In 2023 and 2024, we witnessed a focus on net zero transition planning and transition finance, recognising the need to scale capital flows not only into green finance and projects, but also in moving sectors away from a dependence on fossil fuels towards a net zero economy. We saw the publication of frameworks and guidance to support the use of transition plans by corporates and institutions, to promote consistent disclosure and improved credibility around the implementation of net zero goals and targets, whilst attempting to minimise global fragmentation in requirements. We also saw transition finance being increasingly discussed with countries such as Japan actively encouraging deployment of transition finance products in their economies. We also saw attention drawn to nature-related transition plans in the final quarter of 2024.
Below, we review developments in 2024 and will bring you further news of developments in transition finance and transition planning throughout 2025. Stay up to date on ESG regulatory and transition-focused developments by signing up to our ESG Regulatory Alert tool here.
1.1 UK: Transition Finance Market Review – catalysing transition finance
January 2024 brought the formal launch of the Transition Finance Market Review (TFMR). The TFMR was commissioned by the UK government in response to the feedback to the Green Finance Strategy call for evidence. Its objectives were to consider how the UK financial and professional services could become a leading hub for transition finance services and help companies to align investment and funding with credible net zero pathways.
- December 2023: TFMR terms of reference published.
- January 2024: TFMR officially launched.
- 14 March 2024: TFMR published a Call for Evidence. Read more here.
- 17 October 2024: Report and recommendations of TFMR published (the Final Report).
The TFMR Final Report sets out a blueprint for a transition finance market that will provide capital to support decarbonisation pathways and bolster finance flows to support the UK’s net zero transition. The TFMR marks a move away from a sole focus on green finance and recommends enabling policies which incentivise investment in transition activities and the development of ‘clear and robust sectoral decarbonisation pathways’, supported by clear and credible corporate transition plans. The high level intention is to create a system which rationally devolves the UK’s Nationally Defined Contributions (NDCs – essentially the country-level commitments) down through sector transition pathways and from there onwards into individual business plans. The proposals include the establishment of three bodies:
- The Transition Finance Council (acting as a central hub for transition finance thought leadership in the UK and providing a governance and delivery function for tracking and implementing the recommendations of the TFMR and periodic reporting on the recommendations’ implementation);
- The Net Zero Council (developing sector pathways and feedback on policy enablers and blockers); and
- The Transition Finance Lab (developing financing structures and feedback on policy enablers and blockers). Read more here.
In her Mansion House speech in November 2024, the Chancellor of the Exchequer, Rachel Reeves, said that she wanted London to become a global hub for financing the energy transition. Energy transition is clearly only a part of overall net zero transition but the political reality means that this agenda is being shaped with the driving motivation of energy transition at its core. Read more here.
1.2 UK Finance Report: Unlocking the SME Net Zero Transition
On 14 May 2024, UK Finance published a report analysing the challenges that small and medium-sized enterprises (SMEs) face in the transition to a net zero economy. UK Finance reports that 99% of UK businesses are SMEs and although they have relatively low carbon footprints individually, together they are responsible for between 43-53% of UK businesses’ greenhouse gas emissions.
The report makes ten recommendations to address the following three main barriers which were identified as preventing SMEs from taking greater sustainability action:
- Lack of time, capacity and information;
- Lack of finance to respond to SME needs; and
- Policy gap for sustainability and SMEs.
The recommendations, which are targeted at policymakers, financial services and businesses, seek to create the conditions to support SME action aligned with the UK’s net zero goals and include:
- Addressing lack of time and capacity by providing mentoring from banks, the government relaunching the UK Business Climate Hub and provision of training, resources and support from larger businesses to smaller ones;
- The finance sector responding to SME needs by producing guides to help SMEs understand where spending on sustainable action makes financial sense, government “Help to Green” vouchers being offered and the British Business Bank using all available funds and schemes to encourage carbon reduction activity amongst SME businesses; and
- Government, devolved administrations and local authorities need to address the policy gap by publishing sector-specific regulatory readiness guidance and timelines, so that SMEs know how to plan and can obtain some strategic certainty.
2.1 UK: TFMR – the need for transition plans
Above we referred to the TFMR’s Final Report which set out the TFMR’s blueprint for turning the UK financial and professional services into a leading hub for transition. In addition to the need for finance at activity-level, the TFMR acknowledges that entity-level transition finance is crucial. To support corporates in aligning their funding and investments with net zero pathways, the TFMR recognises that clear and credible corporate climate transition plans are crucial. Transition plans form an important part of the transition strategy set out in the TFMR.
Why are transition plans so important? The Transition Plan Taskforce (TPT) and the EU Corporate Sustainability Due Diligence Directive both underline the importance in helping to manage the risks and opportunities of the transition as well as monitoring overall effectiveness at a business, investment and country level. Transition plans are essential to support financial institutions’ capital allocation and pricing decisions. The information contained within them is expected to drive stewardship and engagement from financial institutions as they strive to meet their own targets and transition goals over time. Read more here.
