First, a few words about regulatory chaos. Article 19a(1)(a)(iii) of the CSRD Directive refers to the need to report on the transition plan to a sustainable economy. The ESRS standards define two separate concepts: transition plan and climate change mitigation transition plan. Most often, discussions with experts involved in sustainability reporting concern the latter plan, as the disclosure requirements are described in detail in disclosure requirement E1-1. However, we also have disclosure requirement E4-1 concerning the transition plan for biodiversity and ecosystems and the integration of biodiversity and ecosystems into the strategy and business model. On top of that, we have the CSDDD directive, which in Article 22 refers to the climate change transition plan. In the English original, the plan in the ESRS standards and the one in the CSDDD have the same name: transition plan for climate change mitigation – so it's the same thing, unfortunately the European Commission's translation services have once again failed to impress.
The Due Diligence Directive requires companies covered by it to adopt and implement a transition plan to mitigate climate change – so we have an obligation to take specific actions. The CSRD Directive and, following it, the ESRS standards do not require any action, they only contain reporting obligations. All elements of disclosure requirement E1-4 described in paragraph 16 of ESRS E1 apply only when such a plan exists. If we do not have a transition plan, we use the provision of paragraph 17: we disclose whether we intend to adopt such a plan and, if so, when.
In addition to the confusion in the regulations themselves, we also unfortunately have disorder in the area of support for companies. Creating transformation plans and reporting on them is complicated, so on the initiative of the European Commission, work is currently underway on documents to clarify these tasks. Unfortunately, instead of a coherent approach, we will receive three (actually four) documents:
- EFRAG is currently working on implementation guidance for reporting on climate change mitigation transition plans. The document will be divided into two parts: one will deal with the creation of such transition plans, and the other with reporting on them.
- The Platform on Sustainable Finance is working on a report that will explain what characteristics an investment plan should have in order to be considered climate-friendly.
- The European Commission will develop Practical guidelines for the transition plan, as required under Article 19(2)(b) of the Due Diligence Directive.
All documents will be published at different times. All will concern the same thing, namely transformation plans for mitigating climate change – creating them and reporting on them. Good luck to anyone who will be able to navigate these documents efficiently in the coming years. Last week, during a joint meeting of the Sustainability Reporting TEG and the Sustainability Reporting Board, attended by the chair of the Platform on Sustainable Finance and representatives of the European Commission, I pointed out that such a fragmented approach to the issue of transition plans is a waste of resources for each institution and will introduce chaos and cause additional difficulties for companies.
One more aspect is worth noting. All funds have been allocated to implementation work on transformation plans for climate change mitigation. And where is the issue of just transition, i.e., a just transition? Where are the transition plans for biodiversity and ecosystems? Where are the plans for the transition to a circular economy? Sustainable development is a complex system consisting of interrelated issues and cannot be approached by focusing on just one aspect, i.e., decarbonization alone.
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