What is climate transition planning?

Regulation, investors, employees, other stakeholders and society as a whole are driving the need for all businesses to address their sustainability agenda. It’s about ensuring legal and regulatory compliance, and embedding sustainability and responsibility in the ethos, operations, reporting and reputation of the business. Tackling the imperative to get their business’ sustainability/ESG (environmental, social, governance) approach right is one of the biggest challenges facing board members and in-house counsel today. A key area in which a business can demonstrate its compliance and credentials is its climate transition planning.

Climate transition planning is an organisation’s strategy to support the move to a low carbon economy.

Corporate climate reporting is a key tenet of transition planning.

Climate reporting/corporate disclosures

Essential reporting

Businesses will already be aware of certain, mandatory reporting requirements:

• The Companies Act 2006, the Listing Rules and the Disclosure Guidance and Transparency Rules require certain companies to report in their directors’ reports, strategic reports and annual company reports on environmental and climate-related matters.
• LLPs’ annual reports should include disclosures on greenhouse gas emissions, intensity merit energy efficiency steps and total energy use.
• Large companies are required, in their strategic report, to provide an analysis using non-financial key performance indicators.
• Large unquoted companies are required, in their directors’ report, to provide a report on greenhouse gas emissions, an intensity metric, energy efficiency steps and total UK energy use.
• Quoted companies are required to report on greenhouse gas emissions, an intensity metric and total global energy use and energy efficiency steps.
• Traded/banking/authorised insurance companies should include a non-financial information statement in a strategic report.
• UK incorporated companies with a premium listing should include their annual financial report, a statement setting out whether they have made climate-related financial disclosures consistent with the Taskforce on Climate-related Financial Disclosure (TCFD) recommendations (see below) on a ‘comply or explain’ basis.

Voluntary reporting

It’s become clear, in recent years, that ‘green’ products are more marketable. In some instances, consumers are willing to pay more, and even to switch from preferred brands, for sustainability. Voluntary climate-related reporting can therefore be an effective commercial strategy.

The preferred scope and nature of voluntary reporting will differ from business to business. It will depend on the type of voluntary commitments made at board level. Schemes may involve direct reporting, where the company reports either to the body running the scheme or publicly on the extent it has complied with the scheme; or indirect where the company engages with the environmental performance of other organisations with which it is involved.

There are some key reporting schemes/standards of which all businesses should be aware.

In June 2023, the International Sustainability Standards Board (ISSB) published its first set of sustainability disclosure standards. (The standards fully incorporate the recommendations of the TCFD, which include the expectation of provision, by organisations, of a specific climate transition plan – see below.) The ISSB has launched its standards with the aim of providing useful and comparable data to aid investor decision-making. On 3 October 2023 the Financial Reporting Council, in its role as the Secretariat to the UK Sustainability Disclosure Technical Advisory Committee, confirmed that the UK Government has committed to assess and endorse the ISSB’s sustainability disclosure standards for use in the UK.

The Financial Conduct Authority (FCA) has separately confirmed that it intends to update its existing rules on climate-related reporting for listed companies (which are based on TCFD recommendations) to refer to the UK-endorsed ISSB standards. It’s currently envisaged that the FCA’s new rules would come into force for accounting periods beginning on or after 1 January 2025. In that case, reporting in line with the new rules would begin from 2026.

The expectation is that the ISSB standards will establish a global baseline for sustainability reporting.

On 11 July 2023, the European Securities and Markets Authority (ESMA) published a public statement on sustainability disclosures in prospectuses drawn up under the EU Prospectus Regulation. Although not directly relevant to UK prospectuses, UK firms and market participants are expected to adhere to ESMA guidelines to the extent that they are relevant.

In May 2024, the government published a framework and terms of reference for the development of UK Sustainability Reporting Standards. The framework sets out the assessment, endorsement and implementation process and timetable for the International Financial Reporting Standards Sustainability Disclosure Standards (IFRS SDSs).

In June 2024, the ISSB published its feedback statement for 2024 on the IFRS SDSs. The plans aim to support the application of disclosure requirements under IFRS S2, Climate-related disclosures, and decrease fragmentation of information in the market. During the next 2 years, the ISBB will deliver further harmonisation of the sustainability disclosure landscape as it embarks on a new work plan.

The EU Corporate Sustainability Reporting Directive (CSRD) aims to provide investors and other stakeholders with access to more decision-useful information about companies’ sustainability risks, opportunities, and impacts. It mandates reporting on a range of ESG topics in accordance with the European Sustainability Reporting Standards. The CSRD requires in-scope corporate entities (including EU companies and non-EU companies with EU activity) to commence first reporting on a phased basis from 2025 to 2029.

Climate transition plans

A climate transition plan is a specific, time-bound, action plan that clearly outlines how an organisation will align its assets, operations, and entire business model towards climate science recommendations, such as halving GHG emissions by 2030 and reaching net zero by 2050.

