Climate Transition Plans That Enable Business Transformation

Authors

• Maria Troya

  Former Manager, Climate Change, BSR

• Deb Gallagher

  Former Director, Climate Change, BSR

Key Points

• Stakeholders are issuing calls for companies to disclose how they intend to meet their climate targets via climate transition plans.
• Climate transition plans ensure that business strategies and operations deliver on greenhouse gas (GHG) emission reduction and a net-zero transition.
• BSR outlines five characteristics of a transformative climate transition plan that generates long-term value.

Investor groups and key climate organizations are expecting clarity on how companies are moving from target-setting to taking action with a climate transition plan. The Glasgow Financial Alliance for Net Zero (GFANZ), the Task Force for Climate-Related Financial Disclosures (TCFD), and the CDP, among others, have released climate transition plan disclosure frameworks and guidance recently. In March 2022, the UN Secretary General’s High Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities published its final report with ten recommendations for non-state entities, which include creating a transition plan.

Calls for these disclosures are a response to gaps between companies’ targets and progress, as well as meaningful emissions reductions. In its latest progress report, the Science Based Targets Initiative (SBTi) highlights this gap—of 692 companies analyzed in the report, only 46 percent reported progress against all their science based targets.

Climate transition plans are a set of actions and accountability mechanisms that ensure business strategies and operations deliver GHG emissions reductions and a net-zero transition. While definitions and frameworks are evolving, climate transition plans should state the company’s climate objectives and goals and how they will be achieved via a net-zero aligned resilient business strategy, governance and accountability, business and financial planning, implementation, organizational culture alignment, and engagement with value chains, industry, and policy. In addition, climate transition plans should ensure a just and equitable transition, as well as the protection and restoration of nature and biodiversity.

To ensure that companies make meaningful progress toward their climate commitment, climate transition plans must enable net zero-aligned business transformation. Effective climate transition plans:

1.     Are integral to a resilient business strategy.

Integrating climate actions into business strategy will not be sufficient to deliver meaningful progress—it will require a paradigm shift. Resilient businesses anticipate material changes to the operating environment, systemically develop and test strategic plans in the context of such changes, and allocate resources that enable success in multiple potential futures. By focusing on building resilience, companies will develop and implement transformative climate transition plans that drive meaningful progress toward climate targets and deliver long-term business value. Building a resilient business may require a rethinking of business models, long-term value, and growth.

2.     Are overseen by the board and executive leadership.

Board and executive-level oversight enables alignment of governance, strategy, and internal processes with climate targets and resilience building. Executive decision-making that is consistent with purpose and long-term value generation avoids short-term thinking that sets failure on targets. Governance, accountability, and the integration of stakeholder feedback are vital for companies to remain on track to deliver emissions reductions and be equipped to respond to a changing regulatory environment.

3.     Allocate resources toward decarbonization programs.

A transition toward net zero will require most companies to radically transform their operations and product and service portfolios and address high-carbon assets. Such interventions will require companies to rethink how they allocate resources and deploy human and financial capital. Prioritizing the allocation of financial resources toward these actions will require upfront investment but can build resilience to changing market conditions and bring long-term returns. Financial metrics must be adapted accordingly.

4.     Integrate climate into skill development and corporate culture.

As business models evolve, climate and sustainability-related responsibilities will be embedded across corporate roles that will involve cross-functional collaboration. To facilitate this integration, companies need to invest in skill development, such as reskilling employees from high-emitting business units to transition programs or providing company-wide training on climate change basics.

In addition, companies will need to create enabling cultures, by openly communicating climate-related plans, policies, and procedures to employees and engaging them in decision-making processes. Leadership will have a role in framing climate change as a priority issue for the company.

5.     Lead to closer engagement with value chains.

According to the CDP, upstream scope 3 emissions of the average global company are 11.4 times greater than its direct operations emissions. To meet Scope 3 targets, companies will need to drastically invest in responsible sourcing strategies. By working with upstream and downstream business partners that have aligned priorities, companies will be able to advance collaborative solutions. Facilitating supplier access to sources of finance, technology, and training will ensure value chains have the critical support needed to advance their own climate transitions.

The disclosure of climate transition plan and other sustainability-related information is key to generating decision-useful information for stakeholders. While it is important that companies disclose high-quality information, they must ensure that climate transition plans are integrated into business strategy, lead to short-term action and emissions reductions, and generate a net zero-aligned business transformation. This approach will ensure that companies will be equipped to manage climate-related risks, generate long-term value, and remain competitive in a net-zero global economy.

Beyond business transformation, climate transition plans should lead to system-wide interventions that facilitate a net-zero transition. This requires engagement with public policy, industry, and communities affected by climate and transition policies. BSR will cover these topics in upcoming blogs.