Adapting to the reality of the climate crisis – and to efforts to combat it – requires companies to undergo a process known as transition planning. In-House Perspective assesses the benefits of having a transition plan in place and the role of counsel in creating and implementing one.

The climate crisis is shaping the risks and opportunities businesses face. According to data published by the Copernicus Climate Change Service, 2024 is on track to be the warmest year on record and the first to exceed 1.5°C above pre-industrial levels. According to the UN’s Intergovernmental Panel on Climate Change, ‘crossing the 1.5°C threshold risks unleashing far more severe climate change impacts, including more frequent and severe droughts, heatwaves and rainfall’. Recent extreme weather events in the US and Spain demonstrate how the effects of the climate crisis are already being felt. 

It’s clear that companies will need to adapt to the new reality to survive and thrive. They can do this through a process known as transition planning. Increasingly regulators and standard setters are asking companies to disclose if they have a transition plan in place or even mandating that they have one.

The EU’s Corporate Sustainability Reporting Directive (CSRD) rules applied to the first in-scope companies in the 2024 financial year, for reports to be published in 2025. These companies have to report according to European Sustainability Reporting Standards (ESRS), developed by the European Financial Reporting Advisory Group (EFRAG). ESRS E1 Climate Change says, ‘the undertaking shall disclose its transition plan for climate change mitigation’. EFRAG has recently published draft guidance on transition plans.

The EU’s Corporate Sustainability Due Diligence Directive (CSDDD) says EU Member States will ensure that in-scope companies ‘adopt and put into effect a transition plan for climate change mitigation’. Article 22 of the CSDDD outlines specific requirements for what that transition plan should include. The CSDDD rules apply to the first in-scope companies from 26 July 2027.

The International Sustainability Standards Board (ISSB) IFRS S2 standard requires companies to disclose information on their transition plan if they have one. As part of its efforts to achieve a global baseline for reporting standards, the ISSB has assumed responsibility for the disclosure-specific materials developed by the Transition Plan Taskforce (TPT). The TPT was established by the UK Treasury following COP26 in Glasgow to establish the gold standard for transition plans. Its materials are perhaps the most noteworthy guidance on transition planning currently available.

The nature of a transition plan

A transition plan is a forward-looking, strategic document that outlines how the company will transition to a net zero, sustainable economy. It can be an internal or external document. The transition plan should look at the risks and opportunities the climate transition poses to the business and develop strategies to mitigate the former and maximise the latter.

As part of the process, the business should set out its ambitions and targets and outline how it’s making progress towards achieving them. Targets should be aligned with the Paris Agreement’s goal to limit global warming to 1.5°C. The plan should describe how targets are going be monitored and financed, any initiatives that need to be prioritised to achieve these goals and the commitments senior leadership have made in relation to them. It should also cover any assumptions the company has made or uncertainties it faces, and what’ll happen if the organisation doesn’t meet its targets.

Richard Barker, a member of the ISSB, says that by highlighting the assumptions and uncertainties a business faces, transition plans ‘make the contingencies on everybody else, the systemic nature of the [climate transition], more explicit’.

A transition plan should cover the organisation’s Scope 3 emissions, which are indirect emissions generated across the company’s value chain. It should outline how the business will engage with organisations in its value chain about how they’ll reduce their emissions. Or, it should say if the business will change to lower-emitting suppliers or use more climate-friendly raw materials.

The process of writing the plan may highlight targets that aren’t comprehensive, or that won’t be met. The plan can also add credibility to a company’s targets by demonstrating that it has thought seriously about how it’ll achieve them. Aidan Shilson-Thomas, a research manager in the Corporate Climate team at ShareAction, a responsible investment charity, says, ‘the advent of transition planning […] represents a shift from target setting to taking action’.

A transition plan should affect the organisation’s core strategy and be embedded in how it operates. It should reflect on how the company will transition its business model to a more sustainable one. According to Shilson-Thomas, ‘these might be quite fundamental questions about the current business strategy […] and the way that it operates’. Alasdair Grainger, Managing Director at Grant Thornton in London, says that ‘if done correctly, [transition planning] becomes quite a large-scale transformation project’.

Lara Douvartzidis, Special Projects Officer of the IBA Business Human Rights Committee, says ‘it’s a strategy choice of the company to look at [transition planning] as an opportunity. You may be risking the existence of the business by not engaging with it meaningfully’.

