Disclosing a credible transition plan
By Kelly Flatz, Senior Sustainability Consultant
From this year, climate reporting entities (CREs) in New Zealand must disclosure the transition planning aspects of their strategy as part of their climate-related disclosure requirements. With some CREs having already published their second climate statement, it's a useful time to reflect on the purpose of these disclosures, what is required to comply with the Aotearoa New Zealand Climate Standard (NZ CS) requirements, and how to ensure climate transition plans maintain integrity and meet the needs of all stakeholders.
Under the NZ CS, CREs are required to describe how it will position itself as the global and domestic economy transitions towards a low-emissions, climate-resilient future state. This includes:
A description of its current business model and strategy
The transition plan aspects of its strategy including how its model and strategy might change to address its climate-related risks and opportunities
The extent to which transition plan aspects of its strategy are aligned with its internal capital deployment and funding decision-making processes
A climate transition plan is the aspect of an entity's overall strategy that describes an entity's targets, including any interim targets, and actions for its transition to a low-emissions, climate-resilient future.
The ultimate purpose of these disclosures is to inform primary users about how the business model and strategy might change in response to climate-related risks and opportunities, and how the company plans to meet any targets and interim targets it has in place. In my opinion these disclosures are the most useful and informative as they are the only doing disclosure requirement (perhaps excluding scenario analysis but this is really just a means to an end). They reveal an entity's ambition to transition, how it is currently and planning to transition, and how the transition will be financed in a transparent and comparable way. They are a powerful communications tool for this reason.
Of course one may not actually have any targets, interim targets, or actions related to the transition to a low-emissions, climate-resilient future, and this means the CRE's disclosures will be brief. But for those that do, these disclosure requirements can be tricky to understand first and foremost, but also difficult to put on a page in a way that is appropriate and reflects the entity's overall ambition (especially when the plan is made up of multiple plans). The definition is quite all encompassing and broad, meaning it can be hard to discern what needs to be disclosed and what doesn't. The process itself can also reveal uncomfortable gaps, especially between the ambition of publicly disclosed targets and the realities of meeting them.
It's also timely to remember that this is a mandatory disclosure requirement and not a mandatory doing requirement. It has been widely misunderstood amongst many CREs (and some political parties) that these disclosure requirements (and the NZ CS entirely) force or require entities to transition or set ambitious targets when this is not the case. All these disclosures require is for entities to describe the transition planning activities that exist, and if not, to just say that.
It is these disclosures that allow primary users to assess the merits of an entity and make informed assessments about investment and divestment.
Disclosing a compliant transition plan
So what needs to be disclosed to ensure the requirements are met?
In reality, it doesn’t take a lot to tick the compliance box. Particularly if there isn’t a lot of transition going on. For those with targets and transition activities in place, the difficulty will be in pulling it all together and having the appropriate governance in place to ensure the plan is implemented, monitored, and evaluated effectively.
Complying with the disclosure requirements will mean being honest about the entity’s targets and plans without misleading the primary user, and maintaining proper records about said targets and plans. This means disclosing:
The current business model and strategy: The NZ CS don’t provide a definition for these, but in simple terms this requires an entity to briefly describe of how the business makes a profit and its plan to achieve the business’ objectives. The basis for conclusions in NZ CS 1 note that the XRB Board decided not to provide definitions to give entities flexibility here.
The transition plan aspects of its strategy: This requires an entity to describe how its business model and strategy might change to address its climate-related risks and opportunities. This includes: the aspects of the entity’s overall strategy that describes an entity’s targets, including any interim targets, and actions for its transition towards a low-emissions, climate-resilient future. Depending on the entity’s unique ambition, this could entail:
Any GHG emissions targets and interim targets in place (including if and how they are aligned with any scientific basis), and how they are to be achieved (i.e. the actions to be taken) and how they will be financed (i.e. how and when they will be paid for). This demonstrates that there is a plan in place to achieve any publicly disclosed targets.
The actions the entity is taking and is planning to take in future to manage climate-related risks and harness opportunities.
