Climate-related transition plan guidance – Treasury's consultation paper sets out recommended best practice

Climate-related transition plans are an output of the transition planning process and document how entities identify and respond to climate-related risks and opportunities. Although not mandatory, transition plans can provide a useful mechanism for anyone who must prepare sustainability reports to demonstrate how their proposed transition to a low emissions future. They are also being increasingly relied on to guide investment and lending decisions.

To support this, Treasury has released a consultation paper on developing guidance for best practice for climate-related transition plans as part of its commitments under the Sustainable Finance Roadmap. The consultation period runs until 24 September 2025, and Treasury has indicated its intention to publish its guidance to transition planning before the end of the year.

Mandatory sustainability reporting

Amendments to the Corporations Act, which commenced on 1 January 2025, introduced mandatory sustainability reporting obligations for certain entities. A sustainability report forms the fourth of the annual reports which reporting entities must disclose, alongside the annual financial report, directors' report and auditor's report.

The objective of sustainability reporting is to improve the quality, consistency and comparability of climate-related financial disclosures of reporting entities. Climate-related financial disclosure requirements are being phased in for large organisations, businesses and financial institutions for financial years commencing on or after 1 January 2025.

Sustainability reports must be prepared in accordance with section 296D of the Corporations Act and the standards prescribed for that purpose: the AASB S2 Climate-related Disclosures. This was developed by the Australian Accounting Standards Board by incorporating the content of International Financial Reporting Standard (IFRS) S2 and modifying it to take account of the Australian legal and institutional environment.

AASB S2 requires reporting entities to disclose information about climate-related risks and opportunities (if material) that is useful for primary users of general purpose financial reports in making decisions relating to providing resources to the entity. Appendix A to AASB S2 defines these primary users as "existing and potential investors, lenders and other creditors".

The core climate-related disclosures required by AASB S2 fall into four broad categories: governance, strategy, risk management and metrics and targets. While the preparation and publication of transition plans are not mandated under the climate-related financial disclosure regime, it is a requirement of AASB S2 (as part of the strategy disclosures) to disclose information about any transition plans the reporting entity has prepared.

The position in Australia can be contrasted with the EU position. There, the Corporate Sustainability Reporting Directive sets transition plan requirements for large organisations aligned with the Paris Agreement's aim to limit global warming to 1.5°C. Similarly, the UK Government has committed to requiring UK regulated financial institutions and FTSE 100 listed companies to develop and implement transition plans aligned with the Paris Agreement.

The connection between AASB S2 and the proposed best practice for a climate-related transition plan

AASB S2 defines a climate-related transition plan as an aspect of an entity’s overall strategy that lays out the entity’s targets, actions or resources for its transition towards a lower-emissions economy, including actions such as reducing its greenhouse gas emissions. For those entities that have set emission reduction targets, such as under the Science Based Targets initiative (SBTi), transition plans are a logical way to document how the target was determined and the proposed measures to achieve it.

AASB S2 requires reporting entities to disclose information that enables users of general-purpose financial reports to understand the effects of climate-related risks and opportunities on its strategy and decision-making. This includes disclosing information about any climate-related transition plan the entity has, including the key assumptions used in developing the transition plan, and the plan's dependencies.

Importantly, the guidance is not intended to assist reporting entities meet their obligations under the Corporations Act or AASB S2, although there is naturally some degree of overlap between the sustainability reports prepared consistent with AASB S2 and what should be included in a transition plan.

Treasury's design principles for the climate-related transition plan guidance

Treasury has identified four key principles to underpin the guidance to be developed for best practice transition plans:

• Principle 1: Internationally aligned – Treasury proposes endorsing the use of, and the draft guidance is structured to align with, the latest International Financial Reporting Standards Foundation’s Transition Planning Taskforce Disclosure Framework (IFRS TPT Disclosure Framework). The IFRS TPT Disclosure Framework is considered the leading internationally recognised framework for transition plans, is referenced by other guidance materials, and is increasingly used by organisations disclosing and publishing their transition plans. The IFRS TPT Disclosure Framework was also designed to be compatible with and build on the IFRS S2 Climate-related Disclosures, to which AASB S2 is closely aligned.

• Principle 2: Supports domestic decarbonisation and adaptation – The guidance should help organisations understand how they can leverage Australian policies, contribute to achieving net zero emissions by 2050, and strengthen Australia’s climate resilience through their transition plans.

• Principle 3: Balances ambition and flexibility – although voluntary, the guidance will encourage high ambition in transition plans while still being flexible for practices to evolve over time. It also notes that organisations are at different stages of development, and opportunities in certain sectors depends on available decarbonisation pathways.

• Principle 4: Climate first but not only – The draft guidance is primarily focused on climate transition plans, but also recognises that organisations might be seeking to pursue other sustainability objectives, such as social and environmental objectives. Integrating these considerations early can help organisations take a more holistic approach to their climate transition planning.

The areas of the consultation Treasury is seeking feedback on

The final guidance is expected to comprise three sections:

• Introduction – which provides context on the role and benefits of transition plans.

• Transition planning process – outlines the transition planning cycle and international materials for processes to develop transition plans.

• Preparing transition plans – provides Australia specific considerations but follows the structure of the IFRS TPT Disclosure Framework.

It is the last two sections on which Treasury is seeking feedback as part of its consultation process. The consultation paper specifically seeks feedback on a number of issues with respect to these two parts, including but not limited to:

• Transition planning

  • the proposed design principles and whether there are others that the guidance should prioritise;

  • additional considerations that an end user of transition plans would like to see included;

  • whether reporters/users intend to adopt the IFRS TPT Disclosure Framework and/or any alternative frameworks;

  • areas where the guidance should be more prescriptive or flexible; and

  • whether there is a need for further sector-specific guidance, and who is best placed to provide that guidance.

• Plan preparation

  • whether the level of proposed detail is sufficient and if not, what additional advice or detail should be provided;

  • whether the use of case studies or examples may be of assistance in the guidance and if so, potential case studies or examples; and

  • the comprehensiveness and usefulness of the resources and materials listed in Appendix A to assist transition planning by entities.

The consultation paper concentrates its guidance on transition plan preparation, which is largely structured to align with the IFRS TPT Disclosure Framework.

Other climate-transition plan guidance

Last month, the Climateworks Centre also released a credibility guide for corporate climate transition plans, drawing on and consolidating 34 global best practice resources, along with input from leading Australian industry groups and climate transition experts. This guide is referenced in the Treasury consultation paper as a useful resource to support organisation's transition planning.

The guide offers seven credibility criteria (and 31 associated sub-criteria) that companies, investors and governments/regulators can use to develop or assess climate transition plans (and inform policy development and disclosure guidance to ensure alignment with international credibility best practices).

While the criteria set out in the Climateworks guide are focused on fostering credible transition plans, it also offers guidance for enhancing the credibility of other climate-related financial disclosures required by AASB S2.