At a glance:
- On 8 November, during COP27, the UK Transition Plan Taskforce (TPT) consulted on a proposed sector-neutral Transition Plan Disclosure Framework and related guidance.
- The development and disclosure of credible and actionable transition plans will be a key priority for financial services firms, regulators, and industry bodies in 2023. Once finalised, the TPT’s proposed framework will provide firms with further detail to help them in this task.
- The Financial Conduct Authority (FCA) intends to draw on the TPT’s finalised recommendations to strengthen its transition plan disclosure provisions for listed companies and financial institutions that were written when making Taskforce on Climate-related Financial Disclosures (TCFD) mandatory for certain firms.
- The TPT’s proposed recommendations would represent a significant step change in expectations for firms. Under the proposed framework, they would be expected to publish standalone transition plans at least every three years, with progress against the plan and material updates reported annually as part of general purpose financial reporting.
- The TPT’s proposals build on TCFD guidance and emerging standards from the International Sustainability Standards Board (ISSB), while going further in a number of areas. Their structure mirrors the key components of a transition plan, as recommended by the Glasgow Financial Alliance for Net Zero (GFANZ).
- Developing and implementing the transition plan will be a significant transformation project – it is not just a disclosure exercise. There is a focus in the proposed recommendations on short-term actions, metrics and targets, nature and a “just transition”. Firms would also be expected to take a “strategic and rounded approach” to avoid “paper decarbonisation” and strengthen their governance and culture.
- UK firms should consider how best to engage with the TPT consultation process and the Sandbox. They should also ensure that they understand what would be expected of them under the TPT’s proposed framework, alongside broader regulatory, supervisory, and/or industry measures.
On 8 November, the UK TPT consulted on a Disclosure Framework for sector-neutral transition plans and Implementation Guidance. The proposed recommendations are intended to build on TCFD guidance and ISSB draft exposure standards. They are structured around five elements which mirror the key components of a transition plan, as recommended by GFANZ.
These documents will be available for use by “entities”, defined as organisations that voluntarily choose, or are required by law, to prepare general purpose financial reporting statements.
The TPT also published a Technical Annex to the Guidance and launched a Sandbox to give entities preparing transition plans the opportunity to engage with the framework, provide feedback on their experiences, and ask questions.
The TPT was launched by HM Treasury in April 2022. It contains representatives from companies, financial institutions, regulators, policymakers, and civil society and has a two-year mandate to develop a “gold standard” for private sector climate transition plans applicable to the UK.
The TPT’s consultation was published during COP27. It was not the only publication during and in the run-up to COP27 which looked at transition plans. GFANZ published a range of recommendations and resources on transition plans and the UN’s High-Level Expert Group (HLEG) published a report on the net zero emissions commitments of non-state entities, which included a recommendation on disclosure of transition plans.
Given this increasing focus, it is clear that the development and disclosure of credible and actionable transition plans will be a key priority for financial services firms, regulators, and industry bodies in 2023. The TPT’s proposed framework provides firms with further detail to help them with this and provide transparency on their progress against their commitments and targets.
This blog provides our view on key points contained in the documents and what firms should do now. While the TPT’s recommendations are intended for use by entities, this blog focuses on the implications for financial services firms that would come within the scope of strengthened FCA provisions (“firms”).
FCA to strengthen transition plan disclosure provisions
While the proposed TPT framework is not statutory or regulatory guidance, it is an important document for firms, as the FCA intends to draw on the TPT’s recommendations to strengthen its transition plan disclosure provisions.
This is in line with the UK Government’s announcement during COP26 in 2021 to move towards making the publication of transition plans mandatory.
Currently, premium listed companies, issuers of standard listed shares and global depositary receipts, and certain asset managers, life insurers and FCA-regulated pension providers are required by the FCA to make TCFD-aligned disclosures. The FCA has set out initial expectations on transition plan disclosures for these firms.
The TPT anticipates that existing TCFD-aligned disclosure rules in the UK will be replaced by a requirement for certain companies to disclose in accordance with ISSB standards, which the UK Government has already stated it plans to adopt and endorse for use in the UK. So, depending on timing, new FCA rules on transition plans could either form part of the implementation of ISSB-aligned disclosures or TCFD-aligned rules.
The UK Government, in launching the TPT, aimed to develop a gold standard for private sector climate transition plans applicable to the UK, but globally transferable. As the TPT’s recommendations are relatively granular, they are likely to be of interest to other jurisdictions and regulators as they develop their own approaches. Alignment with global ISSB standards will help make the TPT’s recommendations transferable. However, with the EU and US developing their own sustainability disclosure regimes, differing approaches to transition plan disclosures across countries and regions are likely to continue.
Standalone transition plan published at least every three years
In its proposed framework, the TPT recommends that entities publish standalone transition plans at least every three years, and sooner when there are significant changes to the plan. The transition plan would need to be clearly separate from other climate or sustainability reports, such as in an appendix or separate document.
The TPT also recommends that progress against the plan and material updates be reported annually as part of TCFD or ISSB-aligned disclosures in general purpose financial reporting (e.g., in the annual financial report).
The proposed framework recommends that entities apply the same corporate reporting norms to their transition plan disclosures as they would to broader financial and strategic reporting. This is significant in terms of materiality as it means that they should disclose any information that, if omitted, misstated, or obscured, could reasonably be expected to influence decisions that the primary stakeholders make based on that reporting.
