When is a transition plan not a transition plan and instead potential greenwashing?
French NGO Reclaim Finance warns that the lack of an agreed standard regarding what a “robust” transition plan looks like risks confusion, and potentially greenwashing, at a time when European regulators are calling for banks and large companies to more clearly define how they will decarbonise and reach their climate goals.
Financial institutions are expected to support the transition to a low-carbon economy, with regulators pushing for more disclosure.
Transition planning is also at the heart of EU regulations such as the Corporate Sustainability Reporting Directive, which requires disclosure of transition plans to ensure that companies’ business models and strategies are compatible with the Paris Agreement goals and the EU’s aim to be “climate neutral” by 2050.
Companies that fall within the scope of the Corporate Sustainability Due Diligence Directive are also required to develop and implement a detailed transition plan to ensure that “their business model and strategy are aligned with the transition to a sustainable economy and the 1.5C Paris Agreement temperature goal”.
Yet, Paul Schreiber, senior policy advisor at Reclaim Finance, says a lot of the wording within these regulations is relatively vague when it comes to transition planning and, so far, the EU has failed to standardise what should be included in transition plans or set up any enforcement mechanism. “This means companies can adopt purely ‘cosmetic’ transition plans that mask corporate climate inaction, yet still comply with EU regulations,” he says.
What does a ‘robust’ transition plan look like?
In the absence of regulatory clarity as to what constitutes a “robust” transition plan, Reclaim Finance analysed 26 existing international transition plan frameworks, to produce its guide, “Corporate Climate Transition Plans: What to look for”, which lays out minimum criteria to ensure the quality of transition plans.The criteria are summarised into “red flag” indicators to identify clearly insufficient transition plans.
For example, a robust transition plan would use “robust decarbonisation targets” based on absolute emissions, says Reclaim Finance, yet a number of banks have set decarbonisation targets for certain sectors based on emissions intensity.
Another potential red flag, according to Reclaim Finance’s guide, could be if a company’s climate scenario used for target setting is not a 1.5C low/no-overshot scenario with a limited level of negative emissions, or if the base year is not recent and representative. Insufficient ambition — if targets are not consistent with halving emissions by 2030 or do not aim to reduce emissions by at least 90 per cent by the defined carbon neutrality date — is another red flag.
While Reclaim Finance’s guidance could be useful for major financial institutions to scrutinise their own transition plans and those of companies they finance, Schreiber says it is really calling on regulators to set the bar for their own jurisdiction. “Even standards coming from their own industry, they [banks] can pick and choose,” he says. “We really need standardisation.”
Schreiber says transition plans are mentioned within the European Sustainability Reporting Standards, which companies included under the scope of the CSRD must use, but he says the indicators are too vague.
“It basically asks: ‘Can you explain whether your plan aligns with 1.5C?’ These types of variables don’t really give you any meaningful information regarding the content of the [transition] plan. It makes it almost impossible to compare the plans with each other which is a big issue for financial institutions. That’s why we’re calling for standardisation.”
More than just decarbonisation targets
Although banks have published decarbonisation targets for carbon-intensive sectors such as power, energy and real estate, Schreiber says decarbonisation target setting is only one aspect of transition planning.
“It sets the direction of travel for the company and financial institution,” he explains. “But if I only have decarbonisation targets, I’m saying nothing about the means or actions I’m carrying out to decarbonise. What does it mean financially for my company and my capital expenditure? All this meaningful information is not there when you just put out decarbonisation targets.”
In addition to being a regulatory requirement, having more robust transition plans, says Schreiber, may also bring greater clarity to areas of green finance where banks have to dig pretty deep to really understand what they are financing.
“If you had a very good transition planning standard, or a mandatory one, you wouldn’t have that problem. The banks could come in and say, ‘I’m funding this green bond project and the company that is carrying the project has a strong transition plan’.”
