Transition plan requirements: fragmentation or unity?
It’s been a busy month for climate transition plans.
But with two headline-grabbing COPs and chaos in the EU, it’s been easy to miss November’s less dramatic announcements about net-zero strategies.
First, the EU’s advisory body, EFRAG, unveiled its initial thinking on how firms should disclose transition plans under the European Sustainability Reporting Standards (ESRS) – as required by the Corporate Sustainability Reporting Directive (CSRD).
The following week, the International Organisation of Securities Commissions (IOSCO) published its findings on the current state-of-play in the space, and what needs to happen next.
The next day came the official launch of the International Transition Plan Network, which will convene the international policymaking community, sharing ideas, developments and lessons on the topic.
As transition plans become a key tool not just for those setting disclosure rules in financial markets, but also for prudential supervisors and lawmakers wanting to assess the private sector’s contribution to national climate goals, there’s a growing awareness that these requirements may fast become unwieldy.
Eight G20 countries already have transition plan requirements in some form, according to the latest research from the UN’s Taskforce on Net Zero Policy.
IOSCO, the standard-setter for the world’s securities regulators, notes that entities are concerned about the “lack of global transition plan-specific disclosure guidance, either from regulators or standard setters” and “fragmentation in light of upcoming developments in various jurisdictions”.
It points to EFRAG’s guidance, and a recent consultation by the UK Financial Conduct Authority as examples, and says there is demand from some corners for IOSCO to step in and help establish international ground rules.
But others think the panic about fragmentation may be premature.
Daniele Ciatti, a researcher at E3G, the environmental think-tank that coordinates ITPN, says he’s been “pleasantly surprised” by EFRAG’s efforts to link its recommendations with existing expectations.
Indeed, EFRAG’s report has pages acknowledging TPT’s guidance, along with materials from financial-sector initiative GFANZ and the US Securities and Exchange Commission.
“It’s a very useful attempt at reassuring international companies that there aren’t that many differences,” says Ciatti, who co-authored a report this month on achieving a more streamlined transition-planning framework in Europe.
“ESRS and TPT are likely to rely on similar definitions and criteria, beyond some specific exceptions,” he predicts.
Differences
One of the biggest differences between the two is that a transition plan under EFRAG’s proposals only needs to address decarbonisation.
That’s because the EU’s standards are split by topic, and EFRAG was tasked with working out how transition plans should be disclosed as part of the climate mitigation standard.
Real Economy Progress understands that transition plan disclosures under ESRS will remain focused solely on climate mitigation, and won’t be extended to other environmental objectives in the future.
TPT’s guidance, on the other hand, talks explicitly about the need to address both climate risks and opportunities, and includes recommendations for nature, biodiversity and climate adaptation. It also provides more detail about governance issues like corporate culture, skills and training.
The other big difference between the two bodies is how they approach materiality.
The UK Government, which created TPT, has aligned itself with the International Sustainability Standard Board (ISSB), meaning it wants companies to explain how climate change might hurt their bottom line.
While TPT’s guidance goes slightly beyond this, asking for disclosures about a company’s contribution to climate change and mitigation at a system-wide level – through things like lobbying – EFRAG’s guidance is much more comprehensive, essentially asking companies to explain how they support the EU’s climate objectives.
The third major difference is application.
Right now, TPT’s guidance is entirely voluntary, whereas ESRS is legally-binding across all EU Member States (although many of them are dragging their feet on adopting CSRD into national law).
This is set to change, though: now TPT’s government mandate is over, the taskforce itself has been disbanded and its guidance given to the IFRS Foundation, which oversees ISSB. That means countries committed to adopting ISSB-style guidance – like the UK, China, Japan and Brazil – will probably end up with mandatory transition plan disclosures based on TPT’s guidance.
Some experts involved in the EU’s sustainability agenda are frustrated that IFRS took on TPT’s guidance wholesale, rather than waiting until EFRAG’s final recommendations and then developing something sensitive to both.
One senior Commission advisor suggested that, given the EU has been working on these rules for years, it would have been more appropriate to “ensure compatibility ex-ante” than to ask for it ex-post, which is likely to be the case now.
Efforts for alignment
But mapping is underway, and members of both TPT and EFRAG say there will be bigger efforts to align things over coming months.
The two teams plan to work together closely as EFRAG finalises its recommendations.
Although its draft text namechecks TPT, members of the EFRAG acknowledge, off-the-record, that more needs to be done to address actual equivalences – companies need to understand the extent to which using TPT’s guidance will enable them to fulfil ESRS criteria, for example.
The document mentions the development of an annex that will provide a more detailed table “comparing ESRS with relevant provisions of the TPT”.
“That is something we’re quite constructively working on at the moment and should help offer a clear message to the market around where the overlaps and differences are,” said one TPT advisor, who asked not to be named.
“The key thing for now is: the people that need to be talking to each other are talking to each other.”
EFRAG’s final recommendations are expected to go to consultation early next year.