The basics of transition planning

What you need to know

• Many jurisdictions are introducing requirements for certain companies to develop and disclose climate transition plans (TPs).
• TPs are strategic plans developed by companies to evidence and guide their shift from business-as-usual operations to a low-carbon, climate-resilient future, that aligns with global climate goals, such as limiting global warming to 1.5 °C above pre-industrial levels under the Paris Agreement.
• The Transition Plan Taskforce Disclosure Framework (the TPT Framework)¹ published in October 2023 is considered a gold standard for credible TP disclosures.
• The TPT Framework sets out five core disclosure elements of a TP (ie, foundations, implementation strategy, engagement strategy, metrics and targets and governance). The TPT also published guidance² on the transition planning cycle, which gives information on the process for developing a TP.
• The International Financial Reporting Standards (IFRS) Foundation has assumed responsibility for the TPT Framework, and is integrating the TPT's materials into its training materials and guidance on the transition plan-related aspects of IFRS S2 (Climate-related Financial Disclosures).

Introduction

CDP (formerly the Carbon Disclosure Project) reports that over 1 in 4 companies disclosed that they have a 1.5°C-aligned TP in place³. Despite shifting regulatory drivers for TPs in the EU and some high-profile companies rowing back on climate targets, there are still many drivers for companies to develop and publish a TP. In particular, CDP reports that financial institutions managing US $145 trillion are already integrating TP data into their due diligence processes⁴ so companies with a TP are likely to find that it helps to unlock financing.

This article explores what TPs are and how to prepare one.

What is a TP?

The International Sustainability Standards Board (ISSB) IFRS S2 on climate-related financial disclosures define a TP as “an aspect of an entity’s overall strategy that lays out the entity’s targets, actions, or resources for its transition towards a lower-carbon economy, including actions such as reducing its greenhouse gas emissions” ⁵.

A TP should set out how a company (either a business or a public sector company) intends to contribute to and prepare for a rapid global transition to a low greenhouse gas (GHG) emissions and climate-resilient economy. It should not be a standalone document, but instead woven into the company's corporate strategy and financial planning, informing corporate decision-making and ensuring climate considerations are embedded across business activities. It needs to reflect the urgency to act and should be informed by the latest international agreements on climate change and national commitments such as Nationally Determined Contributions (NDCs) submitted under the Paris Agreement. A TP should cover both mitigation – reducing GHG emissions – and adaptation – managing the impacts of climate change.

TPs have multiple purposes and will be of interest to a variety of stakeholders. Key stakeholders are investors who want to understand the climate risks that investee companies are subject to and how those risks will be managed. TPs are also a key strategy document for internal stakeholders to understand how the company plans to transition to a decarbonised economy by managing its climate risks and capitalise on opportunities presented by the transitioning global economy. Its purpose is to increase the resilience of companies and address the management of climate-related risks and opportunities (CROs).

Why are companies producing TPs?

The main reasons for producing a TP are:

• Mandatory requirements for TPs in some jurisdictions: In some jurisdictions, local legislation requires certain companies to develop or disclose information about their TPs. IFRS S2, which has been or is in the process of being adopted in over 30 jurisdictions globally ⁶, requires disclosure of any TP that a company has (paragraph 14(a)(iv)).
• Investor demand/access to finance: As banks and other investors face increasing demands to report on financed emissions, they are requiring information on their customers’ TPs to determine whether proposed finance is aligned with the transition to net zero.
• Directors’ duties: There is growing evidence concerning directors' responsibility for integrating CROs into business strategy, risk management and financial planning ⁷.
• Possible defence to greenwashing action: A credible, comprehensive, and consistent TP may provide a defence to allegations of greenwashing and climate litigation (see Are Transition Plans at risk of greenwashing claims? and Federal Court sets the standard for corporate climate commitments).
• Market practice: As more companies voluntarily produce TPs in response to shareholders expectations and market developments, companies may also decide to produce a TP to keep up with their peers.

Who are the main users of TPs?

Credible TPs help stakeholders make investment and governance decisions as well as contribute more widely to an understanding of the pace and quality of the global transition. TPs serve important functions for a range of stakeholders:

• Investors (ie, shareholders or creditors) consider the information about CROs that a company faces and how these are managed to determine a company's risk exposure and default risk.
• Financial regulators consider regulated entities' TPs in their assessment of financial stability, assessing effective management of climate-related financial risks across sectors and the financial system.
• Governments rely on corporate TPs to understand the pace of the global and local transition, informing policy development and national climate target setting.
• Public and customers rely on disclosures in TPs to understand companies' progress towards climate targets and the climate impact of goods or services they purchase to inform their purchasing decisions.
• Market participants / sector peers use TPs to understand how they rank against competitors and to identify best practice in achieving sector climate pathways.

Is there guidance on what a TP is or should contain?

Yes –several key bodies have developed best practice standards that companies can use when developing a TP.

TPT Disclosure Framework and IFRS S2

The International Financial Reporting Standards Foundation (IFRS) S2 ⁸, issued by the ISSB, is a key global standard for climate-related financial disclosures. Although IFRS S2 does not mandate that companies develop a TP, it requires companies to disclose any TP that they have in place, including the actions, targets, and resources allocated for transitioning to a lower-carbon economy.

In June 2024, the IFRS Foundation assumed responsibility for the TPT's disclosure-specific materials (see Transition Plan Taskforce publishes final report on next steps for Transition Plans). Those materials are available on the IFRS Sustainability Knowledge Hub and include: 

• The TPT Disclosure Framework ⁹ published by the TPT in October 2023. The framework sets out good practice standards and guidance for credible, comprehensive and consistent TPs.
• Sector specific guidance for 30 financial and real economy sectors ¹⁰ , which gives an overview of each sector’s decarbonisation levers, metrics & targets, and key sources of guidance for a TP in that sector.
• Technical mapping of the main provisions in Task Force on Climate-Related Financial Disclosures (TCFD) recommendations and accompanying guidance relevant to transition planning and also IFRS S2. The technical mapping documents explain the TPT disclosure recommendation(s) that a company may wish to consider as a source of guidance for each TCFD and IFRS S2 provision.

