Last June, the United Kingdom (UK) Department for Energy Security and Net Zero launched a consultation on climate-related transition plan requirements for UK-regulated financial institutions and FTSE 100 companies “to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement”, sending a strong signal to markets about the importance of transition planning for investors and businesses to seize opportunities related to the energy transition. To seize these opportunities, Canadian businesses and investors need to identify opportunities and unlock the necessary hundreds of billions of dollars in investment every year to decarbonize and reach Canada’s net-zero emissions target by 2050.

Credible corporate transition plans can identify risks and develop mitigation and adaptation strategies, which can then lead to innovative solutions, competitive advantages, and other opportunities. Transition plans can also help investors assess businesses’ competitiveness, profitability, sustainability, and resiliency in the future. For businesses, transition plans are a strategic tool to plan for current and future climate disruptions. They help lay out a step-by-step plan to reduce greenhouse gas emissions, adapt to extreme weather events, and seize business opportunities.

The IFRS Foundation published guidance on transition plan disclosures in June to support entities applying IFRS S2 Climate-related disclosures and enable entities to provide high-quality information related to transition planning. Importantly, while IFRS S2 doesn’t require entities to have a transition plan, many elements of IFRS S2 are part of a strong and credible transition plan in alignment with the Transition Plan Taskforce.

Other international organizations, such as the Task Force for Climate-related Financial Disclosures (TCFD) and the Glasgow Financial Alliance for Net Zero (GFANZ), have developed frameworks and guidance on transition plans, outlining key characteristics of transition plans and putting an important focus on strategy alignment, implementation, and engagement. Similarly, the Office of the Superintendent of Financial Institutions (OSFI), in its Climate Risk Management Guideline B-15, requires federally-regulated financial institutions to “develop and implement a Climate Transition Plan in line with its business plan and strategy”.

Governance: A cornerstone of transition plans

The role of boards of directors and trustees

Transition planning—the process that leads to transition plans—needs to be grounded in strong governance. While boards of directors and trustees play an essential role in setting ambitious climate goals, they play an equally important role in developing a plan to achieve the organization’s ambition. It is part of their role in overseeing risk management and compliance, guiding and supporting strategy, and acting in the best and long-term interests of the organization.

Carol Hansell, renowned corporate lawyer and governance expert, mentions in her updated legal opinion on directors’ duties with respect to climate that “the board as a whole should integrate climate change risk into its work plan. Strategy, in particular long-term strategy, is perhaps the most important and obvious area of focus. As the board oversees the strategic planning process, it will be important to consider how climate change risks (both transition risks and physical risks) could challenge the corporation’s success in executing its strategy.” Given that transition planning is a strategic, forward-looking exercise rather than a compliance one, the board plays an important role in setting the tone for transition plans.

Corporate directors are legally obligated to address climate change risk and opportunities as part of their oversight of the company they serve. They are responsible for corporate strategy, including climate-related goals and priorities, and ultimately accountable for how climate risks and opportunities are identified, assessed, and managed. Without their oversight, the climate transition plan risks being disconnected from the actual strategy, decision-making, and execution.

Board buy-in is essential to both the development and the successful implementation of a credible transition strategy. Board and CEO sign-off signals that the organization is serious about delivering on its climate transition plan. A clear governance structure also reinforces the plan’s credibility in the eyes of investors and other relevant stakeholders.

The role of the audit committee

The audit committee also has a role to play in transition planning, given its responsibility of examining and evaluating financial processes, including the organization’s financial statement, which is closely tied to climate reporting. According to Dr Janis Sarra, author of the Audit Committees and Effective Climate Governance: A Guide for Boards of Directors, the audit committee can also set the stage for integrating climate change accountability and the overall maturation of climate risk management, support the identification of financial risks related to climate and the incorporation of a climate change lens across the three lines of defence, and validate and incorporate climate-related financial disclosures within overall corporate disclosures. These responsibilities are all related to effective climate transition planning.

The role of the risk committee

On the other hand, the risk committee supports senior management in identifying, assessing, managing, and mitigating material risks to the organization. The committee sets the organization’s risk appetite and tolerance, approves and monitors the enterprise risk management (ERM) framework, aligns the strategic plan with the ERM framework, oversees the risk culture, and monitors emerging risks. Credible transition planning allows organizations to plan for current and future climate disruptions, ensuring they remain competitive and resilient when facing climate-related financial risks.

Governance is at the cornerstone of transition plans. For transition planning to be effective and successful, a clear governance structure and processes need to be in place.

The role of executive and C-suite leadership

Moreover, the C-suite’s buy-in into the transition plan is as fundamental as the board’s buy-in. Senior management leads the transition planning process. They shape transition planning for creating long-term and sustainable value, like they do for traditional strategic planning, by setting the company’s climate ambitions and interim targets with the support and guidance from the board.

Senior-level executives, notably the chief executive officer (CEO) and chief financial officer (CFO), are responsible for implementing the transition plan, ensuring its cross-functional integration into all business functions, such as finance, operations, investment, and supply chain. They can ensure climate considerations are integrated in key budgeting, capital allocation, and investment decisions, aligning resources and capital with the transition plan. They oversee engagement with relevant stakeholders, such as investors, clients, employees, regulators, and the community in the development and communication of the plan. This engagement contributes to building trust and credibility. Senior management must also ensure that the organization has the internal capacity, resources, and knowledge to implement the plan.

Business Future Pathways, a new finance-led initiative, will help businesses operationalize and report credible transition plans to global capital by providing practical, internationally aligned, and made-in-Canada guidance. C-suite can look for upcoming guidance from Business Future Pathways to help them lead the development of credible and science-based transition plans and provide decision-useful information to investors.

Climate transition plans are a climate governance issue

Transition planning as a strategic planning process and its product—the transition plan—is not a compliance exercise nor solely a sustainability one; it’s a strategic governance imperative. The board and executive leadership have a key role in ensuring a company’s transition plan is rigorous and tied to credible scenarios and decarbonization pathways. Without active board and executive management leadership and engagement in transition planning, transition plans risk being siloed and ineffective.