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Climate transition planning for finance: Cracking the CSO’s budget

"The transition plan is the document where you can articulate why you've made certain trade-off decisions in a way that can build trust with investors."
Melodie Michel
Climate transition planning for finance: Cracking the CSO’s budget
Photo by Arturo Castaneyra on Unsplash

Transition planning is fast becoming a regulatory requirement – but for Chief Sustainability Officers, a solid climate transition plan can also serve as a powerful budgeting and capital raising tool.

Earlier this month, a group of more than 120 global investors wrote a letter urging policymakers to make ISSB-aligned sustainability reporting mandatory around the world. In it, they made a point of mentioning the requirement for companies to disclose their transition plans, arguing that these support financial institutions in making more informed capital allocation decisions, and adds credibility to their net zero commitments.

Transition finance is accelerating worldwide, with a record US$1.77 trillion invested in the low-carbon energy transition in 2023, but BloombergNEF estimates that this level is still “not nearly sufficient to set the world on track for net zero by mid-century”. To align with the analyst’s net zero scenario, energy transition investment would need to average US$4.8 trillion per year from 2024 to 2030 – and transition plans are a crucial tool to ramp up this type of financing. 

Ramping up transition finance

"Transition plans are one of the really critical pieces of infrastructure that you need in order to be able to build more integrity into the transition finance market, because they not only tell you about the past performance of the firm, but also what its forward-looking plans are, which is exactly the information that you need to make a much more meaningful distinction between companies that are taking the steps necessary, and those that are maybe missing the opportunity," explains Ira Poensgen, Secretariat Technical Lead at Transition Plan Taskforce.

Whereas sustainability reports look back at the progress achieved towards set targets, transition plans force companies to look ahead and break down these targets into concrete measures – a perspective shift seen as indispensable by sustainability experts.

The link between climate transition plans and the availability of transition finance is such that the Transition Plan Taskforce (TPT), which was launched in April 2022 to develop a ‘gold standard’ framework for corporate transition planning, recently saw its two-year mandate extended by the UK Treasury in order to support a nationwide Transition Finance Market Review (TFMR).

The TFMR aims to gather evidence on how to make the UK “the best place in the world to raise credibly transition capital, invest and obtain financial and professional services to support a net zero future”. The TPT will support that effort by drawing on the knowledge and networks it established in developing its disclosure framework, including on transition finance instruments and international standards.

Climate transition plans: a trust exercise

According to Poensgen, transition plans are also a way to build trust between companies and their financiers. “They also allow firms to explain the nuances of the situation where the current reporting often doesn't. The transition plan is the document where you can articulate why it is that you've made certain trade-off decisions in a way that can build trust with investors,” she tells CSO Futures.

This is part of the reason why the top piece of advice offered to Chief Sustainability Officers on developing a transition plan is to be as transparent as possible about assumptions and dependencies.

“The disclosure of transition plans is really important for companies to show to capital markets, to the value chain, to all of their partners that they are really serious about walking the talk and actually doing things to achieve their targets,” adds Tatiana Boldyreva, Head of Climate at CDP.

But in order to build that trust, transition plans must go into a high level of detail, not just around the specific actions planned to meet targets, but also around the capital these actions will require – and this is a particular area where companies have so far fallen short of expectations.

Financial planning for the climate transition

In 2022, 18,600 companies disclosed their climate impacts and activities through CDP, but only 3% of them disclosed enough details on how climate issues have impacted their financial planning.

The type of financial data CDP asks for includes granular, forward-looking revenue, capital and operating expenditure figures aligned with the transition to 1.5ºC for the reporting year, as well as a methodology explaining how these figures were calculated.

Approximately 407 of the organisations with strong financial planning disclosures also reported a public 1.5°C-aligned climate transition plan with feedback shareholder mechanisms in place. “This demonstrates that many organisations that reported having developed a 1.5°C-aligned climate transition plan are in fact missing this essential aspect of credible climate transition plan disclosure,” the charity notes.

“Many transition plans in the past have been quite high level, they haven't given sufficient information to really understand not only the impact of individual initiatives, but how much this is going to cost a company, and what the potential cost savings are from this,” says Andy Garraway, Climate Policy Lead at Risilience.

He believes things are about to change, however, since Europe’s Corporate Sustainability Reporting Directive (CSRD), which came into force this year, requires firms to explain how their transition plan is embedded in and aligned with their overall business strategy and financial planning.

“It begins to change the mindset of companies so that they're not only viewing transition planning as a cost, but also as a potential saving,” he adds, noting that climate change is already affecting companies and their bottom lines.

Putting a “stake in the ground” for future spending

In order to get to a sufficient level of detail within their transition plans and unlock sufficient transition finance, Chief Sustainability Officers can adopt a systematic approach to risk management and contingency planning, according to Matt Paver, Chief Operating Officer at Carbon Responsible.

“At an early stage, you're looking at what capital is available within the company to deploy for investment on sustainable solutions. Knowing that and knowing what your targets are, do those things marry up, and if they don't marry up what's the delta? And if there is a delta, how are we going to cover that in future years,” he adds.

Carbon Responsible is a climate consultancy whose clients are an even split between financial institutions and listed companies, and Paver has identified best practices from CSOs around financial planning for the transition. 

He explains that these companies acknowledge within their transition plans that they might not necessarily have set the capital aside for specific actions yet, but that they have a strategy to fill the capital gaps. “We know that that money isn't allocated yet, but in the future, we're looking at allocating 3% of our annual budget to sustainability, so at least they put a stake in the ground about actually dedicating financial resources to sustainability post-2030.”

Using transition plans to get the CFO’s support

Chief Sustainability Officers often have limited resources and influence within companies, although data collected by CSO Futures suggests that this is changing. But for those CSOs that struggle to get the recognition and support they need to do meaningful work, the requirement to publish a solid transition plan is a great opportunity to get closer to their best ally: the Chief Financial Officer.

“One of the benefits of a more integrated approach with financial planning is that the CFO and the financial teams within a company typically carry a lot of weight and a lot of influence that sustainability teams maybe haven't had in the past. 

“As sustainability and financial planning becomes more integrated and holistic, the perceived importance of sustainability within a company will grow as well, which will only benefit companies taking action to reduce their emissions and their nature footprint. So it's fundamentally an incredibly positive thing,” asserts Garraway at Risilience.

This article is part of a CSO Futures series on transition planning for Chief Sustainability Officers. See other articles in the series: