COP29 has just passed with limited progress and all eyes are now on what the new US administration will do in respect to the Paris Agreement in 2025. Despite all that, the practical reality for entities climate reporting in Australia remains almost unchanged. As legally mandated climate disclosure commences, most companies are simply getting on with it and grappling with challenges and difficult trade-offs.

In that context, transition planning is emerging as one of the central topics in mandatory climate disclosure.

The new ASRS S2 accounting standard defines 'climate-related transition plan' as:

"an aspect of an entity's overall strategy that lays out the entity's targets, actions or resources for its transition towards a lower-carbon economy, including actions such as reducing its greenhouse gas emissions".

The mandatory reporting regime does not actually require an entity to make a climate-related transition plan, but if it does have one, then it must be disclosed. ASRS S2 requires that an entity shall disclose information about:

• any climate-related transition plan the entity has, including information about key assumptions used in developing its transition plan and dependencies on which the entity's transition plan relies; and
• how the entity plans to achieve any climate-related targets, including any greenhouse gas emissions targets.

Under the new mandatory climate reporting rules, many more entities will be required to assess and disclose their scope 1, 2, and 3 emissions. While the new rules do not require a plan to reduce these emissions, or even a target for reduction, as many who have volunteered their carbon footprint over the last few years have learned, once these numbers exist and are disclosed, investors, debtholders, and other stakeholders start questioning, "what will you do about it?" Even the decision to have a plan or to have a target or not will be questioned.

Put simply, like so many ESG subject matters which develop from stakeholder expectation to soft law guidance and then finally hard law, climate transition plans are not likely to stay ‘nice to have’ for too long!

Many entities, of course, already have targets and a fair number also have transition plans. Larger emitters that fall within the Safeguard Mechanism need to have a plan to deliver emission reductions. Our experience of assisting entities that are on their transition planning journey has shown that moving from greenhouse gas footprint disclosure to targets to transition plans is where the real challenge lies. When faced with the financial and operational implications identified in the planning process, some rethink their initially enthusiastic settings. Moreover, as science and technology evolve, what could have looked like a straightforward plan/target can become a complex, intertwined, and even politically loaded plan.

We expect to see the creation and amendment of these transition plans increasingly front and centre of political, regulator, financial and other stakeholder scrutiny, debate and discussion.

So what is "transition planning" anyway?

Treasury released the Sustainable Finance Roadmap in June 2024. A key pillar of that was to support the development of climate transition plans. The Australian Government recognised the need for further guidance to Australian entities to support transition planning and Treasury is developing and will publish guidance on 'best practice' transition plan disclosures before the end of 2025.

Treasury will no doubt observe the transition plan disclosure practice of leading Australian entities as it develops in the market (BHP released its transition plan recently, for example). In addition, there are a number of international frameworks which Treasury will consider. A key international framework has been created by the UK's Transition Plan Taskforce (TPT). TPT is not yet a climate acronym widely discussed (far from being in the top search results on Google), but the need for it has kicked in fast. Announced at COP26, established in 2022 and completed in October 2024, TPT's 2023 Disclosure Framework will, we expect, be very influential as Australia's Treasury develops guidance on best practice corporate climate transition planning. The IFRS Foundation is now responsible for the defunct TPT's disclosure-specific materials.

The TPT's Disclosure Framework is based on three principles: ambition, action and accountability. Entities should have ambition in establishing their transition plans, taking a strategic and rounded approach to decarbonising themselves, responding to their climate related risks and opportunities and contributing to economy-wide transition. Actions to be taken in the short to medium and long term should be clearly identified, prioritising direct abatement over purchasing carbon credits. Accountability for delivery of actions should be fully integrated into an entity's organisational processes for business and financial planning and for governance.

The TPT also created sector-specific transition plan resources to help entities in various sectors to access finance while transitioning towards lower emissions – asset managers, asset owners, banks, electric utilities and power generators, food and beverage, metals and mining, and oil and gas.

The influence of TPT's Disclosure Framework has been made very clear at the recent COP 16 on nature and biodiversity when the Taskforce on Nature-related financial disclosures (TNFD) announced that it had used the TPT Disclosure Framework as the model for its guidance on nature transition planning. We will analyse the significance of TNFD's work on nature transition planning separately in coming weeks.

