A robust transition plan is the way for firms to meet net zero

Integrating a credible climate transition plan will enable firms to take ownership of changes to come, write Kate Levick, associate director, sustainable finance, E3G, and Ben Caldecott, director and principal investigator, UK Centre for Greening Finance and Investment; co-heads of the Transition Plan Taskforce Secretariat.

There is growing momentum behind the need for credible and robust transition planning. The G7 has emphasised the importance of private sector transition plans, and multilateral regulatory forums are now examining their potential uses to support market integrity and financial stability.

The net-zero transition is an opportunity to grow the low-carbon economy, create jobs and unlock private investment to new and sustainable markets. It will also be a catalyst for competition between firms and sectors, but preparation and planning will come with costs. Companies operating in countries that have ratified the Paris agreement will need to integrate their plans into their core business strategies by 2050 if they wish to thrive in a net-zero economy.

The UK has led the way on green finance. The country is making progress on its COP26 announcement of a requirement for listed companies and financial firms to disclose transition plans by 2023 – due to best practice expectations identified by the Transition Plan Taskforce. The UK’s Green Finance Strategy published in May also includes a commitment to consult on extending the planned requirement to large private companies.

But there is a long way to go. Research published by EY concluded that, while over 80% of UK-listed firms say they are committed to reaching net zero by 2050, the majority (95%) has not yet publicly disclosed detailed, actionable transition plans. The research found that 78% of FTSE 100 companies have published partially developed plans that do not yet address key questions on strategy and execution, while 17% remain in the early stages of plan development. Of those that have disclosed detailed plans, few are fully aligned with the TPT’s draft framework of ambition, action and accountability.

For firms, it can be daunting to understand what to do and where to start. The TPT’s draft disclosure framework, implementation guidance and technical annex were launched for consultation at COP27 and are now being finalised. They build on existing requirements under the Task Force on Climate-related Financial Disclosures and International Sustainability Standards Board and are aligned with the Glasgow Financial Alliance for Net Zero framework for transition planning. A high degree of convergence is also expected between TPT and the final form of the European Union’s European Sustainability Reporting Standards.

Following the finalisation of the TPT framework, UK regulators will begin the process of creating a transition plan disclosure requirement in the UK. The framework can provide both a starting point for firms needing a new climate transition plan and a review framework for those wishing to test the credibility and comprehensiveness of their existing plan.

Initial iterations of climate transition plans have been seen to lack consistency and detail. Done properly, transition planning enables management teams to develop, communicate and operationalise their climate strategies to the benefit of investors, who need to assess the credibility of their clients’ transition strategies, and insurers, who need to make informed underwriting decisions. Regulators and policy-makers can use the transition plans to support market integrity, consumer protection and financial stability, while corporates can assess the carbon intensity of their value chains – all of which serves to incentivise climate ambition and manage risk exposure.

Incorporating a robust and credible climate transition plan into business strategy will enable firms to take ownership of the changes needed in coming years – to build resilience, respond to and anticipate climate impacts and contribute to the global transition to net zero. Look out for the results of TPT’s consultation on its disclosure framework and implementation guidance in July 2023.