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Climate transition planning: the next step for ESG action

Author: ICAEW Insights

Published: 28 Oct 2024

Mandatory transition plan disclosures are expected next year, but the rationale should be less about box ticking and more about a business’s ability to thrive in the coming decades. Kate Levick from think tank E3G explains why it’s time to act now.

As ICAEW looks forward to hosting a final Transition Plan Taskforce (TPT) event on 1 November at Chartered Accountants’ Hall to mark the conclusion of the TPT’s work, the task facing companies on transition planning is in many cases only just getting started.

The TPT was announced at COP26 in Glasgow and launched in April 2022 to establish the gold standard for transition plans. It boasts a who’s who of business names across its various working groups, with ICAEW’s former chief executive Michael Izza appointed to TPT’s steering group, a role since taken on by his successor Alan Vallance. 

Time for action

London-headquartered think tank E3G, which co-hosts the Taskforce’s Secretariat, focuses on the politics of the climate transition. Kate Levick, who leads E3G’s work on the thorny issue of how to finance the transition to net zero, is proud of its achievements but warns that companies now just need to get on with it. The TPT Disclosure Framework, informed by nearly two years of engagement with more than 600 organisations around the world, emerged in October 2023. In June this year, the IFRS Foundation announced that it would assume responsibility for the disclosure-specific materials developed by the TPT and on 1 October the IFRS Sustainability Knowledge Hub became the official home of these materials.

Despite pledges by the previous UK government at COP 26 to make transition plan disclosures mandatory for UK companies in 2023, regulation has so far failed to materialise, with Levick blaming political drift under the previous government in terms of its commitment to net zero. She is confident that with a new government in office, regulation should come through in 2025 as part of a broader package of reforms that includes the ISSB standards for sustainability reporting. “But businesses shouldn’t wait for the government to regulate,” she urges. “We are seeing increasing numbers of transition plans published and increasingly they’re using the TPT framework as their basis, which is great.” She notes that the Labour manifesto included a pledge to require that transition plans align with 1.5 degrees of warming.

Regulation focusing minds

The stick of impending regulation is helping to focus minds, Levick believes. Meanwhile, regulation in other jurisdictions, notably in the EU where regulatory requirements to publish transition plans – under the banner of the Corporate Sustainability Due Diligence Directive – came into force in July. But the rationale for climate transition plans should be less about box ticking and more about sustainability in its broadest sense, Levick says. “It’s fundamentally in the interest of their business to embed transition planning into their forward strategy so that they can thrive and grow in the coming decades.”

Levick accepts that, for many organisations, putting together a climate transition plan is a big endeavour because it demands a change to corporate strategy and a broad level of support. “That involves creating linkages and conversations between an array of different teams internally – finance, risk, operational people. It’s not something that comes out of the sustainability team in isolation.

“Some companies are a little nervous about committing to something that’s not fully in their control. That’s something that we have addressed through the Taskforce Disclosure Framework. What we say is that companies should talk about the dependencies that they have on action by others to be able to fulfil their plan, and what they’re doing to influence that.”

Accountants’ role in transition planning

Accountants play a key role in the process, Levick says. “The whole area of assessing corporate governance and company performance is moving into the accountancy mainstream. A few years ago, a company might set a net zero target, but not really say how it was going to meet it. 

“We’re moving to a place where companies are expected to deliver on targets, manage their risks, adjust their business strategies and report what they’re doing, and that includes things like forward financial planning. The front end of the company’s report needs to match what’s in the back end. The numbers need to add up to show that this is a real plan.”

As we await flesh on the bones of the government’s Net Zero Strategy, following a successful legal challenge to the versions published by the previous government, E3G is pushing for a national net zero investment plan that will give more clarity and policy certainty to business. Given the shocking state of public finances, the government will be looking to the private sector to fill investment gaps. 

Mobilisation of finance

“The government should send clear signals about which technology and sectoral changes are expected over the coming years and decades. Then it’s about seeing which areas require more mobilisation of finance, whether it’s public finance or private finance, whether the investment is flowing into the areas where it is needed to affect the UK transition on an ongoing basis, and whether more policies and incentives are needed to enable that finance to flow.”

Despite the scale of the task in hand, Levick says it’s hugely refreshing to have a UK government that is reiterating its commitment to net zero, to the UK’s climate goals, to the carbon budgets. “It feels like we’re back on track. They made a very good start with the review to meet environmental targets. But on climate, I feel like they’re probably saving the big guns until the November COP negotiations in Azerbaijan.”

In the meantime, Levick’s advice to ICAEW members setting out on their own climate transition planning journeys is clear: “Companies that are doing it already are vocal about the benefits internally in terms of having better strategic focus, and more robust business planning. But this is not just another reporting requirement. This is about adjustments to business strategy.”

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