Podcast | Climate disclosure

Are you ready for the step change from net zero strategies to transition planning?

This article is based on the second podcast in our series examining the preparations Australian business need to make for disclosures under the new mandatory climate-related financial reporting scheme. The focus of the podcast is transition plans - the work businesses need to do to turn their climate and net zero strategy into a detailed plan that demonstrates how the business will respond to a changing climate and decarbonising economy.

The conversation was led by Andy Tipping, partner, General Manager and Decarb Tech Lead at ERM Energetics, Australia. To bring both a global and regional perspective, he was joined by Max Crawford and Charlie Knaggs. Max is ERM’s Global Co-Head Climate Risk and Adaptation, based in the UK, and his focus is the nexus between climate change and the transition to net zero. Charlie is APAC Regional Partner for Decarbonisation. Based in Singapore, Charlie works across the Asia Pacific to help companies on their decarbonisation pathways.

As we learn through the discussion, the disclosure is just the tip of the iceberg. 90% of the effort is in the planning, its execution and continuous improvement.

 Listen to the podcast.

The following is based on the transcript of the podcast episode.

1.   (Andrew) Max, I was inspired to invite you today based on your recent paper, “Ahead of the Climate Curve: Leveraging climate transition planning to prepare for a low-carbon future”. Businesses are familiar with decarbonisation plans but not so familiar with transition plans. So first up, what is a transition plan?

(Max) There is no consistent definition. The ISSB says a transition plan is “an aspect of an entity's overall strategy that lays out the entity's targets, actions or resources for its transition towards a low carbon economy, including actions such as reducing its greenhouse gas emissions[1]”. It's building on what we've been doing over the last few years in terms of greenhouse gas inventories, decarbonisation strategies, and target setting.

But transition plans go beyond what we've typically experienced when doing decarbonisation roadmaps.

A transition plan is the evolution of climate strategy. It is about assessing and understanding impacts, reductions in risk and maximising the opportunities across the climate space - and it’s about action. How we mitigate risk or decarbonise, looking through the lens of the business model, its value chain, and the way that it makes organisations and capital more resilient to the uncertainties of the future.

It is through disclosures we see how companies are going to achieve their targets. In Europe we have the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). There is the (now) ISSB Transition Plan Taskforce (TPT) Disclosure Framework, which potentially gives the UK-developed framework global significance. TPT provides a holistic view of what transition planning requires.

For me there are three reasons why transition planning needs to be much better integrated into corporate strategy.

1. Engagement with the value chain. A lot of the work to date has been about decarbonisation and quite operational, extending into the supply chain and scope 3 emissions. But transition planning makes decarbonisation more front and centre because no one can get to net zero by themselves. We need a systems level view.
2. Integration with financial planning. What are the resources needed to achieve the ambition of the transition plan? We need to disclose key financial metrics and targets under CSRD in Europe and ASRS in Australia.
3. Transition planning is complicated and broad, but it can drive efficiencies in the way we think about sustainability topics. It is not just about climate. We need to think about nature, water and social factors so that we don't end up with negative impacts, trade-offs, or unintended consequences. For example, we don’t want a mitigation lever which delivers a short term benefit to greenhouse gas reductions but could create longer term negative consequences for society. We don't want organisations to be making such decisions in isolation. It has to be part of a coherent approach.

2.   (Andrew) Under ASRS a transition plan needs to be completed. Yet for many businesses it will be a new undertaking. What is your advice on how best to mobilise? What are the 3 or 4 things that a corporate needs to do?

(Max) Yes, consider the guidance that is available. Look to Transition Plan Taskforce (TPT) and WBSCD for guides to transition planning.[2]

Equally important, look to consolidate efforts on critical inputs, such as GHG inventory (including scopes 1, 2 and 3), decarbonisation roadmap, climate risk assessment, and nature LEAP (Locate, Evaluate, Assess and Prepare) assessments. There is usually a lot of activity across initiatives that could make up a transition plan or form the building blocks. It can be spread across different workstreams, and delivered by different people/ parties, and at different levels of maturity. Certainly different maturity is OK, but you need to be able to look across everything relevant that is going on to bring it together, as well as understand any gaps.

Also this is a continuous process. A transition plan is your marker of progress and articulates intentions. It needs to be well integrated into business as usual processes such as budgeting and risk management. But it's something that needs to be monitored and updated annually, and it's important to always think of how a transition plan can be better integrated into the business’ overall strategy.

Consider where you should focus your efforts. In the early stages, you want internal stakeholder engagement and cross-company ownership. There needs to be board or executive committee level sponsorship which will kick off top down cascading responsibilities. Also, data gathering and management is extremely important. You will have data gaps – which is normal - but you need to be aware of what they are, and how you can improve the data. Having a data management process in place is important.

When thinking about resilience and your business model, determine its resilience to climate hazards, and to decarbonisation – noting different organisations and different industries will form different views. Transformation is a sliding scale and if you identify lots of risk or opportunity associated with your business model, then there’s greater need to transform. Whereas if you are in, for example, a services industry, then the risks and opportunities may fall around the edges and the idea of complete transformation is possibly not necessary. In terms of opportunities, remember lots of stakeholders in the value chain are asking for a transition plan - regulators, investors, lenders, customers. This is an opportunity to put your best foot forward. Understanding that from the outset can be extremely helpful.

Furthermore, remember that investors and regulators won’t be satisfied with a transition plan alone. They will want concrete results and, if these fall short, they will want to know how the company in focus plans to change course to catch up. Investors and regulators don’t want a static transition plan. They want dynamic transition planning.

3.   (Andrew) Something we see in Australia is buy-in at very senior levels, but then initiatives becoming ‘stuck’ in the middle tier. It’s a challenge to push through that layer. I think transition planning could start to move the needle as the remits become wider. That said, there remain organisational issues which prevent progress on even the easier initiatives.

