Europe Treads Own Path to Transition
EFRAG’s guidance will synthesise planning disclosure requirements, but EU must keep an eye on international cohesion.
A move to consolidate guidance on transition planning is expected to provide more direction to European corporates and decision-useful insight to investors. However, the EU has been urged to also prioritise interoperability with international standards and move quickly toward a single transition plan regulatory framework.
Earlier this month, the European Financial Reporting Advisory Group (EFRAG) published draft implementation guidance detailing how firms should ensure their climate transition plans comply with disclosure requirements under the European Sustainability Reporting Standards (ESRS), the reporting rules introduced by the Corporate Sustainability Reporting Directive (CSRD).
The guidance also outlines how ESRS requirements connect to other EU laws, such as the Taxonomy and Corporate Sustainability Due Diligence Directive (CSDDD).
“It offers much-needed direction for companies developing and disclosing transition plans for the first time, helping them navigate the complexities of these requirements, [and] marks a meaningful step towards consolidating these into a single transition plan resource,” Daniele Ciatti, Sustainable Finance Researcher at think tank E3G, told ESG Investor.
EFRAG stipulates that transition plans should include short and long-term emission reduction targets, an overview of how these align with a 1.5°C trajectory, plans of how they will be reached in practice, and how they will be financed in line with the taxonomy.
It follows guidance from the European Commission showing how existing sustainable finance policies can contribute to financing the economic transition.
According to a recent survey conducted by the Principles for Responsible Investment (PRI), only 11% of investor respondents consider the EU’s current legislative framework for transition finance sufficient.
“This indicates a need for additional, more focused policy interventions that direct public finance and private capital into the economic transition,” said Elise Attal, the PRI’s Head of EU Policy.
Separate research conducted by climate and nature investment advisory firm Pollination and the Institute of International Finance noted that financial institutions are increasingly reliant on comprehensive transition plans to assess value and want harmonised guidelines that allow for consistency and comparability globally.
EFRAG advises the European Commission on financial and sustainability reporting. Some of its most recent work includes the ESRS.
Transition plans are mandatory for EU entities falling under the scope of the CSDDD and Capital Requirements Directive (CRD VI), while disclosure rules for transition planning are outlined within the ESRS.
Complementary, not aligned
Because it builds on existing European frameworks, EFRAG’s guidance does not completely align with international standards, prompting interoperability concerns.
“EFRAG’s guidance is quite targeted,” acknowledged Mark Manning, Visiting Senior Fellow at the London School of Economics Grantham Research Institute on Climate Change and the Environment (LSE GRI).
“It is grounded in the specific provisions of the ESRS that relate to transition plan disclosure and includes content that is necessarily linked to the EU’s wider legal and regulatory framework for sustainable finance.”
In contrast, guidance issued by the UK’s Transition Plan Taskforce (TPT) in April spans 30 sectors and specific finance groups, accommodating “different strategic ambitions [and] thereby supporting global applications”, said Manning.
The original remit of the TPT was to create a universal ‘gold standard’, meaning its guidance and recommendations were conceived with the intent to be applied in multiple jurisdictions.
“The two sets of guidance [issued by the EU and the TPT] come from different starting points, but they can be used in a complementary way,” he noted.
The EFRAG guidance also argues this complementarity.
Earlier this year, International Sustainability Standards Board (ISSB) Chair Emmanuel Faber announced that the ISSB would be taking over the transition plan disclosure resources developed by the TPT, in a bid to consolidate frameworks and standards.
Dedicated transition body
A briefing by E3G and fellow think tank ECCO advised policymakers on how to move towards a more cohesive and holistic transition planning framework in the EU.
The report called on the commission to set out a unified economic direction for the EU’s transition and ensure vertical alignment of transition planning regulation – starting with EU-wide requirements – as part of the development of a single transition plan regulatory framework.
The think tanks’ central recommendation is the creation of a ‘transition committee’, which would serve as a dedicated body directed by various European Commission directorate-generals (DGs) to promote cohesion and interoperability in the implementation and oversight of transition plan guidance.
“This committee would be responsible for developing a clear timeline and roadmap toward a single transition plan regulatory framework [in the EU],” said Ciatti.
The committee should also pursue alignment with international transition frameworks, such as the ISSB and the TPT, as well as the Group of 20’s recent commitment on national transition plans, the briefing said.
Manning said there is a case to be made for a committee to monitor transition and transition finance.
“This would help to ensure there is join-up between what governments are doing and what is happening across the private sector, creating a constructive feedback loop,” he said.
“This could be done at a national and/or international level. The proposal for a Transition Finance Council under the UK’s recent Transition Finance Market Review has the potential to perform such a function.”
EFRAG’s draft guidance will be published for public feedback once approved by its Sustainability Reporting Technical Expert Group and Sustainability Reporting Board. It will then be finalised in 2025.
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