Why transition plans are important – and how to deliver them….

In a recent discussion with a senior business leader we were getting into the debate around how (and if) sustainability is really driving value for the business. With a detailed net zero strategy, a robust set of risk and reporting tools in place, gains made in areas from operations to energy and a drive to incorporate sustainability into products and marketing messages, their view was a lot had been done but it was unclear as to whether real business benefit had been created by doing it. This discussion was happening in the context of the annual planning process where the debate was ongoing as to whether sustainability would be a primary focus for the coming year. The issue was that with significant economic headwinds, supply chain issues, and geopolitical instability with elections in key countries in which the business operated, that other elements needed to come first, i.e. the broader economic stability of the organisation.

My focus for the conversation was that this should not be an either/or discussion but should form a key strand of the broader strategic planning to build on the significant work to date and get the scale benefits they were looking for. ?To do this my recommendation to the team was to build out the transition plan mapping out how the sustainability objectives signed up to by the board would be achieved, but within the context of developing the broader strategic plan. The focus would be on interweaving the sustainability elements in a system thinking based approach into the ongoing and somewhat more traditional strategic planning process to use sustainability as a core driver of future business development and value creation.

In effect what we were looking to do was to move sustainability from a somewhat target led but less formally structured approach into the mainstream of business delivery. For me this is exactly what transition plans can and should be doing.

Before we dive into that, it is worth taking a step back to understand where the transition plan focus came from and the tools and approaches that can be used to support delivery. The journey to where we are today has gone through a few stages of maturity from a start point of building basic understanding of the issues, setting baselines and targets and early experiments usually involving incremental change, to more targeted approaches from energy management to transferring fleets to electric vehicles as technologies get to scale and the economics start to play in a way which is favourable to the business.

Yet the interactive nature of sustainability covering all areas of the just transition (People, Planet and Profit) blending in both risk and opportunity, linking this into a robust set of projects and investments cases, many of which will need to be far more transformational in nature than those applied to date, and then blending those into the broader business direction of travel has generally not been done to date - and this is where transition plans come in.?

Transition plan approaches have also been around for a number of years, but it's only in the recent two to three years that a more standardised approach and formal set of tools has become available. For example, in the UK the development of GFANZ and TPT frameworks is now providing the toolkits to support businesses in developing these plans. These also link into ISSB, TCFD, etc. to build on existing data and structures. Transition plan approaches are also being developed in other jurisdictions for example the G7, G20, US and EU. While there are no formal legal requirements to complete or publish a transition plan yet, we are already seeing governments pushing for voluntary publication with a view to formalising this over time (for example targeting 2026 in the UK). In the context of creating greater degrees of clarity around what organisations are doing, making risk identification/investment simpler and pushing back on things like greenwashing, it is unlikely that this direction of travel will change making transition planning something to embrace and get full value from.

So how are we seeing transition plans being applied? In my role as an advisor to several organisations, we're using the transition planning process to move from the somewhat ‘parallel’ approaches (running sustainability alongside BAU) that have been taken to date to building sustainability into the core of how the business runs, including putting in place the rigour that is needed to fully understand the implications to business performance of the pace of change around sustainability. While undeniably this does require additional resource and expertise to deliver, if run in parallel with the broader strategic planning of the business we can leverage a lot of the skills and resources that are already in situ within the business to create a truly integrated approach while streamlining cost and driving pace of delivery.

For some of the organisations that have publish early iterations of transition plans, what has been done is simply a codification of the strategy and delivery to date with very limited depth on the longer-term transition required – leading (in my view!) to limited additional value delivered for the effort expended. The approach we have been following combines pulling together the existing materials and direction of travel, leveraging a systems thinking based approach to then incorporate all elements of a just transition, reviewing different scenarios for future market development (in general this is actually looking at technology adoption and market change, and combining this with the SBTi pathways) and then creating horizon based approaches for sustainability delivery.

Systemising this early, creating models that can be adapted as the market develops is key. This allows for scenarios to be pressure tested:

-????????????? Simulating varying market scenarios/shocks

-????????????? Changing adoption cycles/costs on enabling technologies

-????????????? Modelling in regulatory change – as the thinking and alignment around the best way to tackle key issues forms

-????????????? Determining transition points: Inflection points at which to shift to new business models and management of stranded assets/write downs

-????????????? Managing key stakeholder changes: From customer sentiment, through investor requirements, to government policy

This is managed by building in a set of assumptions and key risks which underpin the model and can then be flexed. While we simply don’t have all the answers at the moment, we create estimates based on the best available information to fill gaps and then improve on these as we develop the model moving forwards.

The implications of using this approach are that we will need to change the governance approach for managing the transition plan and therefore the broader strategic management of the business. With the constant change in the political, regulatory and market frameworks, a more iterative approach will be needed. This is not creating a dynamic strategy as a lot of the changes we are talking about needs long term approaches to build them out, but simply stress testing the model as we would do with the broader risk approach at regular intervals to course correct as needed.

Organisations will need to also decide on how much they wish to share of the work done as part of their transition planning reporting. The options vary from putting together a ‘minimal’ version of the transition plan to meet regulatory requirements through to being heavily transparent – sharing best practice, shifting entire market sectors, and competing on the speed to market leveraging the ‘first mover’ advantage - but creating a ‘rising tide’ approach that brings the entire industry with you (i.e. acting as the market disruptor).

To sum up, the direction of travel around sustainability is now irrevocable, so what we should be using the transition plans for is navigate the just transition changes in the most cost-effective way possible. Much has been made of the ‘$275 trillion in cumulative spend on low-emissions assets’ in the 麦肯锡 October 2023 but as the team at McKinsey pointed out, a lot of this isn’t ‘new’ spend, but is investing in technologies and market approaches to drive business performance. This is about being thoughtful on what to invest in and when, managing assets through asset replacement strategies that play to technology/market development and using sustainability as a competitive advantage rather than waiting for it to be a cost that will be imposed later.

?Transition plans are an essential enabler of this change….