Stage 2 Set your Strategic Ambition
The Transition Planning Cycle
The second stage of preparing a transition plan is setting your Strategic Ambition for responding and contributing to the transition towards a low GHG-emissions, climate-resilient economy.
Define your objectives and priorities
Private sector entities are not just passive participants in the transition. All economic entities operate in an interdependent system in which an exclusive focus on entity-level decarbonisation can lead to unintended consequences. Following the assessments undertaken in Stage 1, this step is about defining your strategic vision for the role you play in the transition to a low GHG emissions, climate-resilient economy, and defining objectives and priorities for managing that change.
Good practice transition plans should be ambitious and should reflect the urgency to act, arising from the observed changes in the climate and the latest scientific findings about climate change. Individual entities will define very different objectives and priorities, depending among other things on the sector, operating context, and transition levers available to them in their business models.
The TPT Disclosure Framework recommends that you take a strategic and rounded approach to transition planning, setting objectives and priorities for:
- decarbonising the entity;
- responding to the entity’s climate related risks and opportunities; and
- contributing to an economy-wide transition.
In defining your objectives and priorities, you may be informed by both ‘bottom-up’ and ‘top-down’ considerations.
Bottom-up considerations are drawn from the entity’s own situation and operating context. These will include:
- the transition levers identified under Stage 1;
- existing voluntary commitments, including stated public commitments and codes of practice that the entity subscribes to;
- relevant organisational and industry standards;
- applicable contractual relationships the entity has entered;
- the assessment of impacts and dependencies conducted under Stage 1;
- the state of available technologies;
- the policy framework in which the entity operates;
- availability of key resources (e.g. access to skills, raw materials, finance etc.).
Top-down considerations are based on the changes needed to limit the future risks of rising global temperatures, based on climate science. These can include:
- national or international commitments, such as
- nationally determined contributions of countries in which the entity operates;
- national adaptation strategies; and
- implementation commitments by countries (e.g. the interim targets defined by the UK Climate Change Committee (CCC) in its Sixth Carbon Budget);
- any targets the entity is required to meet by law or regulation, such as:
- Germany’s law to phase out coal-based power production;
- science-based targets, transition pathways, roadmaps, or scenarios, such as:
- the International Energy Agency’s Net Zero by 2050 Scenario for the Global Energy Sector;
- Sectoral Decarbonisation Pathways developed by the Science-Based Targets Initiative;
- Sectoral Benchmark Emissions Paths developed by the Transition Pathway Initiative; and
- Technology Roadmaps.
Engaging with relevant external stakeholders will help inform your objectives and priorities. This can include engagement with other entities in your value chain, as well as industry counterparts, government, public sector communities, and civil society. This could help to identify opportunities to increase ambition (such as technological options) and any dependencies that need to be considered.
The TPT Disclosure Framework recommends that you disclose whether and how, in setting your Strategic Ambition, you have identified, assessed and taken into account the impacts and dependencies of the transition plan on your stakeholders (e.g. its workforce, value chain counterparts, customers), society (e.g. local communities), the economy, and the natural environment, throughout your value chain, that may give rise to sustainability-related risks and opportunities. It is good practice to revisit the assessment of impacts and dependencies on stakeholders, society, the economy, and the natural environment undertaken in Stage 1 in light of your objectives and priorities. This may help you identify whether any new impacts and dependencies have arisen, or whether any existing identified impacts and dependencies have changed. This can help you revise your objectives and priorities where you find that they may lead to negative, unmitigated impacts on nature, or adverse impacts for stakeholders and society. In addition, this step may help you identify potential positive synergies between climate, nature and a just transition.
Taken together, this can demonstrate how you have taken into account impacts and dependencies of your transition plan in determining your Strategic Ambition and associated objectives and priorities, that will inform the rest of the plan.
Internal governance & engagement pointers
- This process step is about defining the Strategic Ambition of your transition plan as an integral aspect of corporate strategy. It can therefore be led ‘from the top’ and aligned with your wider business model and corporate purpose. It is important to engage early and often with the Board and senior management, through both new and established governance structures, to build awareness, understanding and ownership. This will include socialising the inputs to the planning process (i.e., findings from Stage 1) and building consensus around a clear narrative and the case for change with the board.
- At the same time, it is important that the working group (or equivalent delivery mechanism) responsible for the development of the plan involves those individuals across the firm who will ultimately be responsible for implementing key aspects of the transition plan. This can help to ensure that key individuals take ownership over aspects of the plan, and that the defined objectives and priorities are realistic.
- An executive sponsor of the working group (or equivalent governance body) responsible for the development of the plan may, at this stage, lead on socialising the findings of various assessments carried out under Stage 1 to other key stakeholders, including the Board, so that they can feed into the objective-setting process.
- The leadership sets the tone and culture of an organisation for employees but also in consultation with external stakeholders. Articulating the ambition in a way that is coherent with the broader corporate strategy and in accordance with the duties of the entity’s directors and senior managers, constitutional documents is critical.
- Governance structures can facilitate ongoing internal engagement and consensus building across units, divisions, and functions.
