The UK Pensions Regulator recently published a blog post emphasising the importance for trustees of improving their understanding of environmental, social and governance (ESG) considerations by reviewing the latest developments in transition planning and reporting.
The Regulator has urged trustees to familiarise themselves with the recommendations of the UK Transition Plan Taskforce (TPT), along with the Taskforce for Nature-related Financial Disclosures (TNFD) and the Taskforce for Social Factors (TSF). Whilst at this stage, there is no legal requirement to implement those recommendations, transition planning is a developing area which is likely to become increasingly relevant for trustees. The UK government has indicated it intends to make transition plans mandatory for UK-regulated financial institutions (including pension funds) and corporates, although we are still waiting for a consultation on this.
Background
Trustees may already be familiar with the TNFD and TSF. The Department for Work and Pensions (DWP) launched the TSF last year, which called for trustees to set objectives for their consultants in relation to how they approach social factors and consider asset managers' performance in relation to the same when considering mandates. Further, following the establishment of the TNFD, which aims to improve reporting on nature-related risks, many organisations around the world have committed to making nature-related disclosures based on the taskforce’s recommendations (see here and here).
However, the TPT is a significant new development in the ESG arena which has established a "gold standard" for climate transition planning. Below, we cover what the TPT is and its recommendations, why it is important and the key actions trustees should consider taking.
What is the TPT?
The TPT was launched by HM Treasury in March 2022 to develop a framework for climate transition plan disclosures for corporates and the financial sector to follow. A climate transition plan is an action plan that clearly outlines how an organisation will transform existing assets, operations and business models to transition towards achieving net zero by 2050.
The aim of the taskforce was to develop best practice for credible and robust transition plans as part of annual reporting on business strategy.
In terms of key developments:
- In October 2023, the TPT published its disclosure framework along with implementation guidance and draft sector guidance (see here).
- In April this year, the TPT published sector specific guidance to give practical guidance for 30 different sectors, including advice for asset owners such as pension scheme trustees (see here).
- In June this year, the International Sustainability Standards Board (ISSB) announced that the IFRS Foundation (which is responsible for the ISSB) has assumed responsibility going forwards for the materials developed by the UK TPT to help streamline transition planning across the globe (see here). Although the UK TPT materials were initially commissioned by the UK government, the intention from the start was that they should be relevant and usable by companies globally, so the fact that the IFRS Foundation has agreed to take over responsibility for these materials is a positive sign in the efforts to streamline global transition planning.
Why trustees should familiarise themselves with the TPT framework
- The Pensions Regulator has encouraged trustees to take note of the TPT’s guidelines along with those of the TNFD and TSF. Whilst it is not currently mandatory to adopt any of the TPT recommendations, the Regulator has said that trustees should ensure that their advisers have the appropriate skills and expertise so that they can make well informed decisions and put together effective transition plans.
- The Labour manifesto said that UK-regulated financial institutions (including pension funds) and corporates will be required to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement (see here), so we can expect legislation to follow at some point. Early familiarity with the TPT framework should help trustees to comply seamlessly with any regulations which are introduced.
- The Regulator has said that the "direction of travel is clear" and that the case for becoming familiar with the TPT, TNFD and TSF will only become stronger. TPR have also recently announced in a blog post that they will aim to “constructively challenge” trustee decision-making on ESG factors.
- Adopting the TPT's recommendations can enhance a scheme's governance practices. Transition plans provide a structured approach to integrating climate risks and opportunities into investment decisions, improving overall risk management and strategic planning.
Actions for trustees to consider
Trustees may wish to become "early adopters" of the TPT by considering the following actions:
- Skills and expertise: ensuring that trustees and their advisers possess the necessary skills and expertise to craft and implement effective transition plans. This includes staying up to date with the latest guidance and best practice.
- Improving data: increasing the availability and quality of data will enable trustees to reach more informed decisions on investments.
- Reporting: trustees could consider enhancing reporting to include transition plans. This could include updating statements and policies (including the statement of investment principles, investment beliefs, and responsible investment policies).
- Engagement with investment consultants: trustees could consider setting specific objectives for investment consultants relating to transition planning.
- Considering ESG resources: TPR have published a new ESG resource which centralises all of TPR’s publications on the topic. The resources aim to assist trustees who are looking to go beyond minimum compliance.
What's next?
ESG issues are likely to continue to pose a significant challenge for trustees and will likely climb higher up on trustees’ agendas, in particular when transition plans become mandatory in due course. Familiarisation with the TPT's framework, and integrating its guidance into governance practices, will position schemes to better navigate the transition to a low-carbon economy. Acting now will ensure that trustees are ahead of regulatory requirements and contribute meaningfully to the collective effort towards climate sustainability.
For more information on transition plans, see our transition planning and transition finance materials here.