Nicky Sinker, a carbon specialist at Auditel, a cost, procurement and carbon solutions company, says transition-related risks should be covered in an organisation’s risk register. However, many businesses aren’t capturing all the relevant risks because the issues aren’t well understood. The right person to identify the risks would understand the climate crisis, risk management and the operations of the business: a rare skillset. Risks that are missed can include physical ones within the supply chain, as well as those relating to higher insurance premiums in areas affected by severe weather events. They might also include the risk of resources becoming scarce or more expensive, and in relation to adaptation costs the business will face.

Sinker says transition risks are also being overlooked. An example of such a risk could be exposure to increasing levels of regulation. Barker says transition risk happens when your business model is no longer viable. This could be because your customers and regulation have turned against you, or your buyers have green credentials in their contracts that you can’t satisfy. ‘Every business with any kind of sustainability footprint has transition risk,’ he says.

There are also liability risks associated with the climate transition, such as the risk of non-compliance with regulation and potential litigation and reputational risk if, for example, you’re found to be a polluting company, or you’re accused of greenwashing.

Good governance is vital

Practising good governance is an important part of transition planning. For example, the plan should be regularly reviewed, and key performance indicators (KPIs) should be set to measure success. The business should ensure it’s meeting its regulatory requirements and that the information it’s reporting is correct, with paperwork to back it up.

Good governance of transition plans requires an interdisciplinary approach, rather than the task being allocated to the sustainability team. This could include in-house lawyers, risk professionals, sustainability experts, compliance professionals and representatives of the company’s supply chain. Senior management and the board also have a responsibility to understand the risks and opportunities and support the transition planning process.

Importantly, a transition plan doesn’t have to be perfect from the outset. In fact, TPT’s guidance says a plan should be updated when there are material changes. For example, new initiatives may be launched that would help the company meet its targets more efficiently and these should be included in the plan.

David Howe, CEO of Jordisk Consulting, a specialist environmental, social and governance (ESG) consultancy, says that in many companies, the risk management and governance of ESG issues isn’t given enough attention compared to other areas of the business. He says regulators are stepping in and requiring companies to elevate the management of ESG topics to the same level as financial issues. ‘If we’re going to manage environmental and social impacts effectively inside businesses,’ he says, it ‘needs to be operationalised and the equivalence with financial management is really clear.’ Barker agrees that transition planning is moving from sustainability to finance functions and becoming ‘subject to the same due process, control, rigour and market scrutiny, and therefore legal scrutiny’.

It’s critical that the board is involved in transition planning, that its members understand what’s involved and that they support the process. According to Grainger, ‘the board needs to see this as a board-level initiative which is a systemic assessment of their business’. The board should be educated on climate and ESG topics so its members can challenge the plans brought to them by management and feel comfortable that they’re achievable. When transition planning is built into the overall strategy of the business, it becomes part of every board discussion.

Education is also important throughout the organisation to ensure all the teams involved in transition planning provide useful information and support the process.

Thea Philip, an associate director at Pollination, a specialist climate change and nature investment and advisory company, argues that the requirements of regulations such as CSRD and CSDDD make educating the board and in-house legal teams even more pressing. ‘It is now incumbent on directors and therefore in-house legal teams to be upskilling in order to be able to comply,’ she says.

Howe highlights that sometimes the board sees climate and other ESG issues as ‘a burden and a cost to the business’. However, he says transition plans should provide opportunities as well as mitigating risks. Boards should be asking where the opportunities are and how the business can capitalise on them.

Driving forces

Regulations such as the CSRD and the CSDDD are an important motivator for adopting a transition plan. Even companies that aren’t in scope of these regulations are being asked about their plans by clients that are in scope. For example, they could be requested to fill in a Carbon Disclosure Project (CDP) questionnaire, which rates suppliers based on their responses. In this context, failure to have a transition plan in place could become a risk to the business.   

Investors also increasingly want to know more about how their investments will perform in a net zero economy, and transition plans allow companies to provide them with more detail on how they will adapt. According to Arti Bareja, an associate director at Grant Thornton in London, transition plans ‘give investors assurance that the company has the credibility to be able to navigate this new world of net zero, low carbon alignment and [be] nature positive as well’.

Pollination recently surveyed or interviewed 30 members of the Institute of International Finance about how they’re using the transition plans of those who borrow from them for its research paper, ‘Inside the Playbook: How are financial firms supporting clients on transition planning?’ Matthew Cranford, an executive director in the Washington, DC office of Pollination, says the research found that, alongside foundational material such as greenhouse gas emissions disclosure, governance and ambition, investors are increasingly looking for ‘evidence of implementation’ in the transition plans of the organisations they finance.

