With global temperatures on the rise, climate transition plans have become a hot topic driven by stricter regulatory requirements, growing investor expectations, and the intensifying impacts of physical and transitional risks. This article will explore the essential components of climate transition plans, the challenges companies have identified, actionable steps to address them, and best practices for implementation.
What is a climate transition plan?
A climate transition plan, as defined by the European Sustainability Reporting Standards (ESRS), outlines a company’s efforts to mitigate climate change. The company is expected to communicate how it will adjust its strategy and business model to support the transition to a sustainable economy and limit global warming to 1.5°C in alignment with the Paris Agreement. Additionally, the plan should address the company’s’ approach to managing exposure to coal, and oil and gas-related activities.
Would a validated carbon target be enough?
While more than 4,000 companies and financial institutions had validated science-based targets through the Science-Based Target Initiative (SBTi) by the end of 2023, these targets represent only one piece of a comprehensive transition plan. Ambition does not necessarily translate into action. SBTi validation alone does not guarantee that a company’s investment strategy and action plan are structured effectively to meet these goals. To draw an analogy: the SBTi target resembles an athlete’s target record, while the transition plan represents the rigorous training regimen required to achieve it.
Moreover, a climate transition plan goes beyond carbon reduction. It not only addresses carbon emissions but also the overall strategy, business model adaptations, and key investments and action necessary for a sustainable transition.
Why is a climate transition plan needed?
European institutions are aligning regulations, such as the Corporate Sustainability Reporting Directive (CSRD) and Corporate Due Diligence Directive (CDDD), to drive businesses to align with the shift to a sustainable economy and the 1.5°C target of the Paris Agreement. Consequently, companies must navigate both physical risks from climate change and transitional risks, including regulatory changes and shifts in market demand.
Where is the place of a climate transition plan in a company’s climate transition journey?
A company’s climate transition journey typically involves four steps.
1. Measuring GHG emissions
To begin their climate transition journey, a Green House Gas (GHG) inventory is a prerequisite, providing a foundation for understanding a company’s climate impact. Accurate emissions measurement, using frameworks like the GHG Protocol, Bilan Carbone, or International Organization for Standardization (ISO) 14064, are useful to establish this, upon which the climate transition plan is developed. Proper emissions accounting and reporting is also a key form of extra-financial data sought by financial actors.
2. Implementing a transition plan
Under the European Sustainability Reporting Standards (ESRS E1 Climate change), the transition plan must include several critical elements:
- Targets compatible with the 1.5°C Paris Agreement goal
- Decarbonization levers and planned actions
- Investments and funding supporting the plan
- Potential locked-in emissions
- Alignment with overall business strategy
- Implementation progress
3. Disclosing a transition plan
Regulatory frameworks such as the ESRS, the International Financial Reporting Standards Foundation (IFRS) Sustainability Disclosure Standards, and the Transition Plan Taskforce initiative, alongside voluntary frameworks like the Task Force on Climate-Related Financial Disclosures (TCFD) and the Carbon Disclosure Project (CDP) outline the components that companies should disclose against regarding climate transition plans and offer guidance on how each component should be disclosed. The Corporate Sustainability Reporting Directive (CSRD) standardizes these requirements and is expected to strengthen the quality and reliability of disclosures. While the ESRS imposes no behavioral obligations, disclosure builds trust with investors, regulators, and customers by showcasing a company’s commitment to climate goals.
4. Evaluating a transition plan
The transition plan is dynamic; it requires ongoing evaluation to ensure its effectiveness and credibility. Companies assess their progress toward targets, using established metrics to demonstrate reductions in emissions. The Accelerate Climate Transition (ACT) assessment provides a framework to assess the alignment of a company’s climate strategy and transition plan with the goals of the Paris Agreement, drawing on reported data, sector-specific pathways, and disclosure frameworks.
What challenges are companies facing?
There are three challenges identified by companies that they face in implementing a transition plan: balancing the sensitivity of information and transparency, data availability and quality, and readiness to commit publicly to investment.
1. Balancing the sensitivity of information and transparency
Companies must demonstrate commitment to stakeholders by sharing progress and plans. At the same time, some details (e.g., intellectual property, competitive strategies, or financial specifics) must remain confidential.
Climate transition plans require a delicate balance: organizations must be transparent to build trust with stakeholders while safeguarding sensitive information critical to competitive advantage.
