This year’s COP in Dubai, like previous ones, will focus on country level commitments to reduce greenhouse gas (GHG) emissions and support a global economic move away from GHG reliance. This year, the so-called ‘global stocktake’ on the performance of governments in bringing their emissions in line with the Paris Agreement of 2015 could bring into focus the need to revise and enhance country commitments. Country commitments rely heavily on the private sector to deliver, and hence the increase in regulatory and disclosure regimes around the world. While transition planning is not a specific theme of COP28, its Presidency is inviting corporate net-zero commitments and transition planning through a Net Zero Transition Charter. By signing the charter, private sector entities are committing to:
- Publicly set 1.5 degree aligned, science-based, credible and transparent Net Zero 2050 and interim emissions reduction targets
- Produce a credible net-zero transition plan, within one year of COP28 concluding
- Publicly report annual GHG emissions and progress on their net-zero commitment and transition plan.
Companies have been making climate-related commitments and disclosures for years, but the commitment to drawing up transition plans is relatively recent. With the COP28 Net Zero Transition Charter, and the growing number of countries requiring climate-related disclosures that cover transition plans, we can expect greater insight into how companies are planning, managing and actioning their low carbon transitions.
Disclosure and transparency in transition
Obligations to disclose transition plans have been growing, with two key sustainability reporting frameworks including specific disclosure requirements. Both the International Sustainability Standards Board (ISSB) and the reporting standards for the EU’s Corporate Sustainability Reporting Directive (CSRD), which we covered in an earlier briefing, require information about any transition plans that companies have made to be disclosed. Both standards include basic guidance for what such a disclosure should involve.
The impact of these disclosures will be broad – the International Organization of Securities Commissions (IOSCO) has endorsed the ISSB standards, which should see an uptake by its 130 member jurisdictions. So far, adoption or consultation processes across the globe indicate a strong uptake – some recent countries to indicate their intent to adopt the ISSB Standards include UK, Australia, Brazil, Hong Kong, Japan, Singapore, and Nigeria.
When considering the scale of the EU and the impact of its CSRD requirements globally, the obligation to disclose transition plans will soon cover a large economic footprint.
Turning to the US, while the SEC’s draft climate rule is yet to be finalised, state laws are progressing towards disclosures. For example, in California, two climate disclosure laws, Senate Bill 253 Climate Corporate Data Accountability Act and Senate Bill 261, Greenhouse Gases: Climate-Related Financial Risk create frameworks for disclosures. Together these laws create obligations on companies to disclose their scope 1, 2 and 3 emissions and prepare a biennial climate-related financial risk report.
Best practice planning
Until October this year when the UK’s Transition Plan Taskforce published its final recommendations for transition plan disclosures, guidance for private companies had been limited. The TPT’s recommendations, identified as guiding framework for the COP28 Charter, is a best practice supplement to existing disclosure obligations, focuses on creating standardised, high quality transition plans that help investors to make informed decisions about capital allocation. It was designed to be consistent with the ISSB’s standard for climate disclosure, which will likely have an impact on development of transition plan disclosures in other jurisdictions. The Taskforce is in discussions with IOSCO, whose endorsement could accelerate uptake by their 130 member jurisdictions.
From planning to action
Irrespective of the reason for transition planning, stakeholders (in particular investors and the public) increasingly expect companies to explain their net-zero commitments, describe the actions required for change and evaluate the cost and impact it will have on business strategy and finances. In our view, the following elements of transition planning are critical:
- Assessing the status quo: Companies could consider their existing climate risk profile and emissions footprint. This involves understanding their current and legacy risks, their ongoing risks and impacts and opportunities to decarbonise. Ideally this is undertaken before setting commitments and identifying the actions specified in their transition plan.
- Engaging with stakeholders: Scope 3 emissions, those within a business value chain, are often the most significant portion of a company’s footprint. They are also perceived as the most difficult to reduce since they lie beyond the direct influence of the company. Engagement with stakeholders – both up and down the value chain – can help identify bottlenecks, economies of scale and innovations necessary to build resilience to climate risks and decarbonise.
- Role in strategy: Transition involves ‘fifty shades of green’, as Mark Carney, former Governor of the Bank of England and now UN Special Envoy on Climate Action and Finance, described it. ‘Green’ activities cannot be adopted exclusively, nor can ‘brown’ activities be phased out immediately. This is the point of transition – a rewiring of a company’s business into a new future-fit form through a series of strategically informed steps.
- Governance and oversight: Transition planning is expected to sit alongside existing governance functions for Board and management. Best practice plans should at least align with business strategy, if not be core to it. Depending on the industry, transition planning may also impact the day-to-day responsibilities of many functions and roles.
The COP28 Charter marks an opportunity for a surge in private sector commitment to transition planning, with the world watching to see who will rise to the challenge.
