Progress on net zero transition plans likely to raise standard expected

COP26 last year saw a real push towards putting in place net zero targets for corporates and financial institutions. Now the focus is broadening, to include robust transition plans[1] to actually achieve those ambitions. This carries reputational and legal risks – as well as significant opportunities – and is in any event still quite new, complex and likely resource-intensive.

A number of recent announcements from the UK, UN and the Glasgow Financial Alliance for Net Zero (GFANZ) offer handrails to help support businesses through the carbon transition. They are likely to set the market standard in the short term, and in the case of the UK, to become law in the medium term.

Between them, a clearer picture of what a good transition plan looks like is emerging. This will help businesses avoid inadvertent greenwashing and feel more confident that the efforts they are putting in are consistent with what will be expected of them. 

UK Transition Plan Taskforce – a gold standard?

The UK’s Transition Plan Taskforce (TPT) this week began its consultation a sector-neutral framework providing recommendations for companies and financial institutions on how to develop “gold-standard transition plans”. Sector specific guidance is expected in 2023.

The TPT joins an already crowded field of transition planning advice, but its tacit endorsement from government - having been set up by the Treasury - will likely lend it greater credibility. It recommends concrete actions that a good practice transition plan should cover:

• an entity’s high-level ambitions to mitigate, manage and respond to the changing climate and to leverage opportunities of the transition to a low greenhouse gas (GHG) and climate resilient economy. This includes GHG reduction targets (eg 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;
• governance and accountability mechanisms that support delivery of the plan and robust periodic reporting; and
• measures to address material risks to, and leverage opportunities for, the natural environment and stakeholders such as the workforce, supply chains, communities or customers which arise as part of these actions.

Alongside the framework, the TPT has provided draft implementation guidance and a technical annex. These offer practical advice by setting out the steps companies could take. It also addresses when, where and how to disclose transition plans, and maps the TPT’s recommendations onto wider corporate reporting norms, as well as what the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB) frameworks require. It also relates TPT’s work to the approaches taken by GFANZ. Hopefully, this will mean that businesses won’t have to do the same-thing-but-slightly-differently in order comply with overlapping regimes and different jurisdictions.

The TPT’s output may offer some comfort to businesses leading the way with transition planning, but some nervousness is likely to remain. Not least because there may be a gap between the detailed internal work businesses are doing and what public statements they feel able to make that are useful and manage the risks appropriately. This is especially so when making forward-looking statements, and must be placed in the context of hardening regulatory expectations and growing climate litigation. As familiarity and market practice develops, this anxiety should ease.  

It also includes recommendations relating to nature and the just transition, two areas that are likely to become more and more pressing in conversations about sustainability, so is well placed to remain relevant.

Timing for when the TPT’s recommendations will become mandatory requirements remains unclear. Last November, the government announced its plans to require asset managers, regulated asset owners and listed companies to publish transition plans that “consider the government’s net zero commitment” or explain why they don’t. This would then be incorporated into the UK’s Sustainability Disclosure Requirements (currently being consulted on by the FCA), and requirements strengthened to encourage consistency in published plans. But given the government’s issues with progressing its legislative agenda, and no clear announcements around the SDR’s timings, it’s not uncertain when this will actually happen.

The UN’s “red line around greenwashing”

The snappily named UN High Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities (UNHLEG) has also released a major new report setting out standards for transition plans for companies and financial institutions, as well as cities and regions. The report is likely to set the international standard due to its clarity, UN provenance and the quality and diversity of its experts, who hail from across the world including richer and less rich nations. Whilst the report is non-binding, is likely to inform how governments look to regulate non-state actors’ transition plans in the short to medium term. It will also impact how the market judges businesses’ efforts.   

The report is exacting in its demands although none are radical. It offers clear recommendations on what companies and others should and shouldn’t be doing. These may pose challenges for some businesses, both in meeting them, and from the risk of not meeting them as expectations harden.

The report sets out five principles that should guide the setting and attaining of net zero targets:

• Having ambition which delivers significant near and medium term emissions reductions on a path to global net zero by 2050;
• Demonstrating integrity by aligning commitments with actions and investments;
• Embracing radical transparency in sharing relevant, non-competitive, comparable data on plans and progress;
• Establishing credibility through plans based on science and third-party accountability; and
• Demonstrating commitment to both equity and justice in all actions.

It goes on to offer 10 “main recommendations”, each supported by “detailed recommendations”, for business to measure their efforts against and derive some assurance they are on the right track. These include pledging to meet net zero and setting a net zero target, creating a transition plan, replacing fossil fuels with renewables, and being transparent and accountable, as part of a just transition.

UNHLEG also makes clear a number of red flags that will show a business or other non-state actor is falling short. Non-state actors cannot:

• claim to be net zero while continuing to build or invest in new fossil fuel supply, which is entirely incompatible with continued investment in fossil fuels (as confirmed by the International Energy Agency and others). So too for deforestation and other environmentally destructive activities;
• buy cheap carbon credits that often lack integrity instead of immediately cutting their own emissions across their value chain;
• focus on reducing the intensity of their emissions rather than their absolute emissions or tackling only a part of their emissions rather than their full value chain (ie covering Scopes 1, 2 and 3);
• lobby to undermine ambitious government climate policies either directly or through trade associations or other bodies. Instead they must align their advocacy, as well as their governance and business strategies with their climate commitments. This includes aligning capital expenditures with net zero targets and meaningfully linking executive compensation to climate action and demonstrated results; and
• overlook the imperative to move from voluntary initiatives to regulated requirements for net zero for consistency, which should include necessary assurance on net zero pledges and mandatory annual progress reporting.

GFANZ’ Net Zero Guidance for Financial Institutions

The Glasgow Financial Alliance for Net Zero (GFANZ), a global coalition of sector-specific financial institution alliances launched at COP26, has published its final report (and executive summary), focussing specifically on recommendations and guidance for financial institutions regarding net zero transition plans.

The report is less prescriptive than the UK and UN efforts, but offers more flexibility that may be more palatable to the range firms around the world. It recommends that they should focus on four key transitions strategies, being the financing and enabling of:

• entities and activities that develop and scale climate solutions;
• entities already aligned with limiting global temperature rises to 1.5°C;
• entities and activities committed to transitioning towards limiting global temperature rises to 1.5°C; and
• the accelerated managed phase-out of high-emitting physical assets, such as fossil fuel power plants.

It goes on to illustrate the elements of a credible transition plan comprising ten core components, grouped into five themes being: foundations, implementation strategy, engagement strategy, metrics and targets, and governance.

GFANZ recognises that developing net-zero transition plans will vary by jurisdiction and will depend on the individual characteristics of each financial institution, including size, business model, sector coverage, and other factors – which explains the focus on principles over prescriptive outcomes.

This guidance comes as GFANZ watered-down its requirements for members to adhere to the UN’s Race to Zero requirements around fossil fuels and coal.

Planning to transition

No one has yet established the mould for what the ‘perfect’ transition plan would look like. It’s unlikely to happen as it will vary by business and sector. But the these three recent reports and recommendations bring some core features into better focus, and offer a standard against which regulators, investors and customers can start to more rigorously assess businesses’ efforts.

[1] The TPT defines a transition plan as “integral to an entity’s overall strategy, setting out its plan to contribute to and prepare for a rapid global transition towards a low GHG-emissions economy.” GFANZ defines it similarly as “a set of goals, actions, and accountability mechanisms to align an organization’s business activities with a pathway to net-zero GHG emissions that delivers real-economy emissions reductions in line with achieving global net zero.”