DELOITTE DIVE IN: Transition plans. Episode 2: Credible transition plans
This is the second post of Deloitte’s ‘Dive In’ article series in which we introduce and discuss companies’ transition plans towards a low-carbon economy. Here, we are considering the credibility of the transition plans as the upcoming posts will explore transition plans’ possible impact on a company’s financial reporting and the resilience of transition plans. Stay tuned for the next episodes over the coming weeks.
Expectations for the transition plans
After the first CSRD reporting cycle, there were discussions and comments regarding the reporting of climate change actions, emission targets, and climate transition plans. These discussions have reflected the strong interest of various stakeholders in companies’ climate initiatives and their progress in reducing emissions. Different groups of stakeholders expressed concerns about the comparability, feasibility and credibility of the transition plans, emphasising that the absence of these qualities would undermine the plans’ informative value and, consequently, their usefulness.
According to the CSRD reports from 2024, the main pain points in the published transition plans related to whether financial resources been allocated for implementation, if the company’s highest governance bodies are aware of or have approved the plan and how the company monitors progress and makes operational adjustments to meet targets. Briefly, in many cases the transition plans were more akin to a set of actions or activity programmes than an actual roadmap.
The elements of credibility
The ESRS establish the foundational elements of a credible transition plan.
“The plan should clearly explain how the company intends to align its business model with its emission reduction targets.”
To provide an eagle-eye view of the matter, the plan should be substantiated by quantitative targets and be accompanied by key actions, enabling users (and stakeholders) to understand the purpose of each step outlined in the plan while keeping the end-goal in sight. Key actions included in the plan should be accompanied by the resources necessary to implement them.
To support the plan’s viability and secure organisation-wide commitment, it should be closely aligned with the company’s strategic objectives and overseen by the most senior governance bodies.
The ambition level of emission targets is part of the credibility of the transition plans. ESRS require companies to set targets which are compatible with the goal of limiting global warming to 1.5ºC. Many companies are seeking for external validation for their climate ambitions by getting their net-zero or 1.5ºC targets validated by the SBTi. Transition plans should be responsive to changes in progresses, prioritising solutions that do not affect targets; for instance, if emissions in one year are not reducing according to plan, the planned activities for the coming years should cover the lag in the company’s progress towards its targets.
“Stakeholders should be able to assess the company’s efforts to ensure that their strategies and business model are compatible with the global warming objective.”
Thus, the tracking and reporting about the company’s progress towards their emission reduction targets is crucial in creating credibility for the company’s transition plans.
To build credibility for the transition plans, transparency is recommended. This relates to the transparent and verifiable methodologies behind the transition plan and also to the transparency in the company’s sustainability reporting about the elements of the transition plan.
Be mindful of your emission targets
A company cannot have a credible transition plan without credible emission reduction targets. One angle of on-going discussions relates to the coverage of the company’s emission reduction targets. Has the company included Scope 3 emissions in their targets? Which categories have been excluded from the Scope 3 emission accounting and target setting? What is the share of the excluded emissions from the total Scope 3 emissions? In many cases, the possibilities to remarkably reduce a company’s emissions (Scope 1 & Scope 2 emissions) have already been used – now companies must turn to more demanding areas in their emission reduction activities. Typically, this would mean cutting emissions in the company’s value chain and motivating the value chain actors in regard to emission reduction activities.
Conclusion
“Ambitious, thorough emission targets with clear progress benchmarks are the basis of a credible transition plan, alongside its integration into the company’s strategy.”
However, there are additional elements that, when considered, add value both internally and to external stakeholders: allocated resources, the involvement of senior governance bodies and year-by-year responsiveness to past performance. Incorporating these factors helps to meet the overall expectations for an effective transition plan.
When these elements are included, the company’s progress towards its transition plan is clearly communicated. This transparency fosters a better understanding of the company’s climate actions and supports the company’s reputation as a responsible, sustainable business.
