On 25 April 2022, the UK Treasury launched the Transition Plan Taskforce (TPT) to develop the gold standard for private sector climate transition plans. The TPT has a two year mandate to produce a disclosure framework for transition plans which encourages entities to back up their targets with rigorous and credible short-term actions. The TPT brings together leaders from industry, academia and regulators and coordinates with international organisations such as the International Sustainability Standards Board (ISSB) and the Glasgow Financial Alliance for Net Zero (GFANZ) to create a framework which is consistent with global standards and rules. In November 2022, the TPT published a consultation on The Transition Plan Taskforce Disclosure Framework, together with Implementation Guidance and Guidance: Technical Annex and also launched a sandbox to road test the TPT’s outputs and gather practical feedback from the market.
The TPT invited feedback and responses to the framework and guidance by 28 February 2023 with a view to finalising the framework in 2023.
Why do we need a transition plan disclosure framework?
The FCA introduced mandatory rules for listed companies, large regulated asset owners and asset managers to disclose transition plans as part of the implementation of Task Force on Climate-Related Financial Disclosures (TCFD) recommendations in January 2022. In scope firms will be required to make these disclosures from 2023. Outside of this group, a growing number of companies have announced net zero targets and other climate pledges but the quality of the plans is variable and many plans lack detail on short term actions which are being taken to achieve the targets. The variability in plans and disclosure makes it difficult to assess credibility and to compare approaches across entities. This is problematic in a number of respects. So called “aggregator reporters”, including institutions such as asset managers who are obliged to report under TCFD, for example, depend on credible, accurate, comparable data in respect of their portfolios and clients in order to adequately make climate-related disclosures in their own reports. To determine their scope 3 emissions, they need information from their supply chain and downstream value chain in order to aggregate data inputs higher up.
What is a transition plan?
The TPT Framework defines a transition plan: “A transition plan is integral to any entity’s overall strategy, setting out its plan to contribute to and prepare for a rapid global transition towards a low GHG-emissions economy.” It also notes that the transition plans should reflect the urgency to act: including all relevant commitments the entity has made in all jurisdictions, national commitments and the latest international agreements on climate change.
The TPT recommends that transition plans 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 GHG and climate resilient economy;
- short-, medium- and long-term actions the entity plans to take to achieve its strategic ambition, alongside details on how these 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.
What is the TPT Disclosure Framework?
In light of the good practice set out by the TPT it has designed a framework which is based on three guiding principles: ambition, action and accountability. The TPT Disclosure Framework itself is broken down into a number of disclosure elements (Foundation, Implementation Strategy, Engagement Strategy, Metrics & Targets and Governance) and sub-elements based on the three guiding principles – see Part 4 of Consultation: The Transition Plan Taskforce Disclosure Framework for the list.
This reporting structure has a number of different features and is expected to be reasonably complex for users to get to grips with in the first period. However, providing for an initial robust and comprehensive framework up front hopefully minimises the need for future change, meaning that it is easier for companies to provide substantive and well organised data from the beginning, without the need for continual adjustment (and the associated knock-on effects that will entail through the value chain). Below, we assess some of the main features of the TPT with commentary, providing insight into the main discussion topics raised in various industry working groups we have assisted in preparing responses to the consultation.
Key Features and Commentary
What the TPT says: Entities are recommended, as well as including material information related to the transition plan in their annual report, to publish their transition plan in a standalone document sitting alongside the annual report. Entities are expected to update the transition plan when there are significant changes or at least every three years.
In the interim years, progress against the plan and all other content in the plan which is deemed to be material to investors should be reported annually in line with TCFD- or ISSB-aligned disclosures in general purpose reporting (i.e. annual report).
Commentary: The TPT framework does not currently prescribe where the transition plan or related reporting (if not included in the entity’s annual report) should be published. In order to promote accessibility and accountability, the TPT should prescribe that any separate transition plan together with transition plan-related reporting which is not included in annual report (perhaps due to the materiality test) and any additional sustainability reports should be published on an entity’s website in the same location as an entity’s annual report and financial statements.
Who should be providing data?
What the TPT says: Reporting under TCFD in the UK currently applies to certain large or listed companies and LLPs, asset managers and certain asset owners (to varying degrees). In order for these entities to make TCFD-aligned disclosures and to produce adequate and credible transition plans and associated reporting, they will need to collect and aggregate a huge amount of information from companies downstream, such as suppliers and investees. Currently, these downstream companies are not necessarily required to do any specific climate-related reporting and this means that at the top of the chain it will be extremely difficult for entities to credibly report Scope 3 greenhouse gas emissions in the transition plan.
