Recently ELS Europe has received an uptick in queries from financial and non-financial organisations on transition planning. We share insights on the process of transition planning, the content and use of a transition plan, how it may be financed in the context of EU and international sustainable finance frameworks as well as a short checklist for users.

What is the purpose of transition planning and the Transition Plan?
All companies have compelling reasons to improve the environmental performance of their products and services such as competitiveness, long-term viability, obligations to shareholders and workforce, and crucially management of strategic and financial risks and liabilities.
In this context, transition planning is a process by which companies identify and manage strategic and financial risks associated with their transition towards climate-neutrality, resilience and improved environmental performance.

EU legislation defines transition as meaning a ‘transition from current climate and environmental performance levels towards a climate neutral, climate-resilient and environmentally sustainable economy’….’while avoiding lock-in’.

The Transition Plan is a disclosure document which demonstrates to investors and key stakeholders, the company’s actions, accomplishments, and ongoing plans to transition on a periodic basis.

Is the scope of transition plan limited to reducing greenhouse gas emissions?
Transition planning is not exclusive to climate change mitigation. It also serves as the cornerstone for financing climate resilience, nature protection, sustainable water resource management, circular economy, pollution prevention as well as interdependent social objectives, such as a just transition for community and workforce.
Achievement of key performance indictors (KPIs) along appropriate timelines in the transition process are necessary. An overarching example is the aim to achieve the objectives of the Paris Agreement of limiting global temperature rise to 1.5 degrees Celsius and achieving climate neutrality by 2050.
Equally important milestones are adapting to climate change and transforming economic activities in such ways to achieve a circular, resilient economy that minimises damage to the environment and regenerates biodiversity.

What may a Transition Plan contain?
A Transition Plan is a company’s overall strategy that lays out its targets and actions across all the environmental objective’s material to its business model and key stakeholders. A Transition Plan uses science-based targets that are publicly and freely available for its sector-specific scenarios, pathways, and opportunities.
One means of developing a transition strategy and articulating a company’s Transition Plan and therefore eligibility for transition finance, is to align the business model and relevant targets with the EU Taxonomy. A large cohort of the taxonomy’s technical screening criteria (TSC) are sector agnostic – such as the TSC for climate change adaptation, the energy sector TSC for mitigation of 100gCO2e/kWh. The ‘do no significant harm’ criteria cover a large swathe of sectors; most are sector agnostic and provide a clear pathway to demonstrating progress in the Transition Plan’s strategy and achievement of no harm across all environmental objectives. For climate change mitigation the 1.5 degree alignment may furthermore be evaluated and demonstrated using IPCC scenarios and pathways.

Are companies required to report their transition plans?
In Europe, a key requirement of the Corporate Sustainability Due Diligence Reporting Directive (CSDDD) is the obligation for companies to adopt and put into effect a transition plan for climate change mitigation. The CSDDD requires companies to report in accordance with the Corporate Sustainability Reporting Directive (CSRD) and its sustainability reporting standards. Accordingly, a draft guidance on Transition for climate change mitigation has been published by the European financial reporting advisory group (EFRAG).
Internationally several bodies have been formulating guidance for climate-related Transition Plans. Most noteworthy is the IFRS – Transition Plan Taskforce (TPT) Disclosure framework which provides guidance on a good Transition Plan. For financial institutions, the Coalition of Finance Ministers for Climate Action (CFMCA), UN Environment Programme FI (UNEP), and Glasgow Financial Alliance for Net Zero (GFANZ) have published guidance and capacity building scenarios.

How is the transition financed?
Financial instruments that may be used to fund a company’s Transition Plan include green investments, green loans, and green bonds.
Finance for a company’s transition may be driven by public or private finance or blended finance (a combination). Alternatives for investors to align their portfolios include decarbonisation benchmarks, KPI’s linked to the EU Taxonomy, IPCC pathways, and other common metrics for transition plans.
In Europe, financing of sustainable investments applies rules to financial market participants as contained in the Sustainable Finance Disclosure Regulation, the EU Climate Benchmark Regulations, and the Taxonomy Regulation.

Does transition planning apply to start-ups and SME’s?
Yes, transition planning is important to startups and SMEs for two key reasons: to benefit their products and services, and as a unique selling point to their customers.
For start-ups and SME’s, a Transition Plan may mean upgrading existing or developing new technologies, products and services that enable larger companies to achieve their transition climate and sustainability goals. Innovation to support transition is ripe across technologies and services across communications, agriculture, manufacturing, and transport.

Is there a short checklist to help data users?
A short checklist of key questions for financial institutions as data users to apply across their portfolios may be along the lines of:

• What transition impacts, risks and opportunities are identified as relevant to a company’s business model?
• Which environmental objectives are in-focus?
• What are the methods and tools used and planned for use in defining the company’s transition pathway?
• How are the Transition Plan targets contributing to achieving the stated objectives and causing no significant harm?
• What are the transition timelines for successfully executed targets year-on-year?

Opinions expressed are those of the author, Dawn Slevin, Managing Director ELS Europe. This information does not constitute legal, regulatory, technical or other advice.