CSRD Update: EFRAG publishes draft Transition Plan Implementation Guidance

In November, EFRAG – the EU Commission's technical advisors in relation to sustainability reporting – published an early draft of its implementation guidance for companies that are required to disclose their transition plans for climate change mitigation in accordance with the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD) (the Guidance).

The Guidance is intended to be read alongside the ESRS but does not form part of them and is therefore not binding for companies reporting under the CSRD. Another important disclaimer is that the Guidance has been prepared for use by large listed and unlisted companies that are subject to ESRS; non-listed small and medium-sized enterprises (SMEs) ought to use a separate standard that has yet to be published.

The Guidance is structured into four chapters, which detail:

• the EU framework for preparing climate change transition plans;
• what and how to disclose with respect to the new data points under DR E1-1-Transition plan (ESRS E1-1§16);
• the links between ESRS and other components of the EU's sustainable finance framework which relate to climate transition plans (including the Corporate Sustainability Due Diligence Directive (CS3D) and the EU Taxonomy Regulation); and,
• responses to 21 FAQs.

As the Guidance is in an early draft form, it may evolve over the coming months. For now, the key points to be understood about the draft Guidance are as follows:

1. Alignment with the Paris Agreement: companies preparing transition plans must disclose their climate change targets – under ESRS E1-4 – and explain how these targets are science-based and compatible with limiting global warming to 1.5°C (the target set in the Paris Agreement 2015). It appears that this datapoint has been introduced to reflect the fact that merely having a greenhouse gas (GHG) emission reduction target does not necessarily mean it is a GHG emission target aligned with limiting global warming to 1.5°C (e.g. it could be a target aligned with limiting global warming to 3°C, which would not be aligned with the Paris Agreement).
2. Actions and Decarbonisation Levers: by reference to their GHG emission reduction targets (required by ESRS E1-4) and climate change mitigation actions (required by ESRS E1-3), companies must explain how they will address the gap between their current baseline, and their targets, particularly with respect to the "mid-time horizon" of 5-year-long cycles. It is suggested in the Guidance that this disclosure could be presented in the form of a table or a graphic which shows the effect of developments in a company's operations – such as adoption of new technologies – over time.
3. Investments and Funding: companies are required to disclose the investments and funding that support their climate transition plan, including EU Taxonomy-aligned CapEx. Additionally, companies should be clear about the time horizon in which their investments and funding has been allocated to support climate change mitigation. To look at an example, if a company were to invest in developing a complex zero-carbon industrial plant, this project will involve completing initial scoping, design, construction, and initial operations phases, each of which may take several years. In this case, for the purpose of ESRS, the Guidance welcomes companies to separate long-term projects into different steps and clarifies that the financial resources allocated to the project can be considered "actions" to mitigate climate change on the "mid-time horizon" (5 years), "even if the carbon reductions may only come to fruition in the long-term horizon."
4. Locked-in Emissions: 'locked-in emissions' are estimates of future GHG emissions that are likely to be released due to decisions already made, assets purchased, products produced, or infrastructure invested-in during a company's lifetime. The concern is that, unless locked-in emissions are appropriately included in a company's GHG emission reduction calculations, decisions made in the past or present could make it more challenging for the company to achieve its targets in future.  Under this datapoint, companies must include a qualitative assessment of the potential locked-in GHG emissions from the company's key assets and products. This assessment must include an explanation of if, and how, these locked-in emissions may make achieving a company's GHG emission reduction targets more challenging.
5. Interoperability: where companies undertake activities that are captured by the EU Taxonomy Regulation, they must disclose whether their actions are Taxonomy-aligned. This can capture climate-related objectives and compliance with technical screening criteria. With this datapoint, EFRAG is seeking to achieve consistency between the different parts of the EU sustainable finance system (comprising, in part, CSRD, CS3D, and the Taxonomy Regulation). This goal aligns with the EU Commission's push to streamline and simplify these laws with the introduction of an 'omnibus' legislative instrument, which we discussed recently on ESG Notes).
6. Governance, Strategy, and Progress: the Guidance emphasises that climate transition plans must be "embedded" in a company's overall strategy. Companies must also provide ongoing updates on the implementation progress of their climate transition plans, providing detail about the effectiveness of their planned actions and the way these measures contribute to emission-reduction targets.
7. Considering a "just transition": while the Guidance focuses exclusively on climate change mitigation (corresponding to ESRS E1), it highlights that companies must consider the social and biodiversity impacts, risks and opportunities (IROs) which are connected to the climate transition plan and disclose how the climate transition plan may affect workers, communities, and ecosystems.

Next Steps

The Guidance is an early draft which still needs to be approved by EFRAG's Sustainability Reporting Technical Expert Group and Sustainability Reporting Board. Once approved, it is expected released for public consultation in early 2025 and published in final form from March 2025.  

For more information about EFRAG's recent publications, please see our discussion of the draft sustainability standards for non-EU companies and the draft standards for climate reporting for non-EU companies.

The authors would like to thank Sophie Pamplin for her contribution.