Future Proofing Your Business Through Robust Transition Planning: The Transition to a Climate-Resilient Economy
When future proofing a business, the board has the role of overseeing the development of a strategic and credible plan, with concrete steps in the short and medium term, for how the business will adapt so that it can thrive and be resilient in a low-carbon economy. As simple as it may sound, a transition plan is the output of a deliberate process that breaks down high-level, long-term goals into meaningful and measurable milestones.
Transition planning is fundamentally an exercise of business change and strategy, and it falls squarely within the board’s oversight remit. What the climate transition means for each business will vary, so it requires boards to think strategically about what their businesses need to look like in the future, where they see competitive advantage, and what it will take to achieve the desired transformation.
Drivers for Globally Consistent Transition Plans
Regulators, investors, and G20 leaders, including the US Treasury and the US Securities and Exchange Commission, are calling and converging on the need for globally consistent transition plans. These are necessary to facilitate capital flow into investments and technological advancements that drive decarbonization and resilience across the economy at the required scale and pace. Setting decarbonization targets is simply table stakes; credible and ambitious transition plans to map out the journey to net-zero emissions are becoming the expectation to give investors and other stakeholders confidence about an organization’s resilience and ability to thrive in the future.
Thanks to recommendations from organizations such as the Glasgow Financial Alliance for Net Zero and the Transition Plan Taskforce, there is now broad consensus on the elements of a robust transition plan. These elements include the following:
- Foundation: Setting out the strategic ambition (e.g., net-zero commitments) and the high-level business model and value chain changes needed to support the ambition.
- Implementation Strategy: Elaborating ambition into concrete steps and actions in business operations, products and services, policies and conditions, and financial planning.
- Engagement Strategy: Outlining plans to engage with stakeholders (e.g., value chain, industry and government representatives, other parties in the public sector, interest groups) to support strategic ambition.
- Metrics and Targets: Identifying the business, governance, financial, and greenhouse gas emissions metrics that will be used to drive and monitor progress.
- Governance: Ensuring board and management oversight and accountability of the plan, including alignment of culture, incentives, and organizational capabilities (e.g., structure, skills) to support execution.
The Board’s Role in Transition Planning
There are a few actions boards can take to aid the companies they serve in the transition planning process.
- Ensure strategic alignment. Boards should seek to understand and align with management on what climate transition means for their organizations and how it integrates into the business strategy. This includes ensuring that the necessary analysis is being carried out to provide a full understanding of how climate-related risks and opportunities augment and shape the business strategy.
- Challenge executives on ambition, depth of analysis, and impact. Boards should challenge executives on the company’s strategic climate transition ambition and its enablers, including targets, commitments, underlying assumptions, and external factors. There needs to be assurance that the delivery of the plan will not have any adverse impacts for stakeholders and society.
- Balance pressures and stakeholder demands. Balancing the short-term pressures and long-term interests of the company is delicate and requires the board’s oversight. A strategic, ambitious, and credible transition plan, which hinges on a compelling business case, should help navigate disparate stakeholder demands and reinforce why the business is a good long-term investment.
- Validate interim actions and targets will achieve ambition. Interim targets and actions must be in alignment with long-term strategic ambition. It is necessary for management and boards to ensure that there are clearly defined roles and responsibilities and that they have the necessary skills to achieve their targets. Boards are expected to hold management accountable to connecting interim actions and targets to the end goal.
- Align governance and incentives. Executive incentives and governance structures and processes should be well aligned to ensure there is comprehensive accountability for delivery of the plan.
- Drive a supportive culture. As with any major strategic change, boards should ensure that the culture of their organizations supports the transition strategy. The right culture can be a powerful tool in driving the climate transition, engaging the entire workforce and encouraging effective and courageous climate leadership.
A key aspect of a board’s stewardship role is to ensure the long-term sustainability of a business. Developing a transition plan is not only increasingly an expectation, but also a key strategic tool to build climate resilience and aid engagement with stakeholders, including current and future investors.
The transition to net-zero emissions is not easy. For many organizations, it may be the most disruptive transformation they will experience. Despite inevitable delivery headwinds and geopolitical and economic challenges, boards must challenge executives and maintain momentum amid pressure from regulatory bodies, investors, and other stakeholders. Inaction will cost businesses dearly; proactive businesses will see huge potential for cost reduction, increased productivity, and new commercial opportunities that will shape their success for decades to come.
WTW is a NACD partner, providing directors with critical and timely information, and perspectives. WTW is a financial supporter of the NACD.
Holly Teal is the North America Climate Practice leader at WTW.
Ken Kuk is a senior director of the Executive Compensation and Board Advisory at WTW.
Hannah Summers is a director of the Executive Compensation and Board Advisory and the Climate Practice at WTW.