A climate transition plan outlines how a company will align its business model with its decarbonisation goals, with time-bound actions, and ambitions for net zero emissions by 2050 or earlier. The Investor Group on Climate Change (IGCC) has identified five principles for credible transition plans, constructed from a review of existing transition plan frameworks and guidance.

Principle One: Set comprehensive, science-based quantitative targets across all material

Companies should set targets that are comprehensive and aligned with the Paris Agreement. These targets should be separated into short-, medium-, and long-term targets and it should cover all material emissions. The Climate Action 100+ (CA100+) benchmark methodology is used to assess these targets against the company’s sector trajectory. Furthermore, it is recommended that these targets cover most of the Scope 1 and 2 emissions, and for a firm’s most material Scope 3 emissions. Investors prefer independently verified targets including science based targets to prove credibility. Furthermore, target baselines should be representative of the business and its more recent base year.

Principle Two: Outline a strategy to deliver targets, identifying enablers and disclose quantifiable impacts.

It is important that companies identify specific actions to reduce emissions as part of the transition plan. Companies should set and disclose separate goals and targets for ‘low-carbon’ initiatives and their contributions toward the target. Offsets and negative emissions technologies are being used to meet net zero targets. Negative emissions technologies such as carbon capture and storage, utilisation and storage, or nature-based solutions, account for only a small proportion of emissions reduction. Offsets should be used as a last resort to neutralise residual emissions.

Principle Three: Set sector-specific commitments and actions aligned with 1.5C decarbonisation pathways.

It is important that companies set targets, commitments, and actions that suit their respective sector when establishing transition plans. This is due to pathways and time frames for net zero emissions being sector-related. Each sector has its key challenges and sector-specific actions. The differences are caused by factors such as established abatement opportunities, whilst other sectors do not have clear pathways to decarbonisation due to technology still being in its infancy.

Principle Four: Ensure investment commitments are aligned with targets

Management is often judged on where companies invest their capital. This includes a decrease in investments in carbon-intensive infrastructures/assets and increasing green/low carbon investments. Companies can use the International Energy Agency’s net-zero by 2050 scenario to determine appropriate capital expenditure (CapEx), dispositions, acquisitions, and capital allocation strategies. Furthermore, the Climate Accounting and Audit Indicator provides companies with information for financial statement disclosures.

Principle Five: Commit to annual transparent disclosure and monitoring with external verification

Annual reporting on climate disclosures is required by investors. These reports are often produced using the Task Force on Climate-Related Financial Disclosures’ guidance. Furthermore, investors prefer independent external verification or reviews of decarbonisation targets and crucial climate-related information. It is also ideal if greenhouse gas emissions are verified by an external party such as an independent environmental auditor.

Overall, companies must plan and deliver ambitious decarbonisation across all industries.

1. Investors are seeking greater transparency to make informed assessments and comparisons of a company’s ability to transition to net zero. Companies will need to provide investors with credible transition plans if they wish to retain and attract quality, long-term capital.
2. For the goals of the Paris Agreement to be achieved, companies need to plan ambitiously to decarbonise across all industries.
3. Companies should disclose forward-oriented Capital Expenditure (CapEx) budgets for at least three years. If the targeted production is behind, then a company should specify discrepancies and disclose break-even costs for new and existing projects such as investments in bioenergy with carbon capture storage.
4. Companies should not make acquisitions of assets that compromise their commitments net zero goal. Furthermore, the disposal of fossil fuel assets should be allocated to parties that intend to operate those assets in a manner consistent with net zero.
5. If a company is a fossil fuel producer, then it should disclose the peak and decline in fossil fuel production and price forecasts along with its diversification plans.
6. Decarbonisation targets need to be verified independently to ensure it is in line with the company's net zero pathway, and this review is preferred by investors seeking confidence in disclosures.
7. Specific actions and individual contributions to the emission target should be clearly stated. The total contribution of individual actions should account for 75% of medium-term and 50% of long-term reduction. Actions to close the gap or reasons for the gap between the total identified actions and the emissions target should be stated.
8. It is important that targets specify whether emissions are accounted for under the operational, financial and equity share approach. Companies should avoid omitting any emissions by employing one approach over another in their target calculation, and if they do, they should disclose why.