In the more than a decade I’ve spent working on climate change, carbon markets and the energy transition, there’s been a lot of exciting progress and commitments as companies and countries began embracing the net zero promise. I’m lucky enough to have been on the front lines witnessing organisations usher in crucial changes and helping others develop and implement net zero strategies myself.
Recently, the Financial Conduct Authority (FCA) indicated it might update its climate-related disclosure listing rule and move to mandatory reporting in the future, which could include climate transition plans1. Due to this possible change, I’ve prepared a guide on what goes into creating a transition plan and the potential challenges you could face while doing so.
What is a climate transition plan?
Climate transition plans present an organisation’s strategy in the move toward a low-carbon economy. It should contain the following:
- clear commitments, including greenhouse gas reduction targets (e.g., a net zero commitment)
- impacts of the transition on the company’s strategy and business model
- actionable steps to meet the commitments
- performance clearly measured, monitored and disclosed to highlight current and future achievements
- transition governance mechanisms, including connections between progress and remuneration.
TCFD recommends transition plans
In its 2021 status update report, the Taskforce on Climate-Related Financial Disclosures (TCFD) introduced climate transition plans as an additional disclosure recommendation. The FCA has subsequently adopted the updates to the TCFD recommendations, which therefore requires standard listed companies2 and FCA-regulated asset owners, managers and pension providers3, to disclose transition plans on a “comply or explain” basis starting in 2023.
There are clear connections between climate transition plan requirements and other TCFD recommendations including; effective governance, strategic decision-making to manage long-term risks and, metrics and targets to monitor the delivery of the plan.
What makes a good climate transition plan?
Whilst specific entities have regulatory disclosure requirements in line with those aforementioned, there are other climate transition planning standards that exist. The Glasgow Financial Alliance for Net Zero (GFANZ), the Carbon Disclosure Project (CDP) and Climate Bonds Initiative (CDI) have all released guidance on climate transition planning. Despite the range of current voluntary disclosure frameworks on climate transition plans, there are common themes across all of them. Disclosure of these themes should enable transition plan users to understand the credibility of the underlying strategy.
Currently, depending on the maturity and the types of disclosures that they are already making, companies are using best practice from multiple standards to stretch their climate transition plan disclosures to conform with wider societal expectations and regulatory standards
1. Underpinned by 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 and additionally internal carbon pricing can help drive management decision making within the organisation.
2. Strategic alignment: They should be aligned with addressing climate-related risks and opportunities. In turn, this should be a part of the wider company strategy. Strategy development should focus on
a. Decarbonization activities, in particular:
- strategic asset management and targeted measures to help improve emissions performance
- portfolio alignment measurement for financial institutions
- sectoral pathways across the economy
b. Detailed action plans to enhance investor understanding of interdependencies and challenges of being able to deliver on climate commitments, enabling their decision-making. These should include the company’s strategy to achieving net zero including impacts to the current business model, risks and opportunities of the commitment and potential future costs.
c. Engagement with a variety of stakeholders, enabling a transition that can be achieved through:
- public sector engagement to advocate for policies that support or enable an accelerated and orderly transition to net zero
- collectively working on common challenges to represent sector views cohesively
- supporting clients and suppliers by encouraging net zero aligned transition strategies.
In addition, climate transition plans should outline to external users how an entity plans to finance its transition activities and use policies to guide implementation and potential trade-offs between the transition strategy and key financial metrics.
3. Strength in quantification: Long-term and interim targets enable an entity to set its transition to a low-carbon economy. Selected targets should be in line with sector-wide, science-based pathways. Progress against targets should be tracked regularly using relevant metrics. Where transition plans align to TCFD metrics and targets exceed industry standards, there is particular emphasis on:
- an approach that is more comprehensive than emissions reductions that considers wider climate risks and opportunities, nature and biodiversity, and additional social and governance considerations
- 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 developments required.
Which elements of climate transition plans do firms find difficult?
KPMG professionals recently surveyed clients to understand how prepared they are to prepare and implement a climate transition plan. The survey showed a little more than one-third of clients were confident their net zero targets are feasible using existing technology, and of those, only 25 percent had cost their targets. Setting targets that rely on nascent technology creates a significant risk that these targets may not be achievable.