A Climate Transition Plan (CTP) is a strategic summary of how businesses intend to transition to a sustainable economy and align their business operations with global climate goals, particularly the targets set by the Paris Agreement. This work is required by the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standard E1 (ESRS E1).
The CSRD embeds the concept of double materiality, meaning companies must assess how their activities impact the environment and society (outside-in perspective) and how environmental changes affect their business operations (inside-out perspective). This dual focus underpins a company’s Climate Transition Plan, which acts as a summary for many of the other key decarbonisation-focused disclosure requirements in ESRS E1, the specific standard focused on climate change.
Core components of a climate transition plan
Climate Transition Plans (CTPs) will likely be the most important document that key stakeholders look at to judge how seriously companies are taking climate action. It will be easy to separate those well prepared from those papering over the cracks and planning for business as usual.
The CTP is in many regards a summary of key decarbonisation-related disclosure requirements from the rest of E1. Already from this point, it becomes quite complex: The plan brings together the foundational elements from the ‘Metrics and Targets’ section: E1-4 GHG targets (which in itself requires full knowledge of E1-6 scopes 1-3 emissions), together with a summary of Polices and Actions (E1-2 and E1-3).
The CTP then compliments this mix by including some more information about locked-in emissions as well as information about how the plan will be financed and integrated into overall business strategy and financial planning. The CTP is therefore not the starting point for companies taking climate action, but the finishing point so to say.
Now, let’s look at what is required before turning to the key challenges these requirements pose.
1. Targets
- Companies must disclose how their GHG emission targets are compatible with limiting global warming to 1.5°C, in line with the Paris Agreement. This includes explaining if the company is excluded from EU Paris-aligned benchmarks, which are key to demonstrating alignment with climate goals.
- More detailed requirements for how targets should be set are found in E1-4, for example: Companies should have targets for 2030 and for every 5-year period after, up to 2050, ensuring traceability over time.
- Setting targets clearly requires that companies also have conducted corporate carbon footprint with scopes 1-3. This is further detailed in E1-6.
- Although not explicitly referenced, setting SBTi-approved targets is one way to ‘easily’ meet the criteria set out here. Companies not using the SBTi framework will have more of a burden demonstrating how the targets align with a 1.5-degree scenario.
2. Actions
- The CTP must specify key decarbonisation levers, which could involve changes in products and services, shifts in operational processes and deeper engagement across the value chain.
- Specific actions may include energy efficiency improvements, transitioning to renewable energy, and reducing emissions across scope 1, 2, and 3 categories (direct, indirect and value chain emissions).
- It is essential to explain how these actions are being funded, particularly referencing Taxonomy-aligned CapEx (capital expenditures related to climate change activities). The EU Taxonomy sets clear criteria for which economic activities qualify as contributing to climate goals.
3. Potential Locked-in GHG Emissions
- Companies need to assess the potential locked-in emissions from key assets and products. Locked-in emissions refer to future emissions that are unavoidable due to current investments in high-carbon infrastructure or products.
- This step ensures that companies are not only focusing on short-term gains but also mitigating future climate risks linked to long-lived assets or carbon-intensive practices.
4. Taxonomy Regulation
- The CTP is also where companies make specific reference to the EU Taxonomy, which defines criteria for activities contributing to climate mitigation or adaptation.
- Where relevant, the CTP should explain objectives or plans for aligning CapEx and OpEx with the Taxonomy's climate criteria.
- Companies must disclose whether they are investing in sectors like coal, oil, and gas, which are scrutinised for their high carbon emissions. Any significant expenditures in these sectors must be reported transparently.
5. Strategic Alignment
- The CTP must be fully embedded in the company’s business strategy and financial planning. Companies need to show how the transition to low-carbon operations is central to their overall strategy, rather than a peripheral concern
- The CTP should have explicit backing from top management, with key milestones for climate action clearly reflected in executive decision-making processes.
- Companies should explain the progress in implementing the transition plan every year.
Key Challenges
It is important to be aware of and understand key implementation challenges for creating and implementing a Climate Transition Plan. The challenges of revisiting and adjusting targets, ensuring adequate investment, aligning decarbonisation actions with business strategy, transforming business models, and tackling value chain emissions are all interrelated and require a well-coordinated, cross-functional approach. Below are more detailed insights into each of the key challenges:
1. Revisiting targets
Many companies have set high-level targets (e.g., achieving net zero by 2030 or 2040) without fully assessing the feasibility of these goals. Overly ambitious targets can be problematic if the company lacks the necessary technologies, capital or organisational capacity to achieve them. On the other hand, some companies may have set targets that are too conservative, failing to meet the bar of being compatible with limiting global warming to 1.5°C in line with the Paris Agreement.