2.2 EU: ESMA publishes report on Trends, Risks and Vulnerabilities
On 29 August 2024, ESMA published a risk report reporting on trends, risks and vulnerabilities, including a section on transition finance: ‘Rocky road to financing the transition’.
It notes that there are concerns about mobilising enough private capital to finance the transition to net zero. It cites political pressure as a driver for cautious implementation of ESG (especially in the US) and financing net zero and it notes that this has impacted the ability to bring about change through shareholder engagement. It also highlights fears about firms’ abilities to adapt business models and activities. It identifies the importance of transition plans to change this narrative and ‘steer broader investor willingness’ to mobilise capital for the transition as transition plans could ‘play an important role in establishing clear strategic priorities and identifying relevant information to collect internally’.
Although this report was published nearly a year ago, the trends have continued into 2025, with geopolitical pressures continuing to play a strong role in shaping the role of ESG in finance.
2.3 EU: EFRAG published draft implementation guidance for transition plans for climate change mitigation
On 4 November 2024, EFRAG, the private association mandated by the European Commission to provide technical advice for the European Sustainability Reporting Standards (ESRS), published draft implementation guidance on climate change mitigation transition plans (Transition Plan IG) focused on clarifying transition plan disclosure requirements under ESRS E1.
The cover note issued with the draft Transition Plan IG outlines that:
- the draft reflects an early stage of the development of EFRAG position on transition plans for climate change mitigation;
- the objective is to finalise version 3 of the Transition Plan IG by the end of 2024 and launch the public feedback period in early 2025.
In the EFRAG SR TEG meeting on 21 January 2025, timing was discussed in the context of the omnibus simplification package. The meeting was to approve the Transition Plan IG and clarified that there are three workstreams: the EFRAG Transition Plan IG, reference practices and clarification of 1.5 degree compatibility from the European Commission. EFRAG approved and published a revised draft of the Transition Plan IG on 23 January 2025. In the TEG meeting, the timeline was discussed ad a consultation was expected from mid-February to April but no further drafts or consultations seem to have been issued, perhaps due to the uncertainties around the changes to the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive. The EFRAG website states that “EFRAG is currently working on an IG on transition plans”.
In the TEG meeting it was also mentioned that the ISSB planned to start a project to adapt the TPT framework into its own educational materials and that this was expected to start in April 2025 and conclude in July 2025.
2.4 International Transition Plan Network (IPTN) launched
The International Transition Plan Network (ITPN) was launched at COP 29 in November 2024 “to support the development of global norms for transition plans by the private sector and to support climate policy that makes best use of transition plans”.
It is a membership network bringing the official and private sectors, civil society and academia together for informal dialogue to support new partnerships and avoid global fragmentation of approaches to transition plans. The members include official sector members, such as ministries, regulatory bodies and international regulatory forums, standard setters and the private sector (which is represented by private sector representative networks).
2.5 Nature transition plans
(a) TNFD publishes a discussion paper on Nature Transition Plans
On 27 October 2024, the Taskforce on Nature-related Financial Disclosures (TNFD) published a discussion paper on nature transition plans. The main focus until this point has been on climate mitigation transition plans – effectively moving corporate towards net zero – but this paper discusses how nature can be incorporated into a transition plan, recognizing the dependence of companies on nature and how nature-related impacts, risks and opportunities need to be considered and built into organisation’s business strategy.
The TNFD discussion paper sets out draft guidance for financial institutions and corporations that are developing and disclosing their nature transition plans, including a nature transition plan should include and how a plan should be presented and disclosed. They recognize that this may be separate to climate mitigation planning in the beginning but envisage that organisations will move towards integrated plans including nature and climate over time, recognizing the strong interlinkages between the two.
The draft guidance builds on the best practices for climate transition planning and is structured around the same five themes as recommended by GFANZ. It covers all aspects of nature apart from climate change and greenhouse gas emissions as drivers of nature loss and natural carbon stocks (which are covered by GFANZ guidance from October 2024, see below). The TNFD published its Discussion Paper on Nature Transition Plans with draft guidance for corporates and financial institutions on nature transition planning in February 2025.
(b) GFANZ publishes Nature in Net-Zero Transition Plans consultation paper
In October 2024, the Glasgow Financial Alliance for Net Zero (GFANZ) published a workstream consultation paper Nature in Net-Zero Transition Plans which supplements the guidance provided in Financial Institution Net-zero Transition Plans report (November 2022).
The proposed guidance is entirely voluntary and sets out opportunities to use nature to mitigate greenhouse gas emissions as well as opportunities to support emissions reductions and sequestrations. These activities (nature-related levers) expand the toolkit for financial institutions to achieve their net zero commitments and identify additional net zero financing opportunities. The consultation paper “addresses the distinctive characteristics associated with nature sources and sinks and how these might be included in [a net zero transition plan]”.
We note that on 31 January 2025, GFANZ announced that it has paused work on nature-related transition planning to shift its focus to addressing barriers to mobilizing capital.
We will publish briefings during 2025 to keep you up to date with matters relating to transition plans and transition finance. To read all issues of Transition Focus articles, visit our ESG regulatory alerts tool.
