Transition Plans: Finding a Common Ground for the Financial Sector

Last week, the day before the 2024 UK election, I was part of a roundtable discussion in Paris that included several government mandated bodies* along with banking and asset management practitioners from UK, France and Germany. The agenda was to discuss best practice in creating and analysing transition plans and climate action.

With election campaigns in both UK and France apparently paying relatively little attention to this area, and with continued mixed signals around the commitment to climate actions from regions, governments and corporates, this was a timely discussion, and it was refreshing to hear some publishers of climate transition plans argue that their ambition was underpinned by expected future competitiveness. Below I outline my key reflections and takeaways.

Culture matters

We explored and discussed the importance of cultural change within companies to support corporate transition. Courage and high ambition transition plans can be underpinned by a Theory of Change, or ToC (the narrative which sets out how investment activities or products are expected to contribute to a positive impact). This narrative can explain the intentionality of climate action, any trade-offs it requires, as well as its expected outcome and details. However, even with credible ToCs, the development of transition plans is likely to be an iterative process. The challenge anti-greenwashing rules are bringing to the disclosure around climate activity was also discussed. ToCs have the potential to support ambitious strategies when they are sufficiently granular and flexible.

Some participants thought that label regimes can support leadership and that management in institutions focus minds. This can be compounded by KPIs that are linked to incentives. This was found to be a good support for the cultural shift required of a transition plan.

Mandatory actions and materiality

With more jurisdictions requiring the mandatory disclosure of transition plans, this is expected to increase the level of good quality information available for investors and their decision making. However, for this to be really successful, the various jurisdictions must integrate interoperability – essentially having some form of common alignment – in any upcoming regulations or reporting mandates.

A point for potential improvement remains around materiality definitions and assessments, in effect looking at how climate and ESG risk and opportunities affect an organisation’s financial performance, but also how an organisation affects climate and environment, and how those interactions could affect financial performance. In addition, there is potential for improvement around scope 3 disclosures as well as accountability and the pursuit (mandatorily or not) of transition plans’ test of compatibility with 1.5°C. Materiality matters and that clear and simpler guidance of how to establish it is important. However, in terms of providing guidance for all these complex and unresolved issues, there is still much to do, I am afraid.

* Sustainable Finance-Beirat (SFB) in Germany, the Transition Plan Taskforce (TPT) in the UK and the Institut de la Finance Durable in France

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