Environment Matters S2:E3 – The path forward for transition plans

Today’s podcast will focus on decarbonisation and transition plans.

That’s a particularly hot topic in light of ongoing developments in both the EU and the UK.

This is another of our ESG topics, following on from our discussion of climate change and sustainability in supply chains, which we covered in episode five of season one.

In that episode, we explored expanding corporate sustainability reporting disclosure and due diligence obligations.

I’m delighted to be joined by my colleague Gabi Gershuny, who’s an associate in our team.

Hi Mike, it’s great to be here.

Hi Gabi.

I’m also really delighted to be joined by David Desforges as a guest for today’s discussion.

David is not only our first external speaker to join one of our podcasts, but also our first international speaker.

David is an experienced environmental counsel who practises in France as a solo practitioner and as of counsel for independent Paris-based law firm Almain Avocats.

He has over 30 years of experience in environmental law. His practice spans the traditional sectors of environmental law as well as issues relating to climate change, circular economy requirements, and ESG.

David, I’m really pleased you’re joining us.

Thank you very much Mike for the very nice introduction, and thank you to both of you for inviting me to join.

My pleasure.

Welcome.

Many will be closely watching developments in the omnibus proposals in the EU, which are likely to affect transition plan requirements under the Corporate Sustainability Due Diligence Directive.

We’re lucky to have David with us to share his insight on those evolving requirements at the EU level, as well as their transposition into national law in France.

We’re also going to touch on the position in the UK, where just two days ago at the time of recording we had the long-awaited launch of a consultation on transition plan requirements.

As well as the complexities for companies as they navigate this divergence between different jurisdictions and uncertainty in a shifting landscape.

Gabi, before we dive into our discussion with David, you’ll probably know that I always like to start these podcasts by making sure we get our definitions right.

Could you explain what we mean when we talk about decarbonisation and transition plans?

Sure, thanks Mike.

There’s a patchwork of mandatory legal regimes as well as voluntary frameworks and standards which introduce requirements or guidance for companies to prepare plans or reports that set out in broad terms their strategy for adapting their business to transition to a low-carbon economy.

The requirements or recommendations for the contents of those plans or reports vary across different regimes and frameworks.

When we talk about climate transition plans, key features include an assessment of climate-related risks and opportunities, metrics and targets, which might be aligned with international and national climate targets.

For example, the 1.5 degree goal in the Paris Agreement, or in the UK the net zero target by 2050 in the Climate Change Act 2008.

Also governance processes for assessing risks and opportunities and for monitoring progress towards targets, as well as implementation and engagement strategy.

That’s a great, really helpful explanation.

Why are these plans important now and why should companies be thinking about producing them?

First and foremost, certain companies may be legally required to produce plans or reports, usually if they meet certain thresholds relating to their size and annual turnover.

For example, the CS Triple D, Mike, that you mentioned. The law as it currently stands requires in-scope companies to adopt and put into effect a transition plan for climate change mitigation.

As you alluded to Mike, as part of the European Commission’s first omnibus package, there are proposals to amend this requirement to replace the obligation to put the plan into effect with a clarification that the plan includes outlining implementing actions planned and taken, and also to postpone that obligation to adopt transition plans by two years.

We’ll await further developments on that as the process progresses.

Beyond the CS Triple D, there are various other EU regimes which impose requirements on companies to produce decarbonisation or climate neutrality plans.

Hopefully we can explore some of those regimes further with David.

But even if companies are not subject to mandatory requirements, there are lots of reasons why many companies are already choosing to produce a climate transition plan using voluntary reporting standards or guidance such as the Transition Plan Taskforce Disclosure Framework or the recommendations of the Task Force on Climate-related Financial Disclosures, both now the responsibility of the IFRS Foundation.

It’s worth noting that the IFRS Foundation recently published new guidance on what to disclose about a company’s plan when reporting under the IFRS S2 standard or climate-related disclosures.

The recent UK consultation on transition plan requirements actually helpfully sets out the benefits of transition planning for companies in a very clear way.

These include supporting firm-level emission reductions, increasing competitiveness and reducing the cost of debt.

It highlights the importance of the process of preparing a plan to embed action throughout a company’s operations and also in its wider value chain.

