An Integrated Transition

As global momentum builds behind transition planning, Mark Manning, Senior Visiting Fellow at the London School of Economics, makes the case for a systemic response to climate change.

The UK’s Transition Plan Taskforce (TPT) hit a significant milestone last week with the release of its final set of transition plan resources to help businesses mobilise finance for the net zero transition.

The resources included deep-dive guidelines for seven sectors – including asset owners, asset managers and banks; high-level guidance for 30 sectors of the global economy; and advice on how to undertake a transition planning cycle.

They were the culmination of two years’ work, including the TPT’s Disclosure Framework, published in October to help companies develop robust transition plans as part of their annual reporting.

“The TPT is an important and powerful initiative because it established transition planning as a strategic endeavour and an integral part of corporate strategy, not just a compliance exercise,” Mark Manning, Senior Visiting Fellow, Grantham Research Institute on Climate Change and the Environment at the London School of Economics, told ESG Investor.

In his former role as strategic policy advisor on sustainable finance at the Financial Conduct Authority (FCA), Manning was the regulator’s representative on the taskforce. He currently co-chairs the TPT’s disclosure framework and implementation guidance workstream.

“The TPT has also focused on gearing transition planning towards decarbonisation of the whole economy, rather than [that of a] specific entity,” he added.

The taskforce has highlighted a problem with ‘paper decarbonisation’ – which is effectively decarbonising a financial institution’s balance sheet without contributing to that of the economy. For example, an asset manager may have a limited carbon footprint and can appear to be on track to net zero by divesting its high-carbon assets, however such action is effectively passing the problem onto someone else.

The way the TPT has developed a strategic approach to whole-economy decarbonisation, and given prominence to the engagement pillar within a transition plan, highlights the role that financial services firms can play in being part of the solution in mobilising finance to encourage and support those efforts.

Manning highlighted the TPT’s work on international alignment – particularly on leveraging existing resources and working within the prevailing transition-planning and reporting landscapes.

Importantly, the TPT Disclosure Framework is aligned with the key components of the transition-planning guidance developed by the Glasgow Financial Alliance for Net Zero (GFANZ) in 2022, and the International Sustainability Standards Board’s (ISSB) reporting standards.

“The TPT framework can be used as guidance to the transition plan-relevant provisions within the ISSB standards, which is important for the framework’s global applicability,” said Manning. “This is to ensure that it’s not just another thing that firms need to do, but rather something to help them achieve what they’re already required to – or soon will be – more effectively.”

This week, the Network for Greening the Financial System – a group of central banks and supervisors committed to sharing best practices – released its latest package of reports offering guidance on transition planning across member jurisdictions.

Unified ecosystem

Aligning company plans with country plans is a developing work stream Manning has been involved in at the new Centre for Economic Transition Expertise (CETEx), established by the Grantham Research Institute at the London School of Economics. Launched in March, CETEx aims to develop rigorous policy-oriented research to help accelerate policy processes within jurisdictions, as well as at regional and global levels.

At the core of the centre’s thinking is the integrated transition-planning ecosystem. “The concept recognises the immense progress made over the past few years, including the TPT’s work, to develop frameworks for corporate and financial services sector transition plans – however, it needs to go further,” said Manning. “Arguably, we need to be thinking about transition planning as a system response to the challenges of climate change.”

In his view, governments have to play a lead role in tackling climate change, as private sector entities don’t have the capacity to move the needle alone.

“To deliver their own plans effectively, companies need clear and coherent policy settings, as well as understanding the direction of the economy and how that flows from international agreements – most notably the Paris Agreement,” he explained.

Some companies may also need to tap into some form of government support. “Ultimately, the climate challenge is going to touch every part of government,” Manning continued. “Therefore, a coherent whole-of-government response is required – as well as one that is integrated with responses at the corporate and financial services levels.”

As part of its common work with the World Bank, the University of Columbia Centre for Sustainable Investment, King’s College London and Aviva, CETEx is also looking to develop and reinterpret the TPT’s content to inform strategic national transition plans (NTPs), which underpin nationally determined contributions (NDCs) under the Paris Agreement.

This collaboration comes at a critical time, as countries signed up to the accord need to refresh their NDCs by 2025, committing to further and faster adoption of renewable energy sources. “CETEx aims to support the process by encouraging signatory governments to develop their plan in a strategic, whole-of-government way, which is connected with transition planning across the economy,” said Manning.

It uses the TPT Disclosure Framework’s five pillars – foundations, implementation strategy, engagement strategy, metrics and targets, and governance – to identify the key elements that should be included in a strategic NTP. It also considers the mechanisms through which national transition planning can be integrated within corporate and financial services sector planning.

“For example, under the implementation strategy pillar, there will be key elements of policy incentives – and financing – supporting the implementation strategies of corporate plans,” explained Manning. “The finance piece has to be done in a targeted way, as public finance can act as an ‘unlocker’ for private finance, and as a catalyst for private investment.”

CETEx has sketched out the integrated transition-planning ecosystem concept in a policy brief and submitted it to T20 – the G20’s think tank arm. It is also engaging with various policy bodies, such as the Coalition of Finance Ministers for Climate Action and GFANZ. In that regard, the IMF and World Bank Spring Meetings this week have been important events to elevate the debate, with the NDC refresh expected to figure prominently in many discussions.

According to Manning, the next task for CETEx is to develop a long-form report that incorporates examples, illustrations and practical content associated with each aspect of the integrated transition-planning ecosystem. But time is limited if the report is to have the impact he anticipates.

“It won’t be helpful to deliver something at the back end of this year, because we will have missed important opportunities to influence the NDC refresh,” he said. As such, the centre is aiming to publish the report by mid-year.

Looking ahead

In January, the TPT’s mandate was extended until the end of July – and a potential further three-months – with the objective of supporting HM Treasury’s Transition Finance Market Review (TFMR). The review, which aims to position the UK as a ‘leading hub’ for transition financial services, is approaching the end of the initial call for evidence – 25 April – and is expected to release its report in the second quarter.

Vanessa Havard-Williams, Chair of the TFMR, has been involved in the TPT from the outset and is fully aligned with its mission of seeing how transition planning and transition finance can come together.

“Transition finance needs to be geared towards delivery and implementation of the transition plans of those who are seeking finance,” said Manning. “A well-crafted, credible transition plan can be a real foundation for the decisions that lenders and investors make in relation to transition finance, and can also underpin the design of transition-oriented financial instruments. It is absolutely critical that these are being taken together.”

But the TPT’s work is not quite finished yet. At the end of its formal mandate, the taskforce plans to publish a document setting out a forward pathway. Manning has observed a growing consensus among the TPT community on the need for its future work to focus on two specific areas.

First, ensuring that the TPT is fully embedded in supporting the strategic direction of companies, as well as in the legal and regulatory framework. “The FCA has already signalled an intention to formally reference the TPT within its rules, and is viewing the TPT disclosure rules as part of the reporting framework for climate and sustainability, alongside ISSB standards,” said Manning.

And second, harnessing the power of the TPT community, which has come together to build an effective ecosystem around the framework – something Manning deems “incredibly valuable”. This would mean embedding the TPT framework fully in data services, analytical tools, and the way professional services firms advise their clients.

“Part of that can be achieved through a follow-up to the TFMR to harness the power of the transition plans, which will support the building of the transition finance ecosystem as well,” he added.

However, this should not be exclusive to the UK.

“The TPT has been designed to fit within global frameworks, and has been committed to aligning its guidance with policy processes at the International Organization of Securities Commissions, the Financial Stability Board and the G20, as well as bilateral engagement with jurisdictions around the world,” Manning continued.

Even in the absence of a formal legal and regulatory mandate, the momentum behind transition planning across the corporate and financial services sectors is growing, and the TPT’s work has already influenced the latest transition plans developed by NatWest, Lloyds, Compass Group and SSE.

“That is what we wanted to achieve from the get-go and it is already happening on the ground,” said Manning. “As an ecosystem builds and we coalesce around this thinking, more and more companies will do the same. The fact that well-crafted transition plans are emerging means people see it can be done in practice.”

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