12 Jul 2023

Why should non-executive directors care about transition planning?

Ashley Alder, Chair of the Financial Conduct Authority, talks to Chapter Zero about why the net zero transition is such an important area of focus, why non-executive directors should care and where we go from here.

Ashley Alder

Guest author

It’s now clear that the net zero transition is a catalyst for fundamental change across the economy. All businesses need to think about what this means for them, especially how they can manage transition risk in their operations and how they can capture opportunities as the world decarbonises and customer needs evolve. If businesses act early, there is huge potential to reduce costs, improve productivity and capture new commercial opportunities.

This means that climate strategy should be an integral part of corporate strategy.

It’s also clear that this is not just for companies in high-emitting sectors.

A core recommendation of the Transition Plan Taskforce (TPT) is that a company should take an approach to transition planning which goes beyond its own risks and GHG emissions. This includes actions by those that can support the transition of others by providing technology or finance. If companies across the economy contribute in this way, they can minimise future financial risks and capture opportunities together.

It’s essential that market participants have access to credible forward-looking information to assess a company’s prospects in this new environment. Take the debt market, for example. Where a company’s prospects are tied to its transition plan, an investor’s assessment of the credit quality of a long-dated instrument may well rest on the detail of that plan. For sustainability-labelled instruments such as green bonds or sustainability linked loans, the transition plan can provide essential context for financing, and can underpin performance targets and KPIs in the design of the instrument.

How will investors allocate capital for a sustainable future?

The TPT Framework encourages an ambitious approach, which is iterative in nature and reflects the urgency to act. It clarifies that transition plans should emphasise concrete actions, particularly over the short term. And it supports greater accountability to entities’ stakeholders for the delivery of transition plans, especially through periodic reporting.

Importantly, the TPT Framework aims to be internationally applicable – it aligns with GFANZ guidance on transition planning and is designed to integrate with and build out from the ISSB Standards.

In short, complete and consistent global adoption of the ISSB Standards, combined with high-quality forward-looking strategic information in transition plan disclosures, will give investors the information they need to allocate capital for a sustainable future.

So why should non-executive directors care about this?

  1. Because transition planning is an exercise in fundamental business change, it falls squarely in the territory of board oversight.
  2. In overseeing executives, it will be important that NEDs fully understand the nature of climate-related risks and opportunities and how they may shape corporate strategy.
  3. They will need to challenge executives on their climate ambition, including commitments and targets, and satisfy themselves that the actions set out in a transition plan flow coherently from that ambition.
  4. NEDs will also need to ensure that the right decision-making, organisational and incentive structures are put in place to support delivery of the actions under the plan, and that key policies, capabilities and resources are aligned with the goals of the plan. Finally, they will need to stand behind public disclosure of the transition plan.

And so where do we go from here?

We need to accelerate work in three basic areas necessary to embed trust in the system. These are:

  1. Data availability and integrity
  2. External assurance
  3. Transition finance.

The whole effort hinges on broad-based access to high-quality data.

Reliable data is essential to populate credible climate disclosures and inform effective transition planning. The goal of the Climate Data Steering Committee is to create an open, free, central repository (or Net Zero Data Public Utility) of climate transition-related data, commitments, and progress.

We also want to see the development of trusted ESG data and rating services, to help combat greenwashing. We have asked the industry to work towards a voluntary Code of Conduct; a project that is progressing well.

Reliable third party assurance of climate disclosures is a must.

Even with the best reporting standards in the world, without assurance there will always be doubt around the quality and reliability of corporate climate disclosures, just as quality audits are essential to trust in financial statements. The FCA has been co-leading international work in this area, which aims to encourage the rapid development of standards by the global bodies which currently set conventional audit standards.

Finally, we need to redouble efforts aimed at unlocking capital to fund the transition.

As the Government’s recent Green Finance Strategy pointed out, to deliver on the UK’s net zero ambitions through to the late 2020s and 2030s, an additional £50-60 billion of capital investment will be required each year.

No board – and certainly no NED – can afford to ignore or downplay the importance of transition planning. Those that engage will see twin benefits. They will be able to manage the risks and opportunities which arise for their businesses, and in doing so they will also contribute to positive societal outcomes.

Ashley Alder

Guest author

Chair of the Financial Conduct Authority

Note that this is adapted from a speech given to Chapter Zero members by Ashley Alder at the LSEG Market Open on 27 June 2023.

Guest authors

Our guest authors write in a personal capacity and the views expressed within may not reflect those of Chapter Zero.

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