Time to Accelerate the Transition

Disclosure and analysis must drive the “ultimate goal” of real-world change within companies, says David Russell, Chair of the Transition Pathway Initiative.

The Paris Agreement of 2015 highlighted the urgent need for a global transition towards more sustainable business practices, specifically use of carbon-free sources of energy. Capital expenditure on wind and solar assets grew to US$490 billion in 2022, overtaking investment in new and existing oil and gas exploration for the first time. But while there is no doubt that the clean energy transition is accelerating, it’s not happening fast enough. 

Launched in 2017, the Transition Pathway Initiative (TPI) is a global project established by the London School of Economics’ Grantham Research Institute on Climate change and the Environment (LSE GRI) in collaboration with the UN-backed Principles for Responsible Investment (PRI), and backed by individual asset owners and managers.  

The primary goal of the TPI is to encourage companies to reduce their carbon emissions and transition their business strategies to align with the goals of the Paris Agreement.  

The initiative does this by providing investors and other stakeholders with valuable information and insights into how companies are responding to climate change. This helps investors identify which companies are taking meaningful steps to address climate risks and seize opportunities associated with the transition to a low-carbon economy, as well as those that are not.  

Learning curve 

In July, the TPI appointed former Head of Responsible Investment at UK-based pension fund Universities Superannuation Scheme (USS) David Russell as Chair. The role presented a “steep learning curve”, he says, despite being involved in the initiative for several years prior as a steering committee and board member.  

According to Russell, before Adam Matthews, Chief Responsible Investment Officer for the Church of England Pensions Board (CoEPB) and Faith Ward, Chief Responsible Investment Officer of Brunel Pension Partnership (BPP), helped to set up the TPI, investors primarily measured how companies managed climate change by assessing their carbon footprint. 

While this assessment is still a part of investor evaluations, particularly in the context of reporting in line with the Task Force on Climate-related Financial Disclosures, Russell says it’s essential to recognise that this approach is “backward-looking”, reflecting a company’s historical carbon emissions, with data often outdated by a year. 

“Carbon footprints alone do not provide insights into a company’s ability to make this transition – this is where TPI steps in,” he says. 

The TPI offers several key features, among which is an assessment framework which the initiative uses to assess companies’ carbon emissions and climate-related governance practices, including the targets they set. TPI collects this information and delivers it to investors, providing a forward-looking perspective.   

This approach helps investors identify which companies in their portfolios are well-positioned to make the necessary transitions and those that are not.  

It focuses on companies that have established policies and targets to drive this change,” says Russell, adding that this aspect becomes crucial for asset owners and managers which have committed to achieving net zero by 2050 in alignment with the Paris Agreement. 

For companies that are progressing well, this information is valuable, he says, but for those lagging behind, it prompts engagement to encourage better transitioning or at least more transparent reporting on transition strategies. 

TPI helps to integrate this information into the investment decision-making process, making it an essential tool for investors. It also enables investors to engage with businesses and exert pressure on companies that need to accelerate their transition efforts. 

“In the context of the increasing focus on ESG factors in investment decisions, TPI plays a pivotal role in enhancing transparency and credibility in climate-related information for investors,” says Russell.  

“It provides a structured framework for assessing companies’ climate-related commitments and actions, enabling investors to make informed decisions on whether companies are actually aligned with Paris Agreement ambitions, and to engage with companies to drive positive change.” 

Expanding horizons 

Investors are conducting their analyses against an increasingly volatile and unpredictable backdrop.  

The anti-ESG movement in the US is a complex phenomenon with a range of motivations and perspectives, characterised by a mix of ideological opposition and a fear of so-called ‘woke capitalism’ to concerns about environmental priorities subverting profit and return maximisation.  

According to Russell, investors who focus on sustainable development, responsible investment, or climate change-related issues “cannot ignore” the political pressure and opposition present in the US and other countries regarding ESG. 

In addition to climate change, there are several other systemic issues gaining prominence, such as biodiversity and nature-based challenges, including antimicrobial resistance, which investors must prioritise to better understand the investment risks and opportunities.  

But, given the scale of the climate change problem, it is where the TPI’s focus will remain for the foreseeable future, he says.  

That does not mean that the TPI is not building out plans for expanding its coverage, however. Although the initiative’s primary focus is on public equities, particularly targeting the major emitting companies and high-emission sectors within the public sector, there are plans to broaden its transition assessment, says Russell.  

Its current strategic emphasis on the largest emitters has supported TPI