Climate transition plans: time for companies to take action

Climate transition plans are shifting from a recommendation to a requirement. Current and future regulations are mandating companies to produce credible plans that will require significant effort to produce and put into action.

So, what do these plans entail? How do they differ from climate goals and targets? And what do companies need to do to get ready? Read on for an overview.

What is a climate transition plan?

Climate transition plans comprehensively detail how a company is going to evolve in order to operate in a climate-constrained economy. They outline the process by which a company’s business model and operations will change to achieve their decarbonisation goals.

These robust documents place the impacts, risks and opportunities of climate change at the heart of a company’s strategy.

How do climate transition plans differ from decarbonisation targets?

Many companies will have net zero targets or some sort of roadmap to decarbonise operations. They’re usually owned by sustainability teams and potentially cover risks that companies see as financially relevant for their ongoing operations.

However, transition plans go much deeper and much further. They are integrated into the business model of a company and must evolve as that model changes over time. As such, they require buy-in from multiple stakeholders across the organisation.

• Finance teams will have to budget for anticipated operational changes.
• Managers will have to adapt processes to accommodate change.
• R&D departments will need to create new, more sustainable products and services.
• Sustainability teams will be key in coordinating actions and gathering data on progress.

What regulations and frameworks require climate transition plans?

Regulations in major economies are beginning to mandate companies to produce viable transition plans. Moreover, the main climate-related reporting frameworks include them as a required standard. This heightens the need to be prepared.

Some, like the Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB), only require disclosure of a transition plan if a company has one.

More recently, regulations such as the Corporate Sustainability Due Diligence Directive (CSDDD) and the UK’s upcoming Sustainability Disclosure Requirements obligate companies to have a transition plan.

Are companies prepared with credible climate transition plans?

Climate transition plans are a serious undertaking for any company and will take time. But many may need to pick up the pace. The Carbon Disclosure Project (CDP) recently reported that in 2023 just 0.6% of the 23,000+ companies that disclose through its platform have a ‘credible’ transition plan – one that includes all 21 of the CDP’s recommended indicators.

Just over 10% of reporting companies provided a plan with more than two-thirds of the required indicators.

What should a climate transition plan contain?

Most frameworks are not specific about what a transition plan should contain. However, the EU’s CSRD and CSDDD outline four broad elements required. They require that a transition plan shows how a company’s strategy and business model are compatible with:

• the transition to a sustainable economy
• limiting global temperature change to 1.5˚C, in line with Paris Agreement goals
• the objective of hitting net zero by 2050.

They also require transparency around exposure to fossil fuel-related activities.

The European Financial Reporting Advisory Group (EFRAG) – the designers of the reporting standards used by CSRD – also plan to publish advice on transition plans to guide companies more clearly on what and how to report.

In the meantime, the highest profile attempt to inform companies about transition plans is the UK’s Transition Plan Taskforce (TPT). Launched shortly after COP26, the TPT provides best practices for companies to create and submit their transition plans. It is aligned with the ISSB’s definition of a climate-related transition plan and will likely also form the basis for EFRAG’s own guidance.

The TPT guidelines emphasise taking a ‘strategic and rounded approach’ to setting what it calls a company’s strategic ambition. This central ambition should address three key inter-connected pillars:

1. decarbonising the company’s operations
2. responding to the company’s climate-related risks and opportunities
3. contributing to the wider transition to a low-carbon economy.

Taking this strategic ambition, companies can form a transition plan that provides clear action steps that are accountable to a broad range of stakeholders.

Time to take action?

In our view, the focus being placed on transition plans by various international reporting institutions and regulatory bodies will only intensify. As will investor and societal demand for more climate-related information. Getting ahead of the curve will give companies a competitive advantage when transition plans become mandatory in their jurisdiction.

And, of course, creating the plan is just the first step. The next is to take action to deliver it. This is what companies will be held accountable to, by internal and external stakeholders.

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