Clifford Chance

The Framework provides a helpful reference point for companies to use when reviewing and stress-testing their existing transition-related disclosures and updating transition plans. Companies should consider whether their existing disclosures align with the Framework’s recommendations and, where discrepancies exist, determine if these are justifiable based on the company’s strategy and circumstances.

Although compliance with the Framework is currently voluntary, the heightened scrutiny of the accuracy, credibility, and completeness of transition-related disclosures, means that companies should carefully consider the Framework as part of their broader governance process for relevant disclosures.

The initial step involves evaluating your company’s strategic ambition concerning the transition to net-zero, and how this is reflected in your organisation’s governance, planning, and ongoing disclosures. The Framework encourages companies to take a strategic and rounded approach to their transition planning. This involves not only focusing on their own decarbonisation and addressing their own climate-related risks and opportunities, but also considering how they can contribute to an economy-wide transition and protect and enhance long-term value for stakeholders, society, the economy and natural environment on which they depend.

It is, of course, for each company and its directors to determine the scope and ambition of their transition plan.

The recent decision in ClientEarth v Shell plc(3) offers directors reassurance that UK courts will not interfere with business decisions in relation to climate strategy made in good faith where the directors have considered all relevant factors. However, following the correct decision-making procedure and being able to demonstrate that you have done so is key.

Whilst the Framework is focused on the UK, many other jurisdictions, including the EU and US, are implementing new climate and transition-related disclosure rules. The EU’s draft Corporate Sustainability Due Diligence Directive (CSDDD) suggests that the EU may go further and require certain EU and non-EU companies to have a ‘Paris-aligned’ transition plan. The US SEC’s Climate Disclosure Rule for US securities issuers is said to be imminent, and California is planning to enact its own GHG emissions and climate risk disclosure legislation.

Companies should evaluate the potential applicability and timing of these requirements and take them into account (along with the many additional sources of guidance and recommendations that may apply to their business sectors) when developing their transition plan.

The good news for companies navigating these constantly evolving requirements and differing timelines is that standard setters are increasingly working together to ensure their disclosure standards are interoperable and cross-refer to other relevant guidance or recommendations.

For instance, the Framework has been designed to build on the climate-related disclosure standard IFRS S2 issued by the International Sustainability Standards Board (which is in the process of being endorsed for use in the UK). In addition, the TPT has published mapping documents to IFRS S2, the TCFD’s Recommendations and Guidance and the European Sustainability Reporting Standards. The Framework also aligns with the Glasgow Financial Alliance for Net Zero (GFANZ) transition plan framework. The TPT hopes that the Framework will inform the development and convergence of transition plan disclosures in other jurisdictions.

Transition plans are increasingly under intense scrutiny from investors, regulators and other stakeholders. The risk of climate-related claims, both in terms of adequacy of mitigation strategies and accuracy of disclosures, is escalating.

Companies should view their transition plan disclosures in light of these developments and consider steps they can take to mitigate associated legal risks.

Key considerations for companies include:

• Ensuring disclosures are accurate and not misleading by omission. Avoid making promises or focusing solely on the “good news”. Provide context and balance.
• Maintaining consistency between transition plan disclosures, financial statements, any other sustainability reporting, and across different channels (for example, social media, websites, etc.).
• Explaining underlying assumptions, judgements, estimates, and sources of uncertainty. Use disclaimers where appropriate.
• Strengthening processes to develop and verify disclosures and to challenge the reasonableness of assumptions and judgements made and documenting these appropriately.
• Ensuring effective board/committee/management oversight.
  Consider obtaining external assurance where appropriate.
• Keeping statements under review and up to date.

Companies that seek to adopt the best practice approach set out in the Framework are likely to address many of the points set out above and to have gone a long way towards mitigating the risk of being accused of greenwashing.

For a company, reporting on plans to transition to a lowercarbon economy is more challenging than reporting on historical financial information. A transition plan is necessarily forward-looking, has inherent uncertainties and often relies on underlying information that may be less reliable to start with (for example, where information is obtained from other entities in the value chain).

The internal systems and controls that companies have established to ensure their transition plan reporting is accurate and not misleading (for example, GHG emissions), and to challenge the reasonableness of assumptions and judgements made, are likely to be relatively new and may well be less developed compared with those for financial reporting.

However, as the importance of these disclosures grows, so too do regulatory expectations for oversight and accountability. The FRC is proposing to revise the UK Corporate Governance Code and expand the role of the audit committee and enhance Board accountability for the effectiveness of internal controls over all reporting. By integrating financial and sustainability reporting teams, companies can ensure internal coherence, communication and consistency in reporting processes. In anticipation of changes to the UK Corporate Governance Code, companies should review their governance structures and processes to ensure that they are fit for purpose, not least in the context of climate change and the transition to a net-zero economy. Board oversight of reporting on climate risks and the extent of climate expertise on boards are also on the proxy advisers’ agenda, and so additional board training could be beneficial.

Whilst the Framework sets out what good practice transition plan disclosures should look like, the TPT recognises that companies will need time to develop and iterate their transition plans. As the FCA recommends, early engagement with the Framework should assist companies to improve their existing disclosures as well as to plan ahead.

The Clifford Chance Transition Planning team has been advising the entities that comprise the TPT Secretariat on both the Framework and certain sector guidance, as well as being represented on the Just Transition working group. We also have been supporting the Taskforce on Nature-related Financial Disclosures in developing their framework which was launched in September. We use these insights to inform our advice to companies on a range of matters relating to transition planning, and sustainability and climate-related risk management.

1. https://www.fca.org.uk/publications/multi-firm-reviews/tcfd-aligned-disclosures-premium-listed-commercial-companies
2. https://www.fca.org.uk/publications/newsletters/primary-market-bulletin-45
3. ClientEarth v Shell plc [2023] EWHC 1137 (Ch)