‘Probably the most important mention in the EU’: Climate transition plans in CSRD and ESRS
Transition plans under the Corporate Sustainability Reporting Directive aren’t mandatory, but they’re likely to be hard to dodge
The Corporate Sustainability Reporting Directive (CSRD) is the only EU law where entity-level climate transition plans are already in force for the private sector in the EU.
“Article 19 of CSRD is probably the most important mention of transition plans in the EU at the moment,” explains Pietro Cesaro, a specialist in transition finance at environmental think-tank E3G. He describes the Directive – and the standards that underpin it – as “very likely to be the main reference point for transition plan requirements at EU level”.
Other rules currently being negotiated, such as the Corporate Sustainability Due Diligence Directive, the Capital Requirements Directive and Solvency II all refer back to these rules.
It may be the flagship rule, but it’s not mandatory
CSRD spells out what companies need to disclose to the markets around sustainability, including a requirement to publish a climate strategy in line with 1.5°C. But it only deals with disclosures, not company behaviour, so it doesn’t technically have a legal mandate to force firms to create transition plans – only to publish them if they already exist.
“If a company does not have a transition plan, it should report whether and when it intends to have one,” a spokesperson for the European Commission told REP.
And Cesaro says the EU currently gives firms a clear way out: “The ESRS tells companies it’s fine not to have a transition plan if they identify climate change as not material to their business.”
He is referring to the European Sustainability Reporting Standards, which outline exactly what, and how, a company should report in order to comply with CSRD.
When is it necessary to publish a transition plan under CSRD?
The standards are close to adoption, having been watered down at the last minute to allow companies to omit information they deem immaterial to their business.
In reality, many believe the systemic nature of climate change means that few companies will be able to justify reaching a conclusion of immateriality, so despite the comply-or-explain approach, CSRD is expected to generate plenty of transition plans.
“Such plans describe how the company’s strategy and business model are compatible with the transition to a sustainable economy, and with the limiting of global warming to 1.5°C in line with the Paris Agreement and with the objective of achieving climate neutrality by 2050,” said the Commission spokesperson.
What does ESRS say a transition plan must contain?
More specifically, the ESRS requires transition plans to include:
- Decarbonisation targets along with information about how they’ll be achieved (through new technologies, energy efficiency measures, changes to products and services etc) and financed;
- An explanation of which assets or activities won’t be able to be sufficiently decarbonised;
- An outline of how the transition plan dovetails with other EU regulation (namely how the company’s activities will align with the taxonomy over time, and whether it’s banned from Paris Aligned Benchmarks)
In addition, companies must show how those transition plans have been embedded into their broader corporate strategy and how effectively they’re being implemented.
It’s worth noting that these expectations are only for “transition plan for climate change mitigation”. When it comes to biodiversity and ecosystems, “companies will need to assess their business model against these environmental aspects and assess their alignment with local, national, and global policies [and] outline a transition plan to align business model and strategy with global biodiversity goals and planetary boundaries related to biosphere integrity and land system change,” explained a Commission official.
And, although the broader ESRS addresses risks, there is only one explicit reference to risk management in its list of requirements for climate transition plans: the likelihood of stranded or ‘locked in’ assets.
Note: This article was updated after publication to include an explanation of biodiversity-related transition plan rules under ESRS.