By Kate Ryan, Senior Policy Advisor at E3G
Private sector transition plans can play a vital role in accelerating an orderly shift to a climate-resilient world. With momentum growing, the key now is to ensure consistent approaches for ambitious, credible and accountable plans. The G7 and G20, working with key multilateral partners, should support the development of shared international approaches to transition plans and planning.
This year has seen increased understanding of the value of strategic transition plans. Financial institutions and corporates can use them to align their core businesses with the actions needed for climate safety: reducing emissions, addressing climate-related risks and opportunities, and contributing to the economy-wide transition.
Jurisdictions are developing transition planning guidance and requirements
- The EU recently adopted the first set of European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD). These require companies to disclose their transition plan for climate mitigation, if they have one. Mandatory transition planning requirements for large companies are being discussed under the proposed Corporate Sustainability Due Diligence Directive (CSDDD).
- The US Treasury has released a set of “Principles for Net-Zero Financing and Investment”, signalling to investors and financial institutions that transition plans are becoming a new norm. The guidelines encourage use of this critical tool to align forward-looking strategies, investments, and activities with the transition.
- The Australian government recently consulted on climate-related financial disclosures for large entities, including a proposal for transition plan disclosure requirements.
- The UK’s Transition Plan Taskforce (TPT) will release its final Disclosure Framework and a suite of supporting guidance next week.
- Alongside the UK, major economies including Japan, Nigeria, and Singapore have said they will adopt the International Sustainability Board’s (ISSB) S1 and S2 disclosure standards, which include transition plan related requirements.
Momentum is also building in multilateral fora
This spring, G7 Finance Ministers and Climate and Environment Ministers highlighted the need for corporates to underpin Paris-aligned, net zero commitments with credible transition plans. The G20 had already identified transition plans as an important policy tool in 2022.
In June this year, the ISSB finalised its IFRS S1 Sustainability-related disclosure standard and S2 Climate-related disclosure standards. The latter included an expectation that firms should disclose transition plans.
Transition plans were a key topic of discussion at this year’s New York Climate Action Week. The UN Secretary-General’s Climate Ambition Summit on 20 September included a call for governments to develop consistent regulation and mandatory requirements for transition plans, including on interim targets.
Finally, many international standard-setting bodies and organisations have set up working groups on private sector transition planning and plans. These include the Financial Stability Board, the International Organisation of Securities Commission and the Network for Greening the Financial System. This demonstrates the role that comprehensive transition plans can play across a range of regulatory approaches.
Developments are welcome – now we need a shared global approach
Consistency and clarity across jurisdictions and regulatory use cases is critical to prevent risks of regulatory arbitrage, and to maximise our chances for an orderly transition to climate safety. An essential starting point is to create consensus around what a good transition plan looks like.
At the same time, it must be acknowledged that different jurisdictions have different needs. Recognising that private sector transition plans should be aligned with, and contribute to, their respective country’s NDC, and support national or regional pathways, could help resolve this tension.
Critical next steps could therefore include:
- The G7 should lead by example and commit to requiring mandatory and high-ambition transition plan disclosure by private companies under the Italian Presidency in 2024.
- G20’s Sustainable Finance Working Group should pursue work to further flesh out common principles for credible private sector transition planning. This can build on work achieved under the Indonesian presidency, and most recently by the IMF, World Bank, OECD and BIS. The principles should reflect the need for ambition, fairness (allowing for national circumstances), and the creation of accountability mechanisms to secure credibility. They could build on a holistic “one plan, many users” approach to overseeing private sector transition plans. This approach provides a basis for governments, regulators, and international standard setters to create the consistency and clarity needed across various jurisdictions and regulatory/supervisory approaches.
- Continued work within and across various international forums and regulatory networks remains critical. There should be an emphasis on coordination efforts to ensure these efforts remain aligned and support common approaches. The Financial Stability Board is well placed, potentially with the IMF and/or OECD, to support this effort in 2024.
This blog has been sourced from E3G and can be accessed here