Why transition planning is an indispensable tool for reaching net zero

Since the Paris Agreement of 2015 to limit global warming to 1.5ºC, thousands of companies around the world have committed to net zero emissions, usually by 2050 or earlier. A growing number are taking the next step: developing a transition plan that maps out how to reach the target.

The number of companies with a transition plan aligned with the Paris Agreement jumped 44% to 5,900 in 2023, according to CDP, an environmental disclosure platform.

There are many reasons for having a transition plan. It is a useful strategic tool for businesses to manage their climate risks and opportunities. A robust plan can also provide comfort to investors assessing a company’s resilience to climate change, easing access to capital.

For many companies, however, the most immediate reason to draw up a transition plan is to fulfil regulatory requirements. Transition plans are mandated for many companies in jurisdictions including the EU, Switzerland and Australia, with others such as the UK, Singapore, Japan and South Korea expected to follow suit.

Similar but different

Although the benefits are widely understood, there is no global agreement on what constitutes a transition plan. Many countries are basing their rules for such plans on the standards released by the International Sustainability Standards Board (ISSB) in 2023 as IFRS S2, Climate-related disclosures. The UK, for example has built on these to develop its Transition Plan Taskforce (TPT) framework, widely seen as the gold standard when it comes to transition planning.

In the EU, the scope of a transition plan is covered by the E1-1 disclosure requirement of the European Sustainability Reporting Standards (ESRS), part of the Corporate Sustainability Reporting Directive (CSRD). Where transition planning is not mandatory, the CDP’s voluntary framework is widely used.

There are variations in each regarding the aims, audience, scope, content and format of the transition plan. Nevertheless, ISSB, TPT, ESRS and CDP all agree that a credible transition plan should include the following:

• Climate ambitions and objectives
• Climate governance
• Scenario analysis
• Climate related risks and opportunities (and strategy)
• Climate mitigation actions and decarbonisation levers
• Greenhouse gas emissions reduction targets
• Investment plan to support transition plan

TPT goes further than most in also recommending the disclosure of stakeholder engagement relating to the net zero transition, as well as climate mitigation and adaptation policies. The former is also in CDP’s framework and the latter in ESRS.

An evolving discipline

Transition planning is a young discipline. As such it continues to evolve, especially in response to concern about how the net zero transition affects the cost of living.

Following the election of a climate-sceptic to the White House, the US Securities and Exchanges Commission (SEC) in February halted implementation of its climate disclosure rule. In April, Canada’s market regulator paused work on new rules to mandate climate disclosures to prioritise the competitiveness, efficiency and resilience of the country’s markets.

Even in Europe, which has been at the vanguard of sustainability regulation, the EU has stopped the clock on further implementation of its CSRD and Corporate Sustainability Due Diligence Directive (CSDDD). During the pause, the European Parliament will debate amendments primarily intended to reduce the reporting burden on small and medium-sized companies.

The proposed changes include replacing a requirement in CSDDD for companies to “adopt and put into effect a transition plan for climate change mitigation” with a clause calling on them “to adopt a transition plan for climate change mitigation, including implementing actions”. Businesses affected by the regulation – along with lawyers, consultants and others – are debating whether the new wording weakens or removes the requirement for companies to carry out their transition plans.

Net zero needs a transition plan

Despite the loss of regulatory momentum, climate transition plans continue to be mandated or recommended in many jurisdictions, and expected by investors needing to assess climate risk in their portfolios. Their benefits for corporate strategic planning remain unchanged.

Nevertheless, the 2024 EY Global Climate Action Barometer published last November found that only 41% of global companies had disclosed a transition plan.

Under regulatory and market pressure, this is sure to increase. For it is not enough to have a net zero ambition: companies are now expected to disclose their climate risks and their plans for addressing them – by setting targets, outlining implementation strategies, and articulating how they intend to maximise opportunities in a low carbon future.