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Keeping on the Straight and Narrow

UK proposals to mandate climate transition plans are part of wider scrutiny effort. 

It is a truth universally acknowledged that a company transitioning to net zero greenhouse gas (GHG) emissions by 2050 or sooner is in want of a detailed plan. 

Not only must the plan achieve the tricky task of getting from Point A to Point B, it must also convince others that the chosen route is achievable. To better inform their investment decisions and decarbonisation efforts, investors want visibility of companies’ interim milestones, as well as a comprehensive account of how each goal will be met.  

“Investors and policymakers want to know what those targets actually mean,” says Jaakko Kooroshy, Global Head of Sustainable Research at global index, data and analytics provider FTSE Russell. “How committed are companies to achieving these targets? How do they translate on a net zero journey? These are big questions the market is trying to solve.” 

The current completeness and quality of transition plans is varied. 

Only 1% of over 13,000 corporates across 13 industries and 117 countries disclosed against 24 key climate transition plan indicators, according to a 2021 report by sustainability disclosure platform CDP. Eighty-four percent responded to less than 80% of those indicators.  

Financial services, power and fossil fuels companies had the highest rates of disclosure, while organisations in transportation services and apparel delivered the least data. 

“The lack of a detailed transition plan should be a red flag for investors, suggesting that the company has not fully considered climate-related risks and the impact of the low-carbon transition on its business,” says Kathrin Wartmann, Associate Director at research and data provider Sustainable Fitch.

“This is not only a sign that the company might not be conducting appropriate risk management and mitigation but also that the company might be missing out on possible climate-related opportunities.” 

Governments are also keen for visibility of companies’ decarbonisation ambitions and progress as they track their nationally determined contributions. 

Until recently, companies have been unclear on what needs to be disclosed in their transition plans and what level of detail is necessary. 

On 25 April, the UK government launched its Transition Plan Taskforce (TPT) to develop a transition plan disclosure framework. TPT’s work will be incorporated into the UK’s regulatory regime through its planned Sustainability Disclosure Requirements (SDR) 

Existing voluntary climate-related reporting guidance – such as that provided by the Task Force on Climate-related Financial Disclosure (TCFD) and Climate Action 100+ (CA100+) – will inform the TPT’s efforts.  

There are other areas in which the TPT will have to set their own expectations, spanning from reliance on carbon offsetting and carbon capture and storage (CCS) technologies to transparency on climate lobbying.  

Throwing down the gauntlet  

In line with the UK government’s roadmap, the TPT now has two years to achieve nine set goals and introduce a transition plan framework for financial services and real economy sectors that “will hopefully provide a pragmatic basis that can be replicated around the world”, says David Harris, Global Head of Sustainable Finance Strategy at the London Stock Exchange Group (LSEG) and a member of the TPT.  

Over the course of 2022-2023, the TPT will be making recommendations, preparing detailed sectoral templates, creating guidance on third-party verification, and producing a pathway for future work on transition plans for consultation.  

The taskforce will also consider guidance on avoiding greenwashing strategies, and the simplification of assessing, comparing and interpreting transition plans.  

Although it’s well understood at this point that climate-related issues don’t exist in isolation – underpinned as they are by broader social and environmental concerns – FTSE Russell’s Kooroshy warns that the TPT shouldn’t “boil the ocean at this stage”. 

“The market will be best served at the moment with a fairly narrow transition plan that is focused on companies outlining how they intend to achieve their decarbonisation targets. We have a very specific problem to solve here: investors want to understand the credibility of companies’ climate transition plans,” he says. 

Harris agrees, noting that it will be important for the taskforce to strike a balance that isn’t “overly prescriptive”, but is still “structured in a way that the market can draw reasonable comparisons between companies”. 

“No two companies’ transition journeys are the same, even if they’re in the same sector. There needs to be a balance that doesn’t create overcomplexity. Ultimately, the result of all of this needs to be real world emissions reductions,” Harris adds. 

