As regulators set higher expectations, financial institutions must move toward rigorous, quantifiable, and operationally embedded transition plans. For boards, this is an opportunity to strengthen risk management and ensure long-term business resilience in the face of complex - but increasingly observable - climate, nature and social challenges faced by today’s economies.
The Climate Governance Initiative’s Financial Sector Hub partnered with McKinsey to deliver a Chatham House webinar on the topic of Transition Planning for Banks, with presenters representing global retail and development banks. This article summarises that discussion and ends with 12 practical tips for board directors seeking to guide their own institution’s transition plan.
The Evolution of Transition Planning
Transition planning guidance had been developed as part of the Glasgow Financial Alliance for Net Zero (GFANZ) framework and was already present within the Task Force on Climate-related Financial Disclosures (TCFD) reporting structure. However, since 2022, extensive guidance has been introduced by GFANZ to establish credible transition plans. These plans centre around five core building blocks, with a strong emphasis on implementation and engagement strategies.
The primary goal of transition planning is to ensure financial institutions can operationalize their climate strategies, integrating decarbonisation objectives into business processes, policies, and client engagement. The Net Zero Banking Alliance (NZBA) has further reinforced this expectation by requiring banks to issue transition plans one year after publishing their sectoral net-zero targets. While most banks have met this requirement, the recent withdrawal of major U.S. and Canadian banks from the NZBA highlights the shifting regulatory and political landscape.
Diverging Approaches in Global Markets
While nearly all American banks have quit climate alliances, European banks are not. UBS has publicly stated it is evaluating its membership, though most European banks continue to publicly reinforce their transition commitments despite the increasing complexity of global regulations.
Despite these commitments, the financial sector remains off track to meet its 2030 and 2050 climate targets. Studies suggest at the current trajectory, that global warming will reach 2.3°C – 2.9°C by the end of the century, far exceeding the 1.5°C goal. This gap stems from technological and financial challenges, including the lack of scalable, bankable solutions in critical sectors and an estimated net-zero financing gap. Given these realities, transition plans must evolve to provide a more pragmatic roadmap for achieving climate goals.
Enhancing the Credibility of Transition Plans
To remain effective, transition plans require a reality check. Decarbonization strategies must be revisited to assess feasibility, implementation pathways, and operational integration across business functions. The European Banking Authority (EBA) has set a high bar with its new guidelines on climate and environmental risk, which take effect next year. For the first time, the European Central Bank (ECB) will begin supervising how banks implement net-zero targets starting in 2026.
Important regulatory developments include:
- Broadening the Scope Beyond Climate: Transition plans will now incorporate biodiversity, nature risks, and social factors.
- Scenario-Based Risk Assessments: Banks must define their baseline scenario, assess the risks of deviations, and provide alternative pathways.
- Quantitative Commitments: Transition plans must evolve from largely qualitative narratives to detailed, numbers-driven strategies akin to standard business plans.
- Enhanced Governance and Accountability: Boards must approve transition plans, with risk management and internal audit functions playing a critical oversight role.
Integrating Transition Planning into Business Strategy
As regulatory expectations intensify, transition planning is shifting from a compliance exercise to a core business planning tool. Banks must move beyond qualitative statements to robust, quantitative strategies that integrate transition targets into financial decision-making.
Currently, most banks are in an intermediate stage—having established clear narratives and qualitative commitments but lacking detailed reconciliation with business planning and financial projections. The most advanced institutions have started incorporating quantitative targets, but governance structures are still evolving to support full integration, including the balancing of global ambition with regional and sectoral nuances.
The future
Three themes which will naturally follow current progress are alignment, localisation, and formalisation. Alignment is crucial as governments move beyond environment ministries to integrate climate policy into finance and planning, ensuring coherence between NDCs, public policy, and financial sector commitments. Localisation recognizes that while science-based targets set global benchmarks, political and economic realities require differentiated, context-specific pathways—particularly in emerging markets where banks mirror their economies. Lastly, formalisation refers to the evolving regulatory landscape, with clearer transition guidelines emerging in different regions, whether through comprehensive frameworks like in Europe or more simplified taxonomies in emerging markets.
Key Responsibilities for Bank Board Directors in Overseeing Transition Plans
- Ensure Feasibility and Practicality: Scrutinise transition plans to assess whether targets are achievable and aligned with business operations.
- Demand Quantitative Clarity: Require clear financial projections, measurable milestones, and sector-specific roadmaps to effectively track progress.
- Integrate Transition Planning into Core Governance: Embed transition strategies within financial planning, climate risk management, and overall business strategy.
- Strengthen Risk Oversight and Governance Structures: Ensure robust internal audit processes, board oversight, and executive accountability for transition plan execution.
- Align with Regulatory Expectations: Stay ahead of EU and global regulations to maintain credibility, minimise compliance risks, and ensure competitive positioning.
- Institutionalise Performance Monitoring: Establish regular board-level discussions to track transition-related KPIs, assess risk exposure, and evaluate the bank’s transition progress.
- Support Data-Driven Decision-Making: Push for strong data collection and analysis capabilities to enhance risk management, customer assessments, and transition finance strategies.
- Adapt to Policy and Market Uncertainty: Require scenario analysis and contingency planning to navigate evolving regulatory landscapes and macroeconomic conditions.
- Embed Climate into Risk & Financial Decision-Making: Ensure transition risks are integrated into lending decisions, capital allocation, and overall risk management frameworks.
- Ensure Customer Transition Assessment Tools Are in Place: Support the development of frameworks to assess customers' transition plans, balancing financial health with sustainability goals.
- Approach Transition as Strategic Change Management: Treat the transition as a fundamental shift in business operations, requiring cultural, structural, and strategic adaptation.
- Use Transition Plans as a Strategic Tool: Move beyond compliance-driven reporting and leverage transition planning as a tool for stable, long-term profitability and growth.
Conclusion
The future of transition planning lies in its ability to bridge climate ambition with financial reality. With regulators setting higher expectations, financial institutions must move toward rigorous, quantifiable, and operationally embedded transition plans. For boards, this presents an opportunity to enhance oversight, strengthen risk management, and ensure long-term business resilience in the face of complex - but increasingly observable - climate, nature and social challenges faced by today’s economies.