EU Platform on Sustainable Finance publishes recommendations on core elements for assessing climate transition plans
13 March 2025
What you need to know
- The EU Platform on Sustainable Finance (PSF) has published a report on the core elements for assessing corporate climate transition plans (TPs).
- The Report suggests four core elements for evaluating TPs, which the PSF recognises are a key tool in raising and granting the transition finance needed by businesses to align their business models with climate and other environmental targets.
- The four core elements are: (i) science-based and time-bound targets (ii) levers and actions to achieve those targets, (iii) financial planning and (iv) governance and oversight of the plan and its implementation.
- The Report also recommends issues for financial market participants (FMPs) to consider when assessing the credibility of TPs.
What you need to do
- FMPs that are looking to build the assessment of TPs into their credit approval processes should review the PSF's suggested credibility criteria and adopt them where relevant.
Overview
On 23 January 2025, the EU Platform on Sustainable Finance (PSF), which is an expert advisory body established under Article 20 of the Taxonomy Regulation ((EU) 2019/2088), published a summary report: Building trust in transition: core elements for assessing corporate transition plans. The Report identifies core elements for evaluating transition plans (TPs), which the PSF recognises are a key tool in raising and granting the transition finance that is needed by businesses to align their business models with climate and other environmental targets. The Report also recommends issues for financial market participants (FMPs) to consider when assessing the credibility of TPs and makes recommendations to the EU Commission on enhancing the effectiveness of its policy framework and supporting the market to provide and access transition finance.
Key findings of the Report include:
- FMPs can assess TPs on four core elements: (i) science-based and time-bound targets (ii) levers and actions to achieve these targets, (iii) financial planning (i.e. investments and funding supporting the TP) and (iv) governance and oversight of the plan and its implementation.
- The EU Taxonomy and other tools including disclosures required by EU legislation (e.g., the climate neutrality plans required by the EU Emissions Trading Scheme (EU ETS) or the transformation plans required under the Industrial Emissions Directive (2010/75/EU) (IED)) can help to evaluate the robustness and consistency of TPs. In particular, the EU Taxonomy can enhance the credibility of a company’s financial planning by demonstrating how its expenditures align with the EU´s net zero by 2050 target and other EU environmental objectives.
- Effective TPs take a holistic approach which integrates climate mitigation and adaptation actions with broader environmental and social objectives.
The report is intended to complement the anticipated EFRAG Implementation Guidance on Transition Plans for Climate Change Mitigation (TPIG), which will support entities in meeting transparency and disclosure obligations under the EU Sustainability Reporting Standards (ESRS) made under the Corporate Sustainability Reporting Directive (CSRD) ((EU) 2022/2464) (see Ashurst Governance & Compliance Update - Issue 60).
In its Omnibus Package announced on 26 February 2025, the Commission proposed changes to Article 22(1) of the Corporate Sustainability Due Diligence Directive (CS3D) ((EU) 2024/1760), which currently requires in-scope companies to adopt and put into effect 1.5 degrees Paris aligned climate TPs. If the proposed changes are adopted by the EU Parliament and EU Council, companies would no longer be required to put TPs into effect but they will still need to develop them. The EU Commission also proposes to review the ESRS to reduce the number of mandatory datapoints that in-scope companies must report. It is not clear how this will affect existing requirements relating to TPs in the ESRS (see EU Commission publishes first Omnibus Package to simplify sustainability regulations).
Principles and core elements to assess TPs
The PSF considers that FMPs should assess TPs based on all material impacts, risks, and opportunities faced by companies, not just those related to climate change mitigation. The Report sets out guiding principles and core elements that can be used to assess TPs. There is a table in section 4.2 summarising the issues the PSF recommend FMPs consider when assessing TPs. The PSF also recommends that the Commission develops a checklist of core elements FMPs should consider when assessing corporate TPs when providing transition finance in the EU.
The three principles that should guide TP assessments include:
- Ambition, environmental and social integrity. FMPs should assess if the targets in a TP are compatible with the 1.5 degrees Paris Agreement goal. Even where the TP's focus is on climate mitigation, the plan should avoid causing significant harm to other environmental and social objectives.
- Consistency & feasibility. FMPs should assess whether the TP is consistent with the company’s business strategy, ambition and mitigation actions and whether decarbonisation levers are feasible given external dependencies, disclosed assumptions, and the relevant time horizons. FMPs should assess whether the targets are technologically achievable and economically viable and, if not 1.5 degrees aligned, work with the company and other stakeholders to understand what actions need to be taken to ensure they can be aligned to that goal in the future.
