The Case for Transition Planning

Following the most recent episode of Green Hub TV, which looked at Transition Planning, Leisa Cardoso de Souza explains transition planning in more detail, and why a credible plan is so important.

The idea of transition planning isn't entirely new, but the structured, framework-driven approach we see today is. Back in 2019, there was a lot of talk about commitments for 2050, and since then, we've seen a move toward more actionable blueprints that incorporate forward-looking elements.

Initially, there were voluntary disclosure guidelines like those from the Taskforce for Climate-Related Financial Disclosure (TCFD). However, we are now witnessing a shift to regulatory disclosure frameworks like the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) in the EU, and with the International Sustainability Standards Board’s Climate-Related Disclosure (IFRS S2) being adopted in and with potential in different jurisdictions.

As part of this evolution, transition plans have matured, and the shift represents a movement from mere pledges to concrete actions.

Transition plans are also increasingly recognized by investors as valuable tools for ESG integration supporting decision-making processes and help, among others, to distinguish industry leaders from laggards, decide on the weight of investments. Investors are also observing a potential pricing differential linked to these plans, supported by evidence of their growing adoption in the market.

All that said, transition plans should not be seen solely as a reporting exercise, but also as a change management tool. They can help communicate to internal and external stakeholders the ambition, actions (decarbonization levers), and accountability of the organization and thus support against greenwashing claims.

It’s true that not all transition plans are created equal. A credible transition plan should clearly articulate several key elements and answer: What are your greenhouse gas (GHG) emission reduction targets? What decarbonization levers will you implement? Where are you directing your capital, and who is responsible for these actions?

Credible plans should have measurable, time-bound targets that consider short, mid, and long-term horizons. They need to outline specific, quantified decarbonization levers and be aligned with science-based pathways. While the market is converging on what constitutes credibility, it's important to note that there isn’t a one-size-fits-all approach.

That said, there are a plethora of frameworks and guidance available, such as those from the Transition Plan Taskforce, Climate Bonds Initiative, and the World Benchmarking Alliance, which on the surface, can seem challenging to navigate.

But there are common threads that run through these frameworks. Core elements include ambition —covering target scope (operational and supply chain – that is 1, 2 and 3), type (absolute or intensity-based), and timeframe; action – strategies and actions to reduce GHG emissions; and accountability – governance structures, internal processes, and even cultural elements linked to HR and executive pay.

According to CDP’s 2023 State of Play of Climate Transition Plan Disclosure, published in June 2024, about 6,000 companies reported having a climate transition plan aligned with the Paris Agreement's 1.5-degree target. However, only 39% of these companies reported on more than two-thirds of the key indicators for assessing credibility. And of the 6,000, just 2% are disclosing to all 21 indicators.

The challenges companies encounter are varied and numerous. They often struggle with crafting a complete strategy—this includes verifying their emission inventory, accounting for Scope 3 emissions, and linking KPIs to remuneration. Setting targets can be straightforward in the short term, but long-term science-based targets often prove to be significantly more challenging, particularly when engaging with policy matters. Lastly, financial planning is another hurdle, as organizations must identify spending that aligns with their transition plans.

It’s also essential to consider dependencies that can influence transition planning. For instance, physical and non-physical factors, as infrastructure, availability of resources, regulation and consumer behaviour, can present significant challenges on the implementation of transition plans, even if credible. The automotive sector offers real-world examples of these enablers, illustrating how companies must navigate various challenges on the ground. A more detailed discussion on the auto sector is available on the second episode of our Green Hub TV.

In 2024, Natixis CIB launched the development of an internal transition plan assessment (TPA) methodology to equip the bank’s client analysis on transition potential. It will provide a forward-looking and analytical view of the robustness and credibility of their transition plans, including not only   standalone plans but those integrated into broader climate strategies and sustainability reports. The TPA tool revolves around four pillars: ambition (GHG emission reduction targets), past and current performance (meeting GHG targets and share of brown vs green assets), actions (decarbonization levers), and management of the transition (steering of the transition plan, stakeholder engagement, and just transition), to provide a robust, forward-looking assessment of transition potential.

The TPA will allow Natixis CIB to elevate our strategic dialogue on these issues and deepen our understanding on how to support our clients in their transition approach through the CIB’s entire range of products and services.

While progress is being made, there's still a substantial journey ahead. Transition planning is not just a reporting exercise but a vital tool for change management.