Climate and sustainability reporting for financial services has undergone significant transformation over the past decade. Regulators are increasing their focus on quality, transparency and alignment of non-financial reporting, which has driven creation of interoperable regulation and broader supervisory mandates for greenwashing risk. Alongside expansive regulatory developments like the Corporate Sustainability Reporting Directive (CSRD), new standard-setting players such as the Transition Plan Taskforce (TPT), the Taskforce on Nature-related Financial Disclosures (TNFD) and the Taskforce on Inequality and Social-related Financial Disclosures (TISFD) have emerged, setting the stage for a new era of sustainability accountability in financial services globally. 

Beyond disclosure requirements, both CSRD and TPT are pivotal in reshaping how financial institutions incorporate sustainability and climate change into their business strategies. It is imperative for financial services firms to both integrate the CSRD requirements for transition planning (where material) and leverage the TPT guidance for credible transition plans. This dual approach will help institutions comply with increasing regulatory demands, as well as future-proof their businesses and strategy as the world transitions to a low-carbon economy. 

Understanding the CSRD and TPT frameworks

CSRD extends beyond traditional sustainability reporting and demands unprecedented levels of non-financial impact, risk and opportunity disclosure. The CSRD disclosure requires double materiality analysis, assessment of value chain impacts, mandated assurance, and mandatory digital tagging. This directive ensures that financial institutions consider and disclose not just how sustainability-related risks and opportunities affect their operations and strategic objectives, but also the financial institution’s impact on people and the planet.

The CSRD adopted 12 European Sustainability Reporting Standards (ESRS). These standards encompass requirements for Environmental, Social, and Governance (ESG) aspects. Under the environmental standards, CSRD mandates disclosure of transition plans for climate change mitigation (ESRS E1-1), as well as biodiversity and ecosystems (ESRS E4-1), where deemed material by the reporting organisation. Sector-specific ESRS are expected in the next few years.

Meanwhile, in October 2023, the TPT released its final disclosure framework – comprehensive guidance for organisations to develop and disclose credible transition plans. In April 2024, it released further sector-specific guidance, including for Financial Services (Asset Managers, Asset Owners, and Banks). In alignment with global sustainability standards like the Task Force on Climate-related Disclosures (TCFD) and International Sustainability Standards Board (ISSB), the TPT framework encourages and helps organisations to shape and communicate their strategies for achieving decarbonisation, managing climate-related risks, and contributing to a global transition.

Leveraging synergies of CSRD and TPT frameworks to future-proof business strategy

For financial institutions already navigating the complexities of CSRD reporting, the TPT framework offers valuable guidance that can enhance the quality of transition-related disclosures and future-proof an organisation’s climate-related objectives and strategy. Here are six actions we believe firms should take:

1. Align CSRD and TPT strategy

By aligning CSRD reporting requirements with the framework provided by TPT, financial institutions can adopt forward-looking, strategic and holistic sustainable practices that are integrated into their business models, achieving buy-in at all levels across the firm and value chain. This strategic alignment helps future-proof business operations against long-term changes in environmental conditions and the institution’s own commitments, making sustainability a core component of corporate strategy.

2. Streamline cross-functional programmes

Implementing the requirements of both TPT and CSRD requires a significant cross-functional effort and implementation programme to establish and report on the climate strategic ambition. Organisations will have to engage multiple functions to assess impact and make changes to operational models, with a focus on data, controls, systems and governance structures. Engaging these functions early and ensuring operating models are flexible and adaptable to both CSRD and TPT reporting requirements is the most effective and efficient approach. This streamlines and prepares internal processes and capabilities to respond to the ever-evolving regulatory demands.       

3. Create a clear engagement strategy

Engagement with stakeholders is a crucial element of CSRD’s value chain analysis. TPT’s framework on stakeholder engagement encourages companies to align engagement with their set strategic ambition. By utilising TPT’s guidance on a targeted engagement approach, institutions can ensure that CSRD’s value chain analysis goes beyond a ‘tick-the-box exercise’ and aligns with the requirement to inform the double materiality assessment.   

4. Embed climate plans into finance processes

TPT guidance encourages and helps companies embed climate plans into their financial planning processes. It helps evaluate how a company’s transition plan impacts its financial performance over the short, medium, and long-term. The TPT framework is complementary with CSRD’s double materiality requirements as both encourage firms to assess financial risks, opportunities and impact on the organisation and to optimise the existing decision-making

5. Think about how to build investor confidence

Both CSRD and TPT focus on providing stakeholders, particularly investors, with clear and reliable information. Complimenting CSRD’s rigorous disclosure requirements with actionable and credible transition plans informed by TPT’s guidance will foster investor confidence and could lead to more favourable financing conditions.

6. Drive future regulatory alignment

The comprehensive nature of the TPT guidelines will help institutions meet rigorous CSRD requirements as well as prepare for other upcoming regulatory expectations, such as the Financial Conduct Authority’s (FCA) plans to incorporate TPT into the Listing Rules by 2025. Early adoption and alignment of these frameworks will ensure institutions are well-prepared for upcoming regulatory changes, providing a competitive edge in the market and mitigating risk of non-compliance.  

The role of scenario analysis in drafting robust transition plans

Our experience in working with financial services firms on CSRD programmes has shown that drafting credible transition plans as part of wider organisational change and scenario analysis implementation is crucial, with most stakeholders identifying it as the next key priority for their organisations.  

One of the key challenges identified by our clients is creating a transition plan that is both robust and achievable. Such a plan must consider the decarbonisation trajectory of relevant geographies and sectors, enabling institutions to forecast external factors that affect their exposure to climate-related risks, while also identifying climate-related opportunities to incorporate into their strategy and decision-making.  

CSRD explicitly requires institutions to assess climate-related risks and opportunities using scenario analysis - an essential tool for evaluating decarbonisation trajectories and their impact on organisations. However, despite an uptake in its usage, a common challenge remains: a lack of credible scenarios that depict the most likely trajectory of a global transition. It is crucial for institutions to develop robust, tailored, real-world transition scenarios to identify the realistic climate-related risks and opportunities.   

Creating realistic scenarios (such as Baringa’s Base Case scenario) produces actionable insights across technologies, sectors and geographies. These insights can directly feed into company strategy, helping identify the largest sustainable finance opportunities for the next decade, as well as enhance the relevance and impact of the institutions’ transition plans.  

Next steps

The evolving landscape of climate and sustainability reporting, driven by the CSRD and TPT frameworks, represents a pivotal shift for financial services. By integrating these guidelines, financial institutions can meet disclosure requirements, embed sustainability into their strategic and operational frameworks, and enhance regulatory compliance whilst building resilience against future environmental and economic challenges. Early preparation is crucial to ensure smooth implementation, adapt operational models, engage stakeholders, and refine strategies.  

For financial institutions, the emphasis on credible transition plans, robust scenario analysis, and stakeholder engagement will be instrumental in driving sustainable growth and securing investor confidence.  

To learn more about how Baringa can help you effectively address regulatory requirement such as CSRD, prepare credible transition plans and navigate this complex, yet crucial, transformation whilst capturing transition-related opportunities, please get in touch with us.

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