- CFRF, List of CFRF guides
- GFANZ, Defining transition Finance and Considerations for Decarbonisation Contribution Methodologies (2023)
- GFANZ, Financial Institution Net-Zero Transition Plans (2022)
- GFANZ, Expectations for Real Economy Transition Plans (2022)
- GFANZ, Workshops in a Box – Foundations
- TCFD, Guidance on Climate-related Metrics, Targets and Transition Plans, particularly its guidance on cross-industry climate-related disclosure recommendations (pp. 10-28 ; 54-65) (2021)
- SBTi, Sectoral Decarbonisation Pathways
- TPI, Sectoral Benchmark Emissions Paths
- Chapter Zero, Board Toolkit (2022).
This sub-step may inform disclosure against:
- TPT Sub-Elements: 1. Foundations and 4. Metrics & Targets.
Identify the key assumptions and external factors on which your plan depends
As we have observed, developing a transition plan is necessarily a flexible, dynamic, iterative, and adaptive process. Individual entities are developing their transition plans under considerable uncertainty, reflecting (non-exhaustively):
- the inherently forward-looking nature of the exercise;
- the interdependent nature of the transition, which relies on actions by governments and entities across the economy;
- limitations on the availability of data to support entities in analysing these interdependencies (e.g. limited emissions transparency in value chains); and
- evolving scientific knowledge and practice.
When considering these variables, you will need to make assumptions about current or future events. It also means that your ability to achieve stated objectives and priorities will depend on external factors over which you may have varying degrees of control or influence.
This may, for example, include assumptions and dependencies on:
- policy and regulatory action (e.g. existing or future subsidies for R&D activities, incentives for demand-side behaviours, government action on climate adaptation);
- decarbonisation (e.g. the speed of grid decarbonisation, the availability of key low-carbon inputs at scale);
- macroeconomic trends (e.g. labour availability, cost of borrowing, inflation, interest rates);
- microeconomic and financial factors (e.g. availability of finance, relative prices, cost of capital, margins on key activities, expected capex needs to acquire, maintain and upgrade fixed assets);
- technological developments (e.g. speed of technological innovation, costs of key technologies);
- access to counterparty data and reliability of data (e.g. information about asset location, exposure to physical and transition risks, emissions data);
- shifts in client and consumer demand (e.g. projected demand for new and existing products and services);
- the levels of warming over the short, medium and long term;
- the physical impacts of the changing climate, and the regional and spatial implications of these (e.g. expected changes in precipitation patterns, water availability, temperatures, and extreme weather events, expected impacts of these changes on assets and/or supply chains); and
- the effectiveness of adaptation efforts and possible limits to adaptation (e.g. resilience of assets and/or supply chains to changes in precipitation patterns, droughts, floods, heatwaves and other extreme weather events).
As you define your Strategic Ambition, it is important to acknowledge, challenge and raise internal awareness around the assumptions that you are making and the main external factors on which the success of the transition plan relies. An important discipline is to test the implications of key assumptions and external factors, to understand the key sensitivities of your transition plan.
This step can:
- allow you to better assess the feasibility of your plan;
- help you articulate clearly to users of the transition plan, where you rely on external factors;
- inform how you plan the implementation and engagement strategy under Stage 3 (e.g. where you identify a strong dependence on policy or regulatory change, this may help prioritise policy engagement activities); and
- empower you to be proactive in managing the implementation of the transition plan over time, as certain assumptions become more or less likely.
This sub-step may inform disclosure against:
- TPT Sub-Elements: all under 2. Implementation Strategy.
Internal governance & engagement pointers
- To gather as much information as possible, these steps need active internal engagement with different internal teams and functions to consider assumptions and external factors.
- Some entities might find it useful to collect information from their stakeholders and/or value chain to further complement that identification.
Identify strategic changes to business model and value chain
Once your entity’s ambition is identified, along with the assumptions and external factors on which it depends, it is important to identify the key implications on your business model and value chain. When doing so, you may consider changes in the short-, medium-, and long-term. Examples of key business model and value chain changes include:
- the entity’s portfolio of products and services offered (e.g. moving from oil and gas production to renewable electricity generation and retail, shifting from a “fast” fashion product portfolio to a slow fashion product portfolio, launching new products to help mortgage customers improve the energy efficiency of their houses); and
- entering or exiting specific markets.
Changes within the business model:
- business model changes: reductions or removals in the entity’s office space (e.g. a service business selling its offices and becoming fully ‘remote’);
- changes in the channels or methods of customer interaction (e.g. a retailer closing physical stores and becoming online-only);
- changes in ‘own’ site electricity and fuel usage (e.g. moving to renewable sources of electricity and powering machinery using low- or no- GHG emission fuels);
- changes in investment strategies (e.g. moving to an investment strategy with a greater focus on transitioning assets or climate solutions); and
- changes in production or distribution technology (e.g. phasing out diesel-fuelled vehicles and replacing them with electric vehicles, introducing electric or hydrogen powered steel furnaces, moving to regenerative agricultural practices).
- entering new supply chains due to significant changes in product design, required inputs or procurement policies; and
- changes in the geographical reach of the entity’s value chain.
This sub-step may inform disclosure against:
- TPT Sub-Elements: all under 2. Business model and value chain, 2. Implementation Strategy and 3. Engagement Strategy.