Building a Transition Plan Aligned with the CSRD

The CSRD came into force on January 1, 2024, and the first publications of non-financial reporting are expected as early as 2025.

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To regulate and harmonize these publications, European reporting standards have been created: the ESRS. Within these ESRS, ESRS E1 focuses on climate change. The goal of this standard is to understand the company's impact on climate change and how it plans to reduce its greenhouse gas emissions or adapt to climate change.

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The central element of ESRS E1 is the publication of a climate transition plan by the company. This is what is required in DR n°1 (ESRS E1-1).

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How to build your climate transition plan? What should it contain to comply with the information requested by the CSRD? How to make it, beyond a simple reporting exercise, a central element in the company's strategy?

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We detail the major challenges of this transition plan.

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1. General Framework and Ambition of the Transition Plan

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Why is this transition plan necessary?

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The objective is to enable investors analyzing companies' non-financial publications to ensure that the transition plan developed by the company is compatible with the Paris Agreement, i.e., with a climate warming scenario limited to 1.5°C.

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It is not just a matter of checking whether the company has set a target for reducing GHG emissions by 2030 or 2050 and seeing how ambitious or not this target is. The objective of reducing emissions is just one point among others. The challenge is to ensure that the company is deploying a complete transition plan with ambitious objectives, means to achieve them, and monitoring of its implementation.

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What is the set objective? By when? What does the company's decarbonization trajectory look like? What levers are or will be implemented to achieve these objectives? What financial resources will be associated with them? What are the locked-in emissions? And how is the company changing its governance to monitor and control the implementation and results of this transition plan?

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2. Key Elements of the Transition Plan

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2.1 A Decarbonization Trajectory

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This is the central element of the transition plan: the decarbonization trajectory. What is the reference year and what is the target year for achieving the objectives? What are the set objectives? How to achieve them? Are they compatible with a 1.5°C scenario?

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This decarbonization trajectory requires the company to calculate and publish GHG emission reduction targets.

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This point directly refers to what is required in DR n°4 of ESRS E1 on objectives related to climate change mitigation.

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Several points should be considered to publish objectives in line with the ESRS:

- The emission reduction target must be expressed in absolute value and, if relevant, in intensity.

- The reduction target must be published in gross value, i.e., without considering carbon credits, absorbed emissions, or avoided emissions.

- The objective must cover scopes 1, 2, and 3. Either the company publishes separate objectives (by scope) or an aggregated objective.

- The company must set a reference year, a reference value, and a target value at least for the year 2030, if possible for 2050 if it has an objective for that year. After 2030, the target values are set every 5 years, i.e., for 2035, 2040, 2045, and therefore 2050. The reference year must be within the 3 years preceding the first year of CSRD format reporting. For the reference value, the company can average its emissions over 3 years to be more representative and to correct certain short-term effects (e.g., a significant increase in emissions due to high consumption following temperature anomalies in one year).

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Finally, it is a crucial point in setting objectives and the decarbonization trajectory: ESRS E1-1 specifies that the company's trajectory must be compatible with limiting global warming to 1.5°C in line with the Paris Agreement.

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How to ensure that your decarbonization trajectory is compatible with the Paris Agreement?

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The ESRS specify that objectives should be based primarily on a sectoral decarbonization methodology if it exists and, if not, on an absolute decarbonization methodology.

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The company must therefore follow a methodological framework based on the Paris Agreement. Often cited are the SBTi framework (with sectoral approaches or absolute contraction) or the Net Zero scenario of the International Energy Agency.

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The company must clearly specify in its reporting which methodology and framework were used to define the reduction objectives.

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2.2 Publication of Decarbonization Levers

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The company must publish the decarbonization levers and key actions it has already or will implement to achieve its objectives.

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This plan may include: adopting renewable energy sources, improving energy efficiency, reducing fuel consumption, etc.

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The objective is to ensure the ambition of the transition plan and its concrete translation into action.

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The company must be able to list the decarbonization levers, describe them, quantify their individual contribution to the decarbonization trajectory, and indicate the timeframe for their deployment.

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2.3 Calculation and Publication of "Locked-in" Emissions

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Locked-in emissions are those generated by the company's long-lived assets and products over their entire lifecycle. For example, installing an industrial gas or oil boiler for a factory.

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The company must calculate the GHG emissions generated by the use of this installation over its entire lifecycle.

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The key assets to consider are those that are active (already operational) and those that are firmly planned (likely to be deployed by the company in the next 5 years).

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The company must calculate the sum of the GHG emissions associated with these assets for scopes 1 and 2. It must also do so for the GHG emissions related to the direct use phase of the products sold if the company has identified the "use of products sold" category of scope 3 as significant (according to the GHG Protocol).