Commentary: The TPT needs to include information as to how in-scope entities will collect and require this data and consider the need to widen the reporting requirement to all private companies (perhaps with proportional obligations depending on the size of the companies). The TPT also needs to consider the sequencing of the requirement for entities to provide information, as the entities sitting at the top of the chain, the data aggregators, will need to be able to receive information and perform due diligence on entities further down the chain (this becomes impossible if such downstream entities do not need to collect/provide data). There is an argument that data aggregators should not be policing the provision of data, this is the role of regulation and without such a widening of information gathering and reporting the disclosures made by the data aggregators could be unintentionally distorted.
Such additional obligations on all private companies will affect small and medium sized enterprises (SMEs) disproportionately. They will struggle initially, both practically and financially, to prepare such information and they will need support to provide the relevant disclosures. We expect that this will give rise to a new industry of advisers and data handlers for SMEs and guidance and safeguards will need to be considered and given by the TPT.
What the TPT says: The TPT has been produced to help businesses develop their practical plans to contribute to and prepare for a rapid global transition to a low greenhouse gas and climate resilient economy, including net zero targets. At this point, focus is on decarbonisation and responding to climate-related risks and opportunities (in line with the priorities of TCFD).
Commentary: The TPT needs to consider not just climate-related disclosures, as these are but a small piece of the overall sustainability puzzle; but biodiversity and social objectives also need to form a part of the transition framework to enable a just transition. Whilst TCFD reporting is currently mandatory for many organisations in the UK, the complete recommendations of the Taskforce on Nature-related Financial Disclosures (TNFD) are expected to be published in September 2023 and are expected to follow a similar trajectory to become mandatory for at least some market participants in a relatively short order.
The TPT could tackle this new challenge now introducing the TNFD concepts into the TPT, rather than suffering the same kind of “back to front” data and reporting issues we have at the moment, where data aggregators higher in the value chain are obliged to report and therefore require data which downstream entities are not obliged to, and do not, produce.
Whilst TPT is a market leader in relation to transition plans, there are other global standards which exist, for example, the ISSB Standards which are being drafted and the Corporate Sustainability Reporting Directive (CSRD) which is already in force in Europe.
Commentary: The TPT needs to aim for maximum international alignment to ensure that the UK transition plan regime stays in line with other global standards to ensure that entities can operate across border without undue onus or conflicts in disclosure regimes. It is important that the regimes continue to apply the same reporting boundaries (e.g. in respect of reporting emissions and supply chains). The TPT needs to be flexible so that changes can be made to align with other international regimes, such as the ISSB, where there are shifts in the future.
The TPT implementation timeframe will also need to have sensitivity to, for example, emerging markets portfolios etc, which will have longer timeframes for producing base data needed for the transition plan reporting.
For a UK listed company or UK listed issuers, the information included in an annual report is regulated information and is therefore in scope for potential liability under the Financial Services and Markets Act 2000 (FSMA) for misleading statements or dishonest omissions. This would therefore be considered very onerous from the liability perspective.
Commentary: As climate-related information included in transition plans is based on estimates and there are challenges in ensuring it is complete and accurate, the TPT should allow transition plans to be published alongside the annual report rather than in it to avoid unintended risk for entities. There have also been concerns around liability attaching to forward-looking statements necessarily included in transition plans. There are many reasons that a transition plan may need to be updated and forward-looking statements may be found incorrect, for example, economic impacts, policy and scientific advances/changes in interpretation. Therefore, the TPT should consider liability attaching to forward-looking disclosure and consider whether a safe harbour could be provided for forward-looking statements under certain conditions.
Other concerns are linked to whether updates to transition plans may cause accusations of greenwashing because the previous transition plan created certain stakeholder expectations and actions may have been based on it – further clarity is required from the TPT on this point.
Engagement with peers
What the TPT says: The TPT has recommended that transition plans should include disclosures in relation to planned engagement with peers.
Commentary: In light of competition law restraints, without clear competition law guidance in the UK, EU, US and other jurisdictions then it is important to avoid enhanced competition law risk. Entities should not be required to declare peer to peer engagement – this is unlikely to be outweighed by the potential gain. We also anticipate that reporting entities will continue to engage with most peer engagement activities through trade organisations which play an important role in the market on these topics.
The TPT will consider the feedback it has received with a view to finalising the framework in 2023. Although the framework is not yet finalised, many entities are required to produce a transition plan in this financial year and will have begun to put in place policies and procedures to collect the relevant data from stakeholders, supply chain and investees and will be producing their baselines for such key performance indicators. Entities will need to continue to be nimble as the ISSB standards, the CSRD and other global standards become available and are considered by the TPT for consistency and operability – it is likely that the rules will evolve over time.
Our Sustainable Finance & Investment practice brings together a multidisciplinary global team to support our clients in this mission-critical area.
This note is intended to be a general guide and covers questions of law and practice. It does not constitute legal advice.
Authored by Emily Julier and Bryony Widdup.