In 2023, the TPT plans to establish “a sandbox” for large companies and financial sector firms to pilot and evaluate transition plan templates, recommendations and metrics. 

James Alexander, CEO of the UK Sustainable Investment and Finance Association (UKSIF), says the TPT’s proposed scope should be extended beyond large listed companies to include “large comparable private companies and unlisted firms because, realistically, these firms have the same level of impact”. 

“At some stage, companies will struggle to complete their transition until they know the transition plans of their suppliers,” he adds. “The TPT needs to think about the support smaller firms are going to need.” 

Wartmann emphasises the importance of ensuring transition plans are aligned with companies’ audited financial statements.  

If an oil and gas company announces a 2050 net zero target but doesn’t show any changes to capex (for example, shifting to renewable energy) or asset valuation (to account for stranded asset risk) this could make investors and other stakeholders doubt the credibility of the company’s transition strategy,” Wartmann says. 

The UK isn’t the only part of the world considering mandatory transition plans.  

In April, the European Sustainable Investment Forum (Eurosif) and UN-convened Principles for Responsible Investment (PRI) sent a letter to EU lawmakers calling for the incoming Corporate Sustainability Reporting Directive (CSRD) rules to mandate transition plans. MEPs have backed this approach, but the CSRD is still subject to trilogue discussions.  

Drawing on experience 

There is plenty of existing guidance out there to inform the UK’s mandatory transition plan framework. 

It’s important the taskforce doesn’t attempt to reinvent the wheel,” says Alexander. 

Most notably, the TCFD framework has already been adopted into legislation around the world, including the UK.  

In 2021, the TCFD consulted on its metrics, targets and transition plans, with a view to updating its original 2017 framework and guidance. The TCFD noted that two-thirds of consultation respondents had developed a transition plan or planned to do so within the next 12 months. Ninety six percent said that organisations’ disclosure of transition plans would be “very useful” or “somewhat useful” for their TCFD-aligned reporting.  

Following feedback, the TCFD’s finalised updated guidance outlined recommendations for climate transition plans. A high-quality plan should be aligned with the corporate’s wider business strategy, anchored in quantitative elements, subject to effective governance processes and transparent about the specific initiatives and actions required to execute its transition ambitions, the TCFD said. 

The Science Based Target initiative (SBTi) also launched a global science-based certification of companies’ net zero targets to ensure that corporates are on track to align their decarbonisation targets with the 1.5°C of global warming promised by signatories of the Paris Agreement. 

Race to Zero is a UN-backed global campaign through which members are expected to publicly disclose their commitment to reaching net zero by the 2040s or sooner and halving current levels of emissions by 2030.  

Members of the Global Financial Alliance for Net Zero (GFANZ), which have collectively pledged US$130 trillion of private capital to mobilising CO2 emissions reductions, are required to align with the Race to Zero criteria.  

Over the course of Q1 2022, over 150 independent experts discussed eight key topics to strengthen and consolidate the Race to Zero’s existing criteria, including fossil fuel transition, transition plans, carbon offsetting, and the campaign’s minimum criteria for net zero commitments. The latter is known as the ‘4 P’s’: pledge, plan, proceed and publish. It is now open to public consultation until 20 May. 

Further, the UN recently created the High-Level Expert Group on the Net Zero Emissions Commitments of Non-State Entities to develop standards for net zero emissions pledges by businesses, investors, cities and regions. Members include Günther Thallinger, Chair of the UN-convened Net Zero Asset Owner Alliance. 

Through its Net Zero Company Benchmark, CA100+ – a US$54 trillion investor-led engagement initiative working with global corporates to drive faster corporate climate action – assesses companies on their transition progress through ten indicators. These include setting short to long-term decarbonisation targets, committing to aligning future capex with decarbonisation targets, and disclosing climate lobbying activities.  

However, the latest round of benchmark assessments highlighted that the majority of companies failed to show progress against the indicators. For example, just 5% explicitly committed to aligning their capex plans with their long-term GHG reduction targets.  

