Don’t Let Transition Risks Catch You Unawares

Don’t Let Transition Risks Catch You Unawares

The majority of firms are unprepared for the low carbon transition, with limited plans in place and inadequate disclosures. Only just over a fifth of organizations disclosing through the CDP’s climate change questionnaire in 2022 had already developed a 1.5-degree-aligned climate transition plan. Of these 4,100 firms with a plan, 42% reported that it was publicly available and there was a well-defined mechanism to collect shareholder feedback. Less than 1% of the 4,100 disclosed the level of detail that the CDP considers a credible climate transition plan across all areas. These indicators incorporated in the CDP questionnaire align closely with the TCFD by including scenario analysis, targets, risks and opportunities, carbon accounting and governance. However, the CDP also includes value chain engagement, low carbon initiatives, financial planning and policy engagement.

This limited transparency of transition plan details could be because firms don’t want to publicly disclose information about their business plans when it may be strategically advantageous to keep this information private. This practice is seen in corporate TCFD-aligned disclosures, as limited numbers of organizations disclose under the governance pillar, despite its comparatively easy requirements. However, corporates must demonstrate robust climate transition plans to meet regulatory requirements and stakeholder demands. To comply with the EU’s CSRD, firms must disclose climate transition plans – a requirement also incorporated in the SEC’s proposed climate disclosures. Investors are making similar demands. Aviva Investors, for example, has recently called on all businesses in its portfolio to publish robust and viable climate transition plans in 2023. Creating a transition plan and managing transition risk is also in firms’ financial interest, as shown in a recent six-year study.

Business leaders looking to form transition plans and analyze and address their transition risk exposure should engage professional services providers and look for digital solutions to help manage the task. Cambridge-based software firm Risilience, for example, provides transition risk and physical risk analysis to facilitate net zero and business resilience planning. Risilience closed a $26 million Series B funding round at the beginning of February; capital it plans to use to expand into the US and further develop its SaaS platform. To find out more about other digital solutions in the space, executives can use our recently published Verdantix Tech Roadmap: Climate Risk Digital Solutions.