Transition plans: the big picture

These strategies could form the basis of new transactions and prudential requirements, and even feed into subsidy regimes and public procurement rules.

Transition plans are the next big thing in climate policy.

In keeping with its wider reputation on sustainable finance, the EU has been the most prolific jurisdiction when it comes to mandating the disclosure of transition plans. 

Big companies in the region must publish such strategies if they exist, and now there are plans to mandate their existence through new laws. There are also proposals to require banks and insurers to disclose transition plans under capital requirements and solvency rules. 

But the combination of mixed policy objectives and siloed negotiation processes has resulted in what Paul Fox, a senior research officer at Brussels-based think tank Finance Watch, describes as “a complex array of contexts and legal language that fails to provide any clarity on how transition plans should be written, or whether an entity will have to produce more than one”. 

In Solvency II and the Capital Requirements Directive, for example, transition plans are being asked for as a means of assessing financial risk. The Corporate Sustainability Due Diligence Directive, on the other hand, wants transition plans to demonstrate that a company is contributing to Europe’s commitment to the Paris Agreement. 

It’s unclear whether a single document will be able to satisfy these very different objectives.

Lobbying efforts - conducted by different industries and civil society groups, depending on the file - have also led to revisions and tweaks to language that have impacted the uniformity of the rules.

But, Fox notes, EU policymakers have managed to retain some common threads between the requirements, mostly by using the European Sustainability Reporting Standards (ESRS) as a central reference point. 

In another bid to promote interoperability, the UK’s Financial Conduct Authority will soon map guidelines from the Treasury’s Transition Plan Taskforce (TPT) to corresponding expectations under ESRS and the ISSB, to help companies understand the overlap. 

“There is definitely more coherence among transition plan disclosure requirements than there has been with previous sustainability-related reporting rules,” says Ben Caldecott, chair of the TPT, referring in part to overlapping and sometimes contradictory ESG disclosure requirements in Europe and elsewhere, which have caused widespread frustration among investors and companies. 

A focus on decarbonisation

But there are still some “missing pieces,” says Caldecott. 

“One is how you ensure companies are talking about more than just climate mitigation when they map out their strategy for transitioning towards a sustainable economy, because sustainability isn’t just about net zero.”

Climate adaptation is a particularly glaring omission from the rules. 

For example, while the ESRS outlines the need for entities to report on their climate adaptation efforts and resilience to physical risks in its broader requirements, its transition plan standards don’t address the issue. 

The focus of the UK’s efforts are also on decarbonisation, although the TPT has dedicated work streams on nature, the just transition and climate adaptation.

“We don’t yet have a clear view on how to integrate all these elements into a coherent and comprehensive sustainability transition plan, but it should be a priority for everyone working in this area,” says Caldecott. 

REP understands that researchers for the European Commission are developing a methodology for assessing physical and localised climate issues such as resource scarcity, politics and infrastructure in corporate transition plans, but the project is at a very early stage.

Using transition plans to raise finance

While regulators see these strategies as a means of assessing risk, opportunity and impact, they have a more immediate financial use for companies themselves.

“Any company wanting to raise transition finance without running the risk of greenwashing accusations should start with a climate transition plan that sets out its long-term strategy,” says Elia Trippel, a special advisor to the directors of the OECD’s environmental unit, and co-author of a report on the credibility of transition plans. 

“Transition finance is going to be crucial, but it’s much more complex and reputationally risky than traditional green finance, where investors simply support assets that are already low-carbon. In the list of tools that can make it simpler and reduce those risks, transition plans are at the top."

The OECD report identifies 14 different initiatives that provide voluntary guidance for, or analysis of, climate transition plans - including the Glasgow Financial Alliance for Net Zero, the Climate Bonds Initiative, CDP and the Science Based Targets initiative. 

There are hopes from some corners that the market will reach a point where all fundraising done by companies with credible entity-level transition plans will automatically qualify as ‘transition finance’, reducing the costs currently associated with securing a label for each transaction, and providing access to cheaper capital and a wider shareholder base.   

Beyond access to private capital

But Catherine Howarth, CEO of sustainable finance NGO ShareAction and a member of TPT’s delivery group, thinks it will take more than a scaling-up of labelled transition finance to support these strategies. 

“There’s not enough thinking going into how companies are going to finance these transition plans once they’ve developed them,” she argues. “For some companies this is going to be really expensive, and it’s not clear that the markets are going to pay for it.”

In Switzerland, the Government has acknowledged this funding gap and offered to use its own balance sheet to support companies executing their transition plans. 

Starting in January, any Swiss public company, bank or insurer with more than 500 employees must publish a transition plan as part of reporting requirements based on the Taskforce on Climate-related Financial Disclosures. 

On top of that, a climate law was passed in June requiring all companies, regardless of size, to be net zero across their Scope 1 and 2 emissions by 2050.

“To incentivise companies to devise transition plans in a timely manner, the Federation shall provide companies or sectors that draw up transition plans by 2029 with support,” the government said in a statement.

The rules say transition plans should be “science-based” and aligned with medium-term, sectoral decarbonisation targets developed by the government, but there is no further guidance. 

Caldecott suggests that governments could also make transition plans a requirement for companies taking part in public procurement contracts, accessing public finance facilities or needing permissions for large-scale projects. 

“That could be anything from a water company or a public transport provider to firms vying for contracts for airports or applying to build major housing developments,” he says. “These plans could be used to assess how companies in regulated industries are contributing to us achieving the aims of the Paris Agreement.”