• GL
Choose your location?
  • Global Global
  • Australian flag Australia
  • French flag France
  • German flag Germany
  • Irish flag Ireland
  • Italian flag Italy
  • Polish flag Poland
  • Qatar flag Qatar
  • Spanish flag Spain
  • UAE flag UAE
  • UK flag UK

Climate transition plans in the Corporate Sustainability Due Diligence Directive

29 November 2023
Did you know that the proposed European Directive on Corporate Sustainability Due Diligence includes a requirement to not only design but implement a climate transition plan? 

The European Directive on Corporate Sustainability Due Diligence (CS3D) will require mainly large companies across Europe, and in some cases beyond, to take appropriate measures to broadly scope out the impacts of their operations, subsidiaries and business relationships.  This will enable them to identify and assess actual and potential adverse impacts on human rights and the environment across their global value chains. 

Communications about the forthcoming Directive, of which its text in the process of being finalised through the trilogue, largely centres on the requirement to undertake supply chain due diligence on human rights and the environment. It covers a wide range of substantive sustainability matters, including everything from anti-corruption to forced labour and natural resources overconsumption. The European Parliament, in its amendments in June, has strengthened the draft Directive to make explicit that climate change also features alongside environment as a key subject covered. This additional scope of climate change is critical to ensuring compliance with the CS3D.

What does this mean?

The requirement for certain entities (as specified in Article 2) to develop and crucially implement a climate transition plan (Article 15) is not commonly referred to in communications in the public domain about CS3D. The International Sustainability Standards Board (ISSB) offers a useful definition of a transition plan in its S2 Standard: 

"A climate-related transition plan is an aspect of an entity's overall strategy that lays out the entity's targets, actions or resources for its transition towards a lower-carbon economy, including actions such as reducing its greenhouse gas emissions".

The environment and business disclosure platform, CDP define a climate transition plan as:

"A time-bound, action plan that clearly outlines how an organisation will pivot its existing assets, operations and entire business model towards the trajectory that aligns with the latest and most ambitious climate science recommendations, i.e. halving emissions by 2030 and reaching net-zero by 2050 at the latest, thereby limiting global warming to 1.5°C". 

Both ISSB and CDP's definitions are in keeping with the focus of the climate transition plan as articulated in the Directive. This climate transition plan needs to demonstrate alignment between the company's business model and strategy and the 1.5°C Paris Agreement goal, as well as the EU's 2050 climate neutrality target. 

The CS3D specifies seven key elements a climate transition plan must include:

  1. The resilience of the company's business model and strategy to climate-related risks;
  2. Climate-related opportunities;
  3. Decarbonisation levers within the company's operations and value chain, where appropriate, including its exposure to coal, oil and gas-related activities;
  4. How the company's business model and strategy takes account of affected stakeholders' interests and how the company impacts on climate change;
  5. How the company has and will implement its strategy related to climate matters, including its financial and investment plans;
  6. Scope 1 and 2 and, where relevant, Scope 3 emissions for 2030, and in subsequent five year internals to 2050 with progress made to meet these; and
  7. Administrative, management and supervisory bodies' role on climate matters.

The 2023 Green Finance Strategy commits to consult on introducing requirements for the UK's largest companies to disclose their transition plans if they have them. For companies looking to design and implement their transition plans, the October 2023 UK Transition Plan Taskforce's (TPT) Disclosure Framework aims to be the gold standard and offers useful guidance on their design. The framework contains three key principles of ambition, action and accountability. It highlights five key elements of good practice transition plans:

  1. As a foundation, the company must disclose its strategic ambition of the transition plan and the implications on its business model and value chain, coupled with any key assumptions and external factors.
  2. Implementation strategy to achieve the strategic ambition covering its business operations, products and services, any enabling policies and conditions, and information about the effects of the company's transition plan on its financial position, performance and cashflow as well as its resourcing plans.
  3. Engagement strategy across the value chain, with industry, government, the public sector and civil society to achieve the strategic ambition.
  4. Metrics and targets covering governance, business and operations, finance and GHG emissions, as well as information on carbon credits used to achieve the strategic ambition.
  5. Governance of the transition plan including board oversight and managerial responsibility, combined with information on how its culture aligns with the strategic ambition and any aligned or planned alignment of incentive and remuneration structures with the strategic ambition plus related actions on skills, competence and training.

The TPT Disclosure Framework applies the same approach to materiality and definitions as set out in the International Sustainability Standards Board's general requirements standard.  The good practice elements above reinforce the content requirements of a climate transition plan in the CS3D and can be seen as complementary.

What companies need to do now

If they have not done so already, companies should begin the process of developing their climate transition plans so that they may move towards implementation. This is also consistent with climate science and the urgency for action. At the 28th Conference of the Parties (COP28), to the United Nations Framework Convention on Climate Change (UNFCCC), we expect that climate transition plans will be given centre stage as we move from rhetoric to action and this becomes enshrined in law in various jurisdictions worldwide. 

UN Climate Change Executive Secretary Simon Stiell has commented that: "This must be the year that we course-correct.  A strong outcome at COP28 will support both climate action and the sustainability agenda". The key question to ask is this:  is your business on the right path for climate transition?

If you would like to know more about the EU Corporate Sustainabilty Due Dilligence Directive view our 'what you need to know' guide. Or find out more information about how our Sustainable Business & ESG Practice can support you.

Further Reading