What is a Climate Transition Plan?
The Task Force on Climate Related Financial Disclosures (TCFD) was created in 2015 to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders. Within the October 2021 status update, the TCFD provided new guidance on developing metrics, targets and climate transition plans.
A climate transition plan sets out how an organisation will adapt as we move towards a low carbon economy and should provide:
- high-level targets the organisation is using to mitigate climate risk, including greenhouse gas reduction targets (e.g. a net zero commitment),
- interim milestones, with short and long-term goals,
- actionable steps to meet those targets, and;
- transition governance, including linkage of performance to remuneration.
Why do Climate Transition Plans matter?
Mandatory requirements: the Chancellor signalled at COP26 the intention to make transition plans mandatory for all firms across the economy, as part of the Green Finance Strategy Roadmap. At present, climate transition plans are included in the FCA’s listing rules for some listed companies and asset owners and managers. The government launched UK Transition Plan Taskforce will publish a gold-standard Sector-Neutral Transition Plan framework for consultation at the end of the 2022.
From April 2022, over 1,300 of the largest UK-registered companies and financial institutions are required to disclose climate related financial information on a mandatory basis in line with TCFD recommendations, with first disclosures made in 2023. This takes in many of the UK’s largest traded companies, banks and insurers, as well as private companies with over 500 employees and £500 million in turnover. With the UK Government moving towards making disclosure of climate transition plans mandatory, we envisage other major economies will follow this approach.
Decarbonisation statements require action: climate transition plans provide confidence to the market and investors that the ever-increasing wave of net zero commitments will turn into real action. The expectation has evolved from requiring a decarbonisation commitment to requiring disclosure of how commitments will be met. Organisations should also be able to demonstrate how their governance model is adapting and how the transition is being embedded through linkages to renumeration and other KPI’s.
This action is required at both the strategic and operational level: companies are recognising the overarching impact the transition will have on their business model – from the products they offer, to how they are produced and distributed. This top-down and bottom-up approach has implications for both OPEX and CAPEX decisions, requiring boards to make strategic decisions across their business to enable delivery of the climate transition plan.
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Value creation, protection, and resilience building: while some companies may see the creation of a climate transition plan as simply a compliance exercise, it provides a significant opportunity for a business to take stock and reassess their strategy and business plans. This exercise will likely reveal opportunities for value creation, such as new revenue streams presented by transitioning to a low-carbon economy and build resilience by proactively addressing future climate-related risks.
What are the challenges and opportunities?
The onus now falls on organisations to develop a climate transition plan, which comes with a set of challenges. Notable actions that can be taken to overcome these challenges include:
- Think wider than a decarbonisation roadmap: a climate transition plan is easily mistaken for a net zero roadmap. Rather than simply articulating a decarbonisation trajectory and a target date, a climate transition plan overlays climate risk and employs scenario analysis to drive the timing of lever deployment and sets the required governance processes.
- Realise this is an iterative process: data inputs used to generate the climate transition plan need to be robust, with both the inputs and the plan itself being regularly updated to ensure analysis is accurate, measurable and replicable. Over time the data available will improve. A climate transition plan is a live document and both iterations and course corrections will be necessary as a business and its market evolves.
- Secure stakeholder support to embed within wider strategy: organisations need to recognise the inherent relationship between climate strategy and overall business strategy. Developing a climate transition plan is not a standalone activity and requires support across a wide range of stakeholders to enable the transformation,
- Extend the horizon of business plans and assumptions: the time horizons for assumptions relating to a climate transition plan will often be further into the future than a company’s core business plans. This presents a challenge, not only in terms of accuracy, but also clearly defining these assumptions within the climate transition plan report and broader alignment with TCFD reporting.
- Prepare for a business transformation: A climate transition plan must be followed by transformative action. Any deviation from the plan will knock stakeholder confidence that a business is resilient to the future and serious about climate. A successful transformation requires technical knowledge, strong leadership, direction, governance and buy-in from the business.
Investing in the development of a robust and credible climate transition plan will position a business to take advantage of the low carbon economy, including key areas such as resource efficiency, creating a competitive position on new low emission products and increasing the overall resilience of their operations. Put simply, a proper climate transition plan will help an organisation to remain sustainable and profitable into the future.
How can KPMG help?
KPMG is passionate about helping organisations to deliver on their ESG agenda. Our Climate Risk & Strategy team is supporting Clients across a wide range of sectors as they progress on this journey – including guidance on setting net zero goals, climate scenario analysis and TCFD reporting. KPMG The Climate Risk & Strategy business is co-led by Partner’s Simon Weaver and Bridget Beals, with Simon representing KPMG on the TCFD and also acting as a strategic advisor across all of our TCFD engagements.
We have assisted some of KPMG’s largest Clients to develop their climate transition plans, undertaking activities including benchmarking against peers, performing gap analysis using pre-determined criteria and creating the overall transition strategy. Not only is this equipping these organisations for mandatory reporting requirements, but moreover it’s helping to shape their overarching business strategy.
Our highly skilled and diverse team is working across sectors from industrial and energy, to banking, life sciences and infrastructure and we can support you to develop a globally leading climate transition plan, regardless of where you currently sit on the journey towards the low carbon economy.