Climate Strategy: Decarbonisation, Climate Risk and Transition Planning
Same, same but definitely different.
As companies are working to strengthen their climate capabilities in response to growing pressure from numerous stakeholders, BRODIE has noticed that there is an increasing level of confusion around what should be included in climate strategies and which frameworks relate to the different aspects. This article aims to clarify and simplify this landscape.
What makes a holistic climate strategy?
Figure 1: Relationship between business strategy, climate strategy, transition, and adaptation plan. Adapted from graphic in TCFD Guidance on Metrics, Targets, and Transition Plans.
Decarbonisation
What is it?
Decarbonisation broadly refers to the reduction in society’s reliance on fossil fuels which release greenhouse gases (GHGs). For companies, this specifically means the reduction in their annual absolute GHG emissions. The goal here is to decouple economic performance from the release of GHGs.
Why has it emerged as a constituent part of climate strategy?
Planetary necessity. The planet is warming at an alarming rate caused by an increasing concentration of greenhouse gases in the atmosphere. We need to ensure that the world’s warming is limited to 1.5ºC above pre-industrial levels to avoid the worst effects of climate change. As such, we need companies to quickly and significantly reduce the volumes of GHG emissions that they release.
What frameworks are relevant here?
The Science Based Target initiative (SBTi) began as a collaboration between non-profit groups including the Carbon Disclosure Project (CDP), the We Mean Business Coalition, the World Wide Fund for Nature (WWF) and the World Resources Institute (WRI). It has developed guidance for companies to set science-based decarbonisation targets aligned with climate science and validates such targets. Despite recent controversy surrounding its potential shift in position concerning the use of carbon offsets, it remains the most relevant body in relation to corporate decarbonisation targets.
Additionally, to support with measuring GHG emissions and quantifying the effectiveness of decarbonisation efforts, the Greenhouse Gas Protocol supplies the leading GHG accounting standards globally. Originating from a collaboration between the WRI and the World Business Council for Sustainable Development (WBCSD) in the late 1990s, the Greenhouse Gas Protocol set out to establish an international standard for corporate GHG accounting. It now serves as the accounting platform for most corporate emissions reporting programs worldwide, ensuring consistent and reliable measurement.
What companies can be considered best practice?
IKEA is one of the few companies that has been able to substantiate claims that it has decoupled economic performance from the release of GHG emissions. It has managed to achieve a 24% decrease in its emissions (across Scope 1, 2 and 3 emissions) against a 2016 baseline, while managing to increase its revenue by 31% across the same period.
Climate risk
What is it?
As the world experiences the effects of climate change and tries to adapt, companies will be presented with a number of risks and opportunities. The Taskforce for Climate-related Financial Disclosures (TCFD) recommends viewing such climate risks through the following lenses:
Physical risks stem directly from climate change. This includes acute events like extreme weather, and chronic shifts such as rising temperatures and sea levels. These risks can lead to direct asset damage, supply chain disruptions, and impacts on water and food security, ultimately affecting organisational performance and resilience.
Transition risks, on the other hand, arise from moving towards a lower-carbon economy, influenced by policy, legal changes, and technological advancements. These changes may bring financial and reputational risks to organisations, driven by shifts in markets, technology, and regulatory landscapes.
Why has it emerged as a constituent part of climate strategy?
As global temperatures rise, the effects of climate change are becoming more severe. There is a growing realisation that these effects will impact businesses; three quarters of British businesses, for example, are concerned about its effects in the next 10 years, while two thirds say that a rise in temperature of 2ºC will have a significant impact on their business.
What frameworks are relevant here?
TCFD, launched and spearheaded by the International Financial Stability Board and Michael Bloomberg, was established in response to inadequate reporting of climate risks, aiming to provide a common framework for organisations to disclose such risks and opportunities. Since the launch of the TCFD’s recommendations report in 2017, nearly 5,000 organisations publicly declared their support.
What companies can be considered best practice?
Maersk demonstrates strong climate risk management through proactively assessing and working to mitigate both physical and transition risks. Having undertaken a detailed climate change scenario analysis to identify vulnerable assets, Maersk determined that business-as-usual was not an option. In response to that initial scenario analysis, Maersk has ensured that all its majority-owned terminals and large warehouse locations are part of a loss prevention programme entailing a tailored assessment of climate change-related risks.
Where do transition plans sit in this?
