Michael Watson

The government has opened a series of consultations relating to sustainable finance, including on the development of new Sustainability Reporting Standards (SRSs) in the UK, a separate regime to ensure the information reported in accordance with the new standards is verified by assurance providers, as well as on how to meet its manifesto commitment of imposing transition plan requirements on UK-registered financial institutions and listed companies.

In its transition plan consultation (open until 17 September), the government said it is “considering whether to redefine the scope of entities under any future transition plan requirement”, adding that “the focus will be on economically significant entities, including pension funds, where there is likely a significant investor and public interest”.

SMEs, it said, are not envisaged to be in-scope of any new requirements, though it acknowledged that smaller companies could indirectly be impacted by new transition plan requirements where they are involved in a larger in-scope company’s supply chain. In addition, an increasing number of investors and banks require or encourage the companies they intend to lend to or invest in, to have robust transition plans, and an examination of those transition plans are key component of their decision-making.

Under one option, in-scope entities would face no legal obligation to develop and disclose a transition plan, but would instead be required to explain why they have not published such a plan or transition plan-related information in accordance with any new UK SRSs.

A further option would impose a legal obligation to develop and disclose a transition plan as part of their annual reporting and, potentially, as a separate transition plan document. However, the obligations would not extend to dictating specific goals that entities would need to ensure those plans align with, and nor would they be subject to any legal duty to implement those plans.

The government is also considering mandating transition plan implementation as well as the alignment of such plans with “net zero”. It has acknowledged that this could add costs for businesses as well as bring new legal and compliance risks. It has pledged to “carefully assess the impacts of any new requirements” against its own growth missions and the potential impact on the UK’s global competitiveness.

It said it wants to ensure new transition plan requirements “generate robust and decision-useful information, for investors and other stakeholders” but are not “overly burdensome for companies and financial institutions to meet”.

Many businesses already develop and disclose their own climate-related transition plans, recognising the commercial advantages they can derive from doing so and the value those plans offer to investors and their ability to raise finance.

There is also increasing recognition and legal opinion that good transition plans significantly reduce legal risk and protect corporates and boards from criticism and action from stakeholders because they clearly set out how businesses plan to meet their targets and, critically, the dependencies that impact their ability to do.

Michael Watson is a partner at Pinsent Masons