Transition Plan Taskforce – Reaction to the latest publications

The UK Transition Plan Taskforce (TPT) was launched in April 2022 to develop a gold standard framework for transition plans. This week, the TPT released their first set of draft publications(Transition Plan Taskforce publications, 8 Nov 2022):

• a transition plan disclosure framework
• interpretative guidance which complements the framework
• a technical annex mapping the disclosure framework to the Task Force on Climate-Related Financial Disclosures (TCFD) and the International Sustainability Standards Board’s (ISSB) Proposed IFRS S2 Exposure Draft and summarising the additional disclosure requirements.

These publications will inform how organisations approach transition planning – the preparation, disclosure and, ultimately, the implementation of its transition strategy.

Given the expected integration of certain TPT outputs into climate disclosure listing rules, it’s crucial that companies understand these requirements and start thinking about what it means for them. Below is a summary of key takeaways from the latest publications.  

The TPT outlines a conceptual framework for entities to consider when developing their transition strategy which informs their disclosure. This framework aims to reduce the risk of unintended consequences of focusing on net zero targets in isolation and help accelerate an economy-wide transition.

• Decarbonisation – how the entity will manage its entity-level decarbonisation requirements. This would include setting interim and long-term targets across Scope 1, 2 and 3 emissions.
• Responding to climate-related risks and opportunities – how entities will prepare for and respond to the economy-wide transition and the impact of the changing climate on the underlying activities outlined within the plan.
• Contributing to the economy-wide transition – leveraging its spheres of influence, an entity should seek to work with its suppliers, value chain relationships, industry peers, and public sector partners to drive systemic change across the economy.
  

The TPT’s disclosure framework seeks to set the gold standard for transition plan disclosures. The framework is split into five key elements and 19 sub-elements. Under each sub-element, the framework outlines recommendations for an entity to disclose against. There is complimentary guidance explaining how to interpret the framework in the implementation guidance.

The elements mirror the key components of a transition plan recommended by the Glasgow Financial Alliance for Net Zero (GFANZ), demonstrating the alignment between the two initiatives.

1. Foundations: Under the foundation’s disclosure element, a company should outline its objectives and priorities which underpin the transition plan. This gives entities an opportunity to summarize their overall climate-related ambitions and priorities, outlining their key milestones to meet interim targets. It also gives space for entities to provide an overview of material interdependencies with nature and just transition-related matters, to the extent that it impacts the delivery of the plan.

2. Implementation Strategy: The Implementation Strategy disclosure element focuses on the entity’s short-to-medium term activities the company will be undertaking to align business activities and operations with their transition objectives and priorities. Interestingly, the TPT has defined short-term as less than three years. Therefore, at a minimum, companies will have to ensure that they disclose the actions being taken in the next three years. In this section, there are areas which have been a specific focus of disclosure recommendations:

a. Changes to the underlying strategy – The TPT recommends disclosing the expected changes to the business planning and operations, products and services, and policies and conditions, to meet its objectives and priorities. There is a clear focus on the near-term actions that are going to be taken to deliver long-term objectives and priorities, prompting entities to outline their short-to-medium-term roadmap.

b. Quantification of activities - The TPT encourages entities to provide granular details on planned activities to enable carbon emission reduction across the entity, quantifying the capital required to undertake the activities, changes in resource allocation to deliver the plan and project emission reduction stemming from the implementation. The TPT expects financial impacts to be disclosed with respect to financial position, performance, and change in cash flows.

c. Sensitivity analysis – Scenario analysis is performed as part of the TCFD process. The TPT recommends that an entity should perform sensitivity analysis to understand the key assumptions underlying an entity’s transition plan, the dependencies embedded within the plan and the potential impact that fulfilling the assumptions may have on the plan. As proof of performing this exercise, the TPT expects entities to disclose the underlying assumptions used to assess the credibility of the plan and explain how they are baked into financial reporting. As such, companies need robust analysis to inform the assumptions used.  

