After a summer of heatwaves and wildfires, the Labour government must fulfil its green promises

Global South countries have long borne the worst of climate impacts, and are rightly calling for the Global North to contribute its fair share of finance to drive a just transition and respond to climate damages. But this summer’s heatwaves, wildfires, and rising food prices due to weather induced shortages are a stark reminder that the climate crisis is making life everywhere more unstable. 

This week, an important UK government consultation on rules to require companies and financial firms to have net zero transition plans, has closed. We unpack what the government consulted on, the key points we made in response, and why we’ll need a broader suite of measures to reorient financial flows for a safer future. 

What are net zero transition plans, and what did the government’s consultation ask?

Transition plans are roadmaps for how organisations - like companies, financial firms, or even governments - will align their activities with climate goals. Around the world, requirements for firms to have these plans are being developed and introduced by governments, central banks and other financial supervisors.

The Labour government committed in it’s manifesto to, “mandating UK-regulated financial institutions -  including banks, asset managers, pension funds, and insurers – and FTSE 100 companies, to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement”. The consultation asked how to implement this pledge. 

Transition planning rules have been long in the making. When the UK hosted COP26 in 2021, the then Conservative government said it would make plans mandatory for financial institutions and large companies. But in the years following, this was watered down. Plans were introduced on an optional basis, amidst a broader net-zero retreat that included pushing the Bank of England to roll back on its climate work. As we said in the run up to the 2024 general election, Labour’s manifesto was a welcome step-change - including as well as side transition plans a mission for clean power by 2030, increased public investment through the National Wealth Fund, and re-establishing the Bank of England’s former climate leadership.

But progress has been too slow. With a pledge to introduce a UK Green Taxonomy dropped, former Bank of England staff warning that the Bank is still not prioritising climate work, and a misguided push to deregulate the financial sector in pursuit of economic growth, the ambition with which the government implements transition plans will prove a marker of Labour’s commitment to greening the economy.

How to maximise the impact of transition plans

As Positive Money has previously proposed, transition plans are an important part of the toolkit for aligning financial flows with a green transition. Their effectiveness will depend upon the ambition with which they are introduced and enforced - as a risk management tool, or as part of a transformative agenda to redesign our financial system so that it is fit for the environmental transition?

To date, governments and central banks have largely approached environmental degradation through the lens of financial risks. This means that policies have been based on attempting to mitigate the risks posed to the financial system from the environment, rather than the role played by the financial system in driving environmental breakdown. But leading economists have long argued that this perspective is flawed - and the many initiatives designed to encourage the financial sector to ‘price in’ environmental risks have ultimately failed to shift financing away from destructive activities. 

Political economists Jens van’t Klooster and Klaudia Prodani have argued that by focusing on alignment with government policies, transition plans mark a shift away from this ‘risk-based’ approach, and have the potential to be ‘highly allocative’ in directing where finance flows. To fulfil this potential, they argue, requires ambitious leadership from the democratic policymakers who hold responsibility for climate and industrial policy, rather than transition planning being relegated solely to the domain of financial regulators. 

As we outlined in our response to the consultation, the government should - at a minimum - fulfil the three main components of its manifesto pledge: 

• Transition plans must be mandatory. As the House of Commons Environmental Audit Committee previously stated when it examined the Conservatives’ green finance policies, a ‘comply or explain’ approach would be “defeating the point of the policy” by allowing firms to simply disclose if they do not have a plan. 

• Firms must be required to not just produce, but to implement, plans. A wealth of experience and evidence shows us that relying on voluntary climate pledges and requirements that amount to ‘tick-box’ exercises will not drive companies to change their behaviour. Here, the UK must not follow the EU’s damaging deregulatory push against implementation requirements. 

• Plans must align with credible, science-based UK and global 1.5°C pathways. That means there is no place for new fossil fuels, which are incompatible with Net Zero, and should be required to include clear plans for the phase-out of fossil-fuels and deforestation, as recommended by UN experts. For financial firms, this means halting all forms of financing for new fossil fuels, and plans for phase-out of financing for fossil fuel producers and companies linked to deforestation.

Further questions include the extent to which factors such as nature, adaptation and just transition principles will be required in transition plans. For instance, the rules could require a wind-down financing for activities linked to the destruction of critical ecosystems at risk of crossing tipping points that would have catastrophic consequences for the environment and climate. 

Transformative tools for greening the economy?

Rapidly reorienting our economies to deliver a just and green transition is an enormous task, requiring a coordinated phasing out of entire sectors and harmful activities - like fossil fuels and activities linked to deforestation - and the rapid growth of others - like clean energy. This requires going beyond firm-level regulations, and moving towards the use of ambitious industrial policies, driven by public investment and credit policy, with our governments and central banks working together to steer investment to where it is needed. Transition plans should be implemented with maximum ambition, but should be just the start.