A climate-related transition plan is one of the most significant disclosures an entity can make under IFRS S2. This lesson covers what a transition plan must contain, what IFRS S2 requires if you have one, and (critically) why the standard does not require entities to have one at all.
Listen to this lesson (podcast-style overview)
What is a Climate-Related Transition Plan?
IFRS S2 Appendix A defines a climate-related transition plan as an aspect of an entity's overall strategy that lays out the entity's targets, actions, and resources for transitioning toward a lower-carbon economy, including actions such as reducing its GHG emissions.
Several elements of this definition are important:
- It is an aspect of overall strategy, not a standalone document separate from the business
- It must include targets (where you are going), actions (how you will get there), and resources (what you are committing)
- It is explicitly about the transition: reducing emissions, adapting the business model, realigning capital
IFRS S2 Does Not Require a Transition Plan
This is one of the ISSB's most significant design choices. IFRS S2 paragraph 14(a)(iv) says: if an entity has a transition plan, it must disclose it. The standard does not require an entity to develop a transition plan.
The Basis for Conclusions (BC46 to BC52) explains the rationale: requiring all entities to have transition plans would extend IFRS S2 beyond its role as a disclosure standard into regulation of business conduct. The ISSB's mandate is transparency, not economic management.
However, the disclosure requirement creates powerful market pressure. An entity that has no transition plan must effectively disclose the absence of one, which investors will note.
IFRS S2's approach to transition plans is like financial statement requirements for research and development: you are not required to do R&D, but if you do, you must account for it properly. The act of requiring specific, detailed disclosure of plans creates accountability even without mandating the plans themselves.
What Must Be Disclosed About a Transition Plan
If an entity has a transition plan, paragraph 14(a)(iv) requires disclosure of:
Key assumptions and dependencies. The plan is not just targets and actions; it must reveal the assumptions on which it is based. For example:
- What policies does the plan assume will be in place? (for example, a carbon price at a certain level by 2030)
- What technologies does it depend on? (for example, carbon capture and storage becoming commercially viable)
- What external partnerships or supply chain changes does it rely on?
- What government incentives or subsidies does it assume?
Disclosing assumptions allows investors to assess the plan's credibility: if the plan depends on technologies that do not yet exist at commercial scale, or on policies that are not yet enacted, that is material information.
Net vs Gross Targets in Transition Plans
If an entity sets a net GHG emissions target (meaning a target that accounts for carbon removals or offsets), it must also disclose the gross GHG emissions target underlying it (Basis for Conclusions BC50). A net target should not obscure the entity's actual emission trajectory.
For example, an entity might have a "net-zero by 2050" commitment where the "net" includes purchasing carbon credits to offset continued emissions. IFRS S2 requires the entity to also disclose:
- What is the gross emissions trajectory before offsets?
- What are the specific gross emissions targets for 2030, 2040, 2050?
This prevents transition plans from overstating progress through heavy reliance on offsets while making limited operational changes.
Progress Reporting on Transition Plans
Paragraph 14(c) requires disclosure of quantitative and qualitative progress on plans disclosed in previous reporting periods. This creates year-on-year accountability.
If an entity disclosed a transition plan in year 1 with specific milestones, it must report in year 2 on whether those milestones were achieved. This is analogous to the way financial guidance creates accountability: once disclosed, it must be tracked.
| Transition Plan Element | Required Disclosure |
|---|---|
| Targets | Specific GHG targets by scope, absolute or intensity, with base year and interim milestones |
| Actions | Planned operational changes, capital investments, technology adoption, supply chain changes |
| Resources | Capital committed, staffing changes, financing arrangements (Para 14(b)) |
| Assumptions | Policy environment assumed, technology availability, external partnerships required |
| Dependencies | External factors the plan relies on (government action, market development, supplier changes) |
| Progress (annual) | Quantitative and qualitative update on prior-period milestones |
Example of a credible transition plan disclosure: A major steel manufacturer with a 2030 50% emissions reduction target discloses its transition plan with these elements:
Targets: Reduce Scope 1 emissions by 50% by 2030 (vs 2020 baseline), with interim targets of 20% by 2025. Scope 2 target: 100% renewable electricity by 2027.
Actions: Three actions described with specific milestones: (1) pilot electric arc furnace at Site A by 2025; (2) full conversion of Site B by 2028; (3) green hydrogen procurement partnership from 2026.
