Government announces transition plans
09 November 2021
As part of the UK’s announcement that it will be the world’s first Net Zero-aligned Financial Centre, the UK Government introduced the requirement for UK financial institutions to have robust firm-level transition plans which will set out how they intend to decarbonise.
A transition plan sets out how an organisation will adapt as the world transitions to a low carbon economy. A transition plan will include:
(A) High level targets the organisation is using to mitigate climate risk (including for example greenhouse gas reduction targets);
(B) Interim milestones; and
(C) Actionable steps the organisation plans to take to hit those targets.
Transition plans are in line with recommendations made by the Taskforce on Climate Related Financial Disclosures (TCFD).
The transition plan requirement will be phased in and will be based on a comply or explain approach. The initial scope will require:
(A) Asset managers
(B) Regulated asset owners
(C) Listed companies
to publish transition plans that consider the Government’s net zero commitment or to provide an explanation if they have not done so. This does not necessarily mean that firms themselves need to make net zero carbon commitments but such firms will need to set out what their commitment is (if they have one).
The transition plan requirement will be incorporated into the SDRs (discussed below) by 2023. New legislation will be introduced to implement this. The FCA has also proposed to reference transition plans in its TCFD aligned disclosures rules for listed companies, asset managers and FCA regulated asset owners with effect from 1 January 2022.
The development of ‘gold standards’ of transition plan will be the responsibility of a new Transition Plan Taskforce that will be made up of academia, regulators and the third sector. Expect more announcements to follow as to what a good transition plan looks like.
Ashurst comment: The question for many firms will be what happens if we don’t meet the targets set out in our transition plans? Are transition plans expected to be fluid, adapting to new measures that are taken by a firm. And importantly how much will shareholders hold firms to account with respect to their transition plans? These questions will certainly ensure that firms focus on what is contained in their transition plans but they may mean that fewer firms set out their commitment as net zero.
It is noteworthy to compare these proposals to previous publications which had set out the expectations that firms would make net zero target commitments in their transition plans. There is certainly a softening on this message here.
