EFRAG Publishes Draft Guidance on Climate Mitigation Transition Plans
This blog was originally posted on 11th November, 2024. Further regulatory developments may have occurred after publication. To keep up-to-date with the latest compliance news, sign up to our newsletter.
AUTHORED BY CRISTIAN BARROSO, REGULATORY COMPLIANCE SPECIALIST, COMPLIANCE & RISKS
EFRAG’s Draft Guidance on Implementing Transition Plans for Climate Mitigation
On 4 November, the European Financial Reporting Advisory Group (EFRAG), which is the body mandated by the EU Corporate Sustainability Reporting Directive (CSRD) to develop European Sustainability Reporting Standards (ESRS) and provide implementation support, published a Draft Guidance for Implementing Climate Mitigation Transition Plans.
Scope
The guidance aims to clarify climate transition plan disclosure requirements as outlined in ESRS E1-1. It also provides further information on the ESRS disclosure requirements and links them to regulations such as the CSRD and Corporate Sustainability Due Diligence Directive (CSDDD) among others.
Structure
The document is organized into several chapters as follows:
- European framework for climate transition plans (Chapter 2)
- Specifics of disclosure requirements for climate transition plans (Chapter 3)
- Connections to other European regulatory frameworks (Chapter 4)
- Frequently Asked Questions section (Chapter 5)
Specifics of Disclosure Requirements for Climate Transition Plans
Disclosure under ESRS E1-1 requires consistency between targets and the proposed actions, investments, and strategy and business model changes, encompassing steps, timelines, responsibilities, and resources allocated or planned to make such strategy and business model compatible with the 1.5°C target.
With that in mind, the Guidance highlights:
- Target compatibility with the Paris Climate Change Agreement: The targets must be disclosed and explained in terms of their compatibility with the Agreement’s 2050 climate neutrality objective (1.5°C).
- Actions and Decarbonization Levers: Undertakings have to explain the decarbonization levers supporting emissions reduction targets, such as the market development scenarios or technology pathways.
- Investment and funding: Undertakings must disclose investments and financing plans related to the decarbonization indicated in the transition plans, referencing EU Taxonomy-aligned CapEx and OpEX.
- Supporting disclosures: This includes a qualitative assessment aligned with the taxonomy criteria of the potential locked-in emissions from critical assets and products of the undertakings conducting activities covered by the EU Taxonomy for sustainable finance.
- Governance and strategy: This refers to explaining how the transition plan is embedded in and aligned with the undertaking’s overall business strategy and financial planning in transitioning to a sustainable economy.
- Progress Reporting: Requirement to provide updates on the progress of implementing their transition plans. This should be based on a qualitative assessment of the effectiveness of its GHG reduction planned actions.
Connection with EU Law and Others
Moreover, the draft Guidance details how other European and international sources, such as the CSDDD and US Securities Exchange Commission (SEC) Climate Disclosure Rule, may be considered when preparing ESRS disclosures. For example, it indicates that obligations under the CSDDD equally apply to implementing the transition plan related to potential adverse impacts on individuals, communities, or business partners in the value chain.
On the other hand, the Guidance compares the requirements under the US SEC Rule that an undertaking has to comply with in case it has adopted a transition plan with those set out in the ESRS, such as progress surveillance from the company’s board of directors or the quantitative and qualitative disclosure of material expenditures incurred, among others.
FAQ
Through the FAQ Chapter, the Guidance further explains the disclosure requirements analyzed in Chapter 3. For example, it clarifies that GHG emission reduction targets are the main scope of ESRS E1-1; therefore, any other climate-related target can be disclosed as complementary. It also outlines the importance of considering social and biodiversity impacts, risks, and opportunities (IROs). Therefore, undertakings may consider engaging with stakeholders (e.g., their workforce, those in the value chain, and communities) affected by the transition plan. It also clarifies what the undertaking should disclose if it does not have a transition plan for climate change mitigation or if the undertaking can conclude that the transition plan is not material, among other things.
Next Steps
Finally, it is worth mentioning that the Draft is in the early stages and still needs to be reviewed with different stakeholders, approved by the EFRAG Sustainability Reporting Board (SRB) and EFRAG SR TEG, and will be subject to public consultation in early 2025 before its final version is released, tentatively in spring 2025.
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