House full during the Climate Innovation Forum, a flagship event of London Climate Action Week, on … [+]
If there’s one word that has become significantly popular in discussions about sustainability, it’s “transition.” In everyday English, this word might simply mean changing from one state to another. However, in sustainability discussions, it carries a much deeper meaning. The word transition here signifies a company’s sustainability journey towards reaching net zero. The zealous reference to transition plans lately has made the often-used proverb that the journey is as important as the destination particularly relevant to current discussions on sustainability. To further bring home the point, the word came up in one panel after another in this week’s London Climate Action Week.
Both companies and investors want to step up their game in transition planning. Over 5900 companies disclosed having a transition plan in place, based on the data released last week by the Carbon Disclosure Project—the world’s largest sustainability disclosure platform. This number is huge, as it denotes a double-digit jump of 44% in just a year. Similarly, more and more investors are interested in knowing how their investee companies are planning the transition. Almost 20% of the climate-related shareholder resolutions in North American companies included investors asking for transition plans in the 2024 proxy voting season, based on an analysis by Ceres — a not-for-profit on sustainability that works with investors and companies.
The rising significance of the terms transition planning, transition plan or simply transition makes it a must-know term for anyone interested in sustainable finance. A lot of helpful content has been published recently that can help anyone from beginners to experts understand what a transition plan is, why it is needed, and what more needs to be done. Here are some starting points to help you on your journey of learning about transition plans.
What Does A Transition Plan Mean And Why Are They Needed?
A transition plan is beyond a plan on paper; it is an implementation strategy. It is part of an entity’s strategy that lays out the targets, actions, and resources needed to transition toward a low-carbon economy. Three A’s — Ambition, Action, and Accountability — are core guiding principles of a transition plan, as laid out by the Transition Planning Taskforce set by the UK government during COP 26 with the mandate to provide a framework for transition planning. Last month, the task force also published seven deep-dive sector-specific transition planning guidance covering a range of sectors from electric utilities to food and beverage.
Investors are actively seeking transition plans to understand companies’ intentions and actions towards net zero. About a year ago, 602 global investors called for companies to make Paris climate goals-aligned transition plans. Similarly, GFANZ— Glasgow Financial Alliance for Net Zero is a coalition of financial institutions committed to a specific mandate of helping financial institutions in transition planning. The official website of GFANZ offers a lengthy list of institutions with references to pages where transition planning is mentioned in their reports to inspire organizations to begin their transition planning. The number of financial institutions joining GFANZ has reached over 600.
Information and resources on transition plans are increasing even though they are a relatively new concept. Just this week, a new tool called Transition Arc was launched. It is an online interactive tool that grades 500 companies based on where they are in their transition journey. Almost every month, some new resource appears in this space. To help users better navigate the landscape, the IFRS—International Financial Reporting Standards—just this week announced its plan to support streamlining and consolidating the transition-related disclosure frameworks.
What Makes A Transition Plan Ambitious?
With over 5000 companies mentioning transition plans and 8000 more set to report this year, it can be quite overwhelming to distinguish one transition plan from another. What should people be looking for? Is the mere mention of a transition plan sufficient? Or should there be more that investors and other stakeholders should be looking for?
Most importantly, ensuring that companies’ transition plans are not hollow is essential. Citi — the leading global bank serving more than 200 million customer accounts in more than 160 countries, analyzed the transition plans of their energy clients to find that in 42% of the cases, a substantive transition plan was absent. Similarly, a 2021 assessment of CDP found that only 3 out of the 50 oil and gas companies had transition plan targets ambitious enough to reach net zero. This low number of ambitious disclosures means that many corporate transition plans are not of the quality required or are ambitious enough.
The critical point to highlight here is the need for more guidance to raise the level of ambition in self-reported transition plans. Ambition can be subjective, and if left to the company to set the level of ambition, it may lead to suboptimal outcomes. That is why most frameworks highlight the need for science-based guardrails to define ambition.
To answer what makes a transition plan ambitious, a recently released report from Ceres provides practical guidelines through its Transition Plan Ambition Spectrum. It groups transition plans into four categories: existing disclosure, emerging, robust and leading. Several factors distinguish a leading plan from the other categories. Not only should it have third-party validated science-based targets for 2050 or sooner, but it is also expected to track and report the progress integrating it into regulatory financial reporting. The latter is still rare, although more companies must move in that direction. Guidance on defining ambition, such as that published in the form of this ambition spectrum, can be helpful for investors and other stakeholders to separate the leaders from the crowd and illustrate best practices.
Needless to say, transition planning is a fantastic step and a great path towards the net zero destination. However, it must be ambitious enough; only then will such efforts aggregate to limit global warming under the 1.5-Degree target.
