Making sense of climate transition planning

This article was contributed by Linden Sustainability.

Transition planning is one of the most confusing aspects of the current climate reporting regime.

Different organisations are pushing subtly different definitions and are not always clear on exactly what is required.

This article aims to cut through the noise by defining key terms, summarising the history of transition planning, differentiating between different types of transition planning documents, clarifying requirements for Australian companies, pointing to guidance, and suggesting practical next steps.

Definitions

To put it simply, a transition plan is just a regular old plan that happens to be related to climate change. The word transition refers to the shift to an economy that produces less emissions and is more resilient to the impacts of climate change.

If you want a more official definition, the one from IFRS has become the most cited:

An aspect of an entity’s overall strategy that lays out the entity’s targets, actions or resources for its transition towards a lower-carbon economy, including actions such as reducing its greenhouse gas emissions.

History

Part of the difficulty in providing a clear definition is that it has evolved over time – and recently diverged – with different organisations placing emphasis on different aspects of the climate transition. Here’s a quick history:

• Wave 1: Transition plans have been around for at least thirty years and originally focused on reducing emissions and/or increasing resilience to the physical impacts of climate change, with less of a focus on mitigating transition risks. These reports were originally called Climate Action Plans and most often released by universities and various levels of government.

• Wave 2: The concept took off amongst investors and companies about ten years ago, in large part due to initiatives such as The Investor Agenda, Say on Climate and the Glasgow Financial Alliance for Net Zero. These initiatives promoted the publication of Climate Transition Action Plans (CTAPs) or Net Zero Transition Plans, with a primary focus on reducing emissions and aligning with a 1.5-degree trajectory.

• Wave 3: We’re now at the start of a new wave, with Transition Plans that focus on mitigating the financial risks of climate change on a business. That may include reducing emissions, but it’s not the primary focus. This approach is being pushed by the IFRS Foundation, which has become an influential force in climate reporting and considers normative statements on emissions reduction as outside their remit.

I expect all three varieties of transition planning to continue in one form or another. So, if you’re considering developing a transition plan, it’s important to first clarify whether your focus is on reducing emissions, managing the impacts of climate on your organisation, or both.

Documents

Further confusing the matter is that there are three separate but related types of outputs from transition planning:

• Type 1: Internal documents (typically plural) that are the results of your planning process and might be integrated with other planning documents.
• Type 2: Annual disclosures about your transition plan, which you need to include in your annual sustainability report if aligning with an IFRS S2 based reporting standard like AASB S2.
• Type 3: A public report that summarises the outputs of your transition planning process that you’re willing to share publicly.

Requirements

Australia’s mandatory climate reporting requirements do not require companies to publish a transition plan (Type 3). They don’t even require having a plan (Type 1). But if you do have a transition plan, you must disclose information about it (Type 2).

Stakeholders, however, will likely expect you to have a transition plan of some sort if they believe you to have a material exposure to climate-related risks and opportunities.

Guidance

Most guidance documents relate to Type 3 public reports with a primary focus on emissions reduction. There are a lot of them, but here are some particularly relevant to Australian companies and investors:

• The Transition Plan Taskforce (TPT) has released the most authoritative and comprehensive set of guidance documents
• The Glasgow Financial Alliance for Net Zero has published guidance for financial institutions
• The Investor Group on Climate Change (IGCC) updated their guide for investors evaluating corporate transition plans last year
• The Climateworks Centre in Australia recently released a guide for credible corporate climate transition plans

The recent guidance on transition plans released by IFRS is very different to the above documents. It focuses on Type 2 disclosures about your transition plan for inclusion in your sustainability report and is primarily focused on the financial impacts of climate-related factors on your business.

The Australian Government has also committed to publishing best practice guidance for the disclosure of corporate transition plans by the end of 2025, which will likely influence the type of transition plans that Australian companies prepare in the coming years.

Next steps

If you’re just getting started with transition planning, here are some basic steps to get you started:

1. Orient: First complete a climate-rated and opportunity assessment to identify material climate-related risk and opportunities (CROs) and decide whether you want to set voluntary emissions reduction targets.

2. Plan: If you identify material CROs or set voluntary targets, develop associated internal plans (Type 1).

3. Disclose: Make sure you’re on track to meet your mandatory climate reporting requirements (Type 2).

4. Publish: Consider whether you want to create a public document summarising one or more of your transition plans (Type 3).

As a final word of advice, make these various documents and definitions work for you. You need to meet your legal requirements of course, but beyond that I’d suggest focusing on doing what makes sense for your organisation and stakeholders, not chasing the latest trend and trying to tick every box in a voluntary standard.