INSIGHT by Reclaim Finance
As more and more companies and financial institutions are expected to adopt what are known as “transition plans” in response to emerging regulations and requirements for greenhouse gas emission reductions, Reclaim Finance warns in a new report that the lack of a standardized approach risks significant greenwashing (1). The new research, which draws on analysis of 26 existing international frameworks, sets out clear expectations on the elements needed to ensure that plans are credible and identifies critical “red flag” warnings that indicate that a plan is not fit for purpose. Reclaim Finance underlines that transition plans must be credible and urges European regulators to ensure a robust transition plan standard and enforcement mechanism to set the bar.
A robust transition plan must include decarbonization targets, a decarbonization strategy, an engagement strategy and reporting and governance, while also recognising risks around biodiversity and the need for a just transition, Reclaim Finance argues in its new report, which highlights the importance of transition plans for delivering climate targets.
With more than 920 publicly-listed companies now setting net-zero targets (2), the report says that transition plans are an important tool to set out how these targets will be met. But without a common approach or standard, it is impossible to know whether these greenhouse gas emission reductions are adequate and will actually be delivered.
Reclaim Finance argues that financial institutions, regulators and civil society need to be able to rely on transition plans to ensure climate targets are met – and that regulators need to introduce clear standards and an enforcement mechanism to ensure that this is the case.
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Based on analysis of existing guidance for transition planning (3), the research identifies minimum assessment criteria to allow financial institutions and others to recognise where companies are at risk of greenwashing, with red flag indicators highlighting when a transition plan is not on track (4).
The lack of common standards and oversight for transition plans mean that anything goes, and this leaves the door wide open for companies who are only interested in greenwashing. If we want to ensure that companies are developing credible plans to deliver on their climate pledges and the fossil fuel phase-out, there is a need for clear essential criteria. As a first step, we have identified a set of “red flags” which should sound the alarm for financial investors when a company’s plan is inadequate.
-Paul Schreiber, Senior Policy Advisor at Reclaim Finance (5)
For example, HSBC’s recently published “transition strategy” contains a number of red flags, including on-going finance for the development of coal, oil and gas production (6).
With the European Union introducing new regulations requiring companies to adopt transition plans to show how they will deliver on climate goals, Reclaim Finance argues that clear standards are critical if these plans are to deliver the necessary carbon emission reductions and transform the practices of companies (7).
The integration of transition plans in reporting, due diligence and prudential rules clearly signals the European Union intends to rely on these plans to reach climate goals as well as mitigate related risks. But, so far it has failedto standardize their content and to 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. Clear rules on the adoption and implementation of credible transition plans are urgently needed.
Paul Schreiber, Senior Policy Advisor at Reclaim Finance
Explore the full report
Corporate Climate Transition Plans: What to look for
- Corporate Climate Transition Plans: What to look for, January 30th 2024. An Excel giving access to the full research – The Transition Plan Checklist – is also available.
- Pledges from major companies as monitored by the Net Zero Tracker.
- See the methodology of the report for more information on the frameworks reviewed.
- Examples of red flags include: decarbonization targets that cover only part of the company’s activities or that do not cover all emission scopes; significant volumes of capex devoted to activities that emit high levels of greenhouse gases and/or the absence of financial metrics to enable the deployment of sustainable activities; development of new fossil fuel production projects or support for the development of fossil fuel projects or the companies that develop them…
- Paul Schreiber is also a member of the French Market Authority’s Climate Commission and the Science-based Target initiative’s (SBTi) Technical Advisory Group (TAG). He contributed to the ACT for Finance methodology.
- HSBC published a hundred page document branded as “transition plan” on January 25th 2024. However, the institution failed to cut its support to the development of coal, oil and gas (see the analysis in the Coal Policy Tracker and Oil and Gas Policy Tracker from Reclaim Finance). Continued support to the expansion of fossil fuel production is one of the “red flags” identified by Reclaim Finance in the report on transition plans.
- Large companies will be required to adopt a transition plan under the Corporate Sustainable Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). Banks and insurers will also need to define transition plans following the revision of the Capital Requirement Regulation (CRR) and Solvency II. The recommendations for a robust transition plan put forward in the research would help companies meaningfully comply with the CSRD European Sustainability Reporting Standards (ESRS) and would help financial institutions meet the European Central Bank’s supervisory expectations on climate-related risks
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.
