How to maximise potential when introducing mandatory Paris-aligned transition plans in the UK

Clear policies on corporate transition plan ambition could support much needed green, private-sector investment and the UK Government’s growth ambitions, writes Ira Poensgen.

In recent years corporate transition plans have been high on the policy agenda – these are forward-looking strategies for how a firm plans to respond and contribute to the economy-wide transition towards net zero and climate resilience. In the next few months the UK Government is due to set out how it will implement its manifesto commitment to introduce mandatory requirements for firms to develop and implement transition plans that are aligned with the 1.5ºC goal of the Paris Agreement. This is a much anticipated and welcome step-change that could play an important role in unlocking green investment flows.

Moving beyond a disclosure-only approach raises new policy design questions, such as how to ensure that these benchmarks can be updated over time as policy ambitions, scientific insights and our understanding of possible pathways evolve. However, a well-designed set of requirements would significantly reduce the uncertainty that firms face when making strategic decisions on climate action and unlock critical green investment. This would help the Government in delivering on its growth mission and decarbonisation ambitions.

Tackling emissions and resilience

The UK urgently needs to reverse one of the driving factors behind its sluggish growth: comparatively low levels of business investment, which has been substantially lower than its peers for years. It is also well established that the UK’s economic success is reliant an on orderly and fast transition towards net zero and climate resilience, both at home and abroad.

The economic impacts of a delayed transition on the UK would be considerable, with damage arising through disruption to agricultural production, trade impacts, droughts, flooding and other channels. In 2024, the Office for Budget Responsibility estimated that under a below-2-degree scenario, real GDP would be around 3% lower by 2074 compared with a hypothetical alternative in which there was no climate change. In a below-3-degree scenario, real GDP could be 5% lower by 2074.

In 2023, the UK’s territorial emissions accounted for about 0.72% of global emissions; while this figure may look small, it places the UK among the top 25 emitting countries globally. Tackling these emissions will make an important contribution to reducing cumulative global emissions, and therefore reduce expected damages at home. But the potential economic co-benefits of an accelerated domestic transition go much further, from improved health outcomes to lower energy costs. Taking action can also help position the UK as a global leader, accelerating innovation in climate solutions domestically which can be exported and drive decarbonisation internationally (see also our response to the UK’s consultation on Invest 2035: the UK’s modern industrial strategy).  

To deliver on its growth mission and decarbonisation objectives, a key priority for the Government should therefore be to identify levers that are likely to boost private sector investment that supports climate action – and transition plans are among these levers.

What do firms have planned?

The good news is that there is strong evidence that firms expect to make sizable climate-related investments in the coming years, and that these are ‘additional’, i.e. they go above and beyond what they would be expected to invest anyway. A recent Bank of England analysis investigated the climate-related investment trends of UK firms based on its Decision Maker Panel Survey. It found that over 50% of surveyed firms expect climate to have a positive impact on their total investment levels, with around 25% expecting this impact to be large. This effect is particularly strong for larger firms in more energy-intensive sectors, and the main drivers are efforts to switch to green energy sources and improve energy efficiency. Over 90% of firms expect that at least parts of this investment will be additional.

However, expected investment levels are still below what is required to deliver on the UK’s climate objectives. On the basis of the survey, the Bank estimates that firms will invest about £13 billion in climate-related investment per year from 2025 to 2027. While sizeable, this figure is still too low. In 2020, the Climate Change Committee estimated that an investment of £50 billion annually would be required by 2030 to deliver the UK’s Balanced Net Zero Pathway, with the majority coming from the private sector. In its 2021 Fiscal Risks report, the Office for Budget Responsibility estimated that only about 15–36% (£7.5–18bn) of that would likely be borne by public spending. Even if the higher end of that range were met, that still leaves an overall investment gap of £19bn.

What role could transition plans play in plugging the investment gap?

Transition plan obligations with clear 1.5-degree alignment requirements could play a significant role in unlocking these much-needed financial flows, through two main levers.

Firstly, making transition planning mandatory could play a significant role in improving managerial capacity and understanding of green investment opportunities. This matters significantly both for driving mitigation investments and strengthening firms’ resilience to physical impacts. There is a wide body of evidence to show that management practices are a significant determinant in whether firms take full advantage of profitable climate-related investment opportunities (e.g. see this OECD paper). Improved environmental management practices are consistently shown to be associated with higher investments into, and improved levels of, energy and resource efficiency. Similarly, a recent analysis based on data from the World Management Survey combined with data on natural disasters showed that firms with better management practices had more accurate perceptions of climate change-related risks, were more likely to have invested in adaptive measures, and demonstrated  greater resilience to natural disasters when these do materialise.

As emphasised in the work of the UK’s Transition Plan Taskforce (TPT), “Transition plans are an integral aspect of an entity’s corporate strategy.” Well-designed requirements for companies to develop and implement a transition plan can elevate climate change as an issue to the boardroom, increase engagement across all functions of firms, and accelerate the process of integrating climate considerations into organisation-wide strategic decision-making.

Secondly, an obligation for alignment with a clearly defined ambition level can shift the balance in favour of green investments. When firms face financial constraints and scale back investment activities, foregoing attractive investment opportunities, this scale-back tends to disproportionately impact green investments. A variety of factors contribute to this phenomenon, including that green investment opportunities often have lower return profiles, higher risk levels or require high initial fixed costs, which is less attractive in a constrained financing environment. A 2024 OECD analysis showed that strong environmental policies can have an important mediating effect in this context, increasing the likelihood of firms prioritising green investments.

Introducing a requirement for company transition plans to align to a clearly defined ambition level can be a powerful tool for tipping the balance in favour of green investment. It also does so without being prescriptive on the means, thus maintaining important space for companies to innovate and experiment with different strategies and approaches for reaching climate objectives.

Considerations for the Government as it plans its consultation

We are expecting an important consultation from the Government on its approach to introducing mandatory requirements for Paris-aligned transition plans. As it designs this consultation, and to maximise the potential impact of its policy to scale up green investment and reduce emissions, the Government should consider:

• What is the best benchmark to set? (E.g. should companies align to a set of self-selected or predefined global pathways, the UK’s legal net zero target and carbon budgets, or a series of specific criteria for emissions targets embedded within transition plans [similar to the Science Based Targets initiative’s approach]?)
• How can the benchmarks be future-proofed as our understanding of climate science, global emissions trajectories and climate solutions continues to evolve?
• What scope do the rules provide for considerations of the dependencies of transition journeys across firms and sectors? How can the right balance be struck between holding firms accountable for progress without penalising them for factors outside of their control?
• Will the requirements extend only to the UK’s territorial emissions or will the international operations of UK-headquartered companies be in scope?
• Who will be responsible for monitoring whether the transition plans put forward by firms are in line with the requirements and whether they are being implemented?

These are not trivial questions, but they are navigable ones. Ultimately, this is an exciting opportunity for the UK to demonstrate leadership and galvanise business investment in support of core government missions. With smart policy design, transition plans can provide clarity and direction to firms and become a catalyst for economic growth, resilience and climate action – going beyond a compliance exercise to being a strategic tool for the future.

The author would like to thank Sini Matikainen, Agnieszka Smolénska, Daisy Jamenson and Ben Gilbey for their comments and Georgina Kyriacou for editing. Over the coming months, CETEx will be gathering evidence on some of the questions raised above, to support the discussion on policy design.