Doing that at a strategic level helps companies to manage risks and seize the opportunities of the transition to net zero.

Thanks, Gabi.

So two reasons really then. One is for regulatory compliance and the other is as part of good governance.

Just taking the first of those, David, what are the key overarching pieces of legislation—the sort of compliance requirements in the EU—which require transition decarbonisation plans?

Thanks Mike.

Actually, as you know, energy transition and decarbonisation are nothing new in Europe.

This is a move that started probably more than 15, if not 20 years ago.

It combines legislation with macroeconomic objectives at the level of member states with legislation with microeconomic impacts at the level of companies, both large ones and SMEs.

To give you a meaningful sample, I can highlight five or six of them, which echo Gabi’s comments a few minutes ago about this patchwork of legislation we’re dealing with nowadays.

The first is Regulation 2021-119, also known as the European Climate Law.

It’s not the first of its kind, but it sets a binding objective of net zero greenhouse gas emissions by 2050.

It requires the EU and member states to adopt national climate strategies and policies aligned with climate neutrality.

It forms the backbone for sector-specific and corporate decarbonisation requirements.

As well as the Corporate Sustainability Due Diligence Directive, which Gabi touched on, we also have the almost now infamous Corporate Sustainability Reporting Directive, the CSRD, which requires companies to disclose transition plans aligned with limiting global warming to 1.5°C, as well as climate-related risks and opportunities.

This applies to large companies and listed SMEs.

It’s implemented by the European Sustainability Reporting Standards, especially ESRS E1, which mandates disclosure of decarbonisation targets and plans for in-scope actors.

As you will know, climate change is also an area where vocabulary matters.

It may not be easy to define what is sustainable and what is not.

This is where the Taxonomy Regulation (2020) comes into play, establishing guidance for what qualifies as “sustainable economic activity”—a notion that opens doors to financing.

Hence, companies must report alignment of activities with the taxonomy and demonstrate how they contribute to climate change mitigation and commit, for example, to do no significant harm to other environmental objectives such as biodiversity preservation.

This is all very industry-oriented.

But rest assured that the finance industry is not left aside in this process.

The Sustainable Finance Disclosure Regulation (SFDR) applies to the financial market and financial advisers.

It requires disclosure of how sustainability risks are integrated into investment decisions and the alignment of portfolios with climate goals, including transition strategies.

A financial product may not be marketed as sustainable if it is not accompanied by decarbonisation objectives and implementation roadmaps.

Of course, in this whole process, the EU ETS regime—which is well known to practitioners—is also part of the overall decarbonisation scheme.

It covers the power sector, industry, and aviation.

It requires companies to reduce emissions and increasingly to purchase allowances as their allocation of free allowances will gradually diminish.

Maintaining free allocation will be conditional on submitting decarbonisation plans after 2026 for companies within the scope of the EU ETS.

Last but not least, the Carbon Border Adjustment Mechanism (CBAM) will also require importers, as from 2026, to report emissions embedded in imported goods and submit certificates offsetting their carbon content.

This should encourage foreign producers and importers to develop decarbonisation strategies to secure their access to the EU market.

Thanks, David. That’s really helpful.

There’s obviously quite a patchwork of different bits of legislation relevant to this topic.

Are there any key commonalities or differences we can pick out between them?

Absolutely Mike, and actually there are more commonalities than differences.

Basically these pieces of legislation all have several features in common, regardless of the sector, activity, or economic level.

They all require auditing and taking a snapshot of the existing situation—which alone may be a challenge, as measuring one’s carbon footprint is not easy—but also a source of opportunities for companies to reconsider their policies, as noted earlier by Gabi.

They all require companies to establish objectives or targets and to devise a plan or strategy for getting there, with intermediate milestones.

In all cases, companies are required to substantiate their commitments via verifiable and indeed verified metrics.

Reporting becomes a watchword in this whole endeavour.

Member states report to the EU Commission, companies report to the competent domestic authorities, to shareholders, clients, and stakeholders.

Although all these transition and decarbonisation plans involve a great deal of complexity, they have one feature in common: the whole system and process is ultra-transparent.

Transparency is key here.

