An office worker looks out at the City of London
An office worker looks out at the City of London — where the clock is ticking for asset managers to publish their net zero plans © AFP via Getty Images

A host should set the tone for a gathering. And so, as delegates descended on Glasgow for the COP26 summit last November, the UK government announced that the country would become “the world’s first net zero-aligned financial centre”. Listed companies and big asset managers would be required to publish a plan for achieving net zero carbon emissions — or explain why they could not.

The UK’s status as a global financial hub meant that 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 £50bn in assets, or own more than £25bn. 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 plans to comprise, and how it will sanction companies whose plans fall short.

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

The detailed requirements for transition plans are the remit of the recently formed Transition Plan Taskforce, which includes policymakers, members of the Financial Conduct Authority (FCA) — the UK’s financial services regulator — and representatives from the finance industry. The TPT will build on the current international standards set out by the Taskforce on Climate-Related Financial Disclosures (TCFD), and publish its findings by the end of this year.

These will include how to treat Scope 3 carbon emissions, which cover everything from the start of a company’s supply chain to the final use of its products and its employees’ commuting. That range makes them harder 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 it purchases.

“Scope 3 is notoriously difficult,” says Michael Marks, head of responsible investment integration at Legal and General Investment Management (LGIM). “I expect emphasis on Scope 3, but with understanding that it’s very difficult to measure.”

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

Small and mid-cap companies have furthest to go in catching up on Scope 3, according to Neville White at investment manager EdenTree. “Lots of Scope 3 will be assumptions and modelling rather than hard data,” he says. “At the moment, assumptions could be widely out.” He sees western European countries, including France and the UK, as leading on the issue and likely to set global standards.

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

Marks agrees: “Where we are today is ‘do you have a target?’ Where we’re going next is ‘do you have a long-term target, medium-term target and a short-term target?’’’

It is the latter that will keep the current cohort of senior managers on their toes, according to White. “There’s no point 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’
The COP26 climate conference in Glasgow, where the UK announced its ambition to become ‘the world’s first net zero-aligned financial centre’

Requiring every listed company and big asset manager to publish a transition plan reduces “first-move disadvantage”, according to Nina Seega, a research director at the University of Cambridge Institute for Sustainability Leadership. In the past, companies that published their emissions data and transition plans first found themselves under extra scrutiny while their less sustainable peers were able to lurk in the shadows.

But all publishers of transition plans will be anxious to avoid accusations of overstating their sustainability credentials — so-called greenwashing — particularly after German police raided fund manager DWS in May on suspicion that it had done so.

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

Gilbert says changes to plans are inevitable, since “some assumptions will be wrong, eventually”. 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.

Policymakers at the Treasury — to which the FCA and the TPT are answerable — must walk a fine line in setting transition plan standards. Too lenient, and they undermine the aim of becoming the world leader in green finance; too strict, and companies seeking light-touch regulation may be put off listing in London. Current indications are that levels of disclosure will be at least as high as those of the TCFD, but with the laggards punished by market forces rather than regulators.

“The market will assess [companies’ transition plans] for credibility,” says Marks at LGIM. “We certainly believe this will impact on their cost of capital.”

Indeed, the market is already making such assessments. In 2018, for example, LGIM divested from Japan Post Holdings on climate grounds. It only reinvested this year after the company published a net zero target for 2050 and an interim target for 2030.

Many companies are seeking to avert such setbacks by submitting their plans for external scrutiny — for example, from the Science Based Targets initiative (SBTi), a project that assesses and validates corporate targets in terms of their impact on global warming. Among them is DWF, a London-listed law firm, which will publish its first SBTi-endorsed plan as part of its annual report in the next few months.

“We are genuinely committed to making the changes required,” says Kirsty Rogers, global head of environmental, social and governance at DWF. “There is significant growth in legal action for organisations and individuals who make statements and commitments that are not genuine . . . Reputation will be the most critical factor for an organisation, and increasingly all stakeholders are empowered to speak up.”

Seega at Cambridge points out that NGOs are “very good at exerting pressure” on laggard companies. “We need the market to move and the regulation to follow,” she says. “It usually takes a bit more time for regulation to kick in.”

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