In this blog, Ricardo ESG and climate disclosure expert, Leandro Peraro explains the components of what makes a climate transition plan credible and explores how you can pull together work you have likely already done on existing climate-related disclosures to provide a robust basis for your climate transition plan.
Does your organisation have a credible climate transition plan? Although many companies report having climate transition plans, only 81 out of 18,600 organisations disclosing to CDP in 2022 had a 'credible' plan. CDP is the international non-profit organisation that runs the global disclosure system for investors and companies to manage their environmental impacts. So, even if your organisation already has a transition plan it is likely you will need to rework and refine it to comply with future regulatory and investor expectations.
Regulatory developments and increasing demands from investors and other stakeholders means that now is the time to start or review your climate transition plan building on the foundations you already have in place to develop resilience for your business and work towards a low carbon future.
What is a climate transition plan?
A climate transition plan is the next step in your climate journey and forms a key part of your business strategy. It demonstrates to regulators, investors and other stakeholders how your business is effectively prioritising its decarbonisation efforts for a green economy, as well as its targets and actions to do so.
Definitions vary slightly between the major governing bodies that define climate transition plans but there is broad consensus amongst the major governing bodies, regulators and standard-setters on the definition of climate transition plans:
Organisation / Regulation / Standard
Climate transition plan definition
|UK Transition Plan Taskforce (TPT)||A transition plan is integral to an entity’s overall strategy, setting out its plan to contribute to and prepare for a rapid global transition towards a low GHG-emissions economy|
|CDP (formerly known as the Climate Disclosure Project)||A credible climate transition plan is one that sets out how a business will thrive in a 1.5°C world.|
|Taskforce for Climate-related Financial Disclosure (TCFD)||A transition plan is an aspect of an organization’s overall business strategy that lays out a set of targets and actions supporting its transition toward a low-carbon economy, including actions such as reducing its GHG emissions.|
|International Financial reporting Standards (IFRS)/ International Sustainability Standards Board (ISSB)||—'[a]n aspect of an entity’s overall strategy that lays out the entity’s targets and actions for its transition towards a lower-carbon economy, including actions such as reducing its greenhouse gas emissions’. IFRS S2 Appendix A|
|Corporate Sustainability Reporting Directive (CSRD)/ European Sustainability reporting Standards (ESRS)||Aspect of an undertaking’s overall strategy that lays out a set of targets and actions supporting its transition toward limiting climate change to 1.5°C. ESRS E1|
Why do climate transition plans matter?
The trend of increasing climate-related regulatory reporting is set to continue worldwide. The UK Government have proposed Sustainability Disclosure Requirements that will mandate climate transition plans across the private sector. Expanding worldwide, the International Organisation of Securities Commissions (IOSCO) have endorsed the first two IFRS Sustainability Disclosure Standards issued by the ISSB, and the European Commission have adopted Directive 2022/2464 which detail the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD). Their adoption signals mandating a more prescriptive degree of sustainability and climate-related corporate reporting, demanding a more comprehensive understanding of climate transition plans and how organisations plan to play their role in decarbonising and transitioning to a greener economy.
Back at COP26 in Glasgow (2021), the UK government announced the establishment of a Transition Plan Taskforce (TPT), which was given a two year mandate to develop a “gold standard” framework for transition plans alongside implementation guidance for the private sector. The final disclosure framework is set to launch on Tuesday 9th October, 2023, following stakeholder consultation feedback that scored an 85% approval rating with the approach taken.
The Financial Conduct Authority has signalled that it will draw on the outputs of the TPT to strengthen future disclosure rules for listed companies and financial firms. This will also begin to standardise the way in which climate transition plans are presented in filings, addressing the need found by Ricardo’s report on “The role of transition plans in the UK’s pathway to net zero”, commissioned by the UK Climate Change Committee (CCC) in 2022 to provide an independent and critical assessment of what climate transition plans should include and what policy mechanisms can be used to ensure the UK’s transition plan standard raises ambitions for reducing greenhouse gas emissions.
What makes a climate transition plan credible?
Reports from the Climate Policy Initiative and WWF advocate that credible CTPs demonstrate true commitment to climate action. These should; demonstrate quantified, time-bound interim greenhouse gas emission reduction targets supporting an institutional-wide 2050 net zero goal adhering to a 1.5°C pathway set within wider context-specific sustainability targets and goals (including considerations for a socially just transition); identify high-impact decarbonisation levers as part of an implementation strategy; transparently report on progress, assumptions, monitoring and accountability processes as part of the organisation’s wider disclosures; and be reviewed and revised regularly, flexibly incorporating feedback and increase ambition with progress.
The TPT’s implementation guidance grounds it’s disclosure framework in three ‘guiding principles’ (which are formed from a consolidation of CDP’s technical note):
Outlining objectives and priorities to prepare for rapid decarbonisation. These should include material transition-relevant actions that could affect the organisation’s long-term enterprise value, and be informed by both the latest national commitments and international agreement on climate change. Any greenhouse gas emission reduction targets should consider Scopes 1-3 and should prioritise direct abatement over offsetting via carbon credits.
Connecting the entity’s financial planning, operations, and resources through concrete steps that can be taken in the short- and medium-term to achieve its strategic objectives, based on defined assumptions and analysis of dependencies and uncertainties.
Ensuring climate transition plans set quantified and timebound metrics and targets, supported by robust governance, reporting, and accountability mechanisms, subject to external verification or assurance, and responsive to ongoing feedback from key stakeholders.
Expected difficulty of disclosure against the TPT Framework
|Highest expected difficulty||Higher expected difficulty||Medium expected difficulty|
|TCFD and IFRS S2 alignment:||Strategy||Metrics and targets||Governance|
|TPT disclosure elements:||1. Foundations||2. Implementation strategy||3. Engagement strategy||4. Metrics and targets||5. Governance|
|TPT disclosure sub elements:||1.1 Objectives and priorities||2.1 Business planning and operations||3.1 Engagement with value chain||4.1 Governance, business and operational metrics and targets||5.1 Board oversight and reporting|
|1.2 Business model implications||2.2 Products and services||3.2 Engagement with industry||4.2 Financial metrics and targets||5.2 Roles responsibilities and accountability|
|2.3 Policies and conditions||3.3 Engagement with government, public sector and civil society||4.3 GHG emissions metrics and targets||5.3 Culture|
|2.4 Financial planning||4.4 Carbon credits||5.4 Incentives and renumeration|
|2.5 Sensitivity analysis||5.5 Skills competentcies and training|
How do you integrate your current initiatives into your climate transition plan?
The reality is that different departments lead on decarbonisation, risk management, supply chain engagement, financial forecasting, compliance, etc., in a segmented fashion. Your organisation’s climate transition plan is an opportunity to bring all of these together in a cohesive and robust plan, and most importantly, implement it effectively to ensure meaningful steps towards a low-carbon future.
The TPT recommends three areas for a strategic and rounded approach to transition planning, taking action to: decarbonise, respond to climate-related risks and opportunities, and contribute to the economy-wide transition.
Your organisation may have already begun to take steps in these three areas, so there is no need to start from scratch. Build off these, pull together the different existing elements, identify gaps, create a cohesive narrative, and develop action plans to address them.
Governance is core to these plans. It is the glue that holds these elements together, attributes responsibility for action, and should drive progress. It is vital that governance is backed up by the development of a strong climate action culture across your organisation. This should be engrained across and within departments but should be driven and led by example from the top. A strong organisational culture builds resilience, meaning that the success of plans does not hinge on select individuals. It aligns your whole organisation towards achieving your goals. This kind of culture is cultivated by clear, open communication and feedback, inclusivity, and responsibility.
What initiatives are already underway to understand and reduce your carbon footprint? Perhaps you have started with a GHG emissions baseline, or have taken a step further and established net zero targets (e.g. a 2050 net zero target with interim targets of reducing emissions by 50% by 2030). This is central to your transition plan as the overarching goal.
The TPT has identified that quantifying the expected financial impacts of your plan is often one of the most difficult areas to disclose. In Ricardo’s experience, starting with what you already know is best – such as the CAPEX and OPEX costs of implementing your projects. This can be used to estimate potential returns and conservatively model impacts on enterprise value with improved accuracy through iterations and as data becomes more available.
2. Responding to climate-related risks and opportunities
The TCFD Recommendations, IFRS S2 and CSRD ESRS E1 climate reporting standards require the identification of risks and opportunities. This is a great place to start in addressing climate-related issues important to your business, sector, and the location and jurisdictions in which it operates. For example, your organisation may have identified climate-related physical risks (such as increasing flooding or storms), or opportunities (such as an increased demand for low carbon products and services). These need to be forward-looking to reflect the changing circumstances of the road to 2050 and beyond.
3. Contributing to economy-wide transition
The key here is to communicate what your company’s contribution can be. Identify projects and investments that offer an additional means to accelerate the transition, providing a broader picture that supports the development and scaling of products and services needed to achieve net zero, whilst minimising future risk and protecting long term value.
If you’ve already carried out a portfolio sustainability assessment, you’ll have an indication of which products and services should be the priority focus for your company. For example, an analysis of avoided emissions for customers can demonstrate the bigger picture of the transition to the low carbon economy. Avoided emissions can be counted when an activity results in preventing emissions from being released that would have otherwise occurred. An example of this would be Ricardo’s work with the waste and recycling sector diverting materials from landfill for reuse or recycling, thus offsetting the need to make new products from virgin materials.
When and how should I start my transition plan?
Simple answer – right now. You need a credible plan for reporting to both regulators and investors as well as it being an essential tool to help you align your investments, operations, projects, supply chain and workforce in order to achieve your climate ambitions.
In fact, every climate transition plan will and should be an iterative process. Don’t delay on the grounds that you don’t have all the information - make a start and keep reworking it as more accurate data is available and your governance structure and organisational culture aligns to the process. Identify gaps and work collaboratively to resolve these. You likely already have more data and information than you thought within the organisation, it’s just a matter of bringing it all together.
Four stages to prepare your climate transition plan
(adapted from TPT)
|Develop action plan||
How to get support with your transition plan
We’re not denying it – pulling together a credible transition plan is complex, nuanced and critically important. It impacts the future of your business and the future of the planet. We want to help you to get it right on both counts.
Ricardo’s experts can help you to develop and implement a comprehensive transition plan that is credible, effective and tailored to your organisation. The breadth of our capabilities means we can be your trusted advisor right from the evidence gathering and strategy stage through to implementing and reporting your successes. Our depth of experience advising both policy makers and corporations across multiple sectors means we know the most valuable insights for success and resilience in the short and longer term. We use a suite of robust methodologies such as double materiality assessments, life cycle assessment, economic modelling, feasibility studies, portfolio assessments, regulatory reviews and more to provide you with the data, analysis and expert advice for confident decision making and accelerated progress during your climate transition.