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Transition plans – Where do these fit within mandatory TCFD disclosures?

By Alison Mungall
14th November 2022

This article  explains  how  transition plans fit into the UK Government’s strategy to make the recommendations of the Task Force on Climate -Related Financial Disclosures (TCFD) mandatory across the UK economy by 2025.

How do transition plans align with an organisation’s strategy?

Briefly, a transition plan sets out how an organisation will adapt as the world transitions towards a low carbon economy. According to the TCFD, a transition plan should be part of an organisation’s plan for addressing climate-related risks and opportunities and be aligned with the organisation’s overall business strategy. 

What is the UK policy context for transition plans?

In October 2021, the Treasury published Greening Finance: A Roadmap to Sustainable Investing, a commitment by the government to take action to help align UK financial flows with a net zero economy. The Roadmap states that the UK Government intends to make TCFD aligned disclosures fully mandatory across the UK economy by 2025, including the recommendations on transition plans. Firms will be required  to publish transition plans that align with the government’s net zero commitment or provide an explanation if they have not done so.

Also in October 2021, the TCFD provided new guidance on developing transition plans. They became a specified requirement of TCFD aligned disclosures.

At COP 26 in November 2021, the Chancellor confirmed the intention to make transition plans mandatory for all firms across the economy. The government launched the Transition Plan Taskforce (TPT)  in April 2022, to develop a gold-standard sector-neutral transition plan framework.

In May 2022, the TPT issued a Call for Evidence on the framework. The consultation period closed in July 2022. 

 In October 2022, the Financial Conduct Authority (FCA) opened its consultation on Sustainable Disclosure Requirements (SDR). Through SDR, the FCA intends to build on its TCFD-aligned disclosure rules, including the TCFD’s guidance on transition plans. 

On 8 November 2022, the TPT published the draft TPT Disclosure Framework and draft Implementation Guidance for consultation. The framework makes recommendations for companies and financial institutions to develop gold-standard transition plans, and the guidance sets out the steps to develop a transition plan, as well as when, where and how to disclose their plan. Additionally, the TPT launched a “Sandbox,” to help users to test the implementation of the framework and guidance. The consultation closes on 28 February 2023 and the TPT plans to finalise the framework later in 2023. Also in 2023, the TPT will publish a range of sector guidance, building on best practice guidance and new research.

 The TPT framework will feed into new mandatory requirements for financial institutions and listed companies to publish climate transition plans as the UK moves towards a net zero economy by 2050.

Over the next two years, the FCA plans to draw on the TPT’s outputs to strengthen future disclosure rules for listed companies and financial firms. As TCFD disclosures become mandatory across the UK economy, transition plans will become an integral part of a business’s strategic planning. It is anticipated that other countries will follow this approach.

Are transition plans currently mandatory?

In the 2021 Roadmap, the UK Government proposed making the disclosure of climate transition plans mandatory and sent a strong signal of its intention by setting up the TPT. However, most of the current regulations mandating TCFD disclosures are on a “comply or explain ” basis, as long as readers of annual accounts can understand how and to what extent climate risks and opportunities are being considered and managed. This means that organisations have flexibility in what they disclose, including transition plans. This recognises that some organisations may need more time to develop credible plans.

An example is the FCA’s Listing Rule 9.8, whereby listed companies are required to state in their annual reports whether they have made TCFD consistent disclosures and if not when they plan to make the disclosures. This rule applies to premium-listed companies from accounting periods on or after 1 January 2021 and to standard-listed companies, for accounting periods beginning or after 1 January 2022.

A different approach is in the FCA’s disclosure rules for in-scope asset managers, asset owners, life insurers and FCA-regulated pension providers. The FCA’s ESG Sourcebook specifies explicitly that disclosures must have regard to the TCFD guidance on transition plans. However, the FCA recognises that for an initial period, there may be data and methodological challenges in making TCFD disclosures. Firms can explain any limitations on their ability to disclose and the steps being taken to address those limitations. 

What should companies be doing now?

The TPT estimates that around 700 companies have announced net zero targets. These vary in quality, and many lack detail on short-term actions. This makes it difficult to assess the credibility of the targets. Transition plan disclosures will promote transparency around progress in meeting net zero targets.

Organisations’ transition plans are of particular interest to shareholders and other external stakeholders, especially when they are seeking to verify the credibility of an organisation’s commitments related to climate change and to understand how it intends to adapt to build climate resilience. Whether mandatory or voluntary, they are an integral part of an organisation’s strategic disclosures. We anticipate that they will become mandatory within the next two years.  Firms should be thinking now about the content they will need to include within their transition plans.

How Carbon Intelligence can help

As the UK’s leading science-based targets consultancy and TCFD expert we already help our clients with many of the elements that need to be considered to fulfil a transition plan and its purpose – it’s what our business model was built around.  If you would like to find out more or are looking for a partner to support you with your net zero pathway please get in touch, [email protected]