Uncategorized – Transition Strategy Toolkit

The structure of rules and processes an entity puts in place to manage its responses to the financial risks and opportunities of climate change.The transition plan and its implementation involve large-scale, entity-wide changes. These must be owned and driven forward by management. Robust internal governance structures should be in place to ensure the changes are delivered. This is an iterative process whereby the availability of data will mature with time, and at the point of plan development the data inputs may not have been as robust. Economic abatement capacity assessment means that the cost of reducing emissions is less than the total revenue that will be generated from the investment.Guidance from TCFD suggests an assessment must be undertaken to understand what actions, resources, and projects an entity has available to enable entity-level decarbonisation and influence economy-wide decarbonisation. This assessment will inform which actions are most feasible and impactful to take in the short, medium, and long-term. It will further help an entity understand the speed at which it can feasibly decarbonise and inform long-term interim target setting.The Task Force on Climate-related Financial Disclosures (TCFD) defines transition risks as risks that arise from the transition to a low-carbon economy. Transitioning to a lower-carbon economy may entail extensive policy, legal, technology, and market changes to address mitigation and adaptation requirements related to climate change.

Depending on the nature, speed, and focus of these changes, transition risks may pose varying levels of financial and reputational risk to entities.

Physical risks in turn are those associated with the impacts of climate change. These risks can be event-driven (acute) or associated with longer-term shifts in climate patterns (chronic).
A starting point for an entity to understand its ability to decarbonise its operations and supply chain and to shore up strategic resilience as it responds to the changing climate risks. Unconventional sources such as hydraulic fracking, arctic drilling, oil sands and shale deposits.Financial considerations typically have greater bearing for sectors that are capital-intensive or where transition plans are expected to involve very significant investments and costs. Entities whose transition to lower emissions does not entail significant costs would likely provide fewer details on financial strategy.Costs related to the investments (CapEx) and operational costs (OpEx) needed to deliver the Climate Mitigation Performance Targets.

Examples include research and development (R&D) or investment costs in new technologies or infrastructure, site remediation, contract penalties, regulatory costs, restructuring costs, higher supplier prices arising from the transition, long-term utilities savings from investment in renewable energy assets.

They must address all current, committed, and anticipated impacts. Revenue impacts must include the positive and/or negative impacts from changed product or service offerings and/or the prices of those offerings.

Balance sheet impacts must address balance sheet and cash flow impacts. For example, revised asset values/ write-downs. Target metrics that can be tracked over time might include:

Percentage of the entity’s capital expenditure aligned with the strategic narrative
Percentage of the entity’s R&D aligned with the Strategic Narrative
Percentage of the entity’s asset base aligned with the products/ services described in the vision
Percentage of the entity’s revenue aligned with the products/ services described in the vision

An entity’s consideration of how it will achieve and fund its objectives and strategic goals. Financial planning allows entities to assess future financial positions and determine how resources can be utilised in pursuit of short- and long-term objectives.

As part of financial planning, entities often create “financial plans” that outline the specific actions, assets, and resources (including capital) necessary to achieve these objectives over a 1- 5-year period. However, financial planning is broader than the development of a financial plan as it includes long-term capital allocation and other considerations that may extend beyond the typical 3-5-year financial plan (e.g., investment, research and development, manufacturing, and markets).Elaborate the entity's primary sources of emissions and the physical and transition risks it face in its current state of operations.Capital expenditure (CaPex) is a measure of the value of purchases of fixed assets, such as property, buildings, an industrial plant, technology, or equipment. Alternatively, CapEx is any type of expense that an entity capitalises, or shows on its balance sheet as an investment, rather than on its income statement as an expenditure. (Source: CDP)

Key sensitivities and risks will be specific to the entity, depending on their activity, size, and location among other factors. At a minimum, consideration should be given to key sensitivities and risks relating to:

Policy and regulatory change e.g., how policy and regulatory change will subsidise the cost of investments
Technological developments e.g., reliance on new technologies and the timing and cost of their roll out
The physical impacts of the current and forecast changing climate e.g. how changing precipitation patterns and may impact access to water required for operations
Shifts in client and consumer demand e.g. the level of demand for products or services that the entity is not currently providing
Operating environments change e.g. decarbonisation of the grid
Supply chain considerations, scarcity/prices of key inputs

Broader social and environmental alignment

A summary assessment of the negative environmental or social externalities related to delivering the vision and strategic narrative
A summary description of the steps that the entity is taking, or planning to take, to mitigate those impacts
A summary description of how, if at all, the decarbonisation transition contributes to the just transition in the region in which the activities are carried out

A climate strategy should be focused on net zero targets and therefore, should be aligned with addressing climate-related risks and opportunities. In turn, this should be a part of the wider entity strategy. Strategy development should focus on decarbonisation activities, value chain management and targeted measures to improve emissions performances.This is a generic term used to assign a value to a reduction, avoidance or capture of GHG emissions achieved by a certified project. It is equivalent to one metric ton of carbon dioxide equivalent (CO2e). A carbon credit can be used by a business, organisation or individual to compensate their carbon footprint by financially rewarding an activity that has reduced or sequestered GHGs, and which also brings other sustainable development benefits.Emissions scope materiality by sector

The following figure demonstrates the materiality of emissions scopes by sector. This is high level and provides an overview only, with further guidance available from CDP and the GHG Protocol. As shown, scope 3 is material for most sectors and should be included in transition plans where possible.

These targets cover the entire period until the entity expects to reach net zero emissions, with interim performance targets specified that enable regular monitoring and reporting of progress.

Scope 1 emissions are direct greenhouse gas (GHG) emissions that occur from sources controlled or owned by an organisation (e.g., emissions associated with fuel combustion in boilers, furnaces, vehicles)
Scope 2 emissions are indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling
Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organisation, but that the organisation indirectly affects in its value chain (Source EPA)

Disclosures on GHG emissions targets should include:

Absolute gross GHG emissions reduction targets for scopes 1 and 2
Absolute gross GHG emissions reduction targets for scope 3
GHG emissions intensity targets expressed as metric tonnes of CO2 equivalent per unit of physical or economic output for scopes 1 and 2
GHG emissions intensity targets expressed as metric tonnes of CO2 equivalent per unit of physical or economic output for scopes 3
Any additional GHG emissions targets that the entity has set (e.g., methane reduction targets)

Some entities benchmark against National Plans or Nationally Determined Contributions (NDCs); however, national plans/NDCs are often not aligned with a 1.5°C pathway, and greater ambition should be encouraged.

In ASEAN, to keep the Paris-aligned temperature goal within reach, the Southeast Asian region needs to achieve peak emissions as soon as possible after 2030, and net-zero GHG emissions as soon as possible after 2050, according to the 2021 ASEAN State of Climate Change Report.

The 1.5°C pathway is encouraged for issuers seeking to attract international investors and to be benchmarked against international best practices. An entity’s decarbonisation can be mapped against a science-based emissions reduction pathway, aligned with the 1.5°C pathway by 2030.A pathway that shows how the sector will align with the collective goal of keeping global warming below 2°C, and ideally 1.5°C per the Paris Agreement, known as the sectoral green transition pathway. While the definition of Paris Agreement-aligned will vary from one sector to another, nevertheless, it remains consistent that each sectoral pathway does not merely reflect a sector average or best-in-class performance. Instead, it represents absolute, forward-looking, technologically feasible pathways that ensure the sector aligns with the overarching net-zero emissions economy goals. A set of entity-specific metrics and targets selected by the entity to describe how and when the entity will catch up with/follow/outperform that sectoral green transition pathway.

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Post published:March 1, 2024
Post category:Uncategorized
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