Travers Smith's Sustainability Insights: Why Less Might Be More (Podcast)

KEY INSIGHTS

UK consults on bold climate regulation: In its pre-election manifesto, the government pledged to require climate transition plans for large companies and financial institutions and is seeking views on how to implement that policy.

"Comply or explain" is on the table: Despite its manifesto promise, the UK government may encourage adoption of a plan but allow entities in scope to explain why they don't have one.

Proportionality over prescription: In their responses, industry associations favour targeted, flexible rules – warning that rigid mandates could actually hinder ambition and competitiveness.

A regular briefing for the alternative asset management industry.

The UK government made a very bold pledge before it was elected last year: to require FTSE 100 companies and UK-regulated financial institutions – including banks, asset managers, pension funds, and insurers – to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement.

That was indeed bold, in some important respects going further than any other major economy – including the EU. And, of course, the political landscape has changed since then, at home and abroad. Climate-sceptical political parties are gaining ground in the UK, and the EU is currently walking back its own transition plan requirement, following intense lobbying. Everyone knows President Trump's views. For these and other reasons, the Paris Agreement's 1.5°C goal now looks very challenging, especially for a fiduciary duty-bound asset manager or asset owner.

Given that backdrop, will the British government keep its promise?

Many are urging it to do so, and one recent poll suggests that almost two thirds of the UK population still backs a net zero goal. But there are compelling reasons why the government should be cautious and take a more nuanced approach.

In fact, it is already clear that – despite its manifesto pledge – the government remains at least somewhat open-minded: a consultation document on "implementation routes", issued in June, laid out a variety of options. One option would be to introduce a comply or explain obligation: entities could either disclose a credible plan – or choose not to and explain why.

The consultation, which closed this week, also sought views on whether to require entities in scope to align their plans with the 1.5°C target of the Paris Agreement, and whether to impose a legal requirement to implement the published plan. The government is also considering an extension of the rules to all "economically significant entities", potentially including large private companies, not just FTSE 100 companies.

The government clearly wants to cement the UK's leadership in climate finance. In 2013, the UK was the first major economy to mandate greenhouse gas emission disclosures by listed companies. It is now likely to adopt international sustainability reporting standards, and is expected to require large companies to use them.

At the same time, the government recognises that there is a balance to be struck. The competitiveness arguments are well-rehearsed in the context of disclosure regulations, and those also apply to transition plan obligations. And, as the EU has found with its roll out of sustainability regulation, it can be counter-productive to get too far ahead of key stakeholders.

But, for transition plans, there are also other, less obvious reasons to favour lighter touch regulation. The most prescriptive regulation is not always the most effective, and here less demanding rules might well deliver better outcomes.

"Rather than forcing an entity that is not yet committed to the transition to pretend otherwise – or impose more costs on firms for whom climate is not a material issue – the obligation should shine a light on businesses that are not doing enough"

First, requiring companies to "comply or explain" seems more likely to lead to honest, decision-useful reporting. Mandatory plans create incentives for firms to feign ambition – especially those with limited resources or exposure. When firms are required to give a detailed and structured explanation for why they have not published a Paris-aligned plan, investors gain insight into the real barriers: lack of viable technology, implacable supply chains, or uncertain domestic or global policy. This is actionable intelligence, not just cold comfort.

Second, while there may be a case for pushing listed giants further, not all firms should be treated the same. FTSE 100 companies – many of which already have plans and face the highest levels of scrutiny – are in a different category to large private companies and alternative asset managers. For them, a lighter touch is appropriate. In its response to the consultation, the UK's Private Equity and Venture Capital Association (BVCA) calls for "comply or explain" for large asset managers only, taking into account the nature and size of the firm, with flexibility for strategy-by-strategy plans where full portfolio coverage just does not fit.

Third, ambition is good and firms should certainly be encouraged to be as ambitious as they can be. Transition plans can spur much needed action. But requiring strict 1.5°C alignment across the board ignores reality. Entities that are not yet able to align with science-based pathways to 1.5°C due to technical infeasibility or significant commercial disadvantage should explain why – setting out the obstacles and trade-offs involved. This will clarify where action is most needed, and where government could contribute more through targeted policy, innovation support, or regulatory reform.

In other words, while "comply or explain" reveals the system's weak spots, compulsory alignment could obscure them. Rather than forcing an entity that is not yet committed to transition to pretend otherwise – or impose more costs on firms for whom climate is not a material issue – the obligation should shine a light on businesses that are not doing enough. It might also trigger strategic reflection on the risks and opportunities ahead.

Separately, the government does seem likely to resist calls for an explicit requirement to implement the published plan. Company directors must honestly believe they can deliver their transition plan when it is published, but making companies legally liable for delivering the plan, even if circumstances change, would create significant legal uncertainty. It would probably also reduce ambition – and increase the lawyer-drafted carve-outs. The EU seems likely to drop the implementation requirement from its own transition plan law (CS3D) – as well as only applying it to the very largest companies – and it would be hard for the UK to justify doing otherwise in the current political climate.

In sum: many respondents to the consultation, including those in private markets, have encouraged the government to adopt a measured approach. Driving honest, decision-useful disclosures should be the guiding star for these reforms. Although some will argue that demanding regulation is the best way to achieve that, there are good reasons to start with "comply or explain" and to build in proportionality and flexibility. That way, the UK can continue to set the benchmark for effective climate regulation – without strangling future growth, or risking a damaging about-turn in the years ahead.

The PRI has issued a new guide to Sustainability in Supply Chains for private markets firms and Travers Smith has produced a tracker on supply chain due diligence regulations around the world to support the PRI guidance.

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