The Transition Plan Taskforce (TPT) recently concluded a consultation on its Disclosure Framework and Implementation Guidance, which aims to develop a ‘gold standard’ for the disclosure of transition plans.

The Commonwealth Climate and Law Initiative (CCLI) responds to consultations in areas within our legal expertise on an ad hoc basis. We comment on how existing legal requirements may be applicable within the scope of the proposed framework. Our comments on the TPT Disclosure Framework can be seen below.

General comments on the Disclosure Framework

Directors of UK companies are required to act to promote the success of their company. Given the increased focus on the financial risks posed by biodiversity loss and other nature risks, directors of some companies may already be required to consider biodiversity and nature risks as part of discharging their legal duties. This is amplified by the UK’s commitments to implement Target 15 and other targets of the Kunming-Montreal Global Biodiversity Framework, envisaging regulatory requirements for disclosures on nature-related dependencies, impacts, risks and opportunities of companies. Implementation of some of these targets may create transition risks for companies. 

It is generally accepted that climate related risks and transition cannot be addressed without addressing nature related risks and opportunities. While it is acknowledged that nature is already referred to in ‘material interdependencies’ and the implementation guidance refers to the TNFD, this is limited to considering nature only in the context of climate objectives. The framework could go further to provide for addressing nature related risks, opportunities and objectives in their own right in its conception of ‘transition’, in language that reflects the early stages of companies considering these matters and without imposing obligations that companies would find it difficult to meet. This could be achieved by extending references to a  ‘net zero transition’ to include a nature-positive transition, written in terms that require early stage thinking around nature objectives and disclosures but can be flexible enough to keep pace with changing regulatory and compliance requirements. The mention of ‘unintended consequences’ and ‘trade-offs’ within the Disclosure Framework could also specifically reference consequences for nature and stakeholders. This may assist directors to consider their duties comprehensively. 

Suggestions regarding the disclosure recommendation for section 1.1 Objectives and Priorities:

The TPT’s definition of a transition plan, with which the CCLI agrees, states that such plans should set out an entity’s plans to contribute to and prepare for a rapid global transition towards a low GHG-emissions economy in a manner that is consistent with the duties of its directors and senior managers. As is reflected in the scope of the TPT Disclosure Framework and the TPT Implementation Guidance, such a plan is likely to have impacts across many parts of an entity’s business. The TPT Disclosure Framework also includes reporting requirements for the entity’s arrangements of Board-level governance, including review and approval of the transition plan.

Under s.172 of the Companies Act 2006, directors of UK companies are required to act in the way in which they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, having regard to a number of statutory factors. 

Given the scope of the potential impacts of an entity’s transition plan, when setting the objectives, priorities and interim targets and milestones relating to the entity’s transition plan, directors may need to consider how these factors relate to their duty to promote the success of the company, including the ‘have regard to’ statutory factors. For example, the use of carbon offsets may entail impacts on the natural environment, communities and customers; and the sale of high-emission assets may impact on the entity’s employees. 

Sections 414A, 414C and 414CZA CA 2006 provides that the directors must prepare an annual strategic report to inform members of the company how the directors have performed their s.172 duty, including how they have had regard to the statutory factors.

When disclosing how the factors relating to the entity’s transition plan (and how these will be embedded in the entity’s business strategy), directors may therefore be required to disclose how they have performed their s.172 duty, in line with the requirements of ss. 414A, 414C and 414CZA CA 2006.

In this respect, we note that ‘1.1 Objectives and Priorities’ includes a recommendation for entities to disclose the objective and priorities that they have set to use other levers available to them to embed and accelerate the transition “consistent with its constitutional documents and the duties of its directors and senior managers”. We suggest that this qualifier is applied to the disclosure of all the objectives, priorities and other factors set under ‘1.1 Objectives and Priorities’. This could be done by amending the first sentence of the disclosure recommendations to read “Describe the strategic ambition of the entity’s transition plan by disclosing its objectives and priorities for responding and contributing to an early and orderly whole-of-economy transition, and interim targets and associated milestones, consistent with its constitutional documents and the duties of its directors and senior managers.” We also suggest that the Companies Act reporting requirements are referenced in the sections of the TPT Disclosure Framework which refer to alignment with wider corporate reporting norms, and in the corresponding parts of the TPT Implementation Guidance. 

‘1.1 Objectives and priorities’ could also include describing preparedness for TNFD and any objectives and priorities for nature. This would future-proof the disclosure framework, align it with the risks that companies are exposed to and compliance with directors’ duties and reflect the UK’s commitments under the Kunming-Montreal Global Biodiversity Framework.

Suggestions regarding the disclosure recommendation for section 2.4 Financial Planning :

At present, the disclosure recommendations for ‘2.4 Financial Planning’ refer to impacts and risks on the entity’s financial position. However, opportunities may arise due to the increase in sustainable finance during the transition. Therefore, the disclosure recommendations could include a reference to entities potentially providing information on whether they plan to access sustainability-linked finance or green finance to help achieve their objectives. This would help directors to identify how they might fulfil their duties to promote the success of the company.