From Disclosure to Action: Developing and Implementing a Leading Climate Transition Plan

by Syreel Mishra,

Manager,

Climate Change and Sustainability Services,

EY Ireland

and member of Green Team Network's "Knowledge & Content" Working Group

Recognising the urgency of limiting global warming to 1.5 degrees and moving towards a climate-resilient economy, many organisations have made commitments to reach Net-Zero emissions. While these commitments are a strong starting point, the implementation of a transition plan that captures opportunities, while safeguarding the natural environment and encouraging a fair and inclusive society, further demonstrates an organization’s drive for action.

Corporates and financial institutions are navigating climate transition plans in response to climate-related risks and opportunities, and evolving expectations from key stakeholders such as capital providers, customers, and regulators.

Though financial institutions contribute indirectly to global greenhouse gas (GHG) emissions, they play a key role in the transition through financing, leasing, underwriting, and investing activities. In May 2023, the Network for Greening the Financial System (NGFS) recognised the vital role climate transition plans can play in facilitating the effective and efficient allocation of capital across sectors for the transition to a low carbon economy.

What is a Climate Transition Plan?

A climate transition plan provides a description of an organisation’s implementation strategy to achieve its GHG reduction targets within a specified timeframe and its approach to stakeholder engagement to facilitate the transition to a low carbon economy.

Drivers for development of Climate Transition Plans

There are many drivers for the development of robust climate transition plans, including regulatory disclosure requirements and stakeholder interest from across an organisation’s value chain (upstream, own operations and downstream). Stakeholder interest for transparency and credible, yet ambitious, action is driving the need for dynamic climate transition plans.

Enhanced resiliency of business strategy and operations

Through the development of transition plans, an organisation can place the transition at the heart of its strategy and operations. This integration will help an organisation to:

• Enhance the ESG risk management framework with understanding of climate-related risks (physical and transition) that it may be exposed to.

• Prepare for the transition that needs to happen in the business.

• Develop an understanding of the potential magnitude of the financial effects of the climate-related risks to ensure preparedness.

• Identification of opportunities that may boost brand reputation, open new revenue streams, and elevate competitive edge.

• Coherently articulate the rationale and next steps for key stakeholders to ensure enhanced credibility and stakeholder satisfaction.

  
  

Rapidly evolving transition plan disclosure landscape

Organisations have an interactive transition plan disclosure landscape that can be leveraged to articulate credible transition plans.

In jurisdictions where ISSB Standards are to be adopted, organisations are likely to begin their transition plan development process by leveraging IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2: Climate-related Disclosures. It is important to note that IFRS S2 contains disclosure requirements relevant to transition planning.

In October 2023, the UK Transition Plan Taskforce (TPT) published the final Disclosure Framework and a suite of Implementation Guidance. The TPT Disclosure Framework contains foundational disclosure recommendations that are sector agnostic, and it builds on ISSB’s standards. It draws on the Glasgow Financial Alliance for Net Zero (GFANZ) framework and guidance for credible, comprehensive, and comparable net zero transition planning.

TPT has also published a Sector Summary and sector-specific Deep-Dive Guidance for the financial sector and real economy companies. The TPT Sector Deep Dive Guidance covers the following sectors:

▪              Asset Managers

▪              Asset Owners

▪              Banks

▪              Electric Utilities & Power Generators

▪              Food & Beverage

▪              Metals & Mining

▪              Oil & Gas

TPT have focussed on these sectors specifically due to the sectors’ GHG emissions and the need for (or capacity to mobilise) transition finance in the UK. This resource will provide an opportunity for organisations to kick-start their transition plan disclosures. 

While there is no TPT Sector Deep Dive Guidance for insurers and reinsurers, the TPT Sector Summary provides a high-level overview of decarbonisation levers, metrics & targets, and key sources of guidance for transition plans.

To ensure that the TPT guidelines for climate transition planning are compatible with other jurisdictions, they have engaged with non-UK governments and regulatory networks to build common baselines and principles for transition planning. TPT have engaged with the Financial Stability Board (FSB), the International Organization of Securities Commissions (IOSCO) and the Network for Greening the Financial System (NGFS), as well as the G7, G20, UNFCCC, and the Coalition of Finance Ministers for Climate Action.

Furthermore, requirements for transition plan disclosures are also incorporated within the European Sustainability Reporting Standards (ESRS) of the EU Corporate Sustainability Reporting Directive (CSRD), and the Taskforce on Climate-related Financial Disclosures (TCFD). In October 2023, the UK TPT published a comparison of the TPT Disclosure Framework to the ESRS to support organisations in integrating information from their transition plans when disclosing in line with the ESRS. In the next section, we will explore the alignment between the ESRS and the UK TPT Disclosure Framework.

Stakeholder Interests across the Value Chain

In addition to regulatory entities, employees and consumers are increasingly becoming climate conscious and demanding organisations demonstrate their purpose and action plan to transition to a low-carbon economy. From an investor perspective, climate transition plans signal to capital market ecosystems that an organisation’s business model is transitioning towards climate-resiliency.

Financial institutions, and global entities such as the UN Principles for Responsible Investing (UN PRI) and GFANZ are increasingly demanding disclosures on transition plans to understand how their investments will be impacted from transition risk.

Key elements of a Climate Transition Plan

The TPT Disclosure Framework outlines 5 disclosure elements which have been summarised in this section. Organisations can utilize this TPT Framework for the development of their climate transition plans. As demonstrated in the previous section, the TPT Disclosure Framework complements ISSB’s financial Standards IFRS S1 and S2, and aligns with disclosure requirements within the ESRS.

