How a climate transition plan can strengthen your business model

A transition plan outlines how an organization will align its operations and business model with its climate commitments. It includes specific, measurable actions and interim targets to achieve long-term sustainability goals, including physical and financial resilience. A comprehensive climate transition plan also includes governance considerations, including key roles and responsibilities for individual functions to establish accountability. An excellent resource is the work published by the UK Transition Plan Taskforce (TPT), which presents what can be considered best practice. The International Sustainability Standards Board (ISSB) has assumed responsibility for the disclosure-specific materials developed by the TPT.⁴ and has now published its own new guidance document Disclosing information about an entity’s climate-related transition, including information about transition plans, in accordance with IFRS S2 (pdf).

While some regulations require the disclosure of a transition plan, the process of developing it – “transition planning” – goes beyond a mere disclosure exercise: it’s the strategic process of understanding how a business will operate in a low-carbon future and what changes are needed to make this successful.

Companies may set different levels of ambition as they work to improve their resilience: 

Level 1 — Compliance: regulations require more transparency on transition planning

The landscape of mandatory climate disclosures is evolving rapidly, with a regulatory push that is driving companies to publish transition plans. This includes requirements for disclosing a transition plan under the EU Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD) and under jurisdictional rules set by countries adopting the ISSB on climate-related disclosures (IFRS S2). Using common definitions, these reporting frameworks promote consistency, accountability and comparability.

Level 2 — Value protection: transition planning helps organizations to better manage risks and protect their assets

Transition planning can support organizations in managing risks and protecting assets by providing a framework to identify factors, such as: 

• Climate risks 
• Adaptation and mitigation actions
• Implementation strategy
• Stakeholder engagement needs across the value chain
• Governance models to ensure oversight and accountability
• Necessary financial planning 

Despite increasing climate risk, with larger potential financial losses, most companies have not planned for adaptation to climate change: the EY 2024 Climate Action Barometer reveals that while 81% of businesses have assessed climate-related risks, only 19% have developed adaptation plans,⁵ emphasizing a lack of robust and holistic risk management processes. 

Additionally, investors recognize the value of well-structured climate transition plans in addressing the financial impacts of transition risks and opportunities on investment portfolios.⁶ The latest EY Institutional Investor survey shows that 55% of investors believe that the impact of climate change will acutely or substantially affect their investment strategies in the near term, with investors in Europe and North America far more likely to assert this.⁷ Proactively disclosing a transition plan can help companies demonstrate alignment with the decision-making criteria of investors seeking to fulfill net-zero commitments and protect their portfolios from potential downsides.

Level 3 — Value creation: transition plans can help unlock business value

Beyond value protection, a robust transition planning exercise can also help organizations identify opportunities for long-term value creation across their value chain and be better prepared for a transition to a low-carbon economy. This includes addressing long-term financial planning to ensure financial resiliency and identify opportunities for innovation and growth.

Collaboration is already happening in some regions and sectors. For instance, A Net Zero Transition Plan for the UK Food system report¹⁰ provides an industry-level transition plan that tackles interdependencies to provide a high-level pathway for emissions reductions and overview of technologically feasible decarbonization actions for the UK food system.

Another example is the collaboration between ports in Canada to create green corridors, adopt alternative fuels and electrify their infrastructures, to reduce emissions and enhance operational efficiency.

Power and utilities companies will play a strategic role in the transition to a low-carbon economy through their efforts to decarbonize the grid and offer clean energy procurement options, such as Purchase Power Agreements or Renewable Energy Credits.

Start with climate but bring in nature

As the world faces the twin crises of climate change and biodiversity collapse, there is a growing recognition that these issues cannot be addressed in isolation. A siloed approach to climate change is giving way to more holistic strategies that consider the interdependencies between climate, nature and other environmental factors. Consider both how your company impacts biodiversity and how your transition plan may be adversely affected by biodiversity loss, such as deforestation-reversing natural climate sinks. Conversely, consider how your transition efforts may help improve resilience to climate-related physical hazards through nature-based solutions. For example, there is a myriad of regenerative agricultural practices at the farm level that can contribute to a triple play of sequestering more carbon in the ground, increasing resilience to floods or droughts and contributing to soil health and local biodiversity protection, such as alley cropping, silvopasture and adjacent wetland protection or creation, converting marginal, low-producing crop land into conservation areas. For agri-food businesses, this also presents an opportunity to engage with farmers and suppliers to promote integrated climate and biodiversity transition throughout the food system.

Stay laser-focused

Complex, matrixed organizations are constantly faced with competing priorities and transition planning can easily move to the back burner. Companies need to look beyond short-term political swings to adapt to inevitable climate impacts and make every effort to mitigate worsening effects. Allowing climate action to be dismissed is a business risk. Use transition planning as an effective mechanism to connect the dots between ambitious targets and real action and drive accountability.

Some organizations may struggle to address core business transformation challenges and seize opportunities, as part of the transition planning exercise. Strong governance processes and financial resource allocation, including assessing cost-benefits of actions, identifying investments needs and funding strategies are critical to a transition plan’s success and an impactful organizational transition. In addition, companies may need guidance on how they can monitor and evaluate the effectiveness of their transition plans over time.

Building climate resilience is both a monumental challenge and an area ripe with opportunity for many companies. Transition planning should be top of mind and at the top of the business agenda to support resilience, protect value and unlock opportunities for long-term value creation. A company’s transition plan wants to be strategic, ambitious and actionable to keep organizations motivated to make progress against their plan.