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Why is the calculation of locked-in emissions important? Because it will allow judging the consistency of the company's objectives and decarbonization levers with the emissions locked in for many years or decades.

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This is also a central element for investors to understand the transition risks that will weigh on these GHG emissions and may be costly (carbon tax, other regulations) for the company.

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Companies must therefore explain in their reporting whether these locked-in emissions jeopardize the achievement of GHG emission reduction objectives and whether they entail transition risks. Finally, the company must be able to explain how it will manage its stranded assets by implementing a plan to reduce associated emissions: closure of installations that are too GHG or energy-intensive, modernization of installations, use of renewable energies, etc.

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2.4 Financial Resources Allocated to the Transition Plan

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The company must disclose the nature (financial, human, etc.) and amounts of capital expenditures (CapEx) and operating expenditures (OpEx) that are or will be allocated to the transition plan.

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This refers directly to the resources whose publication is required in DR n°3 of ESRS E1 and the elements of ESRS 2.

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The following points are expected:

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- The nature of current and future resources (financial and others) allocated to the transition plan.

- The amount of current and future financial resources available to the company.

- The company must link the amount of capital expenditures (CapEx) and operating expenditures (OpEx) implemented for the transition plan with the relevant items in the financial statements. The objective is to understand how the expenses of the transition plan fit more broadly into the company's overall expenses. ESRS E1-3 specifies that the company should disclose only significant and necessary CapEx and OpEx to implement decarbonization levers, the aim being to demonstrate the credibility of its actions and not to match each amount to the financial statements.

- The company must explain whether and to what extent its ability to implement actions depends on the availability and allocation of resources.

- The company must be able to explain how the transition plan was designed to integrate and align with the company's overall business strategy and financial performance. In other words, are the company's growth objectives consistent with the transition plan, and does the latter take into account the transition of the company and society towards a low-carbon economy?

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In the context of publishing a guide also dedicated to the transition plan, Reporting on your transition plan in ESRS format, the Autorité des marchés financiers (AMF) surveyed several dozen companies. On the subject of financial amounts allocated to the transition plan, many of these companies report their difficulty in determining precisely the resources allocated to the transition plan beyond 5 years, i.e., in the medium and long term.

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2.5 Governance and Monitoring of the Transition Plan

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ESRS E1-1 asks companies to explain their progress in implementing the transition plan.

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For this purpose, they are required to establish indicators allowing external evaluation of the progress of the plan.

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Different indicators can be monitored, but the most obvious for reporting on the progress of the company's climate objectives are:

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- GHG emissions, total and by scope. DR n°6, which specifies the information expected in the publication of the company's total GHG emissions, emphasizes that calculating GHG emissions is a prerequisite to measure progress in reducing these emissions and achieving the company's and the EU's climate objectives.

- Energy consumption and energy mix.

- Investments in clean technologies.

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Investors surveyed by the AMF in the aforementioned guide emphasize that monitoring and managing the transition plan are significant elements in their analysis of the transition plan and climate reporting of companies.

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3. Other Expected Elements

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3.1 Reporting and Alignment with the Taxonomy

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Article 8 of the delegated act on the European Taxonomy, published in 2021, requires non-financial companies to publish their "green" revenue, i.e., the sustainable share of their revenue, as well as their CapEx and OpEx.

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Furthermore, ESRS E1-1 states that companies must mention their objective of aligning their economic activities with the Taxonomy Regulation.

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DR n°3 requires companies to link the amount of CapEx and OpEx allocated for the implementation of the transition plan with the Taxonomy indicators.

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3.2 Paris Aligned Benchmarks

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Finally, the last element to provide as part of the transition plan is the company's situation regarding the indices aligned with the Paris Agreement (Paris Aligned Benchmarks or PAB). The company must indicate whether it is excluded or not from the reference indices aligned with the Paris Agreement.

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These indices exclude companies whose objectives are not aligned with the Paris Agreement or whose activities significantly harm at least 1 of the 6 environmental objectives of the European Union.

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Conclusion

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As you can see, the transition plan is a strategic document in companies' climate reporting.

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Because it includes many elements requested in other DRs, on decarbonization levers, on resources allocated to the implementation of the plan, on the calculation of greenhouse gas emissions, on objectives to reduce these emissions, the transition plan is essentially a concentrated version of ESRS E1 on climate change.

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Working on your transition plan means addressing many of the information expected in this ESRS.

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But it goes much further: it is not just a matter of complying with the obligations introduced by the CSRD. Working on a CSRD-compatible and credible transition plan is actually equipping yourself with an essential strategic tool to guide your company towards a European market that will undoubtedly be low-carbon within at most 25 years.

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