- The Transition Plan Taskforce Disclosure Framework has been launched, focusing on reporting best practice.
- From 2025, UK-listed companies could have to disclose transition plans in line with ISSB standards.
- Large non-listed UK companies may also be required to do so pending a government consultation.
The launch of the Transition Plan Taskforce (TPT) Disclosure Framework and guidance at the London Stock Exchange last week was a step forward in driving the adoption and use of credible climate transition plans. The mandate for the framework was established at Cop26 by Rishi Sunak, when he was chancellor of the exchequer, in part to help implement new UK disclosure requirements, but its recommendations and guidance are globally applicable.
The voluntary TPT Disclosure Framework helps businesses understand what best practice looks like and by supporting consistent and comparable reporting, will reduce the level of complexity faced by firms that disclose climate-related information.
The framework is designed to be adopted and used by different jurisdictions, companies operating internationally, and is both applicable to finance sub-sectors and real economy sectors.
Already for accounting periods from January 2022, the Financial Conduct Authority (FCA) require UK-listed issuers to make transition plan disclosures on a comply or explain basis.
From accounting periods after January 2025, there will be mandatory transition plan disclosures and the FCA is consulting next year on rules and guidance for listed companies to disclose in line with International Sustainability Standards Board standards and the TPT Framework.
The UK Government is also planning to consult later this year on changes to the Companies Act, that could require the UK’s largest non-listed companies also to disclose their transition plans.
A global transition
There is significant and growing international momentum behind transition plans. The EU via the Corporate Sustainability Reporting Directive and the European Sustainability Reporting Standards is introducing transition plan disclosure requirements.
Singapore has signalled its intention to introduce them and last month the US Treasury Department set out principles for net zero aligned financing that emphasised the key role of transition plans and referencing the TPT Disclosure Framework.
G7 and G20 leaders have come out in support of transition plans too, along with the UN Secretary General. Key international regulators, such as the International Organization of Securities Commissions, the Bank for International Settlements, and the Central Banks’ and Supervisors’ Network for Greening the Financial System are highlighting the importance of transition plans and integrating them into their supervisory work. Transition plans are very much here to stay.
An entity’s transition plan can serve many purposes. Disclosing a transition plan, in addition to improving information for investors and lenders, supports policymakers and regulators to understand the trajectory to net zero and what they can do to accelerate it. It also allows supervisors and regulators to assess whether an entity’s strategy is sufficient given its exposure to climate-related risks. Transition plans can also help stakeholders hold entities to account for their public climate commitments and act as a reference point for transition finance products and instruments.
Central to the TPT Disclosure Framework's recommendations is that preparers need to take a strategic and rounded approach. That means that while a transition plan starts with the entity’s own decarbonisation, companies also need to think carefully about how they will proactively contribute to achieving net zero across society.
This approach is critical if we are to avoid unintended consequences. An exclusive focus on achieving net zero within an entity’s own operations and value chain risks ‘paper decarbonisation’ and passing the buck. For example, simply transferring ownership of high-carbon assets to others, who may be less well placed to bear the risk or phase them out, is counter-productive.
False positives, false negatives
In the case of financial institutions, focusing only on reducing portfolio emissions can lead to both "false positives", such as divesting from companies with high emissions that may enable the transition to net zero, and "false negatives", such as investing in companies with low emissions but may support carbon lock-in. The TPT Disclosure Framework and guidance will help avoid paper decarbonisation and these false positives and false negatives.
Transition plans, if suitably ambitious and delivered with appropriate actions and with proper accountability, can support the allocation of capital to companies and assets that are contributing to meeting the aims of the Paris Agreement, and away from those that aren’t. Now that we have a detailed international disclosure framework for transition plans, as well as associated guidance, we need to move towards their rapid adoption across sectors and jurisdictions.How transition finance is shaping the path to a net zero economy]