- Transparency & completeness. TPs should provide sufficient detail for FMPs to evaluate whether the company’s transition is realistic and aligned with its stated goals.
The PSF's four core elements are based on the elements of a TP required under Article 22(1) of the CS3D. The sections below summarise the PSF's recommendations in respect of these core and other elements.
Targets
The PSF considers that FMPs should assess whether targets are science-based (i.e. aligned with the goal of limiting of global warming to 1.5 °C with no or limited overshoot, which implies meeting net zero by 2050 and a remaining global carbon budget of 400-500 Gt).
FMPs should also understand if climate scenarios (such as those provided by the Network for Greening the Financial System or the International Energy Agency) have been used to set the targets and if the targets cover all of Scope 1-3 greenhouse gas emissions. In addition, there should be short, medium and long term targets and these should include absolute targets although intensity targets can also be provided. (Intensity targets are those that are expressed as the amount of GHG relative to a particular metric e.g. GHG per number of employees or GHG per unit of revenue.) Targets should also be gross targets rather than expressed net of carbon removals or offsetting. Only net zero (rather than intermediate) targets can incorporate the use of carbon removals and only for restricted clearly-defined applications addressing residual emissions (which allowing for justified sectoral variations, will usually be 5-10% of emissions).
The Report explains the characteristics of climate scenarios that FMPs should understand in assessing TPs. For example, the variations in methodologies between the various scenario providers should be borne in mind when making comparisons of TPs across entities or of assets in portfolios.
The PSF recommends that the Commission develops EU sectoral transition pathways for high-emitting sectors consistent with the existing tools like the Taxonomy, provides guidance on selecting climate scenarios to be used in target setting and transition planning and develops criteria for qualifying targets as credible and science-based as this is not currently defined in existing EU legislation. At present, many organisations choose to have their targets verified by the Science-based Targets initiative (SBTi) to demonstrate their credibility.
Mitigation actions and levers
The PSF suggests that mitigation actions and levers should be considered in the context of the external dependencies (such as infrastructure, resources, or geographic or policy factors) that may limit their uptake. It recommends that FMPs should perform a DNSH assessment of the implemented or planned actions using the EU Taxonomy DNSH and minimum social safeguard criteria to see if there are other social or environmental issues that would suggest the actions should not be undertaken.
The PSF also suggests that TPs of companies exposed to fossil fuels should be assessed as to whether they lock-in use of fossil fuel-based assets even where low-carbon alternatives are available or whether they promote the phase-out of fossil fuels. The Report recommends that FMPs should ensure companies disclose a qualitative assessment of the potential locked-in GHG emissions from key assets and products, in line with the ESRS requirements. This should include an explanation of whether and how these emissions may jeopardise the achievement of the company’s GHG targets and drive transition risk, and if applicable, how the company will manage its GHG-intensive and energy-intensive assets that are at risk of becoming stranded. The Report notes that asset-level data and activity-level information, is vital for understanding the risk of locked-in emissions and linking to other tools such as the climate neutrality plans required by the EU ETS or the transformation plans required under the IED can add credibility to TPs.
Activities that lack technological solutions to achieve net zero but where lower-carbon alternatives are available (known as "always significantly harmful" or ASH) require a decommissioning or a managed exit plan. The PSF considers identifying ASH activities would help identify potential stranded assets at a company level and also within portfolios, financial instruments and products. If a list of ASH activities is not given, FMPs should consider if companies exposed to fossil fuels have a phase-out strategy and whether they are investing in new fossil fuel assets, including coal reserves, oil and gas fields, operations, or production.
Financial planning
The PSF suggests that FMPs assess the extent to which the TP is integrated into the preparer's financial plans. FMPs should also use EU Taxonomy capex alignment information to assess whether a company is using sufficient resources to achieve its climate targets. In particular, capex plans for reaching Taxonomy alignment in five-ten years can help understand how a company intends to transition eligible assets at the economic activity-level. If alignment is not currently possible, FMPs can assess whether the company has set targets to achieve alignment in the future.
The PSF also suggests FMPs should check capex information for new investments in fossil fuel infrastructure (excluding capex investments in line with EU Taxonomy’s criteria for gas-related transitional activities). FMPs should use available EU Taxonomy opex alignment information to assess company´s efforts in research, development and innovation. (Note the EU Commission proposes in the Omnibus Package that certain in-scope companies claiming Taxonomy alignment or partial alignment can choose to disclose OpEx KPIs. This may limit the Taxonomy alignment information available to FMPs.)
