Transition Plan Taskforce publishes final Disclosure Framework and guidance

At a glance:
 

• On 9 October 2023, the UK’s Transition Plan Taskforce (TPT) published its finalised Disclosure Framework and supporting guidance, intended to help private sector companies develop, disclose, and deliver “gold standard” climate transition plans.
• The TPT’s Disclosure Framework provides companies with comprehensive and prescriptive guidance and presents an opportunity for companies to leap ahead in building out and implementing their plans in pursuit of their net zero ambitions.
• Consistent with the TPT’s November 2022 consultation, the Disclosure Framework is based around five elements: (1) foundations; (2) implementation strategy; (3) engagement strategy; (4) metrics & targets; and (5) governance.
• We expect regulation on climate transition plans for UK listed issuers to become mandatory and more detailed. The Financial Conduct Authority (FCA) is due to consult on proposals for mandatory sustainability disclosure requirements, based on anticipated UK-endorsed International Sustainability Standards Board (ISSB) Sustainability Disclosure Standards. We expect these to include climate transition plan disclosures. The intention is for these new requirements to enter into force for accounting periods on or after 1 January 2025 and reporting to begin in 2026. The FCA is also set to consult on the introduction of guidance for listed companies’ transition plan disclosures which will reference the final outputs from the TPT.
• We encourage all listed companies and financial services firms to start considering the TPT Disclosure Framework and guidance now, in advance of the FCA consulting on bringing in its mandatory transition plan requirements. Key areas where we think companies should focus include (1) achieving a mindset shift, so that individuals move away from viewing the transition plan as “just” a disclosure exercise; (2) taking a strategic and rounded approach by engaging with their supply and value chain to avoid a “paper decarbonisation”; and (3) considering the financial implications of the changes outlined in their transition plan on their business strategy, resource allocation, and products and services.
• This blog (1) provides an overview of what is in the TPT’s final Disclosure Framework and guidance; (2) sets out how the TPT’s Disclosure Framework will feed into the UK regulatory framework; and (3) provides our view on what companies should do now.

Relevant to:

CEOs, Chief Sustainability Officers, CFOs, CROs, CCOs, and those working on sustainability in Risk, Compliance, and Finance in listed companies and financial services firms.

The TPT was launched by HM Treasury in April 2022 to help private sector companies develop, disclose, and deliver “gold standard” climate transition plans.

On 9 October 2023, the TPT published its final Disclosure Framework and guidance.

A company’s transition plan will increasingly be used and referenced by multiple stakeholders. Companies can use the TPT Disclosure Framework and guidance to leap ahead in building out and implementing their climate transition plans, so that they can meet their own ambitions and stakeholder expectations to decarbonise, support the economy-wide transition, and respond to climate-related risks and opportunities.

What is in the TPT’s final Disclosure Framework and guidance?

The final recommendations set out a climate transition plan Disclosure Framework for private sector entities – organisations that voluntarily choose, or are required by law, to prepare general purpose financial reports.

In line with the TPT’s November 2022 consultation, the Disclosure Framework is based around five elements: (1) foundations – covering strategic ambition, business model and value chain, and key assumptions and external factors; (2) implementation strategy; (3) engagement strategy; (4) metrics & targets; and (5) governance. The Disclosure Framework is comprehensive and prescriptive and provides valuable information for companies on how to produce high-quality disclosures.

Compared to the consultation, there have been some revisions to the sub-elements that sit beneath the five elements. For example, as part of disclosing “strategic ambition” (which previously was titled “objectives and priorities”), the TPT now references avoiding adverse impacts for stakeholders and society and safeguarding the natural environment. This revision recognises the important interconnections between climate, nature and biodiversity and people.

Importantly, and in line with the consultation, the TPT states that it is “good practice for entities periodically to draw transition plan disclosures into a standalone report, in which they may consider including additional content that may not be material to primary users of general purpose financial reports" but may “nevertheless be decision-useful to other stakeholders”. The TPT recommends the standalone report is published either when there are significant changes to the plan, or at the latest, every three years. This is likely to make it more straightforward for users of transition plans to find the information that they need and to understand the nuances in an entity’s strategy.

The TPT has updated the terminology in its original consultation to be more consistent with the ISSB. This is a significant and helpful change for companies that shows how the TPT has sought to build on the global baseline established by the ISSB to bring in additional recommendations to support the UK’s ambitions and priorities. The TPT is now conceptually consistent with the ISSB Standards and the FCA considers that the two frameworks interoperate. The TPT states that an entity can use its Framework as guidance on how to report more effectively on the transition plan-related aspects of IFRS S2, as part of wider sustainability-related disclosures in its general purpose financial reports.

To help companies think about interconnections, the TPT has published technical mapping documents with TCFD and IFRS S2, as well as a comparison with European Sustainability Reporting Standards (ESRS).

The implementation guidance, originally one document, has also been split into implementation guidance (on how to think through the practicalities of developing and implementing a transition plan) and interpretative guidance (on unpacking the Disclosure Framework). This is important in making clear that transition planning is not just a disclosure exercise but has to be supported by a significant implementation programme.

How will the TPT’s Disclosure Framework feed into the UK regulatory framework?

