Businesses are confused about climate transition planning. We think it's EFRAG's role to provide clarity.
5 MINUTE READ | BY KATE JONES AND NICK WYVER | 11 SEPT 2024
Our view in brief
Climate transition plans are the key mechanism for businesses to develop and communicate plans for how they’ll prepare for, and contribute to, the transition to a low-carbon economy. But the divergence in regulatory requirements is undermining their importance.
EFRAG (the European Financial Reporting Advisory Group), which develops guidance for CSRD, the EU’s ambitious sustainability regulation, is currently developing guidance for what climate transition plans must look like under its mandated requirement.
Our view is that EFRAG must align its guidance with the TPT (the Transition Plan Taskforce). The TPT is widely recognised as the ‘gold standard’ for climate transition planning, has been developed in partnership with industry, and is already being integrated into the ISSB. Any other decision will risk years of climate transition plans that are non-comparable, not useful, and ultimately, a missed opportunity to accelerate climate action.
The challenge
The current state of transition plan reporting is, frankly, a bit of a mess. We've held a series of roundtables with clients focused on transition planning this summer. The key thing we've heard from businesses is confusion about the current state of play.
“All of these frameworks say slightly different things so I have to manually piece them together, which is so time consuming – it doesn’t make sense.”
From a recent client conversation
Businesses are struggling with the first step of even understanding what’s necessary, let alone making sure their plan meets the mark – especially when in many instances, they are facing multiple regulatory requirements which will take effect at different points in different geographies. And this regulatory quagmire means that it’s near impossible for businesses to get toward the strategic conversations that transition planning should inspire.
The risk is that the result of this work is a suite of transition plans which are not comparable, defeating the very purpose of giving stakeholders information about a business’ resilience to the transition. It will result in businesses needing to bolt on additional disclosures as they incrementally fall in scope of more regulation, ensuring that transition plans are led by disclosure requirements, rather than the substance of what it takes to get to net zero.
The current landscape
The current challenge is that multiple different standards setters and regulators, including ISSB, TPT, CSRD, CSDDD, and CDP, have all acted to encourage or mandate businesses to develop and disclose transition plans. These efforts, whilst aligned in intention of pushing businesses toward a 1.5°C future, have, however, lacked alignment in the specific requirements for implementation and disclosure.
We’ve got a fuller breakdown of why the landscape of climate transition planning is so fragmented at the bottom of this article - but our view is that this is fragmentation is untenable and EFRAG must make the most of the opportunity to create more alignment.
Why this is important
Transition plans are not – or should not be – regulatory compliance exercises. When done well, they help companies to go beyond setting targets, and move into the important work of which actions are going to be required to achieve them.
The process of developing a transition plan also help companies work through the ways in which they’re going to navigate the transition commercially, balancing the need for further investment with the commercial opportunities and risks the transition presents. Transition plans will increasingly become central to businesses’ conversations with its investors, its employees, its customers, and its wider stakeholder base.
“It [developing a transition plan] has been the first time that the business has engaged in the commercial implications of getting to net zero.”
From a recent client conversation
How EFRAG can – and must - act
EFRAG has an opportunity to bring clarity and coherence to the climate transition planning landscape.
EFRAG released a workplace for its Transition Planning guidance back in April, laying out a plan to speak to 20-30 businesses on their involvement with transition planning. We understand that it plans to consult more broadly through the Autumn. Involving practitioners in this way is hugely important, in our view. But so too is building on the many hours that have been invested by businesses across almost every sector of the economy in the TPT framework.
Our view is simple: EFRAG must develop climate transition planning guidelines that align with the TPT framework – and by association, the ISSB standards.
This will simplify reporting requirements for businesses, but most importantly, it will ensure that companies subject to differing regulatory regimes develop climate transition plans that are credible, comparable, and aligned with global best practice. Given our rapidly dwindling window for climate action, EFRAG must enable businesses to focus on meaningful climate planning, rather than developing different disclosures for different regimes.
The details - a fragmented landscape
The Transition Plan Taskforce (TPT) framework
In brief: Mandated by the UK Government and developed in close collaboration with industry, the framework represents the gold standard for climate transition planning disclosures. It moves the emphasis from ambition to action and accountability.
What it asks for: The TPT framework is structured around three principles – Ambition, Action, and Accountability. Under each is a series of disclosure elements that map key activity and disclosure. Within this structure, it emphasizes forward-looking information, implications for corporate strategy and enabling activities such as climate target linked remuneration, engagement with private and public sector, and employee training. It pairs this with requirements for detailed and technical disclosures on decarbonisation pathways, capital allocation, and financial planning.
CDP (formerly known as the Carbon Disclosure Project)
In brief: The world’s largest voluntary environmental disclosure programme, CDP were one of the first organisations to publish elements which represents the hallmarks of a credible transition plan. It now releases annual progress reports on the number and quality of climate transition plans reported via businesses’ voluntary CDP disclosures.
What it asks for: CDP’s eight elements of a credible climate transition plan largely lean on and align with the language of the Taskforce for Climate-Related Financial Disclosures. They cover common climate disclosure points such as the role and accountability of the Board and Executives, scenario analysis details, and targets. Some crossover with TPT elements are found in engagement, financial planning and implications for business strategy.
The International Sustainability Standards Board (ISSB)
In brief: Global standards setter developing investor-focused sustainability standards (IFRS S1 & S2) which are being widely adopted globally. At present, roughly half the world’s GDP are in the process of adopting the ISSB standards, including the US, UK, and China, with most likely to enshrine as legal requirements through the late 2020s.
What it asks for: The ISSB standards do not mandate that companies develop or disclose a transition plan. Instead, they state that if a company has a climate transition plan, it should disclose it. However, it was announced earlier this year that the ISSB would take responsibility for the work of the TPT, and would look to adopt its framework into the ISSB’s standards, paving the way for more concrete disclosure requirements in the future - and hence the important opportunity for greater alignment.
The Corporate Sustainability Reporting Directive (CSRD)
In brief: The world’s most ambitious and far-reaching sustainability disclosure regime, intended to bring non-financial disclosures up to the same standard as financial information. The first businesses will have to disclose on the 2024 financial year, with as many as 1,100 disclosure requirements mandated.
What it asks for: CSRD mandates that a company develop and disclose a transition plan aligned with a 1.5°C future with specific requirements broadly clustering around emission reduction targets, decarbonisation levers and actions, financial planning and implementation within the business. Whilst there is a focus on the targets and technical detail, there’s less emphasis on enabling activities brought into focus by the TPT framework.
The Corporate Sustainability Due Diligence Directive (CSDDD)
In brief: A wide-ranging regulation due to begin affecting businesses with operations in the EU from 2027 which obliges businesses to conduct due diligence around the human rights and environmental impacts it has across its value chains. Importantly, it also requires businesses to act to prevent and remedy negative impacts identified.
What it asks for: CSDDD takes things a step further than any of the other transition plan frameworks. It requires companies to actually implement their transition plans, and that they be aligned with a 1.5°C future. While it’s light on the detail of what this looks like, it has significant teeth (fines of up to 5% of annual turnover are possible, in principle, for non-compliance) and is differentiated from everything earlier in its focus on action, not just disclosure.
Kate Jones
Sustainability Strategy Director
Nick Wyver
Consultancy Director
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