An assessment of how the business model and strategy might change to address its climate-related risks and opportunities. For example, an automotive company may change its strategy to focus on the electric vehicle market to harness this transition opportunity.
Alignment with capital deployment and funding decision-making processes: This requires an entity to describe how the transition plan aspects are aligned (or not) with capital deployment and funding decision-making processes.
Disclosing a credible transition plan
When reading and assessing climate transition plans, the difference between disclosures that are compliant versus disclosures that are credible is stark. Particularly when you consider the plan in the context of wider stakeholder views and requirements, and not just the NZ CS.
A credible climate transition plan should:
Reflect the urgency to act, arising from the observed changes in the climate and the latest scientific findings about climate change.
Have genuine ambition to reduce GHG emissions (usually including scope 3) with robust net-zero and interim targets in line with science-based pathways and a detailed time-bound plan to achieve them in place.
Consider the views of and impacts on wider stakeholders such as the entity’s workforce, local communities, suppliers, customers, and nature.
Maintain a whole-of-business approach and be core to the entity’s business model and strategy.
Be internally consistent and not at odds with marketing practices and industry lobbying activities that aren’t aligned with the ambition.
Be sufficiently resourced and integrated within existing capital deployment and funding decision-making processes.
Have robust governance in place to support the implementation of the plan, including Board approval and oversight.
A credible plan thus goes far beyond what is required by the NZ CS.
Having a credible transition plan in place offers protection from greenwashing and legal risks by demonstrating and communicating meaningful climate action. While some argue that regulatory requirements to disclose transition plans opens a business up to more legal risk because these plans often include critical uncertainties and dependencies outside of its control, saying or doing nothing does not offer up protection. Failing to act also presents its own risk.
Credibility is also in the eye of the beholder. An entity’s stakeholders will be making their own judgements about a transition plan’s credibility. For example, financial institutions will be making their own assessments about what credible looks like to them. As they too will need to meet their own transition plan disclosure requirements, they will be interrogating their financed emissions and policies. The same goes for an entity's customers.
This is especially relevant for those in high-emitting sectors or those exposed to significant physical or transition risks. For example, the recently launched SBTi Net-Zero Standard for Financial Institutions requires financial institutions to publish a policy committing to the immediate cessation of new finance for coal expansion and new project finance for oil and gas expansion, as well as the phase-out of new general-purpose finance for oil and gas expansion immediately or by no later than 2030. Financial institutions that set net-zero targets will need to demonstrate this.
Multiple disclosure recommendations and resources have been developed globally to support climate reporting entities to disclose a credible transition plan. I have provided a summary of what I have found to be the most useful disclosure recommendations and guidance below. Noting that these are often prepared for a global audience and don’t consider New Zealand’s unique context which is important to keep in mind.
It is also useful to engage with your primary users directly to understand what they want to know. It's possible there are specific disclosures they want to see that are not required in the NZ CS or outlined in these disclosure recommendations.
For those entities very much still the development phase, these disclosure recommendations can also be used as effective gap analysis tools to identify elements that still need to be thought through, planned, and agreed.
Transition Plan Taskforce - Now monitored by IFRS, one could say this is the gold standard. The TPT provides their overall disclosure framework and sector-specific guidance.
High-Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities: Integrity Matters: Net Zero commitments by Businesses, Financial Institutions, Cities and Regions - Provides ten recommendations for credible net-zero ambitions.
International Sustainability Standards Board: Disclosing information about an entity’s climate-related transition, including information about transition plans, in accordance with IFRS S2 - This document supports the TPT disclosure recommendations.
EFRAG: Implementation Guidance [draft] Transition Plan for Climate Change Mitigation - Provides support for entities implementing transition plans, as required under the European Sustainability Reporting Standards (ESRS).
Science Based Targets initiative - While the SBTi provides standards for reduction targets, they provide useful context for setting ambition in line with the Paris Agreement.
If you’re looking to navigate these standards and to develop a compliant and credible transition plan, do get in touch. We provide practical, right-sized solutions that are tailored to your business and that zone in on the material part that climate plays in your strategy.
