The basics of transition planning

Summary

• Transition plans (TPs) will be mandatory for large companies and some financial sector firms.
• In November 2022, the UK government’s Transition Plan Taskforce (TPT) published a consultation on a Disclosure Framework and Implementation Guidance. The final versions of these documents are anticipated in summer 2023 with sector-specific guidance following later in the year.
• The Framework sets out four core elements of a TP (strategic ambition to manage climate impacts and opportunities, actions to achieve that ambition, measures to address material risks and governance mechanisms and reporting). The guidance sets out a process for developing a TP.

Introduction

Transition plans (TPs) have been rising up the corporate agenda over the last year. This is a result of over a third of the largest publicly traded companies having committed to net-zero targets¹ and the need to deliver those targets. This article explores what TPs are and how to prepare one.

What is a TP?

A TP should set out how an organisation (either a business or a public sector entity) intends to contribute to and prepare for a rapid global transition to a low greenhouse gas (GHG) emissions and climate resilient economy. 

It needs to reflect the urgency to act and should be informed by the latest international agreements on climate change and national commitments such as Nationally Determined Contributions (NDCs) submitted under the Paris Agreement.

Why do TPs matter?

TPs allow stakeholders (including shareholders, financing organisations, regulators and the wider public) to assess the climate risks that an organisation could be subject to. This information will help stakeholders make investment and governance decisions as well as contribute more widely to an understanding of the pace and quality of the global transition.

In 2021, at COP26 in Glasgow, the UK government committed to make TPs mandatory for large companies and some financial sector firms² .

Is there guidance on what a TP is or should contain?

Yes – some key bodies are developing best practice standards that organisations should keep up to speed with.

The UK government convened its Transition Plan Taskforce (TPT) in April 2022. Its brief was to develop a gold standard for private sector TPs. Following a summer 2022 Call for Evidence on a sector-neutral framework, in November 2022, the TPT consulted on a Disclosure Framework³ and Implementation Guidance⁴. The TPT anticipates publishing the Framework and the Guidance in summer 2023. The TPT intends to consult on sector-specific guidance in summer/ autumn 2023. This article focuses on the TPT’s framework.

The Financial Conduct Authority (FCA), the Glasgow Financial Alliance for Net Zero (GFANZ), the Task Force on Climate-Related Financial Disclosures (TCFD) and the IFRS’ International Sustainability Standards Board (ISSB) have set requirements for TPs. The UK’s Climate Change Committee⁵, the World Green Building Council⁶ and the International Energy Agency⁷ also provide helpful information on how sectors can transition.

The TCFD’s Implementation Annex⁸ recommends that organisations prepare a TP and their ‘Guidance on Metrics, Targets and Transition Plans⁹ ’ highlights what an effective TP should include and how TPs should be disclosed.

The FCA integrated the TCFD’s Guidance on TPs into its TCFD-aligned disclosure rules for regulated firms and listed companies. The FCA is part of the TPT and plans to strengthen its requirements concerning TPs based on the TPT’s Framework and Guidance once they are published later this year.

GFANZ published recommendations on ‘Financial Institution Net-Zero Transition Plans’¹⁰. The report provides financial institutions with a voluntary framework to apply when developing and implementing TPs.

The ISSB's IFRS S2 ¹¹ includes requirements for organisations to disclose information about their TPs.

Key components of a TP

A TP should include:

• The organisation’s strategic ambition to mitigate, manage and respond to climate change and to respond to opportunities that result from the transition.
• Actions over the short (3 year), medium and long-term that the entity will take to translate its ambition into reality. This should include planned changes to its business strategy, resource allocation and portfolio of products and services. It should also include an engagement strategy that describes how the organisation will engage stakeholders in its value chain to deliver its strategic ambition.
• Measures to address material risks and to leverage opportunities for the environment and stakeholders (including the workforce, supply chains, communities and customers).
• Governance mechanisms to support delivery of the TP and periodic reporting against time-bound governance, operational, financial and GHG metrics and targets.

What is best practice?

The bullets below summarise what the TPT considers makes a good TP.

• Coverage. The TP should cover the entire entity. The reduction targets in the TP should cover scopes 1–3 ¹² emissions and should include both interim (5–10 year) and long-term targets. 
• Focus on reductions rather than offsetting. The actions in the TP should prioritise direct abatement of the organisation’s GHG emissions rather than purchasing carbon credits. The TP should specify the intended use of credits and the type of credits the organisation may buy (e.g. removal or avoidance project credits and natural or technological removals).
• Demonstrate how the targets will be met. The TP should quantify how each action will contribute to achieving the strategic objectives or, if it is not possible to quantify the actions, provide a qualitative description. Key internal policies and conditions to align the entity’s activities with its strategic ambition should be disclosed. These include policies relating to energy and water use, managing its environmental impact, lending and investment activities and choice of, and requirements for, supply chain partners.
• Good governance measures. The TP should be integrated into business operations and management processes. The following bullet points give examples of that integration.