3. Engagement Strategy: Recognising that entities can’t reach net zero in a vacuum; the TPT recommends that entities disclose the planned engagement with a range of external stakeholders to understand how they are embedding and accelerating the economy-wide transition. TPT states three spheres of engagement:

a. The supply chain - Support should be provided to supply chain and portfolio companies to encourage net zero-aligned transition strategies and consequences should be implemented when appropriate engagement is effective.

b. Industry peers - Similar issues are expected to be faced by other peers in the industry, horizontally and vertically, so there are possibilities for exchanging transition expertise and collaborating to overcome systemic barriers to transitioning.

c. Public sector - Policies that promote an accelerated and orderly transition can be implemented through engagement with the government, both directly and indirectly and publicly advocating for such changes. Entities need to outline the dependencies on public sector bodies in preparing their transition plans.

4. Metrics and Targets: Emphasis has been given to the strength of quantification and monitoring mechanisms to track progress against the plan. More specifically, the following three areas have been explicitly called out:

a. Emissions targets - Specific targets along the journey to a low carbon economy should be considered and disclosed. Entities should disclose transition plan targets across all three scopes of emissions and all fifteen categories of Scope 3 emissions. Where an entity excludes any scopes or categories, they should provide a valid reason and outline the steps that the entity is taking to improve monitoring and reporting systems to enable target setting for relevant scope three emissions. This recommendation aligns with the ISSB’s exposure drafts, showing the increased focus on Scope 3 reporting.

b. Carbon Credits - There will be an increase in the transparency of the use of carbon offsets. Their alignment with the ISSB exposure draft however the TPT builds on this and recommends that entities explicitly state why an entity is using carbon credits in calculating their net zero targets and outline the number and cost of credits purchased. This will increase transparency on the intentions of using carbon credits and the quality of credits used. 

c. Range of metrics - The TPT recommends a broader more detailed suite of metrics for entities to monitor their transition progress, beyond carbon emissions. The metrics recommended by the TPT include climate-related governance, wider business activities and finance metrics. 

5. Governance: The TPT has called out the need for well-governed transition plans, including specific recommendations to disclose the process and role of the Board in approving the plan and targets, and how frequently the Board will receive updates on the progress of the plan. The roles of senior management in the delivery and oversight of the transition plan should also be disclosed, and detail on how progress against the plan is included in executive remuneration. Secondly, the TPT recommends changes to the operating model which enables employees to deliver the plan. A change management plan should cover training, and reviewing systems and protocols across the business.

There is clear interoperability between the TPT’s disclosure framework and climate-related disclosures under TCFD and, soon to be superseded by, ISSB. The TPT builds from these global reporting baselines to provide granularity and specificity on transition plans. Whilst TCFD is currently reported on annually as part of general-purpose financial reporting, the TPT recommend a standalone transition plan be produced every three years, with material updates to be reported annually in the Annual Report.

Assurance is expected to become more commonplace, and standards will likely become more rigorous, eventually seeking out reasonable assurance on all transition plans. Consequently, it is expected that the level of rigour required by organisations on the data included in the plan will increase.

At present, companies under the FCA’s listing rules are expected to produce a transition plan in accordance with the TCFD recommendations from 2023 on a ‘comply or explain’ basis. The FCA plans to draw on the TPT’s final outputs to strengthen their transition plan disclosure expectations for listed companies, asset managers and regulated asset owners. Timeline for this consultation and implementation are yet to be announced.

However, the body of work released by GFANZ and TPT in 2023 is expected to increase the expectations of what a credible and robust transition plan looks like. And, with the launch of the TPT’s ‘Online Sandbox’ for companies to road-test the framework, you can expect to see more granular transition plan released in 2023.

The TPT’s publications mean that engagement with transition plans are expected to be a new key part of business strategy moving forwards. Market expectations are shifting and there is now a clear pathway to aiming to ensure companies have robust and credible transition plans. If you would like to discuss your organisation’s approach to transition plans, please feel free to contact me.