“It’s important to remember that these are voluntary global industry initiatives, not a policy or regulatory framework,” points out Harris, noting that this means companies are not forced to stick to the suggested guide rails.  

“We don’t want a plethora of approaches and methodologies that don’t join up globally. It’s critical that the TPT is fully joined up with other global initiatives and standards, including the International Sustainability Standards Board, TCFD, GFANZ, CA100+ and the Transition Pathway Initiative (TPI).” 

Backed by investors with a combined US$40 trillion in AUM, the TPI annually assesses around 400 companies on their preparedness for the transition to net zero using its Management Quality Score methodology. The methodology focuses on climate policy, executive remuneration KPIs, the quality of strategic climate-related risk and emissions reporting, and whether the company has set science-based targets.  

Last year, TPI announced plans to launch the Global Climate Transition Centre, which will help increase its assessment coverage to up to 10,000 companies spanning a broader range of asset classes, like fixed income.  

Even today, new solutions are emerging. The One Earth Climate Model (OECM), developed by scientists at the University of Technology Sydney’s Institute for Sustainable Futures, has mapped out the remaining carbon budgets of 12 carbon-intensive industries, therefore helpfully identifying where additional transition-focused investment is most needed to ensure global warming is limited to 1.5°C.  

NZAOA members are applying the latest OECM findings and data to their net zero target setting protocol and reporting framework.  

But, despite all this guidance, “there is still a lack of deep understanding and engagement from investors with companies’ transition plans”, says Wartmann.  

Difficult decisions ahead 

By mandating transition plans, the UK’s TPT may provide clear guide rails to investors and corporates alike. But the initiative still faces some difficult decisions.  

One of the most important is companies’ usage of carbon credits to offset emissions they cannot cut in the short to medium term.  

Investors want clarity on the extent to which companies are planning to use carbon credits to meet the goals outlined in their transition plans. Full transparency will isolate any laggards proving to be more dependent on offsetting than is necessary. 

“Clearly, if a company plans to reduce their emissions by 50% by 2050 and offset the rest, then that isn’t a credible plan,” says FTSE Russell’s Kooroshy. 

Investee companies should disclose their anticipated emissions and the percentage they plan to neutralise through carbon credits, as well as the volume of carbon credits already purchased, according to recent report by US-based NGO Ceres. 

Companies that are overly dependent on carbon offsetting are open to an array of risks: systemic (by delaying or avoiding climate action), reputation (strategies are under increasing public scrutiny), and litigation (increased possibility of land conflicts or disputes with Indigenous and local communities), the report added. 

For a corporate strategy to be verified by SBTi, companies should only rely on offsetting for 5-10% of their total emissions.  

It’s also important that the TPT is clear on the extent to which companies’ net zero strategies should depend on CCS, experts say. 

The third recent Intergovernmental Panel on Climate Change report on climate mitigation identified CCS as an important solution to reducing emissions in hard-to-abate sectors. However, sceptics are quick to point out its low success rate at scale (so far) and are wary of overly dependent transition plans. 

The Asia Investor Group on Climate Change (AIGCC) recently advised institutional investors to exercise close scrutiny, noting that even current plans for large-scale deployment will fall short of the rate of decarbonisation needed. 

Further, a number of large companies have been caught out engaging in anti-climate change lobbying in person and online, despite having committed to net zero emissions and produced climate transition plans. 

The TPT should ask companies to disclose how their lobbying efforts will contribute to or slow down their transition efforts, says Alexander. Holding companies accountable will likely help to “substantially reduce” the level of anti-climate change lobbying, he adds.  

The taskforce could draw on existing frameworks, such as the Global Standard on Responsible Climate Lobbying (RCLS), which was developed by Swedish pension scheme AP7, the Church of England (CoE) Pensions Board and BNP Paris Asset Management to ensure companies’ lobbying efforts are aligned with the goals of the Paris Agreement.  

“Ultimately, the actions of companies have a huge impact on all of us and the world we live in, so it’s therefore incumbent to ensure that those actions are having a positive impact rather than a negative one,” says Alexander. 

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