That includes information on management actions that have been put in place, for example remuneration linked to climate KPIs or an internal carbon price, and indications that real change is occurring within the business, such as a shift in capital expenditure. Investors are also using transition plans to understand the range of financial and non-financial climate-related risks and opportunities the business faces. Increasingly they expect companies to cover nature and the social aspects of transition planning as well. Cranford says the paper calls for investors to be consistent and to target the information they want. He says investors ‘really need to understand how the performance of their investment and lending will be impacted’ by the transition to net zero.

Shilson-Thomas says transition plans should give investors a fuller picture of a company’s planning and its level of ambition, which will hopefully lead to more meaningful conversations between them and the companies they own. ‘Investors have good cause and a responsibility to look carefully at transition plans […] and to make informed choices about whether the plans are credible,’ he says.

Consumers are also more focused on the climate crisis and want to make informed decisions about the organisations they buy from. They require more details on the action companies are taking to meet the targets they’ve set. Howe says the ‘reputational risk that’s associated with that is only going to increase’. He says having realistic, actionable plans in place gives the organisation some protection from reputational risk, providing the foundations of a narrative about what the company is doing and how it’s taking ownership of its transition.

Nature and social impact

Nature is critical to the transition: addressing the climate crisis and restoring nature go hand in hand. As such, nature should be covered in a transition plan. Less progress has been made in understanding and tackling nature and biodiversity loss and therefore businesses may find this area of the transition plan becomes more sophisticated over time, as further resources – and hopefully solutions – become available.

In April, the TPT’s Nature Working Group provided it with advice on integrating nature into its Disclosure Framework – its advisory paper can be viewed on the organisation’s website. The Taskforce on Nature-related Financial Disclosures is another resource for understanding the relationship between business and nature and offers disclosure recommendations and guidance.

‘A transition plan in principle applies just as much to your biodiversity targets as it does to emissions targets,’ says Barker. ‘The further you go away from emissions targets the less advanced and sophisticated’ transition plans are, he adds.

For Douvartzidis, ‘people should be at the centre of transition plans,’ which businesses can achieve by implementing the UN Guiding Principles on Business and Human Rights and using them in the development of their plan. By doing this, she says, the organisation is ‘much better placed to meet the needs of people and planet,’ and there’s a greater chance of achieving a just and equitable transition in line with the UN Sustainable Development Goals. ‘If people think something’s unfair,’ says Douvartzidis, ‘they’re not going to support it, and we need people to support the transition.’

The in-house opportunity

In-house lawyers should educate themselves on transition plans and the regulatory obligations associated with them. Transition planning is a strategic endeavour that requires an interdisciplinary approach. Well-educated lawyers can work with colleagues across departments, and in the boardroom, to help them understand their role in the transition planning process.

In-house lawyers can also argue the case for having more people in the business who understand the climate crisis and biodiversity loss. Hiring new employees or upskilling existing staff to understand the issues involved can help support lawyers and their colleagues who are involved in transition planning. In-house lawyers can also advocate for transition planning to the board, outlining why the process is important and requires their full support to succeed.

Sinker says in-house lawyers can use relevant regulations to build up a transition planning framework. She adds that the more strategic, all-encompassing nature of transition planning might be less familiar to in-house legal teams. ‘In-house legal teams have a huge opportunity,’ she says, ‘but it’s a new skillset to what they’ve historically [used].’ However, she says that legal teams would be well-placed to advise on the governance framework for monitoring and reviewing a transition plan.

Sarah Laidler, an associate director at the Carbon Trust, a global climate consultancy, says in-house lawyers should find out what the company has publicly committed to and then start asking questions internally about how that’s going to be delivered. For example, if the business has changed from a high to a low-carbon supplier, there’s a question to be asked as to whether they’ve calculated the exact carbon saving that’ll achieve.

Douvartzidis says being part of a network of general counsel or in-house lawyers who share information about transition planning is important, because, she says, ‘teamwork makes the dream work’. She adds that general counsel can make informed choices about aligning the values of their organisation with the law firms they work with.

Barker highlights the legal risk associated with transition planning, for example if targets can’t be met, or claims can’t be backed up. However, choosing not to disclose information is also risky and may not even be an option under certain regulations. ‘You’d expect that the transition from a commitment stage to a transition plan stage requires much more legal input,’ he says, to navigate these challenging areas.

The earlier a business starts working on its transition plan the better. Doing so will save money and leave the company in a better position to meet client and regulatory requirements. It’ll also allow the business to identify missing information and gaps in its planning and receive engagement from across the organisation.

‘As high as the cost may be today, to pivot your business model right now is probably the best investment you can make,’ says Howe. ‘If we do want to shift […] towards a lower carbon economy, to a more sustainable economy, we do need businesses to step up and take this more seriously.’