That’s a really helpful way of thinking about it and simplifying it down to the bare bones.

So while we’ve got you here, it would be great to know how these wider principles and EU legislation are implemented in France, where you’re based. Are there any other key pieces of French legislation on the same topic?

Yes, there are lots of them.

I’ll focus on the mandatory ones, because dealing with the voluntary schemes would probably take too long.

As you might expect, like many other EU member states, France has a mix of such measures.

The mandatory measures stemming from EU requirements are transposed into a variety of codes: the Energy Code, the Environmental Code, the Urban Planning Code, the Monetary and Financial Code, the Commerce Code, and so on.

It forms a compact set of provisions which are, in practice, not always easy to locate and decipher, as their incorporation into existing codes can make them lose their clear EU pedigree in the process.

So when I’m asked to determine where, for example, the CSRD Directive has been transposed, you often have to look in several codes to see exactly what’s been adopted.

Just to give you a sample, these provisions include the Energy Climate Law of 2019.

At the macroeconomic level, this law sets a target of reducing fossil fuel energy sources by 40% by 2030. It also requires the planning of energy policies, which must be updated every five years, and the incorporation of climate considerations in all private and public decisions.

It also means that institutional investors, banks, insurance companies, and asset managers must declare their exposure to transition and climate risks, describe their alignment with carbon neutrality objectives, and report on scope 1, 2, and 3 emissions which they finance.

We also have a National Low-Carbon Strategy, which sets carbon budgets on a sector-by-sector basis, distinguishing between industry, transport, and agriculture.

There’s also an obligation for companies and administrations to establish greenhouse gas reports, which we refer to as the “bilan.”

Thresholds apply to these obligations. They apply to companies with headcounts in excess of 500 employees, local administrative units (or collectivités publiques) with headcounts over 50,000 people, and public undertakings (établissements publics) with headcounts over 250.

Since 2022, these requirements have been reinforced with the obligation to include in such reports climate transition plans, quantified emission reduction objectives, and the consideration of scope 3 emissions.

We also have the more recent Climate and Resilience Law of 2021, which introduced the obligation for listed companies to include a transition plan in their management report.

This obligation has now been reframed with the transposition of the CSRD, which took place in December 2023 and became applicable in January 2024.

Finally, in this non-exhaustive list, we also have new obligations under the Monetary and Financial Code, which require asset managers to factor in risks related to climate change and energy transition strategies. This aligns with SFDR and reinforces the extra-financial reporting obligations they already had to comply with.

That’s really helpful, David.

I think it’s really interesting to look at the requirements at the EU level and then drill down into one EU jurisdiction to see how that actually maps through.

Before we get onto the UK position, perhaps you could talk about where we’re going next. What are the likely developments in the EU and in France?

As you’ve probably seen, it’s more than likely—it’s actually developing as we speak.

The omnibus is the latest development in the EU and in France.

In my opinion, it’s going to send gradual shockwaves through the whole process. It’s not a game-changer, but it does represent a pause in this legislative development in the EU and in the member states.

If you take France alone, there’s a French law from April 30th this year that modifies the CSRD implementation schedule for certain companies.

Basically, it’s been postponed to 2028 for large companies—so it will apply to their 2027 reports—and postponed to 2029 for listed SMEs, applying to their 2028 reports.

This applies to companies with over 250 employees and either turnover above 50 million or a balance sheet over 25 million.

Very large companies that started their reporting in 2025 (for their 2024 reports) will not benefit from any postponement.

Interestingly, there’s a change of schedule but no material change here.

We should keep in mind that the substance of the required reporting, and the obligation to have this non-financial data audited by independent third parties, are not affected by these two-year postponements.

So for now, unless the contents themselves are reconsidered, it’s just a postponement—a pause, but nothing further at this point.

But developments are ongoing as we speak.

Thanks for that, David.

I suppose I take two key points away from all of that.

First, there’s quite a breadth and complexity to the legislation across the EU, which creates difficulty for companies to navigate.

Second, a lot of people were hopeful that the omnibus would radically change things, but it seems it’s broadly the same—it’s just been postponed a bit, so reports of its demise may be exaggerated.

Turning now to the UK.

