23 under review, but the Commission is required to review the minimum standards for EU Climate Transition Benchmarks and EU Paris-Aligned Benchmarks by the end of this year: this is another opportunity to align these minimum standards with the CSRD and ESRS in order to ensure consistency. These files could also require the verification of targets and plans by an independent third party to bring more robustness. Indeed, this is already the case with the EU GBS, in which the Parliament requires verified transition plans. Step 2. Articulate site-level, economic activity-level and company-level targets and transition plans As required by the CSRD, a corporate-level approach is needed. However, the EU Taxonomy sets sustainability criteria at the economic activity level. This means that activities performed by a company, or a specific investment, could be fully aligned with the climate Taxonomy while the investing company’s overall business model is not in line with the climate objective. This was clearly recognised by the Bank for International Settlements (BIS) in October 2021: “Signalling environmental benefits of business activities at the project level does not necessarily imply a similar signal at the entity level” 50 . Notably, this is particularly important for green bonds, which until now focus on specific projects and ignore the overarching corporate level: a company can issue green bonds but still become more environmentally harmful if the bulk of its capex remains focused on harmful activities - typically a fossil fuel company issuing 10% of its capex for renewables and 90% for fossil fuels, and putting capex in new fossil fuel projects inconsistently with the IEA 1.5°C scenario. The company-level approach should therefore be integrated in the EU Green Bond Standard regulation, as required by the Parliament 51 . On the positive side, the EU Taxonomy will bring further granularity to the targets and transition plans (see Section 4.2 above). Similarly, other EU files are under review and may or will require targets and transition plans at site level: they include EU ETS and IED. They should feed targets and transition plans at site level with further granularity as well. Once the EU ETS and IED reviews are over, and then once the Taxonomy Regulation is revised to create an extended Taxonomy framework, the ESRS should be updated accordingly to ensure consistency. Additionally, it should be added that once the Steps 1 and 2 are achieved, it will become important to review SFDR to improve consistency, and to improve as well the reliability and comparability of ESG ratings from ESG rating providers (clarifying data sources among other issues).Step 3. Build EU 1.5°C sectoral decarbonisation pathways 52 to set benchmarks The Commission should build EU 1.5° decarbonisation 50 https://www.bis.org/publ/bppdf/bispap118.htm. 51 For more on this issue, please see the WWF briefing ‘Recommendations for the trilogue on the EU Green Bond Standard regulation’, October 2022. 52 https://librairie.ademe.fr/changement-climatique-et-energie/5185-sectoral-transition-plan-for-the-french-cement-industry.html. 53 https://climate.ec.europa.eu/eu-action/climate-strategies-targets/2050-long-term-strategy_en. 54 Sectoral examples: the ACT initiative is focusing on the following sectors: agriculture, aluminium, automotive, cement, chemicals, electricity utilities, glass, oil & gas, pulp & paper, retail trade, steel, transport. The Transition Pathway Initiative is focusing on the following ones: airlines, aluminium, automotive, cement, chemicals, coal mining, consumer goods, diversified mining, electricity utilities, oil & gas, oil & gas distribution, other industrials, paper, services, shipping, steel. pathways for the relevant sectors (and geographies if relevant), so that companies have a clear benchmark against which to define their own targets and transition plans and competent authorities can use them for their monitoring. The climate law provides two useful elements for that purpose: • The European Scientific Advisory Board on Climate Change should provide technical advice to the Commission, to ensure that the sectoral pathways are science-based; • The Commission is also mandated to engage with economic sectors to prepare indicative sectoral pathways. This is relevant to ensure that the pathways will be truly responding to companies’ needs, given the complexity of certain sectors to decarbonise in a timely way. The sectoral pathways should be aligned with the 1.5° goal by 2100 (net-zero emissions by 2050 at the latest) and build on scenarios that are science-based and whose minimum requirements have been defined by recognised international organisations, scientists or public authorities (e.g. the IPCC or the International Energy Agency). Such pathways should not include overshoot by 2050 (i.e. only build on scenarios ‘with no or limited overshoot’), have a limited reliance on negative emissions, and should propose disaggregated sectoral and regional scenarios that can be used if deemed more relevant than a global scenario. The pathways should be as granular as possible, indicating GHG reductions per sector but also, wherever feasible, an overview of technologies that should be developed (i.e. technology roadmaps) and the estimated amount of investments needed in said sectors/ technologies. Importantly, the Commission should update the 2018 ‘Clean Planet for all Europeans’ long-term strategy 53 , which sets out decarbonisation pathways to climate neutrality by 2050. This document was a milestone and contains eight different scenarios for reducing emissions in several sectors. But it is now outdated with the increase of the 2030 climate and energy targets, the Fit for 55 packages and the higher ambition tabled in RePowerEU. The Commission plans to update it in 2024, at the same time as proposing a 2040 climate target and an indicative GHG emissions budget for 2030-2050. Given the urgency to deliver the improved EU climate and energy targets by 2030, it would be more relevant to update it in 2023. In addition, it should be ensured that pathways are provided for all relevant high-carbon sectors in a sufficiently granular way 54 , otherwise, it will have to be complemented, which risks creating delays. Step 4. Assess the consistency of targets and transition plans As already mentioned, the mandatory targets and transition plans must be standardised adequately to enable meaningful comparability assessments with the sectoral pathways (i.e. the benchmarks) and the targets and transition plans from peer companies: this is critical for many stakeholders including investors. The draft EFRAG ESRS E1 and E4 provide clear criteria and KPIs that help to identify ‘transition-washing’. Targets and transition plans must not be a simple pledge or procedure of information that may or may not deliver operational outcomes. Companies should be accountable for the achievement of their targets and plans. This is why supervisors need to ascertain whether targets and transition plans from supervised companies are consistent with EU climate and environmental objectives, in particular net zero emissions by 2050 at the latest and if climate- related financial risks are identified, assessed and mitigated adequately. Measurement, Reporting and Verification (MRV) to assess the credibility of targets and transition plans must be ensured. Therefore, assessment methodologies such as the ACT initiative 55 need to be set up to assess the various components of a transition plan, the consistency of the transition plan with the target, and the level of the corporate’s transition preparedness and commitment. Step 5. Ensure remediation and penalties where necessary 56 According to the OECD, the implementation of environmental policies requires a strict and concerted action guided by the principle of “ trust and check” to ensure effective and efficient protection of human health and the environment. To this end, supervisors should be empowered to use a recognised dynamic approach to assess corporate targets and transition plans, in a regulatory framework that requires remediation and penalties in case a given company fails to deliver. Harmonisation and minimum standards are needed for sanctions to ensure a level playing field for all relevant companies: sanctions could be framed as a percentage of turnover. 4.4. Entry into application timeline Under the CSRD, the first Delegated Act creating the ESRS must be adopted by the Commission by the end of June 2023, and the second one by the end of June 2024 for sector- specific issues and SMEs. 55 https://actinitiative.org/. 56 https://www.oecd.org/env/outreach/34499651.pdf. For the other files mentioned in this report, it is expected that: • EU GBS will be finalised by the end of 2022; • CSDDD, CRD, Solvency II will be finalised in the course of 2023, as well as the revision of the Benchmark Regulation’s Delegated Act. The CSDDD, CRD, Solvency II, EU GBS, and Benchmark Regulation requirements to set corporate targets and transition plans need,to be consistent, that the ESRS is publicly available. This will already be the case by the end of June 2023 for large companies, and by the end of June 2024 for SMEs. Furthermore, it is logical that the requirement to set targets and plans comes before the requirement to publish them. This makes the following timeline for the requirement to set targets and transition plans possible: • Entry into application in 2024 for regulations (EU GBS, Benchmark Regulation); • Entry into application in 2025 for directives given the transposition delay (CSDDD, CRD, Solvency II). 4.5. Five policy recommendations to ensure consistency across EU regulations on corporate targets and transition plans Building on the previous sections, we recommend EU policy- makers to integrate the following five policy elements: • A mandatory requirement for the establishment of corporate targets and transition plans in the CSDDD, CRD, Solvency II, EU Green Bond Standard (GBS), and the Benchmark Regulation, with an explicit reference both to the CSRD and, when available, to the ESRS E1 and E4 templates in order to ensure comparable, consistent, granular transition plans and avoid duplication. As long as ESRS E1 and E4 are not legally available, the five laws mentioned above should integrate the key elements of the draft EFRAG ESRS E1 and E4 for transition plans, which are summarised in Section 1.5. These laws could also require the verification of targets and plans by an independent third party (as proposed by the European Parliament for the EU GBS). • A requirement for supervision of these targets and transition plans by the competent authorities, in each of the above-mentioned EU laws (as proposed by the Commission to some extent in the CRD). • A requirement for remediation and penalties for companies which do not comply, in each of the above- mentioned laws.