The opportunity to restrict warming to 1.5°C with no or limited overshoot has gone, according to the latest UN Environment Programme (“UNEP”) Emissions Gap Report. Which means the reference pathway for most climate targets, scenario analysis and transition plans in UK financial services has moved.

Global emissions in 2025 were 58.4 GtCO2e, level with 2024. The lowest overshoot scenario UNEP can still model peaks at 1.7 to 1.8°C and returns to 1.5°C by 2100 on roughly a coin toss. Reaching even that requires global emissions to fall 18% by 2030 and 45% by 2035 against 2025 levels. The new Nationally Determined Contributions (“NDCs”), covering 76% of global emissions, deliver only 11 to 15% by 2035 leaving a 16 GtCO2e gap. Current policies leave an even bigger gap and point to a 2.8°C temperature peak. This is a long way of making the point that the chance of an orderly transition looks to have died alongside the 1.5°C pathway.

A disorderly transition and hotter world create heightened financial risk across the lending and investment portfolios of banks and private equity. Something the prudential regulator and central banks are increasingly focused on, even as climate disclosure rules from the Financial Conduct Authority (“FCA”) and UK Government appear to be softening. We wrote about this widening gap between what firms are expected to say versus do in our recent reading between the lines on climate policy article. In brief, expectations are increasing on what to do in response to climate risk while requirements on what to say about it in public are stopping short of the step up previously anticipated.

The PRA’s December 2025 supervisory statement, SS5/25, significantly raised expectations on how banks and insurers identify and manage climate risk. Expectations which it further reinforced in a letter to select bank CFOs in September 2026. Bank of England staff have modelled a widening flood protection gap spilling into the UK mortgage market and James Talbot, the Bank's executive sponsor for climate, highlighted the increasing short term economic impacts from climate change and called for greater collaboration between insurers, reinsurers and banks in an October 2026 speech.

Meanwhile, in September 2026, the FCA confirmed in PS26/19 that UK listed companies will report against the UK Sustainability Reporting Standards ("UK SRS") on a comply or explain basis, rather than blanket mandatory reporting. And, although firms must state whether they have a transition plan, they are not required to have one. The Government consulted in June 2025 on mandating 1.5°C-aligned transition plans for regulated financial institutions and has not yet responded.

The only durable protection a lender or investor can develop in this context is a climate transition plan. By this, we do not mean a glossy public document that ticks a disclosure box. We mean an internal strategy document built the way a corporate strategy and financial plan are built: bottom up, commercial, and owned by the business. That it covers adaptation as well as decarbonisation is, now, also essential.

Most plans are not built that way. They are built top down from a target and a reporting deadline, which was a rational response when the tools on offer, SBTi among them, were top down and 1.5°C-aligned or nothing. Better data has made bottom up modelling possible since, and, frankly, it isn't like we are strangers to approximations in financial planning.

However, regardless of its robustness, if your plan is built on the no-overshoot pathway, four things in it are now wrong. And if you do not yet have a plan, these four things are important considerations as you build one.

Targets. Any target described as 1.5°C-aligned, where delivery depends on the wider economy moving with it, is now impossible rather than improbable. Even on the best case now available, emissions in 2035 are 9 GtCO2e higher than a 1.5°C-aligned pathway requires, a gap UNEP calls unbridgeable.

Scenarios. Climate scenario analysis built on the no-overshoot pathways in the IPCC's Sixth Assessment Report ("AR6") is out of date. But what matters more for financial risk is what this implies for the extreme cases: the disorderly transition and hot house world scenarios that tend to drive provisions. We do not currently have timelines for the IPCC's next Assessment Report ("AR7") which would update scenario pathways and feed into other scenario providers such as NGFS. That means that current analysis likely understates the materiality of the risks.

Pace. Emissions cuts of 5.7% a year and carbon removal at a scale nobody can yet deliver are required to achieve the new best case. A transition like that cannot be smooth or orderly. We have been saying to our clients for two years that disorderly is the best case rather than the stress case, and the numbers in the UNEP report point the same way. Is there an orderly version of a 1.8°C world at all, and if disorderly is now the best case, what should the downside look like?

This brings us to adaptation. The best available case peaks at 1.7 to 1.8°C above pre-industrial levels, with only around a 50% chance of temperatures falling back to 1.5°C by 2100. And on current policies the world is heading for 2.8°C and still rising after 2100. At today’s level of warming, we are already bearing witness to a marked increase in wildfires, flooding, heatwaves and droughts to the extent that they can threaten national security not to mention food security and livelihoods. A new normal of widening extremes needs factoring into plans.

None of this is a reason for lenders and investors to stop planning for and working towards the low carbon transition. Every five years of emissions at current levels adds roughly 0.1°C to peak temperatures, so near term efforts still make a real difference. And progress is being made, with transition economics increasingly making a purely commercial case. Solar build-out has run seven times faster than anticipated in 2015, and renewable capacity three times faster. The COP31 Presidency's proposal to target 35% of final energy consumption to be electricity by 2035 gives lenders and investors a new, more tangible target to consider. Our last Low-Carbon Transition Index, which looks beneath the newsflow to understand the real state of the transition, concluded that things are heading in the right direction, albeit not quickly enough.

Which brings us back to transition plans. In our 2026 ESG Banking Barometer the number of banks, building societies and fintechs in our cohort of 60 that published a transition plan rose from 17 to 19. This proportion is still very low in a sector where the PRA expects firms to have at least internal plans when operating in a jurisdiction with a net zero target (i.e. the UK). The fact that, currently, neither listing rules nor government mandates require financial services firms to have a transition plan is beside the point.

Private equity has no equivalent push from the PRA. However, the risk still exists in the portfolio, it is still getting larger, and just because the disclosure regime is less stringent doesn’t mean that valuations will not be affected over time. Exit multiples, not reporting requirements, are what should drive the decision to develop a transition plan in a portfolio company or fund.

What, then, should climate and sustainability leads in banking and private equity do next? With no updated scenarios to work with, this is a judgement call. If you have no transition plan, we still think the balance favours building one now: the UNEP findings, prudential risk angle and the policy signals warrant the use of existing climate scenarios with a focus on the more extreme cases. Build the transition plan as an internal strategy document rather than something dressed up for publication, with the same rigour as the financial plan and consider adaptation alongside decarbonisation.

If you built a transition plan recently, the case for redoing it urgently, before scenarios are updated, is weaker. Most plans written so far are high level and contain sufficient lower-hanging fruit to address in the near term. The next natural review point, usually about three years into a transition plan, should be soon enough.

Perigon builds climate transition plans for lenders and investors: bottom up, commercial, and with adaptation in them. If you want to assess what you have against best practice or the changing climate and climate policy landscapes, get in touch.

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