MFC108 Climate Trends - Strengthening Transition Plans Climbs to the Top of the Regulatory Agenda Blog Image V1

Climate Trends: Strengthening Transition Plans Climbs to the Top of the Regulatory Agenda

June 6, 2022

A transition plan is the backbone of an organization’s climate strategy as it sets out how a company, public body, or financial institution intends to adapt to a low-carbon economy. Organizations that make climate commitments — like greenhouse gas (GHG) emissions reduction targets — and don’t produce transition plans are failing their stakeholders. This is because it’s impossible to judge how credible their commitments are without these plans.

Many businesses already understand the importance of climate transition plans. A recent survey conducted by the Task Force on Climate-related Financial Disclosures (TCFD) found two-thirds of respondents had either already developed a transition plan or planned to do so in the next year, while another 22% said they planned to do so further in the future. 

The problem is that today’s climate transition plans vary in detail and quality, making it hard for stakeholders to get a clear view on disclosing organizations’ climate targets and actions. Current plans are also difficult to compare and contrast across organizations. 

Governments and regulators are trying to solve this issue. On April 25, the UK Treasury launched the Transition Plan Taskforce (TPT), with a mandate to develop a “gold standard” for UK private sector organizations’ transition plans. Specifically, the TPT will produce a “Sector-Neutral Framework” to guide firms in developing their transition plans, which includes a list of “key elements” that they should cover. The “key elements” include information on entities’ overall climate ambitions, their GHG emissions reduction targets, and their engagement activities with the public sector and industry peers. The group will also develop “Sectoral Templates” and associated guidance to help companies in specific sectors disclose metrics and data that are relevant to their industries. Altogether, the TPT’s work is aimed at enabling private firms to produce standardized and useful transition plans.

The UK is not the only jurisdiction that’s looking to standardize organizations’ climate transition plans. The European Financial Reporting Advisory Group (EFRAG) is responsible for developing sustainability reporting rules that thousands of European Union (EU) firms will have to abide by from 2023 onward. On April 29, the group released a draft of its climate change standards, which include transition plan disclosure requirements similar to those put forward by the UK’s TPT. Significantly, the EFRAG standards would require a company to explain how its transition plan “is embedded in and aligned with its overall business strategy and financial planning.” This will stop firms from developing their climate and business plans in separate silos and force managers to integrate the different teams that are working on these projects.

Efforts to standardize and strengthen climate transition plans are also underway in the US. In March 2022, the US Securities and Exchange Commission proposed a climate risk disclosure rule that would cover all US-listed companies. This includes provisions for improving the credibility, effectiveness, and monitoring of companies’  transition plans. For example, businesses would have to publicly update their investors and other stakeholders on the progress of their transition plans each year. 

The International Sustainability Standards Board (ISSB) also released its draft climate-related disclosure requirements, which discuss transition plans, in March. Among other things, the requirements would force companies to describe their planned changes in strategy and resource allocation to tackle climate risks and maximize climate opportunities. They would also mandate the disclosure of businesses’ direct and indirect climate adaptation and mitigation efforts.  This requirement could substantially increase the amount of information that companies have to report and could become near-universal. This is because the ISSB standards are likely to be adopted by many of the 140 jurisdictions that already subscribe to the ISSB’s sister organization, the International Accounting Standards Board.

While many of these reporting initiatives differ, what ties them together is their focus on improving the quality of transition plans and promoting greater standardization. Regulators and standard-setters don’t want to see feeble transition plans that lack supporting metrics and aren’t comparable. To keep them happy, all businesses will need to raise their games by building up their internal capacities and leveraging external expertise. Companies will also need to transform their overall approaches to strategy. Climate strategy development can no longer be kept separate and detached from business planning. The two must be considered one and the same if businesses are to fulfill their reporting obligations and responsibilities to shareholders.

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