This provides an opportunity for organisations currently preparing for CSRD disclosures to leverage this preparation and insights towards the development of robust climate transition plans through the following elements of the TPT Disclosure Framework:

i. Foundations

Through Element 1 (‘Foundations’) disclosure is required on how the organisation plans to achieve the strategic ambition of its transition plan. The rest of the climate transition plan is built on this foundation as it sets out the organisation’s objectives and priorities for contributing to the transition to a climate-resilient economy.

In this section, organisations will be required to disclose how they aim to capture opportunities, avoid adverse impacts for stakeholders and society, and safeguard the natural environment. Through Element 1, organisations will be required to provide a description of the implications of its strategic ambition on its business model and value chain to demonstrate the integration of transition plan considerations in wider corporate strategy.

ii. Implementation Strategy

Through Element 2 (‘Implementation Strategy’), organisations will be required to disclose on short-, medium-, and long-term actions they are taking within their own operations, their portfolio of products and services, and policies and conditions to achieve the strategic ambition of their transition plan.

The actions (or decarbonisation levers) will be dependent on the nature of the business and may relate to matters such as phase-out of GHG-intensive assets, capital mobilisation with climate-related considerations, portfolio and supplier engagement.

Similar to the ESRS, the TPT Disclosure Framework also requires information about the effects of its transition plan on the organisation’s financial position, financial performance and cash flows over the short-, medium-, and long-term, including its plans on resourcing to achieve the strategic ambition of its transition plan.

iii. Engagement Strategy

In-depth disclosure on stakeholder engagement across the value chain is required by the ESRS and the UK TPT Disclosure Framework. Stakeholder engagement across the value chain is important to identify and pursue strategic opportunities.

Through Element 3 (‘Engagement Strategy’), an organisation is required to disclose on how it is engaging and plans to engage with its value chain, industry peers, government, public sector, communities and civil society to achieve the strategic ambition in its climate transition plan.

The aim of this segment is to provide information on engagement activities that the organisation is undertaking or planning to undertake to manage the impacts and dependencies of the transition plan on key stakeholders across the value chain.

iv. Metrics & Targets

Simply disclosing on the engagement and implementation strategy is not enough. Through Element 4, the TPT Disclosure Framework requires organisations to disclose on the metrics and targets utilized to track and monitor progress towards achieving the strategic ambition of their climate transition plan.

Disclosures under this Element will enable readers to understand whether the organisation’s targets are ambitious yet meaningful and allows them to assess the organisation’s performance. These metrics and targets shall relate to the organisation’s governance, engagement, business operations, financial performance, GHG emissions and removals as well as carbon credits.

v. Governance

The ESRS requires comprehensive disclosures on the governance structures pertaining to material sustainability matters. In alignment, in the UK, the TPT Disclosure Framework requires disclosure on how an organisation is embedding its climate transition plan within its governance structures and organisational arrangements. This aims to demonstrate how the transition plan is ‘owned’ by the Board (or other relevant governing bodies) and how the responsibilities, the monitoring and managing of the transition plan are allocated to senior management to achieve the strategic ambition of the climate transition plan.

Additionally, Element 5 requires information on how the organisation aligns or plans to align its culture, remuneration and incentive schemes and skill development and training to the strategic ambition of the climate transition plan.

The Way Forward

It is vital that transition plans are flexible, iterative, dynamic, and responsive to externalities and are regularly reviewed and updated (UK Transition Plan Taskforce). Organisations should understand that the development of climate transition plans is not a ‘once-off’ activity due to the scale and complexity of the challenge. There are uncertainties that will need to be navigated, such as those related to policy, technology, or climate change. As all organisations operate in an interdependent system, each organisation will need to actively engage with its stakeholders in its own business ecosystem, society, and the economy as it transitions.

Furthermore, engagement with internal and external stakeholders – across the value chain – is critical to the development and execution of credible transition plans. A robust internal governance arrangement should be established to ensure appropriate awareness, ownership, and challenge. As the effective execution of a transition plan will require full-organisational transformation, it should be approached as an integral part of the corporate strategy. 

The development of robust and credible climate transition plans has the potential to reduce greenwashing as well as result in genuine actions reducing global GHG emissions to achieve a low carbon economy. Through ESRS E1 - Climate Change and ESRS S1 - Own Workforce, organisations will be required to disclose on their climate transition plans in detail, including implementation (decarbonisation levers) and engagement strategy. To this effect, UK TPT has published a comparison of its disclosure framework to the ESRS. Organisations currently preparing for CSRD should leverage the UK TPT Disclosure Framework to develop disclosure-ready and and actionable climate transition plans.

Sources:

Climate Transition Planning, EPA Center for Corporate Climate Leadership, United States Environmental Protection Agency.

Sector Summary, Transition Plan Taskforce, April 2024.

The TPT Disclosure Framework, Transition Plan Taskforce, October 2023.

Stocktake on Financial Institutions, Transition Plans and their Relevance to Micro-prudential Authorities, Network for Greening the Financial System (NGFS), May 2023.

TPT Disclosure Framework - European Sustainability Reporting Standards: Comparison, Transition Plan Taskforce, October 2023.

Transition Planning Cycle, Transition Plan Taskforce, April 2024.

The Transition Plan Disclosure Landscape, Transition Plan Taskforce.