Gabi, could you talk us through where the UK fits into that wider patchwork?

Sure, thanks Mike.

Until now, there have been no specific requirements for companies to produce a climate transition plan in the UK.

There are existing requirements under the UK Listing Rules for certain listed companies to make “comply or explain” disclosures in their annual reports about climate-related financial information based on the recommendations of the TCFD, which itself encourages companies to include key details from their transition plans in those disclosures.

There are also other climate and environmental reporting requirements set out in a patchwork of legislation and regulation.

This includes requirements for certain companies to publish information on their energy efficiency measures as part of the Energy Savings Opportunity Scheme (ESOS) and Action Plan, and under the Streamlined Energy and Carbon Reporting Regulations in their Director’s Report, as well as non-financial reporting requirements under the Companies Act 2006.

As you mentioned at the start, just a couple of days ago the Department for Energy Security and Net Zero launched three consultations, including one on implementation routes for transition plan requirements and another on the exposure drafts of the UK Sustainability Reporting Standards, based on the ISSB Sustainability Reporting Standards (IFRS S1 and S2).

The third consultation focuses on providers of assurance over sustainability-related financial disclosures.

These consultations represent the first phase of the government’s approach to modernising the UK’s framework for corporate sustainability reporting.

This follows the government’s manifesto commitment to mandating UK-regulated financial institutions—including banks, asset managers, pension funds, insurers, and FTSE 100 companies—to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement.

The government has announced that it would consult on how best to take forward its transition plans policy, and in parallel consult on adopting the ISSB standards domestically as the UK SRS and mandating reporting against the UK SRS for economically significant companies.

The UK SRS would include requirements for companies to disclose information about transition plans if they have one.

The transition plan requirement consultation seeks views on all the key aspects of the government’s commitment, including designing a transition plan, disclosing the plan, aligning it with the UK’s net zero by 2050 target, and implementing it.

It outlines options the government is considering, including requiring entities to explain why they have not disclosed a transition plan or mandating the development and disclosure of a plan.

The government also recognises that neither of those options would create an express legal obligation to take future action consistent with those disclosures, so it is also seeking views on mandatory changes related to plan implementation.

It notes that this option would take additional time to design and implement, and the government would need to work closely with industry to ensure requirements are proportionate.

Interestingly, the consultation also seeks views on whether and how climate resilience and nature could be incorporated over time to ensure a holistic approach to transition planning, with potential future nature requirements to be developed over a longer timeframe if taken forward at all.

At this stage, all options are being considered and the government has clarified that some might be taken forward in conjunction with others.

The consultation closes on 17 September, and the government has said it will consult again on the detail of any future requirements.

It also makes clear that it will be considering its approach alongside the FCA’s consultation on implementing the UK SRS for listed companies, and alongside the government’s wider ambition to simplify the UK’s corporate and non-financial reporting framework, which it plans to consult on separately in the future.

We’ve had some really interesting insights from David on the EU and French perspective.

In terms of the interaction between the UK and the international landscape, the government has reiterated its emphasis on ensuring international interoperability of UK requirements and on maintaining the UK’s attractiveness as a listing destination.

So it will be interesting to see how developments at the EU level, including the omnibus proposals we’ve discussed, will affect the UK as this moves forward.

Overall, there’s lots more detail to come, but for now it’s a really positive signal that the government is pushing this agenda forward.

That’s fantastic. Thanks, Gabi.

As you say, this is clearly an area where we can expect lots of change, both internationally and domestically.

And I think that leads to the concluding point that it’s really important for companies, especially multinationals, to understand how the evolving regulatory requirements in different jurisdictions operate and how they might affect them, and to navigate those diverging requirements to ensure their plans are legally compliant, robust, and credible.

That’s all we have time for today.

Special thanks to David for joining us and sharing your valuable insights on transition plan requirements in the EU and France, and also to Gabi.

Thank you very much.

Thanks Mike.

Thank you for listening to Environment Matters.

We hope you enjoyed this episode on transition plans, looking at the requirements in the EU, in France, and in the UK.

If you’d like to know more about our Environmental and Energy teams and how our experts can work with you, you can contact me or the rest of the team via our website.