"Climate transition plans: How EU standards can help companies to focus on the right data", 13 May 2021

It is becoming essential for companies’ success - and survival - to align their business models to a net-zero future. To be able to do it, companies’ need to develop comprehensive climate transition plans that address core aspects of their business strategy...

As the EU Sustainable Finance Strategy aims at channelling an additional 500 billion EUR of private investments each year into sustainable business activities, companies need to focus on and report the right data to be able to harness this opportunity. To help them to do so, the EU is replacing its legislation on ‘non-financial reporting’ with a new Corporate Sustainability Reporting Directive (CSRD), which will be supported by reporting standards. Companies will get clarity from these standards on how to report on their climate transition towards a net-zero economy, how to conduct scenario analysis, and on the key metrics to assess risks, opportunities, performance and impacts.

This article addresses two questions: 

1. What information is critical for companies to consider in the context of their climate transition plans?
2. What are the key issues that the EU climate reporting standard needs to address to help companies in this regard? ...

Climate change transition plans are a shorthand for companies’ strategies to contribute to and thrive in a transition towards a net-zero economy...

To be able to develop a climate transition plan, companies need to carry out two assessments.

First, the plan needs to be based on an analysis of the entire value chain to identify where the main impacts, and sources of risks and opportunities are. Not only is this increasingly expected by providers of financial capital and by regulation, it is also important to understand the resilience of business models and for setting the right focus...

Second, companies need to carry out an analysis of climate-related risks and opportunities. This provides the context in which they can consider and justify the investments in the transition. The framework for such reporting is provided by the Task Force on Climate Related Financial Disclosures (TCFD), whose recommendations were globally endorsed and provide a basis for the development of European standards...

Understanding climate-related risks and opportunities is essential for a company’s ability to define a meaningful strategy...

The key factors companies need to focus on in their analysis and disclosure are the following: 

• Principal risks for short, medium and long-term horizons...
• Opportunities...
• Integration of the assessment of climate risks and opportunities in the governance of the company...

The EU standards can help companies and bring down the barriers to reporting by providing clear methodology criteria in four areas:

• Climate change transition plans...
• Baseline climate scenarios and tools for scenario analysis...
• Metrics for risks and opportunities...
• Sector-specific calculation methodologies of GHG intensity and Scope 3 GHG emissions (carbon footprint)...

Clear EU climate reporting standards in these four areas are of critical importance to help navigate companies through their transition.  And as concluded by the European Project Task Force on Non-Financial Reporting Standards under the EFRAG in its final advice to the European Commission, standards on climate change should be one of the early priorities of the future EU corporate sustainability reporting framework...