UK aims to set the tone for companies’ net zero plans

A host should set the tone for a gathering. So, as delegates traveled to Glasgow for the COP26 summit last November, the UK government announced that the country would become “the world’s first aligned net zero financial centre”. Publicly listed companies and large asset managers would be required to publish a plan to achieve net zero carbon emissions – or explain why they couldn’t.

The UK’s status as a global financial hub meant the announcement was of more than local interest – and the deadline is now less than a year away. By June 2023, UK-listed companies will have to publish net zero transition plans, as will regulated investors who manage more than £50 billion in assets or own more than £25 billion. Smaller asset managers with at least £5bn under management have until June 2024 to follow suit.

What is less certain is precisely what the government will expect the plans to include and how it will sanction companies whose plans fail.

“There is a competition between financial centers to be leaders on this issue,” says Alyssa Gilbert, policy officer at the Grantham Institute for Climate Change at Imperial College London. “You can’t just be a leader by having companies that are green unicorns. You have to raise the bar for everyone. Due to competition, other countries will follow.

Detailed transition plan requirements fall within the remit of the recently formed Transition Plan Task Force, which includes policymakers, members of the Financial Conduct Authority (FCA) – the UK’s financial services regulator Uni – and representatives of the financial sector. The TPT will build on current international standards set by the Task Force on Climate-Related Financial Disclosures (TCFD) and publish its findings by the end of this year.

These will include how to address Scope 3 carbon emissions, which cover everything from the beginning of a company’s supply chain to the end use of its products and the travel of its employees. This range makes them more difficult to measure and manage than Scope 1 emissions, which are simply those directly from a company’s own operations, and Scope 2, which arise from the energy that ‘she buys.

“Scope 3 is notoriously difficult,” says Michael Marks, head of responsible investment integration at Legal and General Investment Management (LGIM). “I expect the focus to be on Scope 3, but knowing that is very difficult to measure.”

Companies that get along well with their suppliers will fare better, Gilbert predicts. “If you talk to your supply chain and have a good relationship, it’s easier to talk to them about climate change.”

Small- and mid-caps have the furthest to go to catch up with Scope 3, according to Neville White of investment manager EdenTree. “A lot of Scope 3 will be assumptions and modeling rather than hard data,” he says. “At this time, the hypotheses could be largely ruled out.” He sees Western European countries, including France and the UK, as leading on the issue and likely to set global standards.

Short-term goals are another area to watch. “If 2050 is the only part of your transition plan, you don’t have a transition plan,” Gilbert told Imperial.

Marks agrees: “Where we are today is ‘do you have a goal?’ Where we go next is ‘do you have a long term goal, a medium term goal and a short term goal?’”

It’s the latter that will keep the current cohort of senior executives on their toes, according to White. “There’s no point in setting a 2040 target because they won’t be there,” he says.

The COP26 climate conference in Glasgow, where the UK announced its ambition to become “the world’s first net-zero aligned financial centre”

Require each listed company and major asset manager to publish a transition plan reduces the “first move disadvantage”, according to Nina Seega, research director at the University of Cambridge’s Sustainability Leadership Institute. In the past, companies that released their emissions data and transition plans first found themselves subject to scrutiny while their less sustainable counterparts could hide in the shadows.

But all transition plan publishers will be keen to avoid accusations of overstating their sustainability credentials – known as greenwashing – especially after German police raided fund manager DWS in May, suspected that he had done so.

Last month, Richard Dudley, global head of climate strategy at insurance broker Aon, warned at a net zero conference convened by employers’ organization CBI that transition plans could lead to litigation . Companies that “say [they] want to do something and can’t” could be “open to class action,” he said. He added that such risks could mean that a transition plan “becomes a compliance exercise”.

Gilbert says changes in plans are inevitable because “some assumptions will eventually be wrong.” But rather than avoid committing to anything, she suggests producing “if-then plans,” which involve taking a certain action only if specified conditions are met.

Treasury policymakers – to whom the FCA and TPT are accountable – must respect the dividing line in setting the standards for the transition plan. Too lenient, they undermine the ambition to become the world leader in green finance; too strict, and companies seeking less regulation could be fired from listing in London. Current indications are that disclosure levels will be at least as high as the TCFD, but laggards will be punished by market forces rather than regulators.

“The market will value [companies’ transition plans] for credibility,” says Marks of LGIM. “We certainly think that will have an impact on their cost of capital.”

Indeed, the market already makes such assessments. In 2018, for example, LGIM sold Japan Post Holdings for climate reasons. He only reinvested this year after the company released a net zero target for 2050 and an interim target for 2030.

Many companies seek to avoid such setbacks by subjecting their plans to external scrutiny – for example, from the Science Based Targets Initiative (SBTi), a project that assesses and validates companies’ targets for global warming impact. climatic. Among them is DWF, a London-listed law firm, which will publish its first SBTi-approved plan as part of its annual report in the coming months.

“We are truly committed to making the necessary changes,” says Kirsty Rogers, Global Head of Environment, Social and Governance at DWF. “There is a significant growth in legal actions for organizations and individuals who make statements and undertakings that are not authentic. . . Reputation will be the most critical factor for an organization, and increasingly all stakeholders are empowered to speak up. »

Seega in Cambridge points out that NGOs are “very good at putting pressure” on laggards. “We need the market to move and the regulations to follow,” she says. “It usually takes a little longer for the regulations to come into effect.”

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