Assumptions: Plan assumes green hydrogen available at 4 EUR per kg by 2026 (currently 8 EUR per kg). Plan assumes EU carbon price of 100 EUR per tonne by 2025.
Progress (current year): Renewable electricity at 62% vs 50% target for 2023; Site A EAF feasibility study completed (on track); hydrogen partnership negotiations initiated (6 months behind plan).
Presenting a Transition Plan Overview in Practice
Companies often present a summarised overview of their climate transition plan in tabular format, showing strategic objectives, key activities, assumptions, dependencies, and resourcing in a single view. This provides users with a high-level snapshot before the detailed disclosures that follow.
Illustrative Transition Plan Overview (electricity generation company):
| Pillar | Key Activities | Assumptions | Dependencies | Resourcing |
|---|---|---|---|---|
| Decarbonise the operations | Scope 1: Upgrade inefficient electricity generation assets to reduce fuel consumption and emissions intensity. Electrify company-owned vehicle portfolio. Scope 2: Procure renewable electricity for offices, depots, and operational sites. Install on-site renewable energy systems. | National net-zero target for 2050 will remain in place. Sufficient availability of renewable generation technologies, storage systems, and skilled labour. Electric vehicle charging infrastructure will support an all-electric portfolio. | Market development and availability of low-emission generation technologies. Availability of competitively priced renewable electricity. | In 2025, key personnel were trained and new staff hired to build capabilities needed to deliver the plan across five business units. From 2025 to 2030, the company plans to allocate a total of CU10-20m towards low-carbon technologies and infrastructure. |
| Support customer transition to net zero | Upgrade transmission and distribution infrastructure. Expand power purchase agreements with large energy users and offer green tariffs to residential, commercial, and industrial customers. Collaborate with technology providers to co-develop new renewable energy generation and battery storage. | Customer demand for renewable energy will steadily increase. Technology and materials to support infrastructure upgrades and new renewable generation projects will be available. | Timely investment in workforce skills to support R&D and deployment of new technologies and infrastructure. Continued clarity and stability in climate and energy policy to unlock investment and maintain stakeholder confidence. | As part of the capital allocation strategy, the company has also used an internal carbon shadow price to guide investment decisions (see Lesson 7.4). |
This type of overview satisfies paragraph 14(a)(iv) by disclosing the plan's key assumptions and dependencies, and paragraph 14(b) by showing how activities are resourced. The detailed targets and progress tracking would then appear in the Metrics and Targets section (Lessons 7.2 and 7.4).
Transition Plan Financial Effects
A credible transition plan disclosure also addresses the financial implications of its key activities. Companies disclose both current financial effects (what has already been spent or earned) and anticipated financial effects (what the transition is expected to cost or generate). This connects the transition plan directly to the financial effects disclosures required by paragraphs 15 to 21.
For example, a beverage company might disclose:
- Energy efficiency upgrades: Invested CU250,000 in the reporting year in energy efficiency and photovoltaic solar infrastructure. Plans to allocate an additional 5% in capital expenditure annually over the next five years.
- Vehicle electrification: Received CU20,000 in government grants to replace four diesel vans with electric alternatives. The additional total cost (excluding the grant) was CU148,000 compared to diesel replacements. Estimates CU670,000 of capital will be needed to replace the remaining 64% of the fleet by 2030.
- Renewable energy transition: Estimates CU500,000-750,000 in capital expenditure across three operational sites for solar panels and related infrastructure over five years.
- Sustainable packaging: Upgrading packaging may result in a 5-15% increase in packaging-related costs annually, subject to material availability and supplier pricing.
This level of financial detail allows investors to assess the feasibility and scale of the transition plan, not just its strategic ambition.
Key Takeaways
- 1IFRS S2 does not require entities to have a transition plan, but if one exists it must be disclosed in full - and the absence of a plan is itself disclosed
- 2Transition plan disclosure must cover targets, actions, resources, key assumptions (policy, technology, partnerships), and external dependencies
- 3Net GHG emissions targets must always be accompanied by gross targets to prevent plans from obscuring actual emission trajectories through heavy offset reliance
- 4Para 14(c) requires annual progress reporting on previously disclosed milestones, creating accountability that prevents entities from quietly abandoning commitments
- 5Disclosing assumptions (e.g. assumed carbon price levels or technology costs) allows investors to independently assess whether the plan is credible