6.3 Transition planning

Institutions should understand their sensitivity to ESG risks, in particular environmental transition and physical risks, under different scenarios, including those implying higher levels of physical risk or a disorderly transition. Institutions should understand how different scenarios may affect their transition planning efforts.

For the purposes of monitoring and addressing the specific environmental risks that may stem from the process of adjustment towards the climate-related and environmental regulatory objectives of the jurisdictions in which they operate, institutions should carefully select scenarios by taking all the following steps:

• a) assess the potential implications of EU, Member States and, where relevant, third countries ’ objectives for transition pathways, at least for selected sectors determined on the basis of the materiality assessment. In this process, institutions should take into account the likely pathways originated from the European Green Deal, the EU Climate Law, and the latest reports and measures prescribed by the European Scientific Advisory Board on Climate Change;
• b) consider science-based and up-to-date scenarios originating from national, EU or international organisations as referred to in paragraph 38;
• c) take into account voluntary or regulatory-mandated objectives or commitments of the institution with respect to climate change mitigation and adaptation.

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The geographical reference and granularity, such as in terms of regional breakdowns, of the scenarios and pathways used by institutions should be relevant to their business model and exposures.

The range and complexity of the scenarios used by institutions should be proportionate to their size and complexity. SNCIs and other non-large institutions may rely on a simplified set of main parameters and assumptions, included risks, time horizons considered, and regional breakdown of impacts. Large institutions should benchmark their plans (including final and intermediary targets) against a scenario compatible with the limiting of global warming to 1.5°C in line with the Paris Agreement and with the objective of achieving climate neutrality by 2050 as established by the EU Climate Law.

Institutions should ensure that scenarios and pathways used as part of their plans are consistent across the organisation and time horizons considered, such as when building business strategies and setting targets for the short, medium and long term. Institutions should document the process for scenario selection, and the reasons for any change or different usage. Decisions to use different scenarios for different purposes as well as decisions to modify scenarios should be clearly justified.

6.3.2 Time horizons and milestones

Institutions should establish a set of different time horizons as part of their plans which should include the short term, medium term and a long-term planning horizon of at least 10 years. The arrangements developed to monitor and address ESG risks across time horizons should take into account the principles outlined in paragraph 19.

Institutions should set milestones at regular time intervals to monitor and address ESG risks that stem from the short-, medium- and long-term regulatory objectives of the jurisdictions in which they operate. This includes the objectives of the EU to reduce GHG emissions by 55% by 2030 compared to 1990 level and achieve net-zero emissions by 2050, other intermediate climate targets set by EU or, where applicable, national legislation, as well as objectives related to other environmental factors such as nature restoration¹⁹ or deforestation²⁰ .

Institutions should ensure that short-, medium- and long-term objectives and targets interact and are well-articulated. This includes ensuring that long-term objectives, such as commitments to achieve net-zero GHG emissions, translate into medium-term strategies (e.g. medium-term sectoral policies or growth targets for business lines) and that short-term financial metrics or targets (e.g. profitability indicators, cost of risk, KPIs, KRIs, risk limits, pricing frameworks) are coherent and consistent with the medium-term and long-term objectives.

19 Regulation (EU) 2024/1991 of the European Parliament and of the Council of 24 June 2024 on nature restoration and amending Regulation (EU) 2022/869 (OJ L, 2024/1991, 29.7.2024). 20 Regulation (EU) 2023/1115 of the European Parliament and of the Council of 31 May 2023 on the making available on the Union market and the export from the Union of certain commodities and products associated with deforestation and forest degradation and repealing Regulation (EU) No 995/2010 (OJ L 150, 09/06/2023, p. 20). 41 6.3.3 Materiality assessment basis

The transition planning process of institutions should aim at managing material ESG risks, in particular environmental transition and physical risks identified on the basis of a robust, regularly updated materiality assessment of ESG risks conducted in accordance with Section 4.1. Institutions should set out dedicated actions to monitor and address material ESG risks stemming from exposures, portfolios, and the economic activities and production capacities being financed, which may be particularly vulnerable to the process of adjustment of the economy towards the applicable legal and regulatory objectives related to ESG factors.

6.3.4 Metrics

Institutions should use a range of metrics including forward-looking metrics to support target-setting and drive and monitor the implementation of their plans.

For the purposes of setting targets, institutions should use a set of metrics and indicators considering the ones included in paragraph 81. Institutions should determine, taking into account their business strategies and risk appetite, which other risk-based and forward-looking metrics and targets they will include in their plans with a view to monitoring and addressing ESG risks. This includes assessing, computing, and using metrics to evaluate the financial implications of transition planning for institutions’ business and risk profile over the short, medium, and long term, including by measuring the impact of transition planning on financial performance, revenue sources, profitability, and risk level of portfolios.

When data needed to compute metrics and support the setting of targets is missing, institutions should follow the steps outlined in paragraphs 26, 27 and 29.

SNCIs and other non-large institutions may rely on a smaller range of indicators for the use of metrics and setting of targets and formulate to a higher extent qualitative objectives.

Whilst institutions should at least use a combination of metrics related to climate-related risks, they should take steps to progressively include metrics that support risk assessment and strategic steering related to institutions ’ exposure to, and management of, environmental risks other than climate-related, e.g. risks stemming from the degradation of ecosystems and biodiversity loss and their potential reflective influence with climate-related risks, as well as social and governance risks.