What makes a credible climate transition plan? (CDP)

Our key takeaway: Is your company ready with a credible climate transition plan? A recent CDP report finds that only a very small number (0.4% of all disclosing organisations) have credible plans, based on their disclosures. This is a worrying statistic considering the absolute necessity of limiting global warming to 1.5°C above pre-industrial levels to avert the worst of the climate crisis. However, all hope is not lost. The CDP’s report provides guidance on how companies can develop and implement credible climate transition plans, as well as signpost key indicators showing how companies can improve their disclosures of their plans. This is a call to action: companies must, without delay, develop time-bound climate transition plans, which can be measured and monitored by key KPIs to ensure credibility and robustness. This is not only of legal importance, as companies are increasingly required to disclose climate-related risks due to a proliferation of disclosure laws, but also of business importance. It is clear that we will transition to a net-zero economy; only companies who have a credible and actionable climate transition strategy in place will survive the transformation.

The Carbon Disclosure Project (CDP) published Are Companies Developing Credible Climate Transition Plans?: Disclosure to key climate transition-focused indicators in CDP’s 2022 Climate Change Questionnaire (February 2023):

• What makes a climate transition plan credible?: A climate transition plan is a “time-bound action plan that clearly outlines how an organization will achieve its strategy to pivot its existing assets, operations and entire business model towards a trajectory that aligns with the latest and most ambitious climate science recommendations”—that is, limiting global warming to 1.5°C. So what makes a climate transition plan credible? The report outlines the 8 elements as being key components of a credible climate transition plan, which companies can demonstrate they are meeting by disclosing information according to 21 key indicators. The 8 key elements are: Risks & Opportunities; Governance; Scenario analysis; Targets; Financial planning; Value chain engagement & low carbon initiatives; Policy engagement; and Scope 1, 2 and 3 accounting with verification. More importantly, companies must go beyond disclosure and show that their climate transition plans align with, and are part of, their business strategies: “Environmental disclosure alone is not enough – it needs to lead to accountability and transformation; hence the relevance of climate transition plans as part of a business’s strategy.”

• Very few companies are developing credible climate transition plans: The report highlights that less than a quarter of the companies taking part in the questionnaire had developed a 1.5°C climate transition plan: “In 2022, 18,600+ organisations disclosed through CDP’s climate change questionnaire, of which 4,100 of them disclosed that they had already developed a 1.5°C-aligned climate transition plan.” And fewer still have a credible climate transition plan: “Of these 4,100 organisations, 81 of them reported sufficient detail to all 21 key indicators in the climate change questionnaire that align with a credible climate transition plan.” On a sector-specific basis, the apparel, fossil fuels and hospitality industries had the poorest level of disclosure, with “only one organization in each of these industries disclosing against all the 21 key indicators of a credible climate transition plan.” However, the report emphasises that there are encouraging signs more companies will adopt climate transition plans: “Over 30% of all disclosing organisations reported that they intend on developing a 1.5°C-aligned climate transition plan in the next two years”, and improve the quality of their climate-related disclosures due to a plethora of proposed and enacted disclosure laws: “[W]ith a rapidly evolving regulatory landscape seen across the UK, the EU and the US, forthcoming legislation on transition plans will be a key driver of increased (and improved) climate transition plan disclosure.”

• What can companies do to develop a credible climate transition plan?: The report highlights that for companies to show they have a credible climate transition plan in place, they must disclose sufficient information according to the 8 key elements outlined above. More specifically, companies should: (1) identify and disclose climate-related risks and/or opportunities and have processes in place to manage them; (2) implement good governance policies and structures such as having board-level oversight over climate transition plans and incentives for the management of climate-related issues; (3) conduct robust scenario analysis to “identify potential substantive climate-related risks and opportunities, enhance critical strategic thinking, and help an organization understand how it might perform in different future states”; (4) set near-term and long-term science-based targets (SBTs), which should be time-bound and, if possible, externally verified; (5) plan and outline “time-bound financial planning details required to achieve its climate transition”; (6) outline “time-bound actions to decarbonize business processes (and those of its value chain), with time-bound KPIs”. This involves value chain engagement, increasing share of revenue from low-carbon products and services, and implementing emissions reduction initiatives for its direct and indirect operations. Importantly, supply chain engagement strategy is one key indicator of a credible climate transition plan; (7) publicly communicate that its "policy engagement aligns with its climate ambition and strategy; and (8) include “an annual Scope 1, 2 and 3 emissions inventory that is complete, accurate, transparent, consistent, relevant, and verified by a third-party.”