UK financial institutions and public listed companies will be obliged to publish plans detailing how they will reduce the emissions they respectively finance or are responsible for.
The policy will not require the businesses to commit to achieving ‘net zero’ emissions in their own loan books or operations, but it is designed to encourage an increase in funding for low carbon projects and technologies and align with the UK’s overall target of achieving a net zero economy by 2050.
In a speech at COP26 in Glasgow, UK chancellor Rishi Sunak claimed the UK will become the “first-ever net zero aligned global financial centre”, and highlighted the importance of climate data, green bonds and mandatory climate-related disclosures, among other measures, to realigning the global financial system to support the net zero agenda.
The move to introduce new requirements around what the government referred to as “net zero transition plans” will be underpinned by the development of new standards on what a transition plan should look like and related metrics. The standards will be developed by a Transition Plan Taskforce, comprising representatives from industry, academia, regulatory bodies and civil society. The government said the development of the standards would help address the risk of so-called ‘greenwashing’, which is where organisations overstate what they are doing to support decarbonisation.
Lawyers at Pinsent Masons, the law firm behind Out-Law, welcomed the new policy and said they expect it to have an impact on where investment is channelled.
Helen Gray, who specialises in advising on energy transactions as well as regulatory matters at Pinsent Masons, said: “The plans announced by the chancellor today to mobilise the decarbonisation of the UK’s financial sector mark a meaningful and bold move towards the achievement of the country’s net zero targets. It has long been recognised that these legally binding targets will only be realised if there is a wholesale shift in investment strategies of financial institutions, given that access to ‘green finance’ is the enabler for many renewable energy and net zero projects.”
“Whilst ESG and sustainable investment criteria are already relatively well-embedded in the UK’s finance community, today’s announcement goes further as the government moves towards making the publication of so called ‘transition plans’ mandatory for financial institutions. This step is significant as the transition plans will provide greater transparency for investors and shareholders, with the aim being that the publication of these plans will lessen attempts to ‘greenwash’ investments. By making this information public, we may see more of a push for increased accountability and selective investment from the investor community,” she said.
Carolyn Saunders, who specialises in pensions law at Pinsent Masons, said: “These proposals will do much to support pension schemes to invest sustainably. Whilst needing to invest for the long-term, pension schemes are also under many short-term pressures – for example, to plug defined benefit funding gaps and ensure good returns for the regular flow of members retiring from defined contribution arrangements. For so long as there is no clear alignment between financial flows and the Paris climate change agreement commitments, markets will fail to properly price climate risk and opportunity, making it difficult, in some instances for pension schemes to justify investing for the long term.”
“We can expect the work of the Transition Plan Taskforce to lead to more robust data and reporting, which will give pension schemes the clarity and confidence needed to develop investment and engagement strategies that take full account of climate change issues. Recent legislation and guidance for pension schemes around climate change has recognised that the tools currently available to schemes are limited and that they can only use best efforts to measure and understand the impact of climate change. The requirement for mandatory publication of transition plans coupled with the work of the Taskforce means that those best efforts can only get better,” Saunders said.
Oliver Crowley, also of Pinsent Masons, who specialises in the structuring and establishment of private investment funds, said: “Whilst the details of the obligations are yet to be finalised, private fund managers should monitor how the obligations will impact on them and their strategies, and their portfolio investments on an ongoing basis.”
“As the UK government has noted, there is not yet a commonly agreed standard for what a good quality transition plan looks like. In all likelihood, however, as with EU’s regulation on sustainability‐related disclosures in the financial services sector (SFDR) previously, they will be expected to comply in some form before the guidance and the agreed standard settle. It is also as yet unclear what consequences, if any, there will be for non-compliance with the transition plan requirements,” Crowley said.
Michael Duffy, an expert in energy and infrastructure finance at Pinsent Masons, said: “In announcing the intention to set out a legislative framework to incorporate transition plans into the UK’s sustainability disclosure requirements it will likely incentivise future private sector investment into low-carbon assets by forcing stakeholders, including lenders and investors, to plan ahead and ensure their investments are delivering the targets set out in their transition plans.”
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