FMPs could also assess the consistency between planned investments/ financial planning and stated decarbonisation actions and levers in the TP, particularly relating to the achievement of short and mid-term targets.
Governance
The PSF recommends that a TP should explain Board and audit committee oversight of the TP as well as stakeholder engagement and if the company's position on lobbying and advocacy is aligned with its climate targets. The TP should also detail how it will be implemented and how progress against the targets will be monitored.
Another key area for FMPs to consider is whether the TP explains how performance on sustainability-related targets and executive compensation is linked.
The PSF suggests that the Commission should develop:
(i) A monitoring framework or a public registry that could be used to track emission reductions and implementation of TPs on a company and sector-level.
(ii) A TP template for non-financial undertakings that could be used to comply with EU legislation including CSRD and CS3D.
Other consideration - adaptation and just transition issues
The PSF considers that TPs should address climate adaptation as well as climate mitigation given the interdependencies between these objectives. Other environmental objectives (for example, reducing an entity's impact on nature or reducing waste) should also be integrated where they materially impact or are impacted by the entity, in line with the double materiality principle.
TPs should also address the social implications of the plan to ensure a just transition for the company, workers and wider communities. In particular, PSF recommends that FMPs should assess if the TP takes a people-centred and human rights-based approach that explains how the social impacts of the transition will be addressed, how human rights and labour standards are respected and whether employment and training opportunities are promoted. They should also assess if climate adaptation and resilience measures are incorporated including how working conditions will be safeguarded from climate change impacts and if affected stakeholders have been engaged. The Report notes that the CS3D, which is based on existing business and human rights standards (such as the UN Guiding Principles on Business and Human Rights) provides a framework for integrating human rights considerations into TPs and that these standards also relate to the EU Taxonomy's minimum social safeguards and certain reporting requirements under the Sustainable Finance Disclosures Regulation ((EU) 2019/2088) (SFDR) and the CSRD.
Acknowledging that more work is needed in these areas, the PSF notes that the core principles and elements in its Report could be used across those social and environmental objectives. The Report also notes that the DNSH criteria in the EU Taxonomy provide a valuable tool to reduce harm for eligible economic activities. Plans to transition from harmful activities can be disclosed against the six environmental objectives of the Taxonomy Regulation (see Amendments to the EU Taxonomy Regulation). The PSF recommends that the Commission provides guidance on how adaptation and just transition can be further incorporated into TPs.
FMPs should assess whether the TP includes measures to avoid significant harm to other environmental objectives while making progress toward net-zero emissions. When assessing the robustness of targets, FMPs should assess whether targets include DNSH considerations on other environmental objectives and that consider trade-offs and co-benefits as between objectives.
In line with GFANZ's October 2024 consultation on draft guidance on incorporating nature into TPs (see Ashurst Governance & Compliance Update – Issue 58), PSF considers biodiversity plans should be incorporated into TPs to reduce reporting burdens on companies as well as improve consistency and impact and make assessing companies TPs easier for FMPs.
Comment
The PSF's Report acknowledges the EU Commission's competitiveness agenda, which was announced by Ursula von der Leyen in November 2024 and the Omnibus Package that was imminent when it was published (see EU Competitiveness Compass). The Report references administrative burdens placed on the private sector and stresses the need to use existing legal obligations to develop a methodology for assessing TPs. Following publication of the first Omnibus Package, it is not yet clear what it means for the development of Transition Plans. The proposals (which may yet be subject to further negotiation) still require the development of TPs by entities in-scope of CS3D. It seems likely however, that the level of disclosure will be better tailored to the size and complexity of reporting entities.
Irrespective of the changes that will result from the Omnibus Package, developing and publishing a Transition Plan is still a valuable exercise for companies that will help them to manage their climate risks, demonstrate that directors have adequately taken into account the impact of company's decisions on the environment when exercising their directors' duties, and where the TP is credible, could mitigate greenwashing risks.
Another area where clarity is needed is the possible gap between EU requirements and those in other jurisdictions. The PSF's core elements are similar to the core elements that the Transition Plan Taskforce (TPT) included in its Disclosure Framework and that are likely to form the basis of mandatory TP requirements anticipated in the UK (see Transition Plan Taskforce issues Disclosure Framework and consults on sector guidance). If the PSF's recommendation for the Commission to develop a checklist of core elements for FMPs to consider when assessing corporate TPs is based on this Report, entities with obligations to prepare and publish TPs under both EU and UK legislation may face additional burdens in ensuring that their TP satisfies both sets of requirements.