A transition plan is a component of an organisation’s overall business strategy that outlines its targets and actions supporting the transition toward a low-carbon economy, including actions such as reducing its GHG emissions. With increasing pressure on companies to fulfil decarbonisation and net-zero commitments, these plans should inspire confidence among consumers, markets, and investors that substantial and effective action will ensue.
Examples
Mars: In 2023, Mars published a ‘Net Zero Roadmap’ outlining its pathway to achieving net zero across its value chain by 2050. This plan highlights specific planned actions and investments across areas such as agriculture, logistics, and packaging, providing the anticipated emissions reductions resulting from each of these endeavours.
Figure 2: Screenshot from 'Direct Operations' section of Mars’ Net Zero Roadmap.
Ball: Ball, a manufacturer of aluminium packaging, evaluates various decarbonisation routes in its Climate Transition Plan. This plan considers the impact regulatory, financial, and geopolitical developments may have on achieving desired reductions. For example, it considers scenarios where the development of global aluminium recycling infrastructure may lag projections, assessing its impact on goals and outlining strategies to maintain decarbonisation targets despite potential challenges.
Figure 3: Screenshot of '2030 Scenarios' section of Ball's Climate Transition Plan
Although the concept may appear simple, as transition plans become increasingly prevalent, there has been growing confusion regarding their fundamental purpose and required content. For instance, some portray them mainly as tools to identify and mitigate climate risk, as seen in this article. Therefore, it is crucial to reaffirm that the primary focus of a transition plan should revolve around an entity’s ambitions and actions to reduce its GHG emissions and transition to a lower carbon economy.
This does not mean that a transition plan must be simplistic or reductive. By considering the potential impact of climate-related risks, opportunities and various future scenarios, as demonstrated in Ball’s transition plan, organisations can develop more robust and adaptable decarbonisation strategies. This is reflected in guidance from the Transition Plan Taskforce which recommends “a strategic and rounded approach” to transition plans, based around three inter-related pillars: decarbonising the entity, contributing to an economy-wide transition, and responding to the entity’s climate-related risks and opportunities.
Figure 4: Taking 'a strategic and rounded approach' graphic from TPT's Disclosure Framework.
To assist businesses with developing transition plans, various informative resources are readily accessible, particularly those provided by the Transition Plan Taskforce (TPT). Launched in 2022, the TPT aims to establish the ‘gold standard’ for private sector transition plans. TPT outputs try to support consistency between companies and reduce the level of disclosure complexity. Key materials produced by the TPT include:
A Disclosure Framework which sets out good practice for robust and credible transition plan disclosures.
Sector-specific transition plan guidance for Asset Owners, Asset Managers, Banks, Electric Utilities & Power Generators, Food & Beverage, Metals & Mining and Oil & Gas.
Sector summary guidance, with high level guidance for 30 sectors of the global economy.
Guidance on the how to undertake a transition planning cycle.
With impending legislation such as the EU’s Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) encouraging companies to disclose transition plans (or when they plan to have one in place), it is crucial for companies to ensure they are prepared to deliver such plans confidently. This readiness will not only facilitate compliance but also help protect and enhance the entity’s long-term value.
How should companies navigate this landscape?
Companies must ensure clarity within their own climate strategies. In practice, there will be projects and investments which only address either decarbonisation or climate risk. This is normal and to be expected; as noted above, decarbonisation and climate risk, despite clear overlaps, are distinct concepts and are likely to require different strategies, actions, and stakeholders to be managed in their own rights. Understanding and accepting this reality will help sustainability teams develop more holistic climate strategies and, hopefully, unlock more resource internally.
The resources referenced in this blog can guide companies on what should be included in transition plans, whether that be decarbonisation targets aligned with a 1.5ºC warming scenario, board-level governance of the transition plan or effective policies to aid the transition. What they do not do, however, is guide companies on how to develop these underlying recommendations.
Written by Kiran Rayner & Miles Fenner.
For further insights into deciphering climate strategies and clarifying corporate jargon, check out one of our previous blog posts, "Net Zero Carbon: Taking the Best Route Forward”.
For companies seeking advice in navigating this process and wanting to develop their climate strategies, the BRODIE team has extensive expertise in this space. Want to know what to include in your public climate transition plan? Unsure on how to set a science-based net zero target? Want to identify which levers and actions will tangibly reduce your absolute carbon emissions? BRODIE has helped many of its clients navigate these questions and many more.
Get in touch
If you have similar questions, want to learn more about climate change, or just fancy a chat, please reach out to hello@brodiepartners.com