As at the date of writing (November 2024), there’s no mandatory requirement within UK law to have or disclose a climate transition plan. However, climate transition planning is fast moving beyond the aspirational ‘like to have’, to becoming an essential requirement.

In October 2024, the Transition Plan Taskforce (TPT), created to establish the gold plan for transition plan disclosures (see below), published its final report, following which the government will consult on sustainability reporting requirements for large public and private companies.

Looking ahead, the Corporate Sustainability Due Diligence Directive will (CSDDD), according to a staggered timetable between 2027 and 2029, mandate transition planning [1] for in-scope businesses.

Developing a climate transition plan

Resources and sector guidance

In October 2023 the TPT published its Disclosure Framework, which sets out good practice recommendations to assist companies in making robust and credible disclosures about their climate-related transition plans. The Disclosure Framework is a key component of the TPT’s wider materials designed to aid organisations in the preparation of credible and robust transition plans.

The TPT has also published two types of sector guidance to complement the TPT Disclosure Framework: the TPT Sector Summary and the TPT Sector Deep Dives.

The TPT Sector Summary provides an overview of transition plan guidance for 30 financial and real economy sectors across: consumer goods; extractives and mineral processing; financial services, health care; infrastructure (including construction and engineering and real estate – housebuilder/residential, office, retail, industrial, healthcare and hospitality); renewables and alternative energy; resource transformation; services; technology and communications; and transportation. It’s a practical guide to give preparers and users of climate transition plans key information and guidance. Recognised decarbonisation levers, metrics and targets, and sources for transition planning are provided for 23 of those 30 sectors.

For the remaining 7 sectors – asset managers; asset owners; banks; electric utilities and power generators; food and beverages; metals and mining; and oil and gas (chosen given these sectors’ GHG emissions, need for/provision of transition finance in the UK context, and the quality of existing guidance available in the market) – sector-specific guidance is given in the TPT Sector Deep Dives to help transition plan preparers to interpret the Disclosure Framework.

A step-by-step approach

For a practical, step-by-step approach to devising and implementing a climate transition plan, the TPT Sector Summary suggests:

• Preparers will likely begin by consulting the ISSB standards…
• …which the TPT Disclosure Framework then builds on
• The TPT’s wider suite (Sector Summary/Deep Dives and additional materials, including the Transition Planning Cycle document) should then further help preparers develop transition plans.
• The TPT doesn’t provide an example or a ‘precedent’ climate transition plan, but its Disclosure Framework sets out the 5 key elements of a good plan:

1. Foundations, i.e. the strategic ambition of its plan: objectives and priorities for responding and contributing to the transition towards a low GHG emissions, climate-resilient economy and the high-level implications that the transition plan will have on the organisation’s business model and value chain.
2. Implementation Strategy: the actions the organisation is taking within its business operations, products and services, and policies and conditions to achieve its strategic ambition, as well as the resulting implications for its financial position, financial performance, and cash flows.
3. Engagement Strategy: how the organisation is engaging with its value chain, industry peers, government, public sector, communities, and civil society to achieve its strategic ambition.
4. Metrics & Targets: the metrics and targes that the organisation is using to drive and monitor progress towards its strategic ambition.
5. Governance: how the transition plan is embedded within the organisation’s governance structures and organisational arrangements.

Climate transition planning: How we can help

Ww can work with businesses at every step of their journey to create, implement and deliver an effective sustainability strategy. Climate transition planning will be central to that. Specifically, we can help clients with:

• Measuring and assessing energy, carbon and climate risks
• Climate reporting/corporate disclosures
• Devising, drafting, implementing and maintaining a climate transition plan
• Carrying out sustainability/ESG due diligence, including sustainability-related audits, contract reviews and policy/procedure advice across the business and supply chain
• Updating and informing on sustainability-related developments [2]
• Providing tailored training to staff at all levels
• Assisting with securing ‘green finance’ or investments based on sustainability criteria
• Delivering low carbon, sustainability and other green projects
• Providing comprehensive, cross-disciplinary advice and transactional assistance
• Risk management and dispute resolution strategies if/when sustainability queries, concerns or investigations arise.

Contact: Ben Sheppard, Infrastructure & Energy Group for tailored advice, assistance or training on climate transition planning and sustainability/due diligence reporting and compliance generally.

[1] See our client briefing on the CSDDD.

[2] For example, the European Commission President has just announced (on 8 November 2024) that a new ‘omnibus’ directive (as yet unnamed and undrafted) will streamline regulatory and reporting requirements, currently often overlapping, within three flagship EU Green Deal laws: the EU Taxonomy Regulation, the EU Corporate Sustainability Reporting Directive and the CSDDD. Climate reporting and transition planning is a moving feast. We’ll monitor and reporting on this ‘omnibus’ directive, and any other relevant future developments.