Given the impact that these recommendations, once taken forward, are likely to have on financial statements, firms need to embed transition plan disclosures into the annual reporting cycle. Finance and financial reporting teams will need to be engaged in developing their firm’s transition plan and oversee publication of the standalone document and annual updates.
“Strategic and rounded approach” to avoid “paper decarbonisation”
Under the proposals, transition plans will not just be about decarbonisation, but also about responding to climate-related risks and opportunities, and contributing to the economy-wide transition. For example, a firm divesting from high-carbon assets might achieve “paper decarbonisation”, but not contribute to actual reductions in global GHG emissions.
Therefore, firms would be expected to disclose a broader set of objectives and priorities for responding and contributing to an early and orderly whole-of economy transition. It’s likely that they would need to employ stewardship and work with their clients and suppliers, rather than simply divesting from high-GHG emitting assets or investments.
Short-term actions that lead to quantifiable change
The TPT recommends that entities disclose their objectives, priorities, interim targets, and milestones and that they summarise how these are embedded in their business strategy. They would then disclose the roadmap of short-, medium- and long-term actions (supported by a change management plan) they are taking or plan to take to implement their transition strategy and achieve their objectives and priorities. This would include disclosure of what they consider to be the relevant time horizons, with the TPT recommending that short-term should be within three years, in line with the frequency of transition plan publication.
In relation to products and services, the TPT goes further than both TCFD and ISSB by recommending that entities disclose their plans to change their portfolio of products and services to support their objectives and priorities and interim milestones.
The TPT also recommends that entities disclose the key assumptions and dependencies underlying their plans and the implications if their central assumptions are not met. To do so, the TPT recommends that they perform sensitivity analysis, as a separate activity to scenario analysis.
The TPT’s recommendations would mean a real shift in focus for firms towards thinking about their interim targets, short-term actions, how they quantify the impact and contribution of changes they are making, and their key assumptions and dependencies.
Significant emphasis on metrics and targets across scope 1, 2 and 3 emissions
As expected, the TPT places significant emphasis on metrics and targets. It recommends that entities make disclosures on targets across governance, business, operations, finance, and GHG emissions.
On the latter, in line with ISSB guidance, the TPT recommends that entities set and disclose scope 3 emissions targets. Crucially, where scope 3 emissions categories are omitted, the TPT recommends that the entity discloses the reason for omitting them and any steps it is taking to enable target-setting.
This is important as scope 3 emissions typically make up a significant portion of firms’ emissions. Firms will need to address data challenges and consider how best to influence upstream and downstream emissions across their value chain.
In relation to carbon credits, the TPT recommends that entities prioritise decarbonisation through direct abatement.
Increasing focus on nature and a “just transition”
Under the TPT’s proposals, one of the four key areas that a good practice transition plan should cover includes “measures to address material risks to, and leverage opportunities for, the natural environment and stakeholders such as the workforce, supply chains, communities, or customers which arise as part of these actions”.
We think that the debate on the ‘S’ in ESG is likely to re-emerge and potentially grow over the second half of 2023, so firms should make sure that they are considering broader social issues – such as employment rights, diversity and inclusion, and secondary impacts on local communities – as part of their transition plans.
Firms would also be wise to think about broader biodiversity factors and draw on the Taskforce on Nature-related Financial Disclosures beta framework. See our blog for further details: Measure to Manage: nature-related risks & opportunities | Deloitte UK.
Strengthen governance and culture
Beyond what is covered by TCFD or ISSB, the TPT recommends that entities describe the steps they have put in place to build a culture aligned with their transition plan. This is likely to be new for many firms.
More broadly, firms will likely need to enhance their Board oversight and reporting, roles and responsibilities, and skills, competencies, and training. They will also need to consider how they align their culture, incentive structures, and remuneration with the objectives and priorities in their transition plans.
In relation to external assurance, the TPT recommends that entities disclose the aspects of their transition plans that are subject to external assurance and the nature of that assurance.
What can firms do now?
UK firms should consider how best to engage with the TPT consultation process and the Sandbox. The TPT Disclosure Framework and Implementation Guidance are open for consultation until 28 February 2023. The TPT will reflect on feedback from the consultations and the Sandbox, ahead of finalising the Disclosure Framework in 2023. In 2023, the TPT also plans to publish a range of sector guidance.
Firms are at different stages on their journey to develop, disclose and execute credible transition plans. Some firms may not yet have started developing their transition plans, while others are looking to make disclosures in 2023.
As firms progress, they should ensure that they understand what would be required of them under the TPT’s proposed framework, alongside broader regulatory, supervisory, or industry measures (e.g., GFANZ), when compared to their existing obligations under TCFD-aligned FCA rules and/or guidance. Where there are divergences, they should determine when and how to align.
See our blog on setting the direction for your transition plan for further detail on what firms should think about before they get started on developing their transition plan.
Firms should be left in no doubt that a broad range of stakeholders expect them to lead and support the transition to a fundamentally different and more sustainable economy. A significant transformation project will be required, and a new way of thinking needs to become business as usual. Firms can draw on the TPT and GFANZ documents to help them as they develop and disclose credible transition plans, in advance of strengthened FCA provisions.