Based on existing initiatives and good practices, the 2022 OECD Guidance on Transition Finance sets out ten key elements of credible corporate climate transition plans, which aim to align with the temperature goal of the Paris Agreement (OECD, 2022[1]). The Guidance proposes that transition finance must be grounded in credible corporate climate transition plans, to be effective in mobilising investments for the net-zero transition, while ensuring environmental integrity and preventing greenwashing.
The ten key elements are the following:
1. Setting temperature goals, net-zero, and interim targets: a corporate transition plan will clearly set out and explain its net-zero target and associated interim targets. Net-zero and interim targets will be science-based, consistent with an IPCC 1.5°C reference scenario, and cover all relevant greenhouse gas (GHG) emissions. Interim targets will reflect the need for global GHG emissions to peak by 2025. In certain justified circumstances, companies may choose reference scenarios consistent with limiting warming to below 2°C.
2. Using sectoral pathways, technology roadmaps, and taxonomies: Net-zero and interim targets will be based on available sectoral pathways, technology roadmaps, and taxonomies, where these are available. The plan will clarify how future operating and capital expenditures will be allocated to achieve these targets.
3. Measuring performance and progress through metrics and key performance indicators (KPIs): Climate change mitigation-related metrics and KPIs will cover lifecycle GHG emissions and be measurable and externally verifiable. Targets and reporting will include scope 3 emissions, and any omissions will be limited, justified, and clearly explained.
4. Providing clarity on the use of carbon credits and offsets: The use of carbon credits and offsets will be limited and carefully explained to mitigate the risk of undermining the credibility of transition plans.
5. Setting out a strategy, actions, and implementation, including preventing carbon-intensive lock-in: A clear strategy and concrete actions will be outlined to achieve the company's targets, including addressing transition risks and opportunities over time. The plan will assess the risk of carbon-intensive lock-in, provide a responsible retirement plan for high-emitting assets where relevant, and establish mechanisms to prevent lock-in for existing and future assets and infrastructures at risk.
6. Addressing adverse impacts through the Do-No-Significant-Harm (DNSH) Principle and due diligence for Responsible Business Conduct (RBC): Transition plans will consider not only mitigation goals but also other environmental and social objectives, ensuring no harm is done to them. Conducting risk-based due diligence based on the OECD Due Diligence Guidance for Responsible Business Conduct (RBC) can operationalise the DNSH Principle within transition plans. This helps companies identify, prevent, mitigate, and account for actual and potential adverse impacts associated with their operations, supply chain, and other business relationships.
7. Supporting a just transition: Measures will be taken to mitigate negative impacts on workers, suppliers, local communities, and consumers, in line with relevant International Labour Organisation (ILO) and OECD principles and guidelines. Credible transition plans involve regular, continuous, and inclusive stakeholder engagement and social dialogue.
8. Integrating with financial plans and ensuring internal coherence: The transition plan will be integrated into the corporate business plan, making explicit reference to the company's financial plan. Both plans will be developed concurrently, ensuring coherence.
9. Ensuring sound governance and accountability: A whole-of-entity approach will be adopted to monitor and report on the design and implementation of the transition plan. The plan will be subject to senior management approval and oversight and involve all relevant stakeholders.
10. Transparency and verification, labelling, and certification: Progress on targets will be regularly disclosed, and third-party verification of the plan and its targets will be ensured.