Transition plans are important for developing economies like India as companies start moving away from fossil fuels. Indian power utilities and industrial companies will be financing transitionary activities. Investors need disclosures on how these have helped the company reduce emissions.
The impact on workers and communities from a just transition lens is also critical from an Indian perspective, as several communities rely on fossil fuel supply chains and are economically vulnerable. Transition plans incorporate disclosure on these aspects.
In the short run, current Business Responsibility and Sustainability Reporting (BRSR) requirements can be interlinked to give stakeholders a holistic picture. Going forward, a phased implementation approach will be good to introduce specific transition plan disclosures for regulated entities.
The United Kingdom’s Transition Plan Taskforce, unveiled its much-anticipated transition plan disclosure framework on 9 October. Touted as the “gold standard” in transition plan disclosures globally, the framework can be used as a starting point for other voluntary and regulatory standards to introduce transition plan disclosure requirements. Globally, several regulators and voluntary initiatives are mandating the disclosure of transition plans as part of sustainability disclosures.
In the last few years, companies worldwide have set ambitious net-zero targets. Today, some of the world's biggest companies, with a combined annual revenue of US$26.4 trillion, have net-zero targets.
However, these net-zero targets have also raised greenwashing concerns among stakeholders, with several companies being held accountable. The lack of credible transition plans to back net-zero claims fuels greenwashing concerns. According to the Carbon Disclosure Project (CDP), of the 18,000 plus companies reporting to CDP globally, less than 0.5% have disclosed their climate transition plans.
India’s Business Responsibility and Sustainability Reporting (BRSR) disclosures currently do not include detailed transition plans, but that may need to change soon.
Need for Climate Transition Plans
Climate transition plans help capital market intermediaries identify and channel capital for credible investments, tackle greenwashing, help financial institutions assess the risk of their exposure to specific investments, and assist financial sector regulator assess macro and micro risks arising in the financial system.
Transition plans communicate a company’s ambitions to mitigate, manage and respond to climate risk. These are accompanied by short-, medium- and long-term actions that the entity aims to undertake to achieve these goals, along with defined key operational and financial metrics that will help gauge its progress. Transition plans also define clear governance mechanisms, including board and executive oversight, along with incentives, reporting and accountability structures for achieving transition goals.
Transition Plan Disclosures on the Horizon
Regulators worldwide are on the path of mandating disclosures of climate transition plans. The UK was the first jurisdiction to mandate transition plans for listed companies by 2023. The EU soon followed suit. The United States Securities and Exchange Commission (SEC) referenced transition plan disclosures in its recent proposals. Voluntary bodies, such as the Task Force on Climate-Related Financial Reporting (TCFD), the recently notified disclosure standards by International Sustainability Reporting Standards (ISSB) and CDP are also moving in the same direction.
Transition Plan Disclosures in the Indian Context
In India, 25 of the largest corporates have a net-zero or emission reduction target. Several other companies have specific targets, such as renewable energy integration, diversification of products and services and reduction in supply chain emissions. These commitments will proliferate after the Securities and Exchange Board of India’s (SEBI’s) BRSR regulation becomes mandatory for the top 1,000 listed companies from fiscal year (FY) 2024.
Requiring Indian Companies to Disclose Transition Plans
All jurisdictions that have mandated transition plans to date are in the developed world. However, transition plans are all the more important for developing economies like India for several reasons:
1) Transition plans become critical when companies start moving away from fossil fuels. Several Indian power utilities and industrial companies will be financing transitionary activities. Investors and financiers need detailed disclosures on how these will and have helped the company reduce emissions over time.
2) The impact on workers and communities from a just transition lens is also critical from an Indian perspective, as several communities rely on fossil fuel supply chains and are economically vulnerable. Transition plans incorporate disclosure on these aspects, too.
3) Finally, detailed transition plans will help companies in the developing world attract investors from the developed world by assuaging the latter’s greenwashing concerns.
Alignment of BRSR with Global Developments on Transition Plan Disclosures
BRSR standards have several disclosure requirements that align with requirements under an ideal climate transition plan. For instance, BRSR requires reporting entities to provide details of environmental and social risks and opportunities for their business, the approach to address them and their financial impact. It also requires companies to unveil and report on their policies regarding the nine BRSR principles, encompassing environmental and social metrics. Companies must also disclose oversight and governance of implementing these policies and specific commitments, goals and targets with defined timelines.
What BRSR Lacks on Transition Plan Disclosure
Although there is an overlap between the requirements for transition plans and disclosures in the BRSR (as listed above), there is a lack of integration in the BRSR disclosures. The BRSR does not explicitly link the identified risks and opportunities with metrics and targets related to tracking them.
Additionally, there is no connection between transition goals and the company's broader business strategy and financial performance. Furthermore, the BRSR does not mandate the breakdown of objectives into short-, medium- and long-term goals with corresponding metrics and targets.
Phased Implementation as the Way Forward
A blanket mandate for transition plan disclosures may be too burdensome for reporting entities in India. SEBI can first work on interlinking current disclosures to give stakeholders a holistic picture. Second, it can set up an online regulatory sandbox where stakeholders can provide feedback and suggestions on how best to go about phasing in transition plan disclosure requirements. Guided by such inputs, BRSR should gradually mandate the disclosure of detailed transition plans.
This article was first published on ET EnergyWorld.