What is a climate transition plan?
A climate transition plan sets out an organisation’s interim and long-term emissions reduction targets and outlines the strategies and measures to meet those targets. It can also include other climate-related issues such as governance, a just transition and scenario analysis.
Why are lenders setting expectations for customer transition plans?
Customer transition plans demonstrate a commitment to sustainable business practices and risk management protocols, which can contribute to a company’s long-term financial stability and resilience.
They are also used by banks to engage with customers as part of the Net Zero Banking Alliance (NZBA), an industry-led and United Nations-convened project which seeks to align lending and investment portfolios with net-zero emissions by 2050.
NAB became a signatory to the NZBA in 2021.
What should a transition plan include?
While there is no widely accepted global standard as yet, the Transition Plan Taskforce in the UK has published a sector-neutral framework for high-quality transition plans.
The October 2023 framework says a good-practice transition plan should include the following: high-level ambition to mitigate climate change risks and leverage opportunities; short, medium, and long-term measures to achieve the company’s strategic ambition and how they will be financed, and governance and accountability mechanisms, including robust periodic reporting.
Why are transition plans necessary?
The Investor Group on Climate Change, the leading climate-focused global network of institutional investors with $30 trillion in assets under management, says companies need to provide investors with credible transition plans if they want to retain and attract quality, long-term capital.
A large share of the investment required to meet net-zero emissions must come from emissions-intensive companies, which have the responsibility as well as the capacity to cut their emissions.
Investors therefore want to be able to differentiate between companies navigating a long-term, credible transition and those taking a business-as-usual approach or where their actions and plans aren’t consistent with their public statements or ambitions.
Which companies will be required by NAB to produce a customer transition plan?
NAB says in its latest Climate Report, issued in November, that the transition varies from customer to customer. However, the bank’s initial focus is on major customers in fossil fuel sectors served by the Corporate and Institutional Banking (CIB) business unit because of the scale and impact they can bring to the transition.
From 1 October 2025, the bank says it will require a transition plan to be in place for new or renewed corporate lending, or project-level lending, for certain CIB customers. These customers include those in oil and gas, metallurgical coal and in power generation, where 25 per cent or more of the electricity generated by the customer is from thermal coal.
What about other sectors and exposures?
NAB says transition plans may be required for other sectors and exposures in other business units as the bank sets further decarbonisation targets.
This would also depend on the introduction of Australian Sustainability Reporting Standards, and the expected phased approach for mandatory climate-related disclosures including transition plans.
How will NAB assess customer transition plans?
In developing a framework, the bank says it expects to include elements such as relevant Scope 1, Scope 2 and Scope 3 emissions disclosures; interim and long-term targets and alignment to scenarios consistent with the Paris Agreement; measures to meet the targets, including, where appropriate, capital expenditure, and details about the customer’s level of reliance on offsets and future technology developments.
What happens if the transition plan falls short of NAB’s expectations?
If a customer transition plan would make it difficult for NAB to meet its stated decarbonisation targets for the sector on a portfolio basis, the bank says it will “engage with the customer to review any areas of concern”.
If necessary, the bank says it will “consider contractual protections or reduce our exposure”.
How will NAB’s requirements evolve?
As government requirements and industry obligations on companies change, NAB says it will seek to harmonise its expectations of customers to reduce complexity and expense.
“NAB also recognises that its approach may need to evolve over time, to reflect advancements in technology and science, and improvement to the accuracy of data and information provided by customers, on which the bank relies,” the Climate Report says.
How prevalent are climate transition plans?
Net zero commitments are a critical step towards reducing Australian and global emissions, according to the Australian Council of Superannuation Investors (ACSI), an umbrella group of Australian and international asset owners with more than $1 trillion in funds under management.
ACSI, however, says it’s impossible for investors to assess how a company can reach its net-zero commitment and effectively manage its climate risk without a credible and transparent transition plan.
Last September, Climate Action 100+, an investor-led initiative to help ensure the world’s largest greenhouse gas emitters take necessary action on climate change, released its latest assessments of 14 heavy-emitting Australian companies on their net-zero transitions.
The group said steady progress was continuing. However, while 57 per cent of companies fully disclosed net-zero commitments, only seven per cent had short-term targets to adequately kick-start the transition.
Accompanying transition plans also lacked quantification or capital allocation to align them with pathways to limit global warming to 1.5C, according to Climate Action 100+.