Transition plans: What financial institutions need to do now

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Transition plans - EcoAct blog

Catherine Chisem, EcoAct Senior Consultant - Transition plan blog
Catherine Chisem, EcoAct Senior Consultant

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. 

 

Why are we talking about transition plans?

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.

Transition plans can help guide capital towards climate solutions

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.

Transition plans - IEA Key milestones in the pathway to net-zero
IEA 2050 technology transition roadmap to net-zero emissions by 2050 indicates the scale of change across energy, transport, and the built environment that investors must plan for. Transition plans will define each firm’s approach to implementing net-zero and related climate goals.

Why transition plan expectations matter for financial institutions

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.

What guidance on transition plans has been published so far?

For financial institutions, particularly those in the UK, there are some key pieces of recent guidance and updates to be aware of:

  • The Transition Plan Taskforce (TPT), set up by the UK Treasury in 2022, has released draft guidance on both the disclosure and implementation of entity-level transition plans, aimed at UK companies, but designed to be globally relevant. The TPT will produce individual sector guidance in 2023, and the involvement of representatives from the FCA in this group indicates that regulators are following these expectations.
  • The Glasgow Financial Allianz for Net Zero (GFANZ) has established its own working group dedicated to supporting financial sector firms in designing and implementing transition plans, namely through recommendations and guidance, including its report Financial Institution Net-zero Transition Plans – Fundamentals, Recommendations, and Guidance.
  • The Climate Safe Lending Network (CSLN) released its guidance for Banks, The Good Transition Plan, in October 2021 and in November 2022 released a pre-COP27 addendum in response to significant uptake and feedback from Bank members.

Moving from recommendations to action

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.

What do the new guidance materials recommend?

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.

Standalone transition plans with annual updates

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.

How can EcoAct help finance sector leaders respond to new transition plan expectations?

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:

  1. Assign responsibility and empower that team
    • Governance is a key pillar in both TCFD and transition plan guidance, and by enabling the right people and teams, financial institutions can ensure that transition planning can be a strategic tool rather than a regulatory tick box exercise.
  2. Get on board with TCFD
    • If a financial institution is based in the UK or Switzerland, then TCFD will be mandatory now or at some point in the near future. It is also likely that TCFD and ISSB will converge on reporting requirements. Many of these requirements (such as governance, metrics and targets) overlap with and support transition planning, so by addressing TCFD now, financial institutions can be better prepared for transition planning in future.
  3. Start now
    • Many financial institutions will already have some form of transition plan. As new guidance emerges it is essential to stay on the front foot.
    • Much of the work that makes up transition planning will likely already be done in organisations, possibly under different teams or labels. By identifying this, businesses can make a head start on what needs to be done. Getting started early also gives companies a head-start on using transition planning as a tool for competitive advantage.

EcoAct is well positioned to support financial institutions on this transition planning journey:

  • We have finance experts with deep expertise and experience with all kinds of financial institutions
  • We thrive on complexity and distilling guidance down into an actionable project
  • We have deep knowledge of TCFD, emissions reporting and target-setting.
  • We are a trusted partner for any organisation along the journey to net-zero

Get in touch to find out more.

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