In summary, the TPT's approach to climate transition planning is likely to strongly influence the ultimate Australian regulatory and stakeholder approach to climate transition planning (and ultimately nature transition planning as a fast follower).

What are the key emerging practical issues for transition planning?

After the first steps of measuring and disclosing their footprint, the next step for most entities has been setting a target and a plan to achieve it. For the most part, disclosing and target setting has been an exercise top-down (driven by Board beliefs on what shareholders want) or side-in (from a sustainability team that is a function outside of the core business). However, transition planning cannot be done effectively without the bottom-up exercise from the core business – and, as the entities that are ahead in the transition journey can attest, that is when things become hard (or even harder!).

We have been observing three significant challenges for transition planning of late: timing of technology deployment, handling trade-offs, and the evolving nature of stakeholder expectations.

Timing of technology deployment

The challenges that Australia faces in achieving its 2030 target, and the pace at which new technologies are being deployed (e.g., the sluggishness in EV sales) have a mirror in the corporate world. We have been observing that, when getting down to work out the usage of new technologies or going to the market to build new renewables, the time required to deliver the outcome is beyond target forecasting. For example, taking an onshore wind farm from idea to reality takes about 53 months. And that is assuming that the transmission infrastructure is in place – renewable energy zones and major transmission projects are known to be facing delays. For those thinking about 2030, it is now or never. This also applies to technologies that, for example, depended on the deployment of hydrogen, which has lost a lot of the impetus seen a few years ago. Or EVs' affordability and access to charging infrastructure – these are still expensive and not that easy to charge.

Our work helping clients with their transition planning has been showing that, when starting to distil the high level targets and vision into concrete initiatives with micro-plans, and moved into operational hands, targets can often feel ambitious.

Handling trade-offs

Hard trade-offs are very often needed. The discussion is often a very complex one. Operational teams can feel that changes are being imposed from 'outside', disregarding the technical issues/priorities they deal with. Cost can also take many aback, as most decisions have cost implications. Carbon objectives have been added to senior management targets and objectives – very often, as part of LTIs. However, it is absent from more short-term and operational objectives. Expecting teams to volunteer missing their targets to achieve a top-down or side-in imposed target can trigger challenging discussions!

Our experience has shown us that entering into a transition planning exercise without a process to manage trade-offs/making hard decisions that acknowledges the inherent conflict of transition is doomed to become a source of tension – and, for the most part, risks ending up in a walk back on self-imposed targets.

Moving goalposts in transition planning

Many organisations have been seeing the landscape shifting rapidly, that they are pursuing an always moving target.

A simple example is dealing with electricity contracting. Until recently, a like-for-like MWh purchase of renewable energy would lower scope 2 emissions – without taking into account the exact profile of demand. However, some stakeholders have started to find this insufficient and to seek a load-shaped carbon-free electricity supply. For example, Google has evolved to a clear statement on "plans to operate on 24/7 carbon-free energy by 2030 with clean energy projects and technologies." And, in that context, and a great example of complex trade-offs, chose to activate the nuclear option by "signing the world’s first corporate agreement to purchase nuclear energy from multiple small modular reactors (SMR)."

A second example is how carbon offset markets are changing. A few years ago, CERs were deemed acceptable to meet carbon targets. Nowadays, questions raised about the integrity of CERs have made these more questionable, and shareholders, proxy advisors, feel more comfortable with ACCUs – which are more expensive.

Transition planning and strategy

Transition planning is fundamentally an exercise in strategy – it is not an accident that the relevant regulatory definition refers to a transition plan as an aspect of 'overall strategy' and the new ASRS S2 accounting standard requires disclosure of any climate-related transition plan under the heading 'Strategy and decision-making'.

Navigating transition planning is a complex endeavour. At MinterEllison, we have the legal and strategy consulting capabilities to help clients create or modify a transition plan so that it complies with the emerging soft-law framework and to work through the complexities of creating a plan that is grounded in sensible choices – while minimising organisational pain.

Please reach out at any time to discuss how we can assist your organisation.