What’s happened?
EFRAG, the body behind the evolution of the much talked about European Sustainability Reporting Standards (ESRS) has recently released its guidance on transition plans for climate change mitigation.
Targeted at large companies required to disclose under the EU’s new Corporate Sustainability Reporting Directive (CSRD) against ESRS, this guidance will be important for in-scope organisations.
We take a look at the broader ‘transition plan’ landscape and where this guidance fits.
What are they?
Transition plans are defined slightly differently by multiple entities globally, but the general consensus is that a “transition plan” is a set of targets and actions supporting an organisations transition toward limiting climate change to 1.5°C. This means not just setting net zero targets to drastically reduce GHG emissions, but also having a clear strategy to achieve these targets, and a plan to manage climate related risks and opportunities.
The Transition Plan Taskforce (TPT), which aims to set the ‘gold standard’ in transition plans, recommends that organisations follow three main principles:
- Ambition,
- Action; and
- Accountability.
Using these principles, transition plans should demonstrate how the organisation:
- Will decarbonise by reducing its GHG emissions in its own operations and in its value chain.
- Is responding to climate-related risks and opportunities, including its ambitions and actions to enhance its resilience to the changing climate and responding to climate-related risks and opportunities with mitigation measures.
- Contributes to an economy-wide transition, for example by providing products and services needed to embed and accelerate a transition to a low-GHG emissions and climate-resilient economy.
What makes climate transition plans different?
Imagine solving the most complex challenge humanity has faced, but doing it all blindfolded and with your hands tied. That’s what trying to achieve net zero is like without a climate transition plan. Hint: if you have a credible plan to achieve your net zero targets, you can untie your hands. If you understand your organisation’s place in a low carbon economy and you understand your climate-related risks and opportunities, take the blindfold off. Then you have a fighting chance.
- Transition plans are not just a net zero target or commitment without a plan to achieve it
Over 6,500 businesses globally have set targets under the Science Based Targets initiative (SBTI) alone, with many more in the process of setting them. It is clear that businesses understand more than ever the importance of staying within the 1.5°C target. However, more research is suggesting that many businesses do not have plans that sit behind these targets, and there is even less transparency on what these constitute if they are in place. For example, an EY study estimates that only 41% of the world’s largest businesses have published transition plans, despite most businesses setting public targets. Transition Plans push businesses towards taking action and being accountable for their progress, or lack thereof.
- Transition plans must consider internal stakeholder engagement as a key part of the strategy.
Stakeholder engagement is a key recommendation of the TPT. Without integration of a climate transition plan across the business, success is very limited. Cultural change is vital to ensure we get everyone onboard with the transition and do this successfully.
- Transition plans must have a means to monitor and report progress transparently.
A transition plan that is unable to demonstrate progress with credible evidence does not allow for accountability in achieving these targets, another key recommendation of the TPT.
Why are they important and prevalent at the moment?
Transition plans have been talked about a lot in the past few years, and even more so in the last few weeks, and there’s a reason for that. Not only are they a very practical and valuable means to ensure organisation are prepared for the future, but they also signal a coherent and unified way forward from the confusing and conflicting reporting situation the private sector has found itself in.
Formed back in 2022 to address this, TPT was created with the purpose of creating a framework for climate transition plans, and they launched the disclosure framework in 2023, outlining what constitutes a good transition plan for the private sector. They have also launched valuable sector specific guidance. Since then, there has been a general trend of countries integrating transition plan requirements into legislation and reporting requirements, all to provide investors, governments, and the public with more transparency on progress. The TPT is now being absorbed into the International Financial Reporting Standards (IFRS), as part of a more general shift towards integration of sustainability.
There is deviation in the reporting frameworks for transition plans globally, but one trend is clear, transition plans provide a means to increase transparency in climate action, and encourage real progress.
Key recent developments include:
- The EU (EFRAG) draft climate transition plan guidance was released this month, signaling the direction of travel for EU Transition Plan requirements under the ESRS
- Data shows a 44% increase in companies disclosing transition plans through the CDP
- The UK Financial Conduct Authority (FCA) has been undergoing a consultation to align reporting requirements for listed companies with the IFRS Sustainability Standards, and recommendations from the TPT
How can a transition plan benefit your business?
Aside from the transition plan itself, the legislation surrounding it will level up the playing field, making it easier to compare progress between organisations, leaving no space for confusing language. However, regardless of whether your organisation falls under mandatory legislation or not, a transition plan could be what you need to ensure long term success.
Governance is key to a successful transition plan. After decades of segmented legislation, and both mandatory and voluntary reporting requirements, transition plans bring together key elements of climate action; emission reductions, and managing climate risk and opportunities to contribute to the transition away from fossil fuels. For many organisations, a credible transition plan will make efforts in the area much more streamlined and clear, alongside making progress against targets much more likely. Putting sustainability and ESG aside, preparing your organisation for the future should be a no brainer.
What’s the risk of not having a transition plan?
- Extremely high risk of not delivering on targets
- Reputational damage
- Greenwashing risk
- Legislative compliance risk in some cases
Don’t have a climate transition plan? Or do you already have one you want to improve and implement? Do you have targets you need to understand, meet and communicate progress on?
We are busy supporting many of our clients to develop high integrity climate transition plans linked to their net zero and sustainability targets. Take a look at what we do and how we could help you.