Targets should be revisited regularly (every 5 years after 2030) to reflect new socio-economic changes, and every year companies must explain how their targets are compatible with the limiting of global warming to 1.5°C in line with the Paris Agreement.
2. Investment planning and capital allocation
Achieving climate targets often requires strategic investment planning. Companies may need to invest in renewable energy, energy efficiency technologies, and decarbonisation of supply chains, among other initiatives. For many firms, especially those in capital-intensive industries, this can strain financial resources and may require reallocation of funds away from traditional business activities.
There is often a tension between long-term investment in sustainability and short-term financial performance. This is particularly relevant for publicly traded companies that face pressure from shareholders to deliver quarterly profits. Companies must balance the need for sustainable investment with maintaining financial health in the short term.
3. Achievability of decarbonisation actions
Implementing decarbonisation actions often involves complex technical challenges. For example, shifting from fossil fuels to renewable energy sources, retrofitting existing infrastructure, or adopting low-carbon technologies in manufacturing processes, all of which require expertise, technology investment, and sometimes large-scale operational changes. Companies must ensure they have the necessary technical knowledge or partner with specialised firms to achieve these changes.
The success of a Climate Transition Plan requires collaboration across various departments such as procurement, legal, product design, and R&D. This level of cross-functional coordination can be challenging, particularly in larger organisations with complex hierarchies or siloed structures. Change management practices must be integrated into the CTP to facilitate effective implementation across the business.
For multinational companies, achieving consistency across regions can be particularly difficult. Regulatory requirements, technological availability, and even consumer expectations can vary significantly between countries, meaning that global companies must navigate different climate action frameworks while maintaining coherence in their overall strategy.
4. Strategic alignment & stakeholder engagement
A company’s existing business model may need to undergo transformation to align with a low-carbon economy. This could involve shifting from high-carbon products (e.g., fossil fuel-based goods) to greener alternatives (e.g., renewable energy products), which may disrupt established revenue streams. For some companies, this transformation could be particularly challenging if their core business is carbon-intensive.
External stakeholders—including investors, customers, and regulators—may place pressure on companies to prioritise short-term financial performance over long-term sustainability goals. Investors seeking immediate returns may be resistant to investments in sustainability projects that offer long-term benefits but require upfront capital or operational changes. Conversely, sustainability-conscious stakeholders may expect faster action than a company is prepared to take. Balancing these competing interests requires careful strategic planning and engagement with stakeholders to align on long-term priorities.
5. Value chain complexity
For many companies, especially in industries like manufacturing and consumer goods, most of their emissions occur outside their direct operations—in their supply chains (upstream) or product use and disposal (downstream). Managing emissions across these segments is extremely complex, as it often involves third parties over which the company has limited direct control.
- Upstream challenges: Companies may source materials or products from a variety of suppliers, some of which may be in regions with lower environmental standards. Ensuring supply chain transparency and holding suppliers accountable to climate goals requires substantial effort in supplier engagement, monitoring and contractual agreements
- Downstream challenges: The use of a company’s products by consumers can also contribute significantly to emissions. For example, a manufacturer of electronic devices may have to account for the energy consumption of its products during their use phase. Reducing downstream emissions might require redesigning products to be more energy-efficient or influencing consumer behaviour towards more sustainable usage
- Data collection and transparency: Gathering reliable data across the value chain remains a significant hurdle. Companies often face a lack of transparency from suppliers and partners, particularly in complex, multi-tiered supply chains. This lack of data can make it difficult to accurately assess the emissions embedded in products or services, and it complicates the reporting process under ESRS E1. Overcoming this challenge requires building strong data-sharing frameworks and establishing trust-based relationships with value chain partners.
As we stated initially, Climate Transition Plans (CTPs) will likely be the most important document that key stakeholders look at to judge how seriously companies are taking climate action.
Fully understanding the requirements and the challenges these pose to companies, it a critical first step.
The next step, naturally, is working to overcome the challenges and begin crafting the actual transition plan for your company’s effort in relation to climate action and mitigation. For that, we have developed a 4-step approach to guide you work efficiently forward. Explore our approach to climate transition plans here.
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Patrick Moloney
Global Service Lead, Sustainability Consulting & ESG
+45 51 61 66 46
Jack Robinson
Associate Manager
+45 51 61 05 75