Setting the direction for your transition plan
Since COP26 last year there has been a significant evolution in developments and expectations around how businesses and financial institutions can take meaningful climate action and report progress transparently. Coming out of COP27, with the release of transition planning recommendations by GFANZ and TPT, there is now a clear approach for the private sector to shift gears from setting targets to taking action against their climate commitments.
|Key industry and regulatory developments on transition planning|
TPT’s draft framework for disclosure of transition plan aligns with this five pillar approach, and also provides specific guidance for UK firms on how to report on plans and progress made against them, with mandatory TPT-aligned reporting anticipated in 2024.
These frameworks connect to existing and incoming reporting requirements developed by EU, UK, and US regulators, as well as the global baselining standard being developed by the ISSB.
Transition plans represent the next big step financial institutions can take on their climate journey – transformative action. It is vital that firms now give this priority to leverage the opportunities of the transition, manage their climate risks, meet any commitments they have made, and to meet stakeholder expectations.
The temptation would be to dive in and start creating a plan that meets the requirements. However, this could make the challenge larger not smaller if important initial steps are not taken. Our approach takes financial institutions through the following process. These are sequential steps and an iterative loop to adapt and improve plans going forwards:
But before diving in, we think it’s critical that institutions take three pre-steps;
1) Get clarity in the boardroom: understand how transition planning is different and its full transformative scope
Efforts up to now have focused on setting long-term targets informed by emission baselining and reporting. Alongside these efforts, TCFD reporting has led organisations to setting high-level governance structures and processes to manage strategic risks identified through scenario analysis of climate-related risks and opportunities. Transition plans mark the next phase of this work.
They bring together long-term targets and strategies with the interim targets, granular plans and actions required to implement decarbonisation strategies throughout the organisation. These granular plans include financial and resource plans required to drive organisational change. Plans should also provide details of monitoring processes for tracking progress for yearly disclosure of performance.
Beyond the planning, there is the doing – moving from plan to action. The middle stage of the transition planning loop is the most important and responds to urgent calls for an increase in the speed and scale of action. Operationalising these detailed plans will require embedding new processes throughout the organisation that connect front, middle and back office in a coordinated way.
It’s critical the Board is clear on this. As is having an executive leader who understands this new shift that transition planning requires and can articulate the case for action to stakeholders throughout the business, beyond the Board.
2) Consult stakeholders: anticipate resistance and build support
There is likely to be some apathy across the organisation towards meeting more climate-related criteria. It is key for organisations to communicate to key business stakeholders the step change that transition planning represents, but also how it relates to climate work already conducted across the organisation – efforts to align with TCFD, CDP and SBTi guidance have been well spent and are foundational for this next step.
Transition planning requirements are also emerging from different local and global standard setters. It will not be immediately clear how this aligns with efforts to make sustainability disclosures more streamlined. Stakeholders will need help understanding this context and how standards will develop through consultation periods.
Financial institutions can avoid increasing internal resistance by taking the opportunity to consult widely with business unit leaders, driven by the executive leader, to consolidate the existing initiatives and explain how they can contribute to the transition planning process.
They can also assess and anticipate the level of change required. This means exploring gaps by product and business unit to get an overview of the key challenges across the organisation. Data availability can be expected to be a leading challenge. This gap assessment and baselining of commitments across an organisation, will provide decision makers at the strategic and operational level the appropriate context ahead of building a transition plan.
3) Set the tone: be clear how this aligns with other strategic priorities
There will be significant challenges in developing and implementing a transition plan, but there will also be strategic opportunities. Financial institutions will need to decide how they will position transition planning amongst and aligned with other strategic priorities.
Level of ambition from the Board will determine the level of investment committed to overcome these challenges, and innovation to take new opportunities. This will dictate where on the ambition scale they can aim, setting tone for the first and proceeding phases of transition planning.
Below are examples of how a Leader, Middle of the Pack, and Laggard may respond during the first phase of the process: Aim.
- Going above and beyond requirements identified to implement transparent and pioneering decarbonisation strategies across the value chain (above and beyond operational emissions), including setting aggressive timelines that constrict financed emissions at a faster pace than sector-specific pathways. Willingness to undergo significant transformational and operational change to embed transition plans into corporate strategy and BAU decision making across the organisation. Proactively engage throughout the value chain to deliver change.
Middle of the Pack:
- Meeting requirements of existing initiatives and regulation. Setting a 2050 net zero target and aligning sector transition pathways closely with recommended sectoral pathways. Scope to undergo transformational and operational change. Innovative financial products willing to be trialled before being rolled out on large scale.
- Transition plans are compliance driven rather than being embedded into strategic aims. Limited tools to facilitate change. Nervousness over significant transformational change. Stakeholders unwilling to set net zero targets without clearly defined tools and actions to achieve targets set.
Following these steps will enable organisations to get full sight of work conducted to date and how it can be used, as well as identifying where there may be potential challenges. The resulting plan will benefit from the stakeholder consultations undertaken and will be developed in line with the ambition set.
This is the first in a series of blogs that will look at practical application challenges around transition planning. We will also be launching blogs focused on the TPT and GFANZ frameworks.