We expect regulation on climate transition plans for UK listed issuers to become mandatory and more detailed in the future.

In the first half of 2024, the FCA plans to consult on updating its TCFD-aligned disclosure rules to refer to anticipated UK-endorsed ISSB Sustainability Disclosure Standards. One of the ISSB standards, IFRS S2 Climate-related Disclosures, includes specific disclosure requirements related to any transition plans the entity has.

The FCA has also committed to consulting at the same time on additional guidance for listed companies’ transition plan disclosures which will reference the final outputs from the TPT.

The FCA expects the new disclosure rules for listed issuers, referencing UK-endorsed ISSB Sustainability Disclosure Standards, to be effective for accounting periods on or after 1 January 2025, with reporting in 2026.

Beyond listed issuers, the UK Government said in April 2023 that it commits to consulting on the introduction of requirements for the UK’s largest companies to disclose their transition plans if they have them – with proportionality in mind - and that this consultation will take place in autumn/winter 2023.

The Government also intends to work with the FCA to ensure transition plan requirements are delivered across the financial services sector.

We anticipate that the UK Government will update its TCFD-aligned rules for UK registered companies and limited liability partnerships and that the FCA will update its TCFD-aligned rules for asset managers and asset owners.

What should companies do now?

Given the direction of travel, we encourage all listed companies and financial services firms to start considering the TPT Disclosure Framework and guidance now.

Forward-thinking companies are already doing so. In our recent Corporate Reporting Insights survey on the climate transition plan disclosures of 50 FTSE 100 reporters, 6% stated that they had considered the TPT’s proposed Disclosure Framework when preparing their 2022 disclosures, and an additional 12% stated their commitment to produce TPT-aligned disclosures going forward.

The FCA is also encouraging early engagement with the TPT Framework. In its recent Dear CEO letter to wholesale banks, the FCA asks banks to have regard to TPT outputs as they work to ensure that their financing activities are aligned with their transition plans and that their product and public-facing commitments are delivered in practice.

Key areas where we think companies should focus:

• Mindset shift: the transition will affect multiple business activities and functions, including strategy, governance, finance, operations, HR, risk, compliance, and internal audit. While many senior leaders understand the change that needs to take place, there is also a risk that individuals may view the transition plan as “just” a disclosure exercise. Companies need to clarify Committee remits and build out the necessary short- and medium-term steps they need to take to achieve their transition objectives, so that they can assign responsibilities for plan delivery. Boards need to ensure there is a common understanding of the sustainability strategy both vertically and horizontally across the organisation and engage the second tier of leadership in the business, as it is these individuals who will execute the strategy. Companies can use the TPT Disclosure Framework and guidance on governance and culture, which represent a significant uplift to TCFD guidance, to achieve the necessary mindset shift. (See our previous blog on the top five governance and culture challenges.)
• Strategic and rounded approach: where companies are seeking to manage transition risk or are focusing exclusively on meeting entity-level net zero targets, they may incentivise diverting capital from areas that need investment to decarbonise. This presents the risk of a “paper decarbonisation” with limited impact on the real world. The TPT emphasises that entities should take a “strategic and rounded approach” and consider how pursuing their climate transition objectives may affect other sustainability goals, such as the natural environment or society. Companies can use the transition planning process to drive discussion on potential tensions between decarbonisation, the economy-wide transition, and climate-related risks and opportunities.
• Financial planning: the TPT recommends that entities disclose information about the effects of their transition plans on their financial position, financial performance, and cash flows over the short, medium and long term, to the extent the financial effects of their transition plan are separately identifiable. Companies need to think about how to embed climate plans in the financial planning process. Without this progress, companies cannot assess the desirability or deliverability of their strategy and they will be constrained in their ability to optimise decision-making.

Companies should also pay close attention to the TPT’s 40 sector summaries (open for comment) and sector-specific guidance, which the TPT is due to publish on 13 November 2023 and finalise in February 2024. This aims to provide supplemental sector-specific disclosures, guidance, and references to relevant third-party materials for Asset Management, Asset Owners, Banking, Electric Utilities and Power Generators, Food and Beverage, Metals and Mining, and Oil and Gas sectors.

Financial services firms can view our blog series for detail on our framework to support transition plan design, implementation, and reporting:

• It’s all in the planning: three key challenges to consider when designing a transition plan
• Taking aim at transition planning? Start with strong foundations
• Setting the direction for your transition plan

Conclusion

A company’s transition plan will increasingly be used and referenced by multiple stakeholders – supervisors, investors, lenders, insurers, other companies in the value chain, and special interest groups.

They will want to understand whether the company has the ambition, strategy, governance arrangements, and metrics and targets needed to decarbonise, support the economy-wide transition, and respond to climate-related risks and opportunities.

This amounts to much more than a disclosure exercise. The TPT’s final Disclosure Framework and guidance present an opportunity for companies to leap ahead in building out and implementing their plans.

Forward-thinking companies are already looking to the TPT’s outputs as they develop and disclose their transition plans and we would encourage all companies to follow suit. This will help them to embed their climate strategy into their culture and decision-making and to mobilise their organisation in pursuit of their net zero ambitions.