The 100 largest UK public companies and all UK-regulated financial services firms would be obliged to prepare and disclose credible transition plans that align with the 1.5C goal of the Paris Agreement, if Labour are voted into government in the UK.
The plans were confirmed in the Labour manifesto published last week, ahead of the UK general election on 4 July 2024.
“Britain’s world-leading financial services industry has a major role to play in mobilising trillions of pounds in private capital to address the greatest long-term challenge of our age,” Labour said. “Labour will make the UK the green finance capital of the world, mandating UK-regulated financial institutions – including banks, asset managers, pension funds, and insurers – and FTSE 100 companies to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement.”
Limiting global temperature rises to no more than 1.5°C by 2050 compared to pre-industrialised levels is the stetch target signatories of the Paris Agreement committed to. A secondary objective of limiting global temperature rises to no more than 2°C was also set.
Hayden Morgan, a climate and sustainability adviser at Pinsent Masons, said that if Labour’s plans materialised, they would position the UK as the world leader in mandating transition plans.
Morgan said: “Labour’s plans would require a significant uplift in current planned requirements for disclosures not only to publish a transition plan but also to ensure that those plans align with the 1.5°C goal of the Paris Agreement.”
Morgan highlighted that, prior to the election purdah period, the incumbent Conservative government had confirmed its intentions to mandate regulators to strengthen expectations for transition plan disclosures in line with ISSB standards. He said, though, that the Labour pledge goes much further and is more aligned with “gold standard” guidance developed by the UK’s Transition Plan Taskforce.
The TPT was established following an announcement by then-UK chancellor Rishi Sunak at COP26 in Glasgow in 2022 to set standards on what a transition plan should look like and related metrics. The body comprises representatives from industry, academia, regulatory authorities and civil society. The TPT has developed a disclosure framework that is currently voluntary for businesses to adopt, though it is expected to form the basis of legal and regulatory requirements in the UK in due course. In its 2023 green finance strategy, the government signalled its intention to make the publication of transition plans mandatory.
Morgan said: “For businesses, meeting Labour’s proposed new plans would be a significant undertaking and require them to consider new 1.5°C scenarios in strategy, planning and resource allocation. There is likely to be a debate about the long-term merits to the plans from a financial sustainability perspective and the short-term disadvantages some UK financial services firms may feel they could be exposed to when compared with what other global financial centres are mandating.”
James Hay, a sustainable finance expert at Pinsent Masons, said there is a degree of alignment between what UK financial institutions would face under Labour’s transition plan proposals and ruled that EU companies are facing up to under the Corporate Sustainability Due Diligence Directive (CSDDD).
Under the CSDDD, there is the requirement for in-scope companies “to adopt and put into effect a transition plan for climate change mitigation which aims to ensure, through best efforts, compatibility of the business model and of the strategy of the company with the transition to a sustainable economy and with the limiting of global warming to 1.5°C in line with the Paris Agreement”. Hay said many large UK financial institutions and FTSE 100 companies are likely to be in scope of the CSDDD given the EU directive’s extraterritorial reach.
Hay said that across the international community focused on addressing climate change, there is now broad consensus that the 1.5°C target will be missed. He said current efforts are now focused on restricting temperature rises to no more than 2°C. In that context, he said focusing UK regulation on more stringent targets would be likely to draw debate and “involve a serious trade-off between environmental and social objectives”.
Hay said: “To encourage businesses to adopt serious Paris-aligned business strategies, any future government should conduct a full and proper assessment of what that objective really means in practice both for businesses in-scope of transition plan mandates and the UK economy more broadly, in what is a competitive global market businesses are operating in. The next government needs to reinforce market signals for decarbonisation and pass regulation that considers and evaluates the economic trade-offs it involves.”
Pensions law expert Mark Baker of Pinsent Masons said a requirement to have transition plans would be a new step for pension funds.
Baker said: “For all investors, clarity is essential. There has been a long-running discussion on whether pension trustees’ existing fiduciary duties require them to take into account the interests of the planet, or of society generally. I'd urge the next government not to fiddle with pension trustees' fiduciary duties – unless it's an actual change to the law. The UK pensions industry already has a consensus on the scope of trustees' duties, supported by the FMLC report in February 2024. The government could conceivably change the law, but short of that, it would be harmful to fiddle with the interpretation or commission more reports.”
“However, it is good for pension trustees to see the more balanced way their role is being discussed: for example, the recent exchange between the Conservative pensions minister Paul Maynard and Labour’s Stephen Timms, who chairs the Work and Pensions Committee in the House of Commons, acknowledges that many defined benefit schemes have less scope for climate investing,” Baker said.
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