Taskforce on Climate-related Financial Disclosures (TCFD)

In October 2021, the TCFD published guidance on TPs: 

• An Implementation Annex that provides a definition of a TP and recommends that companies prepare one.
• Guidance on Metrics, Targets and Transition Plans ¹¹ that highlights what should be included in an effective TP and how TPs should be disclosed.

In November 2023, following completion of the TCFD's remit, the IFRS Foundation took over the monitoring of the progress of companies’ climate-related disclosures from the TCFD. 

Other sources and local guidance

The World Green Building Council ¹²  and the International Energy Agency ¹³  also provide helpful information on how sectors can transition.

The UK Net Zero Council and the Transition Finance Council have published guidance on Sector Transition Plans (STPs) ¹⁴ , which sets out a framework for sectors to collaboratively develop decarbonisation pathways aligned with national net zero targets (see Sector Transition Plans guidance supports sector benchmarking, coordination and accountability).

Countries are also developing local guidance for transition planning. An interactive map of the jurisdictional developments around transition planning can be found here.

Key components of a TP

A TP should include:

• The company's strategic ambition to mitigate, manage and respond to climate change and to respond to opportunities that result from the transition. The TP should reflect the urgency to transition and be informed by the latest international agreements on climate change and national commitments, such as NDCs submitted under the Paris Agreement. The TPT emphasises three elements of taking a strategic and rounded approach to developing a TP:
  • decarbonising the company;
  • responding to the CROs affecting the company; and
  • contributing to an economy-wide transition.
• Actions over the short (3 year), medium and long-term that the company will take to translate its ambition into reality. This should include planned changes to its business strategy, resource allocation and portfolio of products and services. It should also include an engagement strategy that describes how the company will engage stakeholders in its value chain, sector, government and civil society to deliver its strategic ambition. It should also contain measures to address material risks and to leverage opportunities for the environment and stakeholders (including the workforce, supply chains, communities and customers).
• Metrics & targets relating to governance, engagement, operations, financial arrangements and GHG emissions that the company is using to drive and monitor progress towards its strategic ambition.
• Governance mechanisms relating to the board and management roles and remuneration as well as information on organisational culture, skills, competencies and training that support delivery of the TP.

What is best practice?

The following bullet points summarise what the TPT considers makes a good TP.

• Coverage. The TP should cover the entire company. The reduction targets in the TP should cover scopes 1–3 emissions and should include both interim (5–10 year) and long-term targets.
• Focus on reductions rather than offsetting. The actions in the TP should prioritise direct abatement of the company's GHG emissions rather than purchasing carbon credits. The TP should specify the intended use of credits and the type of credits the company may buy (eg, removal or avoidance project credits and natural or technological removals).
• Specify how the targets will be met. The TP should quantify how each action will contribute to achieving the strategic objectives or, if it is not possible to quantify the actions, provide a qualitative description. Key internal policies and conditions to align the company's activities with its strategic ambition should be disclosed. These include policies relating to energy and water use, managing its environmental impact, lending and investment activities and choice of, and requirements for, supply chain partners.
• Good governance measures. The TP should be integrated into business operations and management processes. The following bullet points give examples of that integration.
  • Resourcing and verification. The TP should be underpinned by a clear resourcing plan and specify whether it is externally verified or assured.
  • Financial implications. The financial implications of planned changes to strategy, resource allocation and products and services should be disclosed along with how the financial position (eg, changes in revenues and expenditure) will change over time.
  • Board oversight. The arrangements for board oversight of the TP, targets and progress towards them should be disclosed. The TP should also state if the plan is subject to shareholder approval.
  • Culture and human resources. The TP should describe the steps that are in place to ensure the company's culture is aligned with its strategic ambition (eg, thought leadership and training programmes, HR policies and procedures). It should also describe how employee remuneration and incentives are aligned with the strategic ambition.

Reporting arrangements

In many jurisdictions, companies will be required to make climate-related financial disclosures using IFRS S2. 

The TPT recommends that companies should publish a standalone TP at least every 3 years. If significant changes are made to the TP, then the revised TP should be published sooner. Companies should report as part of their TCFD or ISSB-aligned financial reporting on:

• progress against their TP; and
• material updates.

Companies should apply the same corporate reporting norms to their TP as they do to their annual financial report. For example, they should approach materiality in the same way.

How to get started on your TP

The TPT's proposals go beyond a tick-box approach to sustainability and enhanced reporting. They usher in a new approach to how companies plan, resource, finance, manage and govern their activities. A TP should pervade the entire company and be reflected in all teams’ budgets, plans and reporting.

This will require significant collaboration not just across the company but also with external advisors including environmental consultants, lawyers and auditors. Companies are on a steep learning curve to deliver the systemic changes needed to address the climate crisis and make a just transition to a decarbonised economy. TPs are the way they can map out that path.

A long journey begins with the first step. Companies can begin their transition with the following steps:

1. Read the TPT Disclosure Framework.
2. Form a team of colleagues and external advisors who can cover the various disciplines needed to formulate a TP (eg, strategy, risk management, legal, operations and finance).
3. Follow the four-stage process (ie, baselining, setting ambition, developing an action plan and accountability) in the TPT Implementation Guidance.

With thanks to Rob Heslenfeld, Executive, Ashurst Risk Advisory for his input.