As organizations continue to get to grips with regulatory updates on climate disclosures (read our article on ISSB here), the natural next (or parallel) step is transition planning. Indeed, this is fast becoming the emerging focus of climate reporting from investor and regulatory perspectives.
We’ve seen considerable momentum and convergence around the need for transition plans in 2023 so far - G7 leaders have come out in support of them and regulatory/standards bodies, including the International Sustainability Standards Board (ISSB), European Sustainability Reporting Standards (ESRS) and the Securities Exchange Commission (SEC), have all reinforced the expectation for transition plans - building on the foundations laid by the Taskforce for Climate-related Financial Disclosures (TCFD) in 2021.
The essence of transition planning is to identify what needs to change (and how) in the short and medium term for the company to deliver its climate ambition and strategic objectives in the long term. This could include changes across the business plan, operations, products and services, policies and conditions, financial plans, stakeholder engagement plans, governance and organizational structures, skills and/or culture.
The TPT’s disclosure Framework and Guidance brings together best practice for how to effectively develop and disclose a transition plan.
Before getting into the detail of the TPT, let’s take a step back to why published transition plans that are credible and robust transition are so important.
As investors and other financial institutions are pushed to publish their own climate disclosures and make net zero commitments, they are integrating climate and broader ESG (Environmental, Social and Governance) risks of companies into their portfolio and risk management, and capital allocation processes. This means they must understand where climate risks and opportunities lie for their counterparties; they need to see a credible plan and tangible actions for how they will deliver and be able to thrive in a lower carbon world. One institutional investor recently told us they wouldn’t have confidence that a company could deliver the climate strategy if they didn’t see signs that they were building the right skills, knowledge and culture to enable success. They need to see the ‘how’.
Put crudely then, transition plans, done well, are an opportunity to put forward a company’s business case for why it’s a good long-term investment. More broadly, they are a way to build confidence, market signals and clarity across the market about how we will get to a lower-GHG and climate-resilient economy.
That brings us to the TPT and how it can help achieve that.
The TPT, set up by the UK Treasury and co-chaired by Aviva’s CEO, is responding to the market need for credible climate transition plans. The cross-economy taskforce consists of financial institutions, corporates, regulators, civil societies and academia. While the TPT is homed in the UK, at the core of its work has been international convergence and interoperability - it is achieving this through concerted international engagement and deliberate design of the framework so it interoperates with the ISSB’s final climate standards (IFRS S2) released in June 2023. It has also worked in lock step with the Glasgow Financial Alliance for Net Zero (GFANZ - aligning with their recommendations for transition plans) and builds on the TCFD recommendations.
The TPT’s disclosure framework is supplemented by implementation guidance and sector-specific guidance to support companies on their transition planning journey. There is also a technical annex, which maps the TPT’s recommendations to other key climate-related disclosure frameworks (TCFD, ISSB and ESRS) to aid integrated reporting.
Central to the TPT and our own views on effective transition is ‘engagement’. This is distilled into three different forms:
The TPT advocates that companies take a ‘strategic and rounded approach’ to transition planning. This encourages companies to use levers within their sphere of influence to accelerate the economy-wide transition to net zero, as well as ambitions to reduce greenhouse gas (GHG) emissions and respond to climate-related risks and opportunities. This requires engagement with your value chain to understand your transition levers and the impacts and dependencies of these. It is also a critical step in identifying and influencing scope 3 (or financed) emissions – whether that’s suppliers, customers, portfolio companies or clients. An effective engagement strategy is fundamental to developing and implementing your transition plan.
Note: You can read more about the shortcomings of a pure focus on GHG emissions for informing a climate transition strategy in our recent report, ‘Emissions Impossible: Quantifying financial risks associated with the net zero transition’, written in partnership with Institute of International Finance (IIF).
Note: WTW is partnering with Chapter Zero UK to host an event for Board members, business leaders and investors on the back of the TPT’s final publications: Plans beyond pledges: Effective board leadership of the net zero transition. We are also supporting companies with Board, senior leadership, Risk and HR function engagement on climate risks and opportunities through our engagement tool, Climate Vista.
Finally, if you haven’t already, we recommend engaging with the TPT Framework and guidance.
We understand that for Boards and business leaders, the mounting climate regulatory landscape is undeniably daunting. Their governance role is being thrusted into the spotlight, their knowledge of climate risks tested, and they’re being asked to put their name against public disclosures amidst a sea of unknowns. There are elements of the TPT and other frameworks that no doubt raise the bar; for example, asking for information on the financial metrics and targets used to monitor progress and on the anticipated effects of a transition plan on a company’s financial position.
However, with transition plan expectations rising, the TPT provides a clear view on what information is expected, what good looks like and how companies can take steps to move towards that. The impetus to pull together a strategically integrated transition plan is driving robust conversations on climate risk, impact and ambition in the boardroom and across the executive functions, as well as with external stakeholders. Companies that have road-tested the TPT framework have praised its pragmatic approach and recognition that transition planning is an iterative process, subject to developing information, external developments, knowledge and capabilities.
The arrival of the TPT is timely. 2024 is looming as a notable year for climate reporting enforcement globally; the TPT framework should support a positive shift in thinking from a largely compliance/reporting mindset to a more strategic mindset for addressing climate (and broader ESG) risks.