(Max) That's a great point. Transition planning needs to cascade down into different functions, and to the asset level. Assets can have a different portfolio of options available than the options visible at the corporate level. The transition planning process needs to be much more tangible and there needs to be buy-in.

Making resources available is key - remembering that resources are not just financial, they are also the capacity and capability of your people.

4.   (Andrew) Charlie, you're in Singapore and have a good view across the APAC region. What are you seeing in terms of the maturity of transition planning? I'm also interested in your view of Australia versus APAC and what you have seen on the ground.

(Charlie) Climate risk, decarbonisation and net zero transition are all key business topics in Asia. But as a general comment, I would say we are probably not as progressed in terms of holistic climate transition planning as what Max is describing in Europe and possibly what we're starting to see in Australia. Most large companies in Asia have identified and assessed climate risks and opportunities, but they're still at the stage of understanding what that means for the business and trying to think about how that impacts the business model and how they do business in future.

TCFD is still a dominant framework, although that is changing very quickly. We're seeing mandatory disclosure regimes coming online in Singapore, Hong Kong, Thailand and Malaysia. IFRS is the dominant standard for those mandatory disclosures. That's starting to ‘up the ante’ and the expectations for transition planning.

I've been in Asia for 18 months now and wanted to share a couple of my learnings. The first one, and maybe this is obvious, is that Asia is not a homogenous region. There are lots of countries with dramatically different regulatory frameworks, levels of maturity, and cultural traditions. To really understand Asia, you need to look at individual countries and take that nuanced view. When you do that, you see there are quite a few barriers to transition. It's everything from geographic factors, for example, wind power is not really an option in Southeast Asia – through to considering that expanding the electricity grid in many Southeast Asian countries is more costly because those countries are archipelagos and crossing water is expensive. Also, many Asian governments rely heavily on fossil fuel-based state owned corporations that raise revenue used to fund social programs. That creates real challenges, because what are you going to replace those revenue streams with?

On the other hand, there is a real culture of sustainability in many Asian countries that I don't see in western countries. There's a connection to the environment and a tradition of social participation. I think that's a tailwind for transition planning in the region.

5.   (Andrew) In terms of companies that are doing this well, Max, which companies or sectors do you see as the leading lights in this area?

(Max) It's a good question. From my perspective, is anyone doing integrated transition planning really well? Probably not, because it's extremely challenging. But personally, some good examples are BHP’s 2024 CTAP[3], Unilever’s 2024 CTAP and Ball Corp’s 2023 CTP. Each has strengths and weaknesses but performs well.

In terms of industries and sectors, the power sector has been at the forefront for a long time in terms of transformation. To an extent, you would've thought that the automotive industry would be similar, but we don't see many standout transition plans from this industry yet. I think there's good reporting from industries like oil and gas but questions as to whether they align with the outcomes of the Paris Agreement or not. Metals and mining in general do a good job of disclosures. But overall it’s a mixed bag.

What are the hardest parts? These will be company specific, however, disclosures are generally very lacking across integration to financial planning and financial metrics and targets. Other ‘thorny’ elements include transformation, including strategic changes to business models, products and services innovation, and the linkage with risks, opportunities and scenario analysis. Value chain engagement is another area that presents challenges, particularly in terms of measuring effectiveness.

6.   (Andrew) In Australia we're seeing the tier ones doing reasonably well, But there's a huge swathe of the market that hasn't looked at this in any detail. Charlie, from the APAC perspective, what's your view on the companies that are outperforming or which sectors are doing this best?

(Charlie) Firstly, I agree with Max. I think that it’s fair to say that no one is doing this really well. Certainly that applies in Asia as it does in the rest of the world especially for the integration into financial modelling, but also in clearly articulating the business model and the product mix that are going to allow the company to thrive in a net zero future.

My second comment is while we see high quality disclosures, it doesn’t mean the transition plan is high quality. We need better ways of assessing the quality of a transition plan.

In the TPT, they talk about an ‘iceberg’ where the disclosure is the tip of the iceberg. The body of the iceberg is underwater, and that is the remaining 90% of hard work that drives a transition plan. I think we see what we think are decent icebergs at the moment, but there's not a lot underneath the water!

In Asia and from a sectoral perspective, it's the oil and gas companies, power companies, and banking and finance is another where we particularly see an interest in transition planning. Obviously those are the sectors with the most at stake.

(Max) Just to jump in, Charlie, the implementation iceberg came from ERM. It was trying to capture the idea that you'll have your disclosure, something you do every three years, but actually everything that's going on underneath is about implementation - knowing the value drivers you're prioritising and how, for example, you’re engaging with the supply chain, or whether you’re decommissioning assets, or pursuing new capital projects. Also, what goes on beneath the surface forms part of the next disclosure within which you provide an update and present the next set of actions.

7.   (Andrew) Max, any final words of advice other than having a good consulting partner to help you navigate the icebergs! What else would you be recommending to your clients?

(Max) I think, to be successful, companies need to know their place on a sliding scale of transformation. The world is changing quickly and is highly uncertain. To be able to pivot quickly, is always a benefit, and to be well aware of the threats to your resilience. Does that mean you have to change everything right now? No. You have to be focused on value, look for opportunities to reduce costs, potentially move into new markets, and develop new products or services.

Simplify would be my key recommendation. The best plans right now are simple: concise and action oriented. Accept the first plan will have many gaps, but part of the plan will be to improve it over time (don’t let perfect be the enemy of good). And genuinely treat this as a strategy exercise – an opportunity for market differentiation and leadership – anything else will be a missed opportunity.

Then integration. We're very focused on carbon and that's probably right, but we should not lose sight of other sustainability factors.