In the deluge of climate change news in the past weeks, it is easy to have missed a very important development in the UK that has implications for US companies.
On November 3, Rishi Sunak, the UK chancellor of the Exchequer, announced in his COP26 Finance Day speech that the country was working toward ‘making it mandatory for firms to publish a clear, deliverable plan setting out how they will decarbonize and transition to net-zero – with an independent taskforce to define what’s required.’
This comes on the heels of the release of the UK government’s new Greening Finance Roadmap, which notes: ‘The government […] expects to see the publication of transition plans become the norm across the economy.’ This is the first time we have seen transition plans being put at the heart of climate disclosure rules – and it is very significant for several reasons.
It sets an influential new precedent in climate disclosure rules. The UK announcement comes at a time when a number of regulatory bodies, including the SEC, are looking into climate change disclosure rules. The UK’s plan is bolstered by new guidance from the Task Force on Climate-Related Financial Disclosures spotlighting climate transition plans as a part of the TCFD’s recommended disclosures.
Earlier this month, the newly created International Sustainability Standards Board released a new climate change disclosure prototype that similarly focuses on climate transition planning, including metrics that look into climate integration into enterprise financial position, planning, performance and cash flow.
It signals a new expectation that all companies should develop climate transition plans. To date, much of the energy behind climate transition planning has been directed at energy-intensive companies, such as companies on the Climate Action 100+ focus list. But Sunak’s announcement reflects the growing approach from investors and regulators alike that climate change is a systemic financial risk and affects capital markets writ large. The new expectation is that all companies, regardless of industry, need to put in place a climate transition plan that reflects their strategy to remain viable and generate value in a decarbonizing world.
It parallels a growing disenchantment with net-zero goals. In the run-up to COP26, we saw a cascade of net-zero commitments from companies. But a fascinating new survey from Edelman notes that a staggering 72 percent of investors don’t believe companies will achieve their ESG commitments. This mistrust is exacerbated by the fact that corporate net-zero goals are not reflected in long-term strategic plans.
It reflects what investors consider to be a ‘differentiator’ between companies. Given the uniquity of net-zero goals, particularly among large companies, investors are increasingly looking for companies to disclose their climate transition plans. They are interested in decisions that companies are making today on how they will balance the need for rapid decarbonization with continuing to generate value in the long term.
These decisions are being keenly watched in companies and industries that are ‘in transition’ and need to clean up their business models for success in a net-zero world. Where companies disclose detailed and smart transition plans, including related capital allocation and research plans, these will be seen as attractive investment options.
The writing’s on the wall
The writing seems to be on the wall that climate transition planning will be the next frontier for companies and investors to engage on climate change. Much like with net-zero goals themselves, however, the devil will be in the details.
The recent announcement notes that the UK government will appoint a taskforce to determine the requirements of what should be included in a climate transition plan, and we can expect to see more from the investor community on this. Of note in this context is a very interesting proposal from CPP Investments – the investment arm of the Canada Pension Plan – calling on companies to disclose their carbon abatement capacity and how it will evolve.
Having a robust climate transition plan is not optional anymore – companies across industries should start the process of developing their climate transition plans. Investor and regulatory trends make it clear that this is starting to be seen as a baseline expectation for all firms. All companies, especially companies that have set net-zero goals, should take proactive steps to develop a climate transition plan.
Veena Ramani is research director at FCLTGlobal and an expert in corporate governance, climate change and ESG issues