Mandatory transition planning – UK government progresses their manifesto commitment

The Government committed to “mandating UK-regulated financial institutions (including banks, asset managers, pension funds and insurers) and FTSE 100 companies to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement” in their 2024 party manifesto and are now consulting on how best to take forward the policy.

There are two relevant definitions of transition plans, one is set out in the ISSB’s IFRS S2 and the other is in the Transition Plan Taskforce’s (TPT) guidance, with the latter being more detailed but consist with the ISSB’s definition. For more information on the TPT visit our previous article, Publication of the UK Transition Plan Taskforce's sector guidance.

Broadly speaking, transition plans are strategic roadmaps that outline how an organisation intends to adapt and transform its operations, strategies, and business model to align with certain sustainability goals or targets. 

They detail targets, actions, and resources for reducing greenhouse gas emissions and managing climate-related risks and opportunities. The consultation argues that robust transition plans are vital for managing and pricing financial risks, attracting investment, and supporting the UK’s net zero and economic growth ambitions.

The Government’s manifesto commitment focuses on UK regulated financial institutions and FTSE 100 companies. 

However, the consultation also considers whether to broaden the scope to other economically significant entities, including large private companies and pension funds, while explicitly excluding SMEs from any immediate requirements. 

The consultation outlines two primary options:

• Option 1: require entities to explain why they have not disclosed a transition plan or transition plan related information. This would not mandate the production of a transition plan but would enhance transparency by compelling companies to justify non-disclosure.
• Option 2: mandate the development and disclosure of transition plans. This could include a requirement to publish a standalone transition plan document, potentially every three years, in addition to annual reporting on progress actions. The Government is seeking views on the frequency and format of such disclosures, as well as the application of materiality thresholds.

Further questions relate to: 

• the benefits and use cases of transition plans;
• the motivations of entities currently disclosing transition plans;
• how transition plans are used in practice;
• the costs and challenges associated with transition plans;
• developing and implementing a transition plan;
• disclosing the plan and how frequently plans should be disclosed; and
• alignment with nature.
   

As UK regulated financial institutions, asset managers are directly in scope of the proposed transition plan requirements. The Financial Conduct Authority (FCA) has indicated that it will consult on updating disclosure requirements for asset managers in line with the UK SRS and the TPT Disclosure Framework. This means asset managers may soon be required to, pending the outcome of the consultation:

• develop and disclose credible transition plans, either as part of annual reporting or on a standalone basis;
• align their disclosures with the TPT framework and UK SRS, ensuring consistency and comparability for investors;
• integrate transition planning into their investment strategies, risk management, and client communications; and
• consider the implications for their portfolio companies, as transition plan requirements for investee companies will affect the quality and availability of information used in investment decision making and stewardship activities.

The FCA’s forthcoming consultation is expected to clarify the specific obligations for asset managers, but the direction of travel is clear: transition planning and disclosure will become a core regulatory expectation for the sector.

The Government is keen to avoid duplicative reporting. Entities already subject to mandatory TCFD reporting or other climate-related reporting may see some rationalisation, but will need to ensure that their transition plan disclosures comply with any new mandatory obligations.

The draft of UK SRS does not currently require an entity to have a transition plan, however the standards do require disclosures which are commonly disclosed and reported in transition plans and therefore there is a degree of transition planning within UK SRS. UK SRS S2 does not explicitly require disclosure of a stand-alone transition plan. 

Yes and no.

As per the Labour party manifesto, the consultation references transition plans that are aligned “with the 1.5°C goal of the Paris Agreement”. However it has been pointed out (including in the Transition Finance Market Review) that there is no consistent and established understanding of exactly this means. Additionally, the consultation notes that the UK average surface temperature has already warmed by at least 1.2°C and many believe that a 1.5°C is no longer achievable. 

Transition plan disclosures often involve forward looking statements, estimates, and assumptions that may be outside the direct control of the reporting entity. The Government acknowledges the need for legal protection to ensure that directors are not unduly exposed to liability for good faith disclosures. 

Section 463 of the Companies Act 2006 provides a degree of protection for directors in relation to forward looking information in the Strategic Report and Directors’ Report, provided they are not reckless or knowingly misleading. The Government is considering whether similar protections should apply to disclosures made under the UK SRS and transition plan requirements.