Support for transition planning requirements at Pensions UK conference tempered by concerns over ‘tick-box’ risks and lack of broader policy action.
Proposed transition planning requirements have the potential to embed sustainability factors into business strategy – for investors and corporates – but their impact on real-economy decarbonisation will be heavily influenced by accompanying policy initiatives.
There was a largely positive sentiment toward the introduction of transition plans by the UK and other governments at the Pensions UK Annual Conference this week. This optimism was tinged with caution, however, with experts warning that they should be rooted in business and investment realities – and not become an exercise in communication or compliance, as had been the case with climate risk disclosure rules.
Speaking at a panel session in Manchester, subtitled ‘Transitioning from Climate Disclosure to Real-world Impact’, Mark Hill, Climate and Sustainability Lead at The Pensions Regulator (TPR), said transition plans could provide “a framework for strategic planning”.
But Hill emphasised that a transition plan should not be viewed as “an end in itself”, with its value lying in the underlying process, through its potential to integrate climate change and other sustainability factors into business strategy.
Dan Mikulskis, Chief Investment Officer at the People’s Partnership (TPP), said transition plans were most likely to be of value in sectors where carbon emissions were particularly material to financial risk.
“Transition should rest on the business case,” he said, speaking at a separate session.
A holistic and integrated approach to transition planning applied as much to asset owners as the companies in their portfolios, according to David Russell, Chair of the Transition Pathway Initiative (TPI), and former head of responsible investment at the Universities Superannuation Scheme.
“Transition plans have got to be built into the normal activities of the fund,” he emphasised. “They cannot be a standalone project. They should be integrated into the management of the fund as a whole.”
Transition guidance
Guidance on voluntary transition planning is available from a number of bodies, including the Transition Planning Taskforce (TPT), established with support from UK regulators to map out how firms should manage the transition of their business models to a net zero economy.
Further guidance, including a framework for embedding finance into sector transition plans, is being developed by the UK’s Transition Finance Council, headed by COP26 President Alok Sharma.
The UK government is consulting on the introduction of transition planning requirements for large corporates and financial institutions, alongside a parallel exercise on Sustainability Reporting Standards.
The Department for Work and Pensions is also seeking feedback on transition planning requirements for pension funds as part of a three-year review of climate reporting. The TPR has established a Transition Planning Working Group to consolidate industry responses, helping to inform recommendations to the minister in Q1 2026.
Speaking to Sustainable Investor following a plenary speech at the conference, Pensions Minister Torsten Bell suggested pension funds’ existing efforts to incorporate sustainability would be a factor in the government’s approach.
“The UK is ahead of the game generally compared to most other countries, in terms of how sustainability is integrated into our institutional investment environment generally, and specifically into pensions. But let’s see where the review comes to,” he said.
“We should not be complacent. We should keep [asking] is there more we can do. That includes [looking at] the right level of burden on schemes, and the right level of consideration of systemic risks.”
The TPI’s latest annual report on transition planning by corporates – which analysed public data from 2,000 companies, representing three quarters of equities listed globally by market capitalisation – found that just 24% of firms were assessed as ‘above par’ in their adoption of management and governance practices needed for effective climate action.
While advocating in favour of transition planning to support pension funds’ management of climate risks, the TPI’s Russell said asset owners could not effectively decarbonise in the absence of policy change and corporate action.
“Investors in gilts will only be net zero by 2050 if the UK is net zero by 2050,” he said.
TPP’s Mikulskis said investors needed to re-evaluate climate-related investment approaches in light of the lack of policy progress made by governments over the last five years, including a reappraisal of their use of climate benchmarks.
“Asset owners can’t drive the transition,” he said. “Ignoring the lack of policy change risks exposing portfolios to unwanted risk by embedding too much decarbonisation into index construction.”
Learning from experience
The potential introduction of transition plans comes against a backdrop of concern over the impact on competitiveness of burdensome regulation, particularly on sustainability reporting. This week saw the European Parliament reach a compromise deal on the European Commission’s first omnibus package, which stripped back the requirements of several sustainability-related directives.
Speakers at Pensions UK acknowledged that the introduction into the UK legal framework of the disclosure recommendations of Task Force on Climate-related Financial Disclosures TCFD) had the unintended consequence of turning climate risk management into a compliance-led activity.
“The TCFD laid the foundation. It put climate on the trustee agenda. But it has become ‘business-as-usual’, a compliance exercise that looks in the rear-view mirror,” said TPR’s Hill.
Climate-related disclosures in line with the TCFD’s recommendations were introduced for large listed UK corporates and financial institutions in 2022, with scope expanding to other organisations from 2023 onward. However, certain pension funds were required to report climate risks in line with the TCFD from October 2021.
Although TCFD guidelines covered climate governance, strategy, risk, targets and metrics, the focus of in-scope organisations often centred on the reporting of backward-looking data – such as historical information on carbon emissions. This left investors and other stakeholders with insufficient information of the future plans of firms to reduce emissions.
The TPI’s Russell said transition plans had the potential to go beyond TCFD-based rules by encouraging firms to focus on how they manage their own transition to a net zero economy.
“These should not be thought of primarily as communications tools. These are absolutely management tools,” he said.
TPR’s Hill added that the development and incorporation of forward-looking metrics into transition planning would provide deeper insights for institutional investors.
“Transition plans will help to highlight investment opportunities in firms that can thrive in a net zero economy,” he said.
Support signalled
Olivia Sizeland, Senior Policy Advisor at Pensions UK, said the body’s members had signalled support for the UK government making transition plans mandatory for large corporates and financial institutions, but said there were arguments on either side.
As well as helping pension funds to fulfil their stewardship and fiduciary duties through the supply of consistent and comparable information, said Sizeland, transition plans could also provide a “tool for integrating climate into financial risk management”, while bolstering the UK’s role as leader in green finance.
However, she conceded that mandated transition plans had the potential to pose legal risk, albeit small, and to lead to transition plans becoming another box-ticking exercise, particularly for firms with less of experience of sustainability-related reporting.
An alternative approach – requiring the provision of transition plans on a comply or explain basis – would avoid these risks, but might not have the desired impact in terms of accelerating or deepening transition planning efforts.
“If transition plans succeed, they will support saver outcomes. But they must be credible, forward-looking and decision useful,” said Sizeland.
