What’s next for climate transition plans in the UK and beyond? And specifically, what does this mean for Financial Institutions? EcoAct Senior Consultant, Catherine Chisem, examines the road ahead for corporate climate transition planning and key updates on guidance to be aware of.
While COP27 might not have been the success many were hoping for, hundreds of the world’s largest financial firms are getting to work on implementing net-zero and related climate strategies to channel capital towards climate solutions. To help guide this capital, a flurry of new guidance on climate transition plans was released in November, as transition plans become part of standard TFCD reporting expectations in the UK, the EU, and other large capital markets. Mandatory transition plans – regulated disclosures of how a firm intends to align its business model with the goals of the Paris Agreement – are fast becoming a central element of G20 sustainable finance regulation. The focus on climate transition plans from UK, EU and US financial regulators represents the next crucial step in the corporate decarbonisation journey. We are now seeing financial institutions and other large-listed companies establish consistent processes to regularly assess carbon footprints, evaluate climate risk, and set near-term emissions reduction and business transition targets.
As part of this process, a transition plan demonstrates how organisations intend to implement climate goals with detailed strategic planning across different business lines on operationally meaningful timelines. Translating high-level net-zero targets into more detailed annual strategic plans is essential for enterprise-wide goals to be actionable.
For financial institutions, these plans should also address the challenge of ‘transition finance’ and include a systematic approach to redirecting capital to climate solutions and new technologies. Innovations and systems needed to shift away from the fossil fuel economy and increase energy efficiency. Some investors will use external scenario tools, such as the International Energy Agency’s (IEA) 2050 Roadmap to develop a capital deployment plan that is in line with their net-zero target. Others will use internal metrics to monitor progress on clean energy procurement, zero emissions transport fleets, and building decarbonisation. Insurer Allianz recently published its Statement on Oil and Gas Business Models, which sets out the firm’s investment plan for the energy sector and describes how its approach to investing in and providing insurance products to the energy sector aligns with net-zero goals. With more firms developing and preparing to publish transition plans this year, we expect the pace of decarbonisation in the real economy to ramp up.
According to CDP’s latest assessment of transition plan disclosure, the financial services sector is amongst the highest performing in terms of transition plan disclosure, however 95% of those companies’ plans were missing at least one key indicator according to CDP’s own framework. With new guidance for financial institutions emerging all the time, transition plans must be continuously revised and kept up to standard. The need to update and assure transition plan work will increase as regulatory requirements evolve in line with the Transition Plan Taskforce (TPT) recommendations.
In the UK, the Financial Conduct Authority’s (FCA) ESG Sourcebook (relevant to in-scope asset managers, asset owners, life insurers and FCA-regulated pension providers) specifies that institutions must follow TCFD guidance on transition plans. As more G20 regulators follow the FCA’s lead, it can be expected that there will be increased scrutiny on what companies produce, and on any steps being taken to improve the quality and consistency of transition plan reporting.
Finally, as companies exhaust the “low-hanging fruit” of emissions reduction actions, the difficult challenge of systems change will be needed to achieve climate goals. Therefore, ‘transition finance’ will become increasingly important. Financial institutions will need to start preparing their approach to the managed decline of the fossil fuel economy, hinted at in GFANZ’s own work on winding up fossil fuel assets.
For financial institutions, particularly those in the UK, there are some key pieces of recent guidance and updates to be aware of:
All of these efforts are supported by the TCFD’s own high-level guidance on transition plans, as well as multiple other reports from organisations including Climate Action 100+, CDP, Assessing Low-Carbon Transition Initiative (ACT), and The Investor Agenda. There is an abundance of guidance, but individual firms must consider their own ambitions and time horizons when crafting transition plans that align with their existing business growth plans. This is a delicate process that can define a company’s future success or failure in a new era of volatility.
The TPT guidance is designed to represent the ‘gold standard’ in transition plan disclosure and implementation. Separate from the TPT’s detailed guidance document, the GFANZ guidance materials for different types of financial institutions are described as covering five core pillars (Foundations, Implementation, Engagement, Metrics and targets, Governance), albeit relatively streamlined for financial institutions. The TPT guidance itself is designed to work in harmony with both TCFD and IFRS (International Financial Reporting Standards Foundation) reporting requirements.
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 leverage opportunities of the transition to a low greenhouse gas (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. Also to be included are 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 reporting companies publish standalone transition plans at least every three years, and sooner when there are significant changes to the plan or if climate and energy transition policy developments shift the goal posts. Progress against the plan and material updates should be reported annually as part of existing TCFD- or ISSB-related disclosures and regular financial reporting. If a company produces a long-form TCFD or sustainability report, the transition plan component must be clearly indicated.
In addition to detailed guidance, the TPT batch of publications provides a granular comparison on how it relates to both TCFD and ISSB (International Sustainability Standards Board), and recommends that entities apply the same corporate reporting norms to transition plan disclosures as they do to wider corporate reporting. These raise the bar on the transition plan reporting. Now all financial institutions that have set public or internal climate goals need to consider how they will frame the goals in a transition plan.
Fortunately for financial institutions, there are three clear steps that will help prepare for transition planning as an internal process, and, eventually, for external stakeholder reporting purposes:
Get in touch to find out more.
Traditionally, climate disclosure focused on the question “What is the impact of your organisation on climate change?”. The TCFD flips this question on its head, to ask “What will be the impact of climate change on your organisation?”.
Now, more than ever before, we must consider this question and understand the implications of climate change to make sure we are taking adequate action: investors are demanding it, governments are making it mandatory and climate science is telling us it is increasingly urgent.
In our TCFD eBook we demonstrate how to improve business disclosures, strengthen climate and sustainability strategy, and future-proof business through one exercise: TCFD alignment.
Download the guide to learn:
Choose EcoAct for industry-leading expertise in climate strategy and sustainability solutions. We’re here to guide your business through every step towards achieving your sustainability goals while supporting your operational success and market reputation.