Possible actions:
- Companies must establish internal communication policies to clarify what information can be shared and through which channels
- Assess the sensitivity of information before sharing
- Provide tailored levels of transparency based on the audience and context
- Share commitment, results and milestones to demonstrate progress, even when operational details cannot be disclosed
2. Data availability and quality
Limited visibility into the carbon footprint of suppliers, partners, and customers often results in a lack of detailed and granular climate-related data and transition planning. Companies may need to rely on assumptions about value chain emissions.
Possible actions:
- Invest in data collection and third-party providers for value chain GHG emissions and climate transition plans.
- Perform sensitivity analyses to evaluate how assumptions affect the feasibility of the plan.
- Use scenario planning tools and disclose assumptions due to data limitations, updating as better information becomes available.
- Participate in industry collaborations to leverage sector-specific knowledge
- Engage with suppliers and value chain partners to improve data sharing and collaboration.
3. Readiness to commit publicly to investment
Companies may hesitate to publicly disclose investments in climate transition plans due to uncertainty about financial impacts, such as ROI and future regulatory changes or fear of greenwashing accusations if targets are not met.
Possible actions:
- Ensure strong governance structures are in place to support decision-making on investments.
- Develop a comprehensive financial plan that aligns with the transition strategy.
- Analyze decarbonization potential and available levers across the business to identify priority areas.
- Allocate specific financial and human resources to the transition plan to enhance credibility.
- Establish monitoring and reporting systems to track progress and adjust investments accordingly.
What are good practices in preparing a climate transition plan?
To implement a credible climate transition plan, good practices are advised across three key elements: ambition, emissions, and engagement.
Ambition
1. Coverage: All Scopes and Activities
The plan must cover all emissions across the value chain including scope 1, 2, and 3.
2. Milestones: Short-, Mid-, and Long-Term Targets
Set clear and measurable milestones to provide a roadmap for action, ensuring accountability and progress. Milestones should include short-, mid-, and long-term targets.
3. Benchmark Scenario: Use IEA Net Zero (NZ) Scenario
Base the ambition of the climate transition plan on recognized, science-based scenarios, such as the IEA Net Zero by 2050 (NZ) scenario. This ensures credibility and alignment with global climate goals.
Emissions
1. Locked-in Emissions: Analysis of Historical Emissions
Understand and quantify locked-in emissions resulting from past decisions, infrastructure, and operations. This ensures a realistic approach to decarbonization and identifies high-priority areas for action.
2. Future Actions: Detailed Capital Expenditure Plan with Decarbonization Link
Develop a comprehensive capital expenditure (Capex) plan that directly ties future investments to decarbonization strategies and emissions reduction targets.
3. Clear Objectives for GHG Reduction
Ensure that all production-related initiatives are aligned with clear and measurable GHG reduction objectives to drive accountability and transparency.
Engagement
1. Setting Objectives for Suppliers
Establish clear and measurable expectations for suppliers to support the company’s decarbonization goals.
2. Raising Clients’ Awareness
Educate clients on the importance of climate action and help them understand their role in supporting sustainability goals.
To conclude
Climate transition plans have become a crucial tool for companies navigating the challenges of a changing global climate. These plans go beyond simply setting carbon reduction targets, encompassing a comprehensive strategy to adapt business models and operations to a sustainable economy. While companies face challenges such as balancing transparency with confidentiality, ensuring data quality, and committing to public investments, there are actionable steps to address these issues. By following good practices such as covering all emission scopes, setting clear milestones, and engaging suppliers and clients, organizations can create credible and effective transition plans. Ultimately, a well-crafted climate transition plan not only helps companies meet regulatory requirements and investor expectations but also positions them to thrive in a low-carbon future.
References:
- ACT Initiative. (n.d.). Assessing low-carbon transition. Retrieved January 8, 2025, from https://actinitiative.org/en/
- European Financial Reporting Advisory Group (EFRAG). (2023). European Sustainability Reporting Standards (ESRS) Set 1 – 2023. Retrieved from https://xbrl.efrag.org/e-esrs/esrs-set1-2023.html
- Science Based Targets initiative (SBTi). (2023). Monitoring progress in the transition to a net-zero economy: SBTi Progress Report 2023. Retrieved from https://sciencebasedtargets.org/resources/files/SBTiMonitoringReport2023.pdf
