Last month, the UK Government announced that the UK was to be the world’s first Net Zero-aligned Financial Centre.

The Institute for Government defines “net zero” as “a balance between the amount of greenhouse gas emissions produced and the amount removed from the atmosphere”. Indeed, the UK Government has bound itself in law to reach a net zero target by the year 2050. 

Arguably, the announcement by the UK Government last month was tied up with the opportunity presented by the UK Government’s presidency of the United Nations Climate Change Conference 2021 (COP26) held in Glasgow but it is also representative of a general move by western economies towards a more sustainable economic approach.

Broadly speaking, the UK Government’s plan to become the world’s first Net Zero-aligned Financial Centre means that:

• certain businesses and financial institutions must have robust firm-level transition plans setting out how they will decarbonise;
• the UK Government will provide strong oversight to ensure that its targets are met;
• asset managers, regulated asset owners and listed companies must publish business transition plans that consider the UK Government’s net zero commitment or provide an explanation as to why they have not done so;
• the UK Government will set up a transition taskforce formally involving the Financial Conduct Authority (FCA) to develop a “gold standard” with respect to transition plans and the metrics used to judge them; and
• the UK Government will publish a transition pathway for the financial sector in 2022 which will set out how the entire sector will transition to net zero by 2050.

What will a transition plan look like?

Transition plans are a key mechanism by which the UK Government aims to deliver its goal of the UK becoming the world’s first Net Zero-aligned Financial Centre. A transition plan is essentially a roadmap which outlines how an organisation will adapt as the UK moves toward a low carbon economy. It should set out:

• the high-level climate targets toward which an organisation is advancing;
• interim milestones which will contextualise the high-level targets referred to above; and
• any actionable steps to be taken by an organisation to meet its interim milestones and, ultimately, its targets.

However, it should be noted that, while the UK Government is attempting to encourage firms that primarily conduct business in the UK to publish transition plans, it is not proposing to make net zero commitments at firm-level mandatory. It will be left to individual firms to decide how they plan to decarbonise the emissions which they finance via their economic activities.

Indeed, there is not yet a commonly agreed standard for what a good quality transition plan will look like. A number of bodies have published their own guidance on transition plans, for example, the Task Force on Climate-related Financial Disclosures has published a guide to the metrics used in transition plans. 

The establishment of the UK Government’s transition taskforce will allow a benchmark for quality transition plans to be developed. This will be reported on by the end of 2022. Once this standard is in place, the UK Government expects that firms within scope of these measures will start to publish transition plans in 2023 (if they have not already done so voluntarily).  

As a starting point, there are two main principles behind the drive to encourage publication of transition plans. The first is the UK Government’s desire to bolster the accountability of firms by having information regarding their alignment (or lack thereof) with its net zero aims for the economy publicly available. The second is that the UK Government wishes for climate targets to be easily quantifiable in order for companies to be more easily judged as regards their adherence to net zero targets. 

How should businesses respond?

The drive towards a net zero economy has become more politically relevant than ever with the conclusion of COP26 in Glasgow. Indeed, the need to encourage businesses to decarbonise and move towards operating in a net zero fashion by 2050 has become an even more pressing aim for the UK Government. 

While not going so far as to restrict certain activities or investments, the announcement last month that the UK is to become the world’s first Net Zero-aligned Financial Centre is more than mere rhetoric and indicates a policy route that the UK Government is set on progressing. 

Transition plans for individual businesses, although not yet mandatory, are one of the key measures to achieve the UK Government’s economy-wide targets. Therefore, it is imperative that businesses examine their position in relation to economy-wide climate targets and consider publishing transition plans to ensure their public accountability with respect to the fight against climate change. 

For more information please contact John Morrison or Tom Swan, Partners in our corporate finance team and members of the firm’s ESG Advisory Group.

With additional reporting by David Benson.