DELOITTE DIVE IN: Transition Plans. Episode 3: Climate Transition Plans and their Connectivity with Financial Statements

Why Is This Connectivity Important? 

As companies navigate the shift to a low-carbon economy, climate-related risks and opportunities increasingly influence their operations and the information included in financial statements. Equally important is the alignment between environmental, social and governance (ESG) reporting and financial reporting, ensuring a consistent and unified message across all communication channels.  

In their 2025 enforcement priorities, the European Securities and Markets Authority (ESMA) issued a clear reminder to companies that the European Sustainability Reporting Standards (ESRS) require them to illustrate the connections of their sustainability statements to their broader corporate reporting. This means that relevant monetary amounts or other quantitative sustainability information should be presented in the financial statements (direct connectivity). 

Appreciating the effort that reporting entities have put into developing their sustainability reporting, we share the view that there is room for improvement in regard to this connectivity. 

How Transition Plans Influence Financial Reporting 

The Conceptual Framework for Financial Reporting (IASB) sets an objective for the financial statements to provide information about a reporting entity’s financial position, financial performance and cash flows, information which is useful for a wide range of users in making economic decisions. This information should also assist the users of financial statements in predicting future cash flows and their timing and certainty. Further, in addition to complying with the specific disclosure requirements of the IFRS, entities should consider whether to provide additional disclosures if it helps enable the users of financial statements to understand the impact of particular transactions, other events and the conditions related to their financial position and performance. This requires judgement and the consideration of all the relevant facts and circumstances. 

Despite evolving sustainability reporting requirements, financial reporting standards have yet to provide detailed guidance on implementing connectivity between sustainability reports and financial reports. In response, the International Accounting Standards Board (IASB) has published draft illustrative examples (using climate-related scenarios, though the guidance applies broadly to all uncertainties) demonstrating how entities can apply IFRS requirements to report the effects of uncertainties. Key highlights from these illustrative examples include the following: 

• An entity, while concluding that no mandatory disclosures are required about its climate transition plan’s effects, exercises judgement to provide additional disclosures explaining why the transition plan currently has no financial impact. Such disclosures consider qualitative factors – such as climate risk exposure, the strategic importance of the plan and user expectations – ensuring consistency between financial statements and the accompanying reports in delivering material information. 

• An entity determines that additional disclosures about its greenhouse gas emissions policy’s lack of effect would not provide material information due to the policy’s limited operational impact and low climate risk exposure. Therefore, the entity provides no further disclosure. 

• An entity discloses the key assumptions used in goodwill impairment testing, including how these assumptions are determined. It also assesses sensitivity by evaluating whether reasonable changes in assumptions could trigger impairment and disclosing the margin by which the recoverable amount exceeds the carrying amount, assumption values, and the threshold for impairment, enhancing transparency related to climate-related financial risks for the entity’s existing assets. 

• Entities disclose their assumptions and major sources of estimation uncertainty that pose significant risks related to making material adjustments to asset and liability carrying amounts within the next financial year. 

• Entities consider and disclose the effects of climate-related risks on their exposure to credit risk. 

• Information is disclosed about provisions related to plant decommissioning and site restoration.

• Entities assess whether different types of property, plant and equipment have sufficiently distinct risk characteristics to warrant disaggregated disclosures, providing material information to users. 

The examples above offer practical insights into how entities can enhance transparency and meet evolving expectations around reporting uncertainties, particularly those related to climate risks, within the current IFRS framework. 

In an entity’s sustainability reporting there should be an action plan for climate transition, including the main actions that need to be taken to reach the company’s emission reduction targets. In the big picture, when assessing the linkage between sustainability reporting and financial reporting, a company should consider each action point and its impact on financial reporting. It is also recommended that this assessment is documented. To provide structure for the assessment, we have created a matrix tool that helps entities identify and map specific actions to the parts of financial reporting they might influence. This matrix makes it easier to communicate clearly and consistently with both sustainability and finance teams. It also serves as a documentation platform, keeping everyone on the same page throughout the process. 

What is your approach to assuring connectivity between sustainability reporting and financial reporting?

Conclusion 

This means that disclosures should cover the steps, timelines, responsibilities and resources allocated or planned to align the entity’s strategy and business model with the sustainability goals, ensuring transparency and coherence across sustainability reporting and financial reporting.