We asked Philip Richards, Head of ESG at Sustainable Energy First, what the recent guidance on climate transition plans means for UK businesses in practice.

The government’s Transition Plan Taskforce (TPT) recently launched its official guidance for climate transition plans. What does this mean for your clients at Sustainable Energy First and other UK businesses?

Initially, there has been some confusion over exactly which companies will need this guidance, because for larger companies it hasn’t been exactly clear on mandatory requirements to create a climate transition plan.

A bit of background to all this: Rishi Sunak first announced the idea of a science-based “gold standard” for climate transition plans at COP26 in 2021. The first step was to require FCA-regulated businesses, specifically, to do climate reporting of a standard that meets the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD). This rule came into force from December 2021 and applied to premium listed companies, along with other FCA regulated managed/owned assets and pensions. They had to either comply with the TCFD guidelines or explain why not.

Eventually the same obligation was extended to certain larger companies and LLPs, for financial reporting periods starting on or after 6 April 2022.

The original UK TCFD taskforce roadmap expressed the ambition for TCFD-aligned disclosures to be “mandatory across the economy by 2025”. Certain things have to happen first; the UK government has to adopt standards developed by the International Sustainability Standards Board (ISSB). It also needs to finish assessing the outcome of consultations on the issue. It is likely that the new requirements will come into force from the 2025 financial year.

So will more businesses be required to create transition plans in future?

This seems very likely. A number of the people working on the TPT guidance were from the department then known as Business, Energy and Industrial Strategy (BEIS).

“If you’re a UK company with mandated climate reporting, expect some obligation to create a climate transition plan”

Obviously since then a reorganisation has created a new Department for Energy Security and Net Zero (DESNZ) and there was further input from that department.

That suggests a strong connection between UK business policy and climate transition planning that goes beyond just the relatively small number of businesses regulated by the FCA. I would suggest that if you’re a UK company with some form of mandated climate reporting, you can expect that some obligation to create a transition plan is coming down the line and there is no reason businesses shouldn’t align with the disclosure before the curve; especially with future EU legislation which will impact UK companies (more below).

What’s your assessment of the new TPT guidance?

I caught the launch last year and I have a lot of praise for the hard work that has gone into this and more specifically the ambition and efforts to align disclosures. It’s important to remember that this isn’t being presented as a completely finished, set-in-stone set of documents. They are rightly taking an iterative approach, updating as time goes on: reflect on best practice.

I find it commendable that they are aligning with other frameworks and standards as well. The Glasgow Financial Alliance for Net Zero (GFANZ) did the groundwork of identifying what makes a good transition plan for financial institutions, and the TPT guidance draws on this to help further align other sectors. It also builds on the standards set by the International Sustainability Standards Board (ISSB) and intends to further engage with other relevant multilateral organisations.

The TPT guidance obviously draws on the recommendations of the TCFD. How does it move us forwards from that?

TCFD disclosure was linked to governance associated with FCA-regulated bodies, and it has done a good job so far giving confidence to stakeholders that businesses have a robust model in terms of climate risks and opportunities. Now the TCFD considers its role to be over, so it is disbanding and handing over to the ISSB.

There has been some confusion over the multiplicity of frameworks for businesses to align with; we also have the Corporate Sustainability Reporting Directive (CSRD) from the EU, with its own complexities over catchment of companies and subsidiaries and linkages with the European Sustainability Reporting Standard (ESRS), plus other related requirements in different countries and other frameworks be compulsory or voluntary. So it’s good that TPT is carefully aligning with what’s already in place rather than trying to reinvent the wheel and on an international platform as opposed to silo jurisdictions.

TPT incorporates two key elements of the International Financial Reporting Standards developed by the ISSB. These are the adaption of climate transition plans and the need to incorporate requirements for your climate and sustainability reporting (International Financial Reporting Standards: IFRS S1 and S2).

What elements of the changing landscape should businesses be aware of?

Many businesses are fairly comfortable with reporting their Scope 1 and Scope 2 emissions, but in the near future they will have to ensure they have a handle on Scope 3 too. We are moving beyond just reporting numbers to asking “What does that actually mean? What are the climate-related risks and opportunities here?”

“Businesses are probably not aware of how complex things can get”

Businesses are probably not aware of how complex the modelling needs to get if you want to incorporate all the risks and opportunities. Some of our clients already understand this, and they are concerned about getting lost in that complexity, going down the wrong path. For example, I’ve spoken to auditors who had been assessing multiple models for risk assessments across a business and unsure of the extent of assessing the risk. You could spend significant funds and time on very technical assessments that don’t bring that much value to your business as part of setting your transition. This is where expert advice can help you focus on what’s actually relevant, saving a lot of money and time.

As the TPT guidance evolves, it is likely to offer businesses more clarity on how to handle their reporting and climate transition planning. We will also see larger businesses developing models of best practice that others will be able to utilise.

What is your advice for businesses who haven’t got to grips with the TPT guidance yet?

Check out the TPT’s sector-specific guidance, because that’s likely to have relevance to your specific business. Right now you can access a summary of the advice for your sector and deep-dive guidance is coming soon in draft form. Talk to an expert who can help to guide you through what’s needed.

And – this may sound like a strange perspective – try to appreciate the benefits of this. If you treat transition planning as a tickbox exercise, it’s just another compliance headache. But if you engage with it properly, it can help you make savings and plan for future risks, encourage new talent and skills to your business and drive a competitive edge. It can actually help you develop a stronger business model for the future, heading towards strength and growth rather than making costly bad decisions. So that’s my final takeaway: focus on the positives.

If you have further questions about the TPT guidance, please get in touch for a no-obligation chat with our industry-leading experts at Sustainable Energy First.