Climate Transition Planning Becomes Key in Global Economy’s Shift to Low-Carbon Future

The latest WTW report highlights the evolving role of climate transition planning in the global shift towards a low-greenhouse gas, climate-resilient economy. This change is propelled by increasing regulatory demands for businesses to disclose their net-zero roadmaps, offering unique business opportunities. Transition planning is becoming essential in business strategies, focusing on the risks and opportunities linked to the move towards a low-carbon future. Risk managers are advised to adopt a dynamic approach in understanding transition risks, enhancing their grasp of the associated cause and effect.

Businesses face various challenges in their net-zero transition journey, including policy, legal, and market changes, potentially leading to asset value shifts, cash flow disruptions, or increased operational costs. Key strategies include purchasing insurance, exploring alternative risk transfer options, divesting from high-emission assets, or modifying business models to reduce carbon footprints and emissions.

The initial step in managing climate change impact involves quantifying climate risks that could affect business value. Using modelling and analytical tools, organizations can integrate climate risk quantification into their business and financial planning. This approach is vital for embedding transition planning into business strategies, ensuring expected returns while managing climate risks and meeting evolving climate reporting obligations.

Regulatory momentum for robust transition plans and climate risk quantification is increasing. In 2023, the International Sustainability Standards Board (ISSB) finalized its IFRS with the publication of sustainability and climate-related disclosure standards. Additionally, the EU’s Corporate Sustainability Reporting Directive (CSRD) and the US Securities Exchange Commission’s climate proposal mandate transition plan disclosures.

The UK’s Transition Plan Taskforce Disclosure Framework, aligned with the Glasgow Finance Alliance for Net Zero guidelines, assists organizations in developing comprehensive transition plans. Beyond carbon, the WTW and Institution of International Finance report in 2023 points out the limitations of GHG emissions as the sole indicator, suggesting the need for broader metrics in comprehensive transition planning.