Activating your climate ambition

The launch of the TCFD recommendations in 2017 sparked an accelerated recognition of the commercial implications of climate change on business; it provides a framework for businesses to begin building their understanding of their exposure to climate change, through the use of climate scenario analysis. The TCFD has since been reinforced by the FRC thematic publication in July last year, and most recently as of October 2022 by the Transition Plan Taskforce (TPT) which, tasked by the UK Government, published a disclosure framework for transition plans building on TCFD principles.

The purpose of the TPT disclosure framework is to guide companies towards developing and reporting on sufficiently granular climate action with the intention it becomes part of mandatory corporate reporting in the UK. Until now, many businesses have been very clear about their ambition on climate change, for example by publicly committing to net zero and having these targets validated by the Science-based Targets Initiative. However, many have not defined a sufficiently granular path to be able to explain how they plan to get there. Building a transition plan in the face of emerging regulatory requirements, therefore, represents the current challenge for business to be able to corroborate their climate-related ambitions.

What is a transition plan?

A transition plan shows how a company plans to transition their business in response to climate change. This is primarily through decarbonisation; however, it is also about how they will address climate-related risks and opportunities from climate change that may occur for them along the way. These will be the aspects of climate change that have been identified as material to them such as through climate scenario analysis, whilst also enabling an economy-wide transition. As such, a transition plan is not just about decarbonisation, it is addressing those risks and opportunities, and being able to contribute to that economy-wide transition.

The Transition Plan Taskforce Disclosure Framework

The TPT Disclosure Framework establishes three guiding principles for building out a transition plan:

• “AMBITION” – “Contribute to and prepare for a rapid and orderly economy-wide net zero transition”- Although setting an ambition is the first step (e.g., through a science-based target, or making a net zero commitment), there are other aspects required as part of a transition plan.
  
• “ACTION”: “Focus on concrete actions which emphasise the short-term and strive for resilience.” Companies will need to have identified suitably specific and granular actions for meeting that ambition, such as identifying potential blockers for those targets. This will also help to demonstrate their plan is grounded in substance and tangible actions.
• “ACCOUNTABILITY” – “Enable delivery of the plan through clear governance mechanisms along with consistent, comparable and decision-useful reporting and verification.” Once those actions have been identified for that ambition, the company must then determine the appropriate level of accountability, including who is accountable and by what mechanism, for keeping that plan in check.

These three guiding principles form the transition plan in terms of what it entails according to the TPT Disclosure Framework.

Links to climate scenario analysis

In order to make a net zero transformation more than just a roadmap, it is important to consider the links with decarbonisation and climate risks and opportunities. Climate scenario analysis provides a tool to be able to begin the thought process around risks and opportunities. The TCFD Recommendations (Taskforce on Climate-related Financial Disclosures) therefore becomes a necessary input into building a meaningful transition plan.

The climate scenario analysis asked for by the TCFD enables an organisation to identify material areas they want to prioritise based on transition risks, physical risks and opportunities from climate change they have identified, as part of their plan. The TPT Disclosure Framework, considering Action, Ambition, and Accountability can then be used to build out what that plan looks like.

What this means for your business

1. A transition plan can be a re-articulation of climate and sustainability work you have already completed providing you with a clear objective and plan for incorporating your ESG plans into your corporate strategy
2. Climate scenario analysis provides a valuable starting point for setting out the ambition and building out the plan
3. Ambition and gaining internal buy-in are important starting points but are only the beginning.

Once your ambition has been set, as a business you need to have a plan to understand the costs and benefits associated with meeting that ambition and the commercial decisions you will need to make. This will demonstrate to your stakeholders, including investors, that you have considered and addressed the fundamental business transformation requirements for meeting the commitments you have made.