- The TP should be underpinned by a clear resourcing plan.

- The financial implications of planned changes to strategy and resource allocation and products and services should be disclosed along with how the financial position (e.g. changes in revenues and expenditure) will change over time.

- The arrangements for board oversight of the TP, targets and progress towards them should be disclosed. The TP should also state if it is subject to shareholder approval.

- The TP should specify whether it is externally verified or assured.

- The TP should describe the steps that are in place to ensure the organisation’s culture is aligned with it strategic ambition (e.g. thought leadership and training programmes, HR policies and procedures). It should also describe how employee remuneration and incentives are aligned with the strategic ambition.

Reporting arrangements

The TPT recommends that organisations should publish a standalone TP at least every 3 years. If significant changes are made to the TP, then the revised TP should be published sooner. Organisations should report annually as part of their TCFD or ISSB-aligned financial reporting on:

• Progress against their TP. 
• Material updates.

Where organisations publish a long-form TCFD or sustainability report, the TP should be separable (e.g. as an appendix or a separate document).

Organisations should apply the same corporate reporting norms to their TP as they do to the annual financial report (AFR). For example, they should approach materiality in the same way

How to get started on your TP

The TPT's proposals go beyond a tick-box approach to sustainability and enhanced reporting. They usher in a new approach to how organisations plan, resource, finance, manage and govern their activities. A TP should pervade the entire organisation and be reflected in all teams’ budgets, plans and reporting.

This will require significant collaboration not just across the organisation but also with external advisors including environmental consultants, lawyers and auditors to name but a few. Organisations are on a steep learning curve to deliver the systemic changes needed to address the climate and biodiversity crises and make a just transition to a decarbonised economy. TPs are the way they can map out that path.

A long journey begins with the first step. Organisations can begin their transition with the following steps:

1. Read the TPT framework.
2. Form a team of colleagues and external advisors who can cover the various disciplines needed to formulate a TP (strategy, planning, risk and finance).
3. Follow the four-stage process (baselining, setting ambition, developing an action plan and accountability) in the TPT Implementation Guidance.

^References

^{1. 'Net Zero Stocktake 2022’ (Net Zero Beta Tracker, 15 June 2022) available at https://www.gov.uk/government/publications/fact-sheet-net-zero-aligned-financial-centre/fact-sheet-net-zero-aligned-financial-centre} 

^{2. HM Treasury, ‘Fact Sheet: Net Zero-Aligned Financial Centre’ (Gov.uk, 2 November 2022), available at https://www.gov.uk/government/publications/fact-sheet-net-zero-aligned-financial-centre/fact-sheet-net-zero-aligned-financial-centre} 

^{3. Transition Plan Taskforce, ‘Consultation: The Transition Plan Taskforce Disclosure Framework’ (2022), available at https://transitiontaskforce.net/wp-content/uploads/2022/11/TPT-Disclosure-Framework.pdf} 

^{4. Transition Plan Taskforce, ‘Consultation: The Transition Plan Taskforce Implementation Guidance’ (2022), available at https://transitiontaskforce.net/wp-content/uploads/2022/11/TPT-Implementation-Guidance-1.pdf} 

^{5. ‘Latest publications’ (Climate Change Committee), available at https://www.theccc.org.uk/publications/} 

^{6. ‘Ahead of the Wave: Financing the Transition to a Decarbonised Built Environment’ (World Green Building Council), available at https://worldgbc.org/article/ahead-of-the-wave-financing-the-transition-to-a-decarbonised-built-environment/} 

^{7. ‘Clean Energy Transitions Programme’ (International Energy Agency), available at https://www.iea.org/programmes/clean-energy-transitions-programme}

^{8. Task Force on Climate-related Financial Disclosures, ‘Implementing the Recommendations of the Task Force on Climate-Related Financial Disclosures’ (2021), available at https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Implementing_Guidance.pdf} 

^{9. Task Force on Climate-related Financial Disclosures, ‘Guidance on Metrics, Targets and Transition Plans’ (2021), available at https://assets.bbhub.io/company/sites/60/2021/07/2021-Metrics_Targets_Guidance-1.pdf}

^{10. Glasgow Financial Alliance for Net Zero, ‘Financial Institution Net-Zero Transition Plans: Fundamentals, Recommendations, and Guidance’ (2022), available at https://assets.bbhub.io/company/sites/63/2022/09/Recommendations-and-Guidance-on-Financial-Institution-Net-zero-Transition-Plans-November-2022.pdf}

^{11. Exposure Draft: Climate-related Disclosures’ (International Financing Reporting Standards Sustainability 2022), available at IFRS - IFRS S2 Climate-related Disclosures}

^{12. For an explanation of Scopes 1-3 see the GHG Protocol FAQs, ‘Frequently Asked Questions’ (Greenhouse Gas Protocol), available at https://ghgprotocol.org/calculationg-tools-faq}