have been produced to support “reporting entities”, i.e. companies which are subject to transition plan disclosure requirements by the FCA (listed companies and FCA-regulated asset owners and asset managers).
The regime proposed by the TPT will, if adopted in its proposed form, significantly increase the climate monitoring and reporting burden on reporting entities. Amongst other things, reporting entities will be required to publish a standalone transition plan at least every three years, in addition to reporting progress against the plan and material updates on an annual basis in general purpose financial reporting. The proposed regime will also require reporting entities to ensure that their transition plans are “informed by both [greenhouse gas emission reduction] national commitments and the latest international agreement on climate change”, across all jurisdictions in which the reporting entity operates.
Three key principles
The draft Recommendations set out three principles to guide the content and structure of ‘gold standard’ transition plans:
- Ambition – this section should describe the strategic ambition of the entity’s transition plan, including its interim and long-term targets to reduce greenhouse gas (GHG) emissions across Scopes 1, 2 and 3, and any interim milestones used to measure progress. This will include the entity’s objectives and priorities for responding to the risks and opportunities associated with the transition to a net zero economy and the changing climate, including risks to and opportunities for the natural environment and stakeholders. It will also set out how the entity will embed the strategic ambition of its transition plan into its business model, highlighting key implications for products and services, expenditure and material independencies for the natural environment and the entity’s stakeholders.
- Action – this section should disclose the roadmap of short-, medium- and long-term actions the entity will take to deliver on the transition plan’s strategic ambition, as well as planned changes to the entity’s portfolio of products and services to deliver the strategic ambition in its transition plan. It should also set out key internal policies and conditions the entity has developed to align its activities with the strategic ambitions of its transition plan, the financial implications of the planned changes, and details of the entity’s current and planned engagement activities with its value chain, industry peers, and government and civil society stakeholders.
- Accountability – this section should explain the governance, business, operational, financial and GHG metrics and targets the entity will use to measure its progress towards the transition plan’s strategic ambition. It should also set out details of the entity’s intended use of carbon credits to achieve progress towards the transition plan’s strategic ambition.
The draft implementation guidance summarises the key steps that entities might consider when preparing a transition plan and explains how transition plans should be disclosed. It also provides an overview of how external stakeholders might use transition plans to inform their strategic decision-making.
If the draft Recommendations are adopted in their current form, businesses should be aware of the following key points:
1. The onus on reporting entities will increase significantly.
As noted above, reporting entities will be required to publish a standalone transition plan at least every three years, and sooner if there are significant changes to the plan. In addition, progress against the plan and material updates should be reported annually as part of TCFD- or ISSB- aligned disclosures in general purpose financial reporting.
As transition plans “should be informed by both national commitments and the latest international agreement on climate change”, reporting entities will need to be aware of and stay up-to-date on the different Nationally Determined Contributions (as required under the Paris Agreement) of the jurisdictions in which they operate.
2. Actions will be louder than words.
The draft Recommendations emphasise the importance of businesses producing plans which explain how their decarbonisation plans fit into the global net zero transition, and which set out the actions that businesses will take in order to achieve their transition plan. This goes significantly beyond any existing sustainability disclosure regime.
The draft Recommendations also highlight the importance of decarbonisation through direct abatement over purchasing carbon credits, and that “paper decarbonisation” (e.g. by divesting from high-carbon assets in order to rebalance a portfolio) will often have limited real-world impact. This demonstrates the TPT’s belief that the focus of net zero transition plans should be shifting towards concrete decarbonisation steps with significant real-world impact.
3. Increased focus on governance and accountability.
The TPT states that the delivery of a gold standard transition plan should be supported by robust governance mechanisms, reporting channels and accountability structures, including Board and executive oversight. These accountability structures should include quantified and timebound metrics and targets for the actions set out by the entity, and should be reported against on an annual basis. For some businesses, this will mean fundamentally restructuring the way in which climate target-setting and internal reporting is carried out.
A consultation on the draft Recommendations and the draft guidance will be open until 28 February 2023. Following the consultation period, the TPT aims to finalise the Disclosure Framework in the course of 2023.
In addition, the TPT will be publishing sector-specific guidance in 2023, starting with an overview of sector-specific metrics taken from existing guidance which can supplement the recommendations of the TPT Disclosure Framework, and following later in the year with more detailed sector guidance.
At the time of writing, COP27 is still ongoing. With the TPT’s draft Recommendations – and the UN High Level Expert Group’s report on defining credible net-zero pledges and pathways – being published on only the third day of the conference, we expect that further developments in respect of private sector climate transition plans are on the horizon.