EFRAG publishes draft transition plan guidance to support with reporting under the CSRD

Earlier this month, the European Financial Reporting Advisory Group (EFRAG) – the body responsible for developing European Sustainability Reporting Standards (ESRS) and providing implementation support – published its draft non-authoritative transition plan implementation guidance to support companies reporting against the ESRS, as required by the Corporate Sustainability Reporting Directive (CSRD). See our ‘Getting Ready’ article on the CSRD here.

The guidance, which will simply be called “Implementation Guidance 4” (IG 4), will be (as the name suggests) the fourth in a series of documents released by EFRAG to assist companies with reporting preparations. The first three documents, covering the materiality assessment process, value chain reporting, and detailed ESRS data points, were released in May this year. IG 4 is an early draft, and requires approval from EFRAG’s Sustainability Reporting Technical Expert Group and Sustainability Reporting Board before it can be released for public consultation, which is expected in early 2025. It will then be finalised later that year.

The guidance, once finalised, will support preparers of ESRS reporting with reporting against the disclosure requirements on transition plans for climate change mitigation (set out in ESRS E1-1 and relevant sections of ESRS 2). The draft guidance sets out what and how to disclose; covers the European framework for transition plan disclosures; links to other reporting frameworks on climate transition plans; and includes some responses to FAQs. Even though only in draft form it is important guidance for entities currently preparing to report under the CSRD and who are also subject to reporting requirements under other frameworks. 

The draft guidance provides helpful commentary on the following points: 

• An “exclusive” focus on climate: The guidance covers transition plans for climate change mitigation but notes that, due to their strategic nature, transition plans can interact with other environmental and social topics. Incorporating the social aspect of transition planning is often referred to as the ‘just transition’. Whilst the guidance identifies and briefly describes “relevant interfaces”, its exclusive focus is on climate. However, it notes that disclosure requirements covering information beyond climate are covered by the other topical ESRS, for example, ESRS S1 for employees and ESRS S3 for affected communities, and therefore relevant impacts of transition plans (such as effects on workers) will need to be disclosed under these ESRS.
• A requirement to disclose, but not to adopt: The guidance reaffirms that the CSRD is a disclosure framework and does not go as far as the Corporate Sustainability Due Diligence Directive (CS3D), which “imposes a behavioural duty to put into effect the transition plan”. The CSRD and CS3D both use the same definition for what a transition plan for climate change mitigation is, and the CS3D states that companies that report a transition plan in accordance with the CSRD shall be deemed to have complied with the obligation to adopt a transition plan under the CS3D, but the CSRD does not create the requirement to adopt a transition plan. The CSRD requires undertakings who identify that climate change mitigation is material to their business, but who do not have a transition plan in place, to indicate whether and, if so, when, they will adopt a transition plan.[1]
• Carbon credits are excluded: The guidance is clear that greenhouse gas (GHG) emissions reductions targets shall not include any GHG removals or carbon credits as a means of achieving the emissions reductions targets. However, carbon credits can be used to neutralise residual GHG emissions, or for emissions reductions outside of an entity’s value chain.
• Paris Agreement compatibility: Undertakings are to disclose their targets and explain how they are compatible with the 1.5°C target set by the Paris Agreement. To demonstrate this, undertakings should benchmark their GHG emissions reductions targets to a reference pathway to 1.5°C and explain how and to what extent their strategy, business model(s) and climate transition plans are contributing to, and compatible with, a Paris Agreement-aligned transition.
• EU Taxonomy alignment: Undertakings should disclose investments and funding supporting their climate transition plans, including EU Taxonomy-aligned CapEx. In addition, if undertakings conduct activities covered by the EU Taxonomy they should disclose their alignment with Taxonomy criteria. The objective here is to ensure consistency between legislation and associated disclosures. 
• Governance, strategy and reporting on progress: Climate transition plans should be embedded into overall strategy and supported by governance bodies. Updates on the progress of implementing a climate transition plan should also be provided. 

Significantly for UK entities caught by the CSRD due to its extraterritorial effect, the draft guidance does not advocate for close alignment with the Transition Plan Taskforce (TPT) Disclosure Framework (a UK-led initiative which aims to provide businesses with the ‘gold standard’ for climate transition plan disclosures): whilst it notes the existence of the TPT Framework and acknowledges that its guidance can be a “helpful tool” for companies, it states that it is “a voluntary framework, and as such, undertakings are not required to be familiar with it when reporting under the ESRS, which remains the regulatory standard of the European Union”. This would appear to be closing the door to global alignment under the TPT Framework, particularly if undertakings are not required to refer to it when reporting on their transition plans under the CSRD. The draft guidance does appear to contain a placeholder for an Annex table comparing the ESRS with relevant provisions of the TPT Framework, however, and the TPT has already produced a comparison document of the TPT Framework and ESRS. Of course, there is also still room for further alignment between the two regimes during the consultation period on IG 4 on the one hand and the developing standards in the UK and under the International Sustainability Standards Board (ISSB) on the other hand.

The potential lack of alignment with the TPT will be disappointing for preparers in the UK, alongside others navigating requirements in multiple jurisdictions, particularly given the UK Government’s long-term support of the TPT Framework and the current expectation that the TPT’s outputs will be used to inform the ISSB disclosure standards, following the ISSB assuming responsibility for the TPT earlier this year. The ISSB standards are due to be implemented in the UK and will be known as ‘UK SRS’, subject to a positive endorsement decision being taken by the UK Government (expected in Q1 2025).

The TPT has itself warned in its recent Final Report that “[m]ultilateral efforts towards shared norms around transition plans and planning are vital, in order to provide market certainty and avoid regulatory fragmentation”. In the near term, the ISSB has stated that it expects to use the TPT’s materials to develop “educational materials”, and that, over time, it may draw on the TPT’s outputs to “enhance the application guidance” within IFRS S2, the ISSB’s climate-related disclosure standard. A recent report issued by the Transition Finance Market Review (a UK body tasked with conducting an independent review of the barriers to scaling transition finance) notes that jurisdictions in the process of implementing the ISSB standards could look to utilise the TPT’s materials “to promote international interoperability”. In addition, the UK Government’s guidance on ISSB implementation in the UK explicitly acknowledges the “overlap” between the ISSB standards and TPT Framework, and states that the FCA will make reference to the TPT Framework when consulting on strengthening its expectations for transition plan disclosures (expected in 2025). The UK Government is also expected to consult on how best to take forward its manifesto commitment on transition plans (likely with reference to the TPT Framework) in the first half of next year.

[1] Disclosure ESRS E1-1 17.