Section 8 – Monitoring and reporting phase

Module 17 – Transition plan development and assessment

According to IFRS S2 guidance (see Module 23), a transition plan is “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 GHG emissions.”

The guidance in this module serves a dual purpose. 1) It can help FIs to develop their own credible transition plans and provide a framework for assessing the transition plans of their clients. 2) The same principles, criteria and evaluation questions can be applied at both the institutional and client level.

For FIs, active engagement with clients on transition planning is not only driven by regulatory requirements, but is also a matter of reputation, risk management, and value creation. In the context of client and transaction performance monitoring, client transition plans should be viewed as dynamic indicators of both emerging risks and future opportunities. Assessing these plans enables institutions to:

1. Identify which clients are likely to remain viable as the economy decarbonises and those at risk of severe disruption.
2. Detect portfolio concentrations in sectors or geographies exposed to climate-related financial shocks.
3. Encourage early action to reduce the likelihood of stranded assets, loan defaults and portfolio volatility.

Emerging markets face a distinct set of transition challenges. Data availability is often limited, lending tenors are shorter, and there is a stronger need for just transition outcomes. Yet there is also a bigger opportunity to leapfrog outdated business models, build robust foundations for a green transition, and deliver social and economic co-benefits.

Engaging with clients on transition planning can create meaningful value for institutions by:

• Strengthening climate resilience, reducing downside risks and improving risk-adjusted returns.
• Differentiating institutions in a competitive market and helping to capture clients that are positioning themselves for a climate-resilient, low-carbon future.
• Gaining access to climate finance and technical advisory support from international DFIs and MDBs.

Although IFRS S2 is designed to be policy- and jurisdiction-neutral, many countries are adopting its requirements as a baseline for mandatory disclosures. For instance, the Financial Reporting Council of Nigeria has formally published a roadmap for adoption of IFRS S1 and S2 standards, moving to mandatory disclosures by 2028. Other countries, including Singapore, Kenya, Brazil, India and Indonesia, are developing plans to implement IFRS S2 standards.

The increased adoption of IFRS S2 shifts the focus from whether clients have transition plans, to how credible, complete, and relevant those plans are. When assessing clients with significant climate risk exposure, FIs should:

1. Evaluate disclosed transition plans for credibility, feasibility and alignment with recognised decarbonisation pathways.
2. Distinguish between simple disclosure and substantive transition planning, as transparency alone does not demonstrate resilience or ambition.
3. Encourage clients to integrate transition planning into broader corporate strategy and risk management, even where such disclosures may not be mandatory.
4. Where no transition plans exist, despite material climate risks, engage proactively with clients or reassess risk appetite.

Understanding the transition plan disclosure recommendations of IFRS S2

Under IFRS S2, any entity must disclose information about its transition plan if one exists and is considered material. The standard sets out specific requirements for key disclosures, namely:

• Governance
  Explaining how oversight of climate-related risks and opportunities, including transition planning, is embedded in governance structures.
• Strategy
  Describing how the transition plan is integrated into the overall business strategy, including defined targets, actions and resource allocation.
• Risk management
  Detailing how climate-related risks and opportunities are identified and managed.
• Metrics and targets
  Outlining the qualitative and quantitative performance indicators used to monitor progress, such as GHG emissions and capital expenditure for low-carbon technologies.

• Benefits of transition plans include:

  Risk management

  They help entities identify, assess and mitigate transition risks linked to climate change, such as policy shifts, technological disruption or changes in market demand.

  Strategic clarity

  Clear transition plans can strengthen long-term business resilience and value creation by aligning actions with global decarbonisation trajectories.

  Stakeholder communication

  Investors, lenders and other stakeholders increasingly expect clarity on how companies will adapt to a low-carbon future. Transparent disclosures support better risk assessment, pricing and capital allocation.

  Regulatory and reputational alignment

  As regulators move towards mandatory climate-related disclosures, robust transition plans can help institutions stay ahead of regulatory requirements and protect their reputational standing.

Guidance 15: Key elements of credible transition plans

Guidance 15a and 15b highlight the key elements to consider when developing and/or assessing transition plans. Each element, from implementation pathways to adaptive capacity, provides a lens for assessing the plan’s credibility, robustness, and practicality.

Assessing the credibility of client transition plans

The following questions can be used as a high-level checklist during due diligence and ongoing monitoring for evaluating client transition plans; these can also be used as guidance when the FI is looking to develop their own transition plans:

1. Has a specific and time-bound climate target been set?
2. Are clear, actionable steps and investments identified?
3. Is there a mechanism for monitoring, reporting and updating the plan?
4. Does governance include board or senior management oversight?
5. Are social impacts and stakeholder engagement considered?
6. Is disclosure aligned with best practice and international standards?

• Typical red flags to watch for in transition plans:

  Vague or aspirational language

  The plan makes broad commitments referencing future outcomes without concrete actions or near-term milestones.

  Over-reliance on offsets

  The plan delays real emissions reductions in favour of future, unproven, large-scale offsetting.

  Weak leadership alignment

  The plan appears disconnected from overall organisational strategy and lacks clear senior oversight.

  Lack of transparency

  Key assumptions, limitations or methodologies are not disclosed.

  No progress tracking

  There is no structured process for monitoring or reporting progress.

Tool 4: Checklist for assessing the credibility of client transition plans

Tool 4 is a framework for assessing client transition plans in a decision-useful manner. It can be aggregated at sector or portfolio-level for more strategic analysis and benchmarking.

RETURN TO TOOLKIT MAP
PROCEED TO MODULE 18