The importance of transition plans in responsible investment

Since my last blog in July, I had the privilege of being invited to attend a second Transition Planning roundtable, this time in Frankfurt, Germany.

The roundtable brings together various institutions from finance, corporate, academia as well as advisors to policy makers, regulators and supervisors to continue discussing the role of transition plans in building a more sustainable future. In the same vein as the first roundtable, I wanted to share some of my key reflections and takeaways from this session.

Transition plans are becoming a crucial tool for the investment community, providing access to environmental, social and governance (ESG) data that can inform investment decisions. Both the previous UK administration’s strategy and current government’s manifesto have focused on transition plans as part of their general interest to transform the UK into a green finance hub. Similarly, the EU requires transition plans from a prudential perspective, integrating them into the banking package and ESG risk management.

Mainstream adoption and strategic value

Transition plans are gaining traction, particularly in the UK and Japan, driven by investor support and the work of organisations like Glasgow Financial Alliance for Net Zero (GFANZ)[1]. These plans should not be seen as another reporting tool but as strategic instruments that reflect forward-looking strategy and are signed off at the highest levels of leadership. They support the mobilisation of finance and action and should support raising the level of ambition within organisations.

Regulatory landscape and transition plan’s key performance indicators

The regulatory landscape is evolving, with frameworks such as the EU’s European Sustainability Reporting Standards (ESRS), Corporate Sustainability Reporting Directive (CSRD), and Corporate Sustainability Due Diligence Directive (CSDDD) shaping the requirements for transition plans. These frameworks emphasise the importance of checking targets’ compatibility with The Paris Agreements 1.5°C climate goal. The credibility of transition plans can be further enhanced by stress tests and sensitivity analyses that evaluate the financial impact of decarbonisation efforts. Similarly, requiring detailed financial statement disclosures on CAPEX – capital expenditures, OPEX – operating costs, and the cost of decarbonisation (e.g. with more regular disclosures of Marginal Abatement Cost (MAC) curves - a tool to assess the cost-effectiveness of emissions reduction solutions) can help investors and other users understand the credibility of a firm’s future plans.

Challenges and opportunities

Despite the growing importance of transition plans, there are challenges to their development and publication. Legal fears, particularly around greenwashing and the enforceability of plans, remain significant barriers. However, the investment community is increasingly recognising the value of transition plans in signalling ambition, managing risks, allocating capital, and supporting long-term strategic planning.

As regulatory frameworks continue to evolve and investor support grows, transition plans can become an indispensable tool for the investment community.

Conclusion and next steps

Transition plans are set to play a pivotal role in the future of ESG investment from investors such as asset managers. Approaches that link climate transition, adaptation and resilience as well as just transition and nature are likely to contribute to a ‘whole of the economy’ risk mitigation. This is because they will require a holistic evaluation of impacts and opportunities linked to changes in policy, technology and consumer preferences, and the need to adapt economies to increase resilience and including social- and nature-related and not just plans to address the decarbonisation of a firm. [IP1] These transition plans can offer a comprehensive framework for integrating financial and sustainability metrics, supporting sustainable finance, and driving global competitiveness. As regulatory frameworks continue to evolve and investor support grows, transition plans can become an indispensable tool for the investment community.

As governments and companies across Europe continue to grapple with some of these questions, conversations like these are an invaluable opportunity to share ideas, learn from respective experiences and work towards stronger alignment across jurisdictions.  

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.

[1] Transition planning | Glasgow Financial Alliance for Net Zero (gfanzero.com)