Preparing your organisation for climate transition planning
The COP27 has put significant emphasis on prioritising a shift to a decarbonised economy; there is a clear goal ‘to accelerate global climate action through emissions reduction, scaled-up adaption efforts and enhanced flows of appropriate finance’. Climate transition plans are vital not only for the future of our planet, but in helping businesses and organisations keep up with competitors in their respective industries.
There are many factors to consider when creating climate transition plans that may be appropriate for your organisation. Find below key insights into climate transition planning.
What is a climate transition plan?
Climate transition plans detail an organisation’s strategic approach to participating in the push toward decarbonising the economy. The plan typically contains the following elements:
- Clear understanding of the context, challenges and opportunities ahead.
- Firm commitments to actions and goals, including CO2 emission reduction targets, such as a net zero target.
- Impacts of the transition on the organisation, its people and stakeholders.
- Actionable steps with suitable deadlines to meet the commitments.
- Transparency, with performance clearly measured and disclosed.
- Governance mechanisms, including links between progress and remuneration.
Transition plans are a TCFD recommendation
In its 2021 status update report, the Taskforce on Climate-related Financial Disclosures (TCFD) introduced climate transition plans as an additional disclosure recommendation. Organisations are increasingly leveraging TCFD for reporting as 90 percent of the ASX100 recognise climate change as a financial risk and 74 percent are already reporting against the TCFD, while pressure to formally adopt TCFD disclosure requirements builds.
Climate transition plan requirements are distinctly linked with other TCFD recommendations such as effective governance, strategic decision-making, risk management, and metrics and targets to monitor the delivery of the plan.
What makes a good climate transition plan?
A commonality of key themes is emerging across climate transition plans. It is essential in building the credibility of a plan to disclose against these themes.
1. Effective governance processes
Transition plans should be transparent in the oversight and responsibilities of senior management and the board in preparing, reviewing, approving and delivering the plan. Management remuneration should be linked to the delivery of the plan.
2. Strategic alignment:
The plan must detail its challenges and role in the decarbonisation strategy (and a decarbonised economy). It should be addressing climate risk and opportunities and clearly align to the wider company strategy. Strategy development should focus on:
- targeted measures to improve emissions reduction performance
- portfolio alignment measurement for financial institutions
- sectoral pathways across the economy.
b. Action plans that create a deeper understanding of the trials and interdependencies accompanying the delivery of climate action and commitments. These must include the company’s strategy to achieving time-bound emission reduction targets (including a net zero strategy) and steps to mitigate impacts to the current business model, risks and opportunities and potential future costs
c. Engagement with a range of stakeholders, enabling a just transition achieved through:
- engagement to encourage policies supporting or enabling a just energy transition
- collectively working on common challenges to represent sector views
- supporting clients and suppliers by encouraging net zero-aligned transition strategies
- ensuring impacted communities and civil society are centrally considered
Climate transition plans should overview how an entity will finance its activities and use policies to guide implementation and manage trade-offs between the energy transition strategy and key financial metrics.
3. Strength in quantification:
Long-term and interim targets enable an entity to set its own pace in its efforts to decarbonise. Selected targets should be in line with sector-wide, science-backed pathways consistent with the Paris Agreement. Progress against targets should be tracked regularly using relevant metrics. While transition plans are primarily focused on decarbonisation, the broader ESG agenda should remain at the forefront and organisations should ensure co-benefits and synergies are captured by considering:
- an approach beyond emissions reductions, considering nature and biodiversity, community engagement and additional social benefits
- the financial value of future actions, including detailed cost pathways that indicate both to the company and external shareholders the extent and type of business effort required.
Which elements of climate transition planning do firms find difficult?
We recently surveyed clients to understand how prepared they are to develop and implement a climate transition plan. Our survey showed less than half of clients were confident that their net zero emissions targets were achievable using existing technology, and of those, only 25 percent had costed their targets. Setting targets that rely on nascent technology creates a significant risk that these targets may not be achieved.
Clients also find it challenging to implement climate transition plans because carbon considerations are not sufficiently embedded in decision-making. This can be difficult to overcome, but internal consideration of climate change and emissions is crucial in helping the organisation execute its overall plan. Training, implementing an internal carbon price (ICP) and enforcing empowered linkages to departmental or individual key performance indicators (KPIs) can play a key enabling role.
Climate change is an existential challenge that will remain a concern well into the future. While uncertainty remains, we know that decarbonising our economy is not only essential, but urgent. KPMG understands that every organisation is different in its focus, its role and its strategy – knowing this, we can help you understand where you are, where you want to go and how you can get there; this is your Climate Transition Plan.
Please contact us if you have any questions about transition planning.
