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May 13, 2022updated 16 May 2022 10:41am

Climate transition plans: Asset owners face uphill climb

Corporate transition plans are now front and centre of the UK's climate policy. But with little formal guidance as to what makes one credible, there is a huge onus on investors to separate the wheat from the chaff.

By Elizabeth Meager

climate transition plans
Olga Hancock of the Church Commissioners of England says the UK government is yet to put “critical enabling factors” in place for assessing transition plans. (Photo courtesy of the Church Commissioners of England)
  • The UK has made climate transition plans central to its net-zero policy and plans to make them mandatory, but is reluctant to enshrine minimum standards in law.
  • The challenge of determining what is a credible transition plan falls to investors, when some argue that should be down to governments.
  • Stronger government policy on transition plans is a huge step towards decarbonisation, but it must form part of a whole-economy approach, say experts.

From languishing in relative obscurity just six months ago, climate transition plans – which set out how organisations intend to achieve net-zero emissions – have shot up the sustainability agenda. An estimated one-third of all companies globally have one today, estimates environmental impact measurement platform CDP, but that number is set to rise substantially.

As promised at the Cop26 summit in November, for instance, Britain has made transition plans central to its climate policy for corporates and intends to mandate them across the economy in the coming years.

They were accordingly front and centre at the Net Zero Delivery Summit in London this week, with their importance heralded by a who’s who of luminaries, including Cop26 finance adviser Mark Carney, HSBC chief executive Noel Quinn, and Mary Schapiro, vice chair of the Glasgow Financial Alliance for Net Zero (GFanz), who is also a former chair of the US Securities and Exchange Commission (SEC).

So far, so applaudable. Yet there are concerns that the UK government is not going far enough in setting a framework for transition plans and thereby leaving too much uncertainty and room for interpretation for financial firms.

On 25 April it unveiled the Transition Plan Taskforce (TPT), comprising dozens of industry leaders, that will develop a “gold standard” for transition plans by the end of this year. The group launched a call for evidence this week (on 11 May), seeking stakeholder input to inform the TPT’s work.

Lack of guidance

While the TPT will outline best practice, the government is not prescribing a specific course of action, John Glen, economic secretary to the UK Treasury, said during the City Week 2022 event in late April.

“Firms and their shareholders will decide for themselves how they adapt to the UK net-zero commitment and decarbonise their activities and investments… it will be for investors and other stakeholders to judge whether firms’ plans are adequate and credible.”

However, that leaves a lot of room for variance in an area where many feel more standardisation is needed – and more guidance to that end.

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“Every company in the UK having an idea about how it will transition is a good starting point, but there are a few substance points [to address],” says Elizabeth Gillam, head of EU public policy at US asset manager Invesco in Brussels, who is advising the UK government on its green taxonomy. “Firstly, do those transition plans get us to net zero collectively? Are they ambitious enough, and science-based? Individual companies having plans won’t actually get us to net zero without a more holistic system-wide approach.”

With this in mind, the UK Sustainable Investment and Finance Association (UKSIF) has just published (on 10 May) a policy paper setting out recommendations for the government for building a net-zero financial centre. They include setting regulations relating to the real economy, strengthening the stewardship role of investors, ensuring the UK’s green taxonomy and sustainability disclosure frameworks are “world-leading” and learn from the EU’s mistakes, and developing robust carbon markets.

Onus on investors

“We’ve got to take an economy-wide approach to climate change, otherwise we are just shifting assets around and making no difference to the overall carbon picture,” says Olga Hancock, UKSIF policy committee chief and deputy head of responsible investment at the Church Commissioners for England, which manages the Church of England’s £9.2bn ($11.2bn) endowment fund. “That’s the critical role of government – they have to be looking at carbon pricing, for instance, and taking a sector-by-sector approach.”

The lack of guidance on transition plans arguably puts a huge amount of pressure on investors, which vary widely in sophistication. The industry is ready to rise to the challenge, says Hancock, but “critical enabling factors [such as robust carbon pricing and other real economy regulations] are yet to be put in place”.

Luke Sussams, head of ESG for Europe, the Middle East and Africa at investment bank Jefferies, tells Capital Monitor that transition plans are “perhaps the biggest question at the moment within ESG investing”.

“There is real litigation risk for companies making plans, ambitions and statements around what they will and won’t do,” London-based Sussams says. “Obviously, that will require investors and lawyers to track that quite closely, but the risk is real.”

For instance, the transition plans of two companies in the same sector will not be the same, he adds. “Even with a so-called gold standard being outlined, that still leaves the investor with a hell of a lot to do to work out if it’s credible or not.”

Divergence in quality

After all, a third of companies, disclosing via CDP, may have produced climate transition plans, but they show a huge divergence in quality and robustness (see charts below), fuelling scepticism about their credibility. “There are just too many opportunities for greenwashing and for yet more talk to be followed by too little action,” says London-based climate think tank E3G.

Speaking at the Net Zero Delivery Summit, HSBC’s Quinn said he personally had recently reviewed the transition plans of three energy companies and that the bank would set out its expectations for best practice in this area in June. That’s important, he said, because a financial services firm’s transition plan will “ultimately be an aggregate of [those of] their clients”.

“It isn’t something we can create in isolation – our clients are the ones that have to change their business model and technologies – but unfortunately we don’t have the luxury of time, so we will have to work in parallel,” Quinn added. “These will have to be rooted in science, and it has to stand scrutiny – there has to be disclosure at a granular level, sector by sector.”

Banks and investors may consider themselves up to the challenge of creating and assessing transition plans, but ultimately the vast bulk of emissions are produced by the real economy.

“Financial services has a supportive role to play, but we would emphasise the ‘supporting’ part,” says Gillam. “There is always going to be a challenge if the wider ecosystem isn’t aligned.”

More regulatory harmonisation needed?

For that to happen, regulatory harmonisation across jurisdictions would presumably be helpful. But with the EU and the UK seemingly competing to set the pace on climate standards, that could be some way off.

UK chancellor Rishi Sunak had announced at Cop26 that the UK would be home to the "world’s first net-zero financial centre". The general consensus appears to be that the British government believes transition plans will set the UK apart from its peers in this regard.

Meanwhile, the EU is also working to enshrine transition plans in law. The Corporate Sustainability Reporting Directive, due to come into effect from January 2024, will provide the standards needed, for which the Task Force on Climate-Related Financial Disclosures (TCFD) released new guidance in October last year.

The direction of travel seems clear at least, but there remains a substantial gap between what investors want from governments on climate policy and what is actually being provided.

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