Building a Sustainable Future: Key Insights from the EU Platform on Sustainable Finance

The EU Platform on Sustainable Finance has published much welcomed guidance on the elements to assess a good quality transition plan. The report is targeted at financial market participants (FMPs) to help guide their assessment but is also helpful for companies which are looking to craft transition plans which best help attract investment.   

Transition plans are essential tools for raising and granting transition finance – a key consideration given the $750-800 billion annual funding gap required to maintain the competitiveness and sustainability of European industry identified in the Draghi Report.

Transition plans require organisations to convert environmental and climate goals into actionable steps. By doing so, organizations can mitigate strategic and financial risks associated with the transition, uncover new business opportunities, and clearly define their business strategy. This helps determine when the need for transition finance arises throughout the process and communicate the associated investment plan with their investors. For FMPs transition plans are also useful in terms of the information they provide on integrity, transparency and accountability of the targets included in the plans when assessing the transition and physical sustainability risks associated with an investment.

Mandatory disclosure of transition plans is increasingly becoming the norm, however, until now there is limited guidance on what constitutes a suitable transition plan, and this report provides a timely opportunity to leverage the EU's framework to facilitate transition finance.

The EU Platform on Sustainable Finance's report provides detailed advice on developing and accessing corporate transition plans aligned with the EU’s environmental objectives and social commitments under the Paris Agreement.

The Platform identified three guiding principles for FMPs to use, on a best-efforts basis, when assessing corporate transition plans:

• Ambition and Integrity: Ensure transition plans align with the 1.5°C global warming limit and avoid significant harm to other environmental and social objectives.
• Consistency and Feasibility: Ensure transition plans are consistent with the company's strategy, technologically achievable, and economically viable, considering external dependencies and disclosed assumptions.
• Transparency and Completeness: Encourage companies to make transition plans publicly available and include detailed information, enabling a thorough assessment of the company's strategy and alignment with its goals. Overall, the Platform identified three guiding principles that FMPs should use, on a best-efforts basis, when assessing corporate transition plans:

A summary of the Platform's specific recommendations for FMPs' assessment of corporate transition plan and the role the European Commission can play to assist them with this is set out below:

The Platform recognises that the EU Taxonomy, along with other tools such as disclosures from the EU legislative framework (e.g., EU ETS, IED), is instrumental in evaluating the robustness and consistency of transition plans, particularly on how expenditures are aligned with the EU's net zero by 2050 target and other environmental goals.

The Platform also highlights that integrating climate mitigation and adaptation with broader environmental and social goals is essential for effective transition plans. Although the report focuses on climate mitigation, it also stresses the need to consider other environmental objectives, beginning with climate adaptation, for a thorough assessment.

This report is timely as companies in the EU face various obligations related to transition plans and planning. Companies in the first reporting cycle under CSRD/ESRS with a climate transition plan will need to disclose detailed information on its content and how it fits with their strategy from this year. It will also provide financial markets with tools to credibly support the real economy’s transition to sustainability.