Developing A Credible Climate Transition Plan
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The world urgently needs a transition to a low greenhouse gas (GHG) and climate-resilient economy. Transition planning and the disclosure of Climate Transition Plans are critical to this transformation.
Transition plans are increasingly important to investors, lenders, and financial institutions. Almost two years ago, 602 global investors issued a statement to governments and companies to take action. Similarly, over 675 financial institutions from 50 countries have joined the Glasgow Financial Alliance for Net Zero (GFANZ). According to CDP, over 5900 companies disclosed having a Climate Transition Plan in place – a 44% increase from 2022.
At the same time, companies are being held accountable to their transition plans. An annual report from the Grantham Research Institute on Climate Change and the Environment at the London School of Economics assessing climate litigation trends found at least 47 new cases, adding to the 140 previous cases, challenging governments or corporations of making inaccurate claims regarding contributions to the transition to a low-carbon future.
With the increased scrutiny on transition planning, it is important to consider what a credible transition plan entails and how the term and expectations are evolving.
What is a Climate Transition Plan?
A Climate Transition Plan (CTP) is an aspect of an entity’s overall strategy that lays out its targets, actions, or resources for its transition toward a lower-carbon economy, including actions such as reducing its greenhouse gas emissions (IFRS S2, TPT).
I have observed the term transition plan loosely used to describe Greenhouse Gas reduction planning (a broad term that does not specify what the target is) and Science Based Targets (which specifies a carbon emissions reduction target in line with keeping global warming to 1.5C above pre-industrial temperature), so it is important to recognize while a CTP does include a reduction plan and target, it also requires a detailed implementation strategy that includes oversight, risk management, and financial planning.
What is the Gold Standard for Climate Transition Plans?
Source: TPT Disclosure Framework
There is a slight variation between transition plan elements across the different climate laws, frameworks, and standards, as presented in CDP’s 2023 technical note on Climate Transition Plans. However, a clear convergence exists around several key elements of a robust and credible CTP.
The Transition Plan Taskforce (TPT) was launched in 2022 by the UK government during COP26 to bring together industry, academia, regulators, and existing standards and frameworks to develop good practices for transition plan disclosures. The resulting TPT Framework was released in October 2023 and is quickly becoming the gold standard for CTPs. It is consistent with and builds on the climate-related disclosure standards issued by the ISSB, IFRS S2, and the Glasgow Finance Alliance for Net Zero (GFANZ) framework and guidance.
What is the Transition Plan Taskforce Framework?
The TPT Disclosure Framework recommends clearly articulating an entity’s overarching aim for its transition plan, or strategic ambition. A strategic ambition includes an entity’s objectives and priorities for responding and contributing to the transition towards a low GHG-emissions, climate-resilient economy. It also sets out whether and how the entity is pursuing these objectives and priorities in a manner that captures opportunities, avoids adverse impacts for stakeholders and society, and safeguards the natural environment.
The TPT Framework applies the three guiding principles of Ambition, Action, and Accountability.
Ambition that reflects urgency to decarbonize, respond to climate-related risks and opportunities, and contribute to an economy-wide transition
Action to translate strategic ambition into concrete, short-, medium-, and long-term steps
Accountability through integration with organizational processes for business and financial planning and governance
Ambition, Action, and Accountability are applied across the five disclosure elements of Foundations, Implementation Strategy, Engagement Strategy, Metrics and Targets, and Governance.
Are Climate Transition Plans required?
It depends on where an entity is reporting.
The ISSB’s climate-related Standard, IFRS S2, does not require companies to put transition plans in place. However, IFRS S2 does require entities to disclose information about any climate-related transition plans a company has, including key assumptions used in developing these plans and the dependencies on which the plan relies. You can find an up-to-date list of countries that require disclosure to IFRS S2 on the IFRS website, but currently, many jurisdictions plan to or already have adopted them, including Canada, the UK, India, Japan, the Philippines, and Australia.
If an entity is in scope of the European Union’s Corporate Sustainability Reporting Directive (CSRD), it will have to disclose transition plans if it has one, or if it does not, explain why it doesn’t and when it plans to develop one. Likewise, entities that fall in scope of the Corporate Sustainability Due Diligence Directive (CSDDD) are required to adopt and implement a transition plan and “to ensure, through best efforts, that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5C in-line with the Paris Agreement and the objective of achieving climate neutrality” (Art. 15.1, CSDDD).
What are the first steps for developing a credible transition plan?
It is important to recognize that transition planning is an iterative, multi-year process.
The foundation of your Climate Transition Plan should focus on understanding:
Your reporting obligation and stakeholder expectations: This will help you determine your drivers, what your ambition should be, and how it aligns with your overall business strategy.
Your capacity to develop, implement and oversee the Climate Transition Plan: This will help you determine how quickly you can mature your Climate Transition Plan, where you may need additional support or capacity building, and internal champions to build support.
Your GHG inventory, including upstream and downstream emission sources: A GHG inventory is pretty common now, but it is important that the inventory is accurate to determine the baseline for your target, allowing you to evaluate where and to what extent you can make reductions.
KERAMIDA’s professionals help companies meet rapidly evolving ESG regulatory requirements and develop robust and credible transition plans. For more information on how we can assist your organization, contact us or call (800) 508-8034 to speak with one of our Climate Transition Planning experts today.
Author
Becky Twohey, Ph.D., GRI, FSA
Vice President, Sustainability
KERAMIDA Inc.
Contact Becky at btwohey@keramida.com.
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