Transition plan consultation is 'a chance to drive private sector action'
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A new consultation on transition plans asks about mandatory implementation and reveals that the Pensions Regulator is convening an industry working group, which is due to report to the Department for Work and Pensions later this year. The consultation is open until 17 September.
The consultation published by the Department for Energy Security and Net Zero on Wednesday is one of three concurrent consultations. The Department for Business and Trade has published one about draft UK Sustainability Reporting Standards, and another on developing an oversight regime for assurance of sustainability reporting.
TPR convenes industry group
The transition plan consultation asks pension funds how they think any new requirements should integrate with those around Taskforce on Climate-related Financial Disclosures reporting, and wants to know to what extent pension schemes already produce transition plans.
The Department for Work and Pensions is due to review the Climate Change Reporting Regulations, which govern TCFD reporting, this year, building on evidence by the Pensions Regulator.
“DWP considers the review to be a natural place from which to consider the impact of the current climate disclosure regime and potential next steps on climate change-related reports,” the consultation notes.
It adds that as well as reviewing TCFD reporting, the DWP has asked the Pensions Regulator “to assess the practicalities of transition plans for pension schemes” and that the regulator is convening an industry working group of sector stakeholders and large pension schemes, which is due to present its findings to the DWP later this year.
Along with the consultations, the government is commissioning a research project around the benefits and costs of transition planning, and said it will deliver an updated plan that sets out the policy package to the end of Carbon Budget 6 in 2037 for all sectors of the economy by October 2025.
Along with the consultations, the government is commissioning a research project around the benefits and costs of transition planning, and said it will deliver an updated plan that sets out the policy package to the end of Carbon Budget 6 in 2037 for all sectors of the economy by October 2025.
Walking the talk
One of the questions in Wednesday’s consultation is about mandating not just the disclosure but the implementation of disclosed transition plans. Other options would not create a legal obligation “to take future actions consistent with their transition plan disclosure”, the document notes.
Energy security and net zero secretary Ed Miliband said the government is “consulting on how to implement our manifesto commitment to mandate UK-regulated financial institutions and large companies to develop and implement credible transition plans that align with the 1.5C goal of the Paris Agreement.”
Further questions in the consultation consider the role of climate change adaptation, nature and carbon credits among others. A DESNZ consultation on raising the integrity of voluntary carbon credit markets, launched in April, is open until 10 July, while a consultation on a UK green taxonomy closed in February this year.
A long time coming
In its 2024 election manifesto, Labour pledged that if elected to office, it would “make the UK the green finance capital of the world, 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”.
However, the ambition goes back further, with the UK committing in 2019 to reach net zero by 2050, the first large economy to do so. At COP26 in 2021, former chancellor Rishi Sunak announced that firms will be required to set out how they will transition to net zero, and the Transition Plan Taskforce was created in 2022 to develop standards.
Stuart O’Brien, a partner at law firm Sackers, observed that the DWP review of TCFD regulations was originally scheduled for 2023. He believes it makes sense to look at how transition planning can be integrated into the current TCFD regime for pension schemes.
“We will have to wait for the details to emerge from the consultation, but my hope is that the DWP will take the opportunity to reflect on some elements of the current TCFD reporting that have arguably become something of a box-ticking exercise for trustees,” he said.
“We will have to wait for the details to emerge from the consultation, but my hope is that the DWP will take the opportunity to reflect on some elements of the current TCFD reporting that have arguably become something of a box-ticking exercise for trustees,” he said.
Streamlining some of these requirements might “soften the blow” where new transition planning requirements are introduced, he suggested.
“It would be nice, in particular, if the DWP could embrace a reporting model which allowed trustees to focus on reporting only things that have changed during the year rather than having to restate the same governance structures in largely the same form of words each year,” he proposed.
Transition plans for pension funds will help drive change across the economy, said founder of Ario Advisory, Mike Clark. “Transition plans will make it clear what pension funds are responsible for, and what they are not. A key component of a transition plan is the set of dependencies the plan relies on. This will highlight the importance of government policy, in the UK and beyond,” he said.
Clark expects TPR’s industry working group membership and terms of reference to be announced soon.
“Leading pension funds, on behalf of their beneficiaries, will be keen to play their part in the transition. At the centre, it’s an energy transition, and this will be reflected in transition plans,” he predicted.
A key issue for transition plans is to align with the current science and reality of emissions, said sustainability risk specialist at Milliman, Nick Spencer: “Emission budgets for 1.5 degrees will be past within the next few years, and it’s unclear if there are any plausible global pathways to stay under the Paris Agreement.”
Spencer also warned that efforts on disclosure risk crowding out action, saying plans should be clear and short, with a focus on risk management, portfolio resilience and taking action.
“Transition planning should embrace the complexity of the risks and interactions pension funds face. These need to work back from the core goal of paying pensions, through interconnected risks including covenant risk, down to climate and broader systemic drivers,” he advised.
Transition plans for pension funds will help drive change across the economy, said founder of Ario Advisory, Mike Clark. “Transition plans will make it clear what pension funds are responsible for, and what they are not. A key component of a transition plan is the set of dependencies the plan relies on. This will highlight the importance of government policy, in the UK and beyond,” he said.
Clark expects TPR’s industry working group membership and terms of reference to be announced soon.
“Leading pension funds, on behalf of their beneficiaries, will be keen to play their part in the transition. At the centre, it’s an energy transition, and this will be reflected in transition plans,” he predicted.
A key issue for transition plans is to align with the current science and reality of emissions, said sustainability risk specialist at Milliman, Nick Spencer: “Emission budgets for 1.5 degrees will be past within the next few years, and it’s unclear if there are any plausible global pathways to stay under the Paris Agreement.”
Spencer also warned that efforts on disclosure risk crowding out action, saying plans should be clear and short, with a focus on risk management, portfolio resilience and taking action.
“Transition planning should embrace the complexity of the risks and interactions pension funds face. These need to work back from the core goal of paying pensions, through interconnected risks including covenant risk, down to climate and broader systemic drivers,” he advised.
Campaigners want quicker action
Campaign groups welcomed the consultation, and some called on the government to move swiftly.
Fergus Moffatt, head of UK policy at campaign group ShareAction, said some companies are moving too slowly: “Climate change is already hitting the UK hard – from devastating floods to scorching heatwaves – and yet banks and major polluters are still dragging their feet. We urge the government to make transition plans mandatory to set clear expectations for companies, including our sizeable banking sector, to plan for the inevitable transition in a timely way.”
The announcement comes in the same week as a new legal opinion which argues that the disclosure of transition plans does not materially increase legal risk and that, on the contrary, it offers legal benefits for companies and their directors, said Robert Clarke, a senior lawyer at ClientEarth.
“The opinion explains how longstanding legal standards would apply to transition plan disclosures and concludes that, from a liability perspective, additional ‘safe harbours’ are not required,” he said. "This is a chance to move past misplaced liability concerns and introduce effective tools to drive private sector climate action. We urge the government to take this analysis into account as the rules are developed further.”
The announcement comes in the same week as a new legal opinion which argues that the disclosure of transition plans does not materially increase legal risk and that, on the contrary, it offers legal benefits for companies and their directors, said Robert Clarke, a senior lawyer at ClientEarth.
“The opinion explains how longstanding legal standards would apply to transition plan disclosures and concludes that, from a liability perspective, additional ‘safe harbours’ are not required,” he said. "This is a chance to move past misplaced liability concerns and introduce effective tools to drive private sector climate action. We urge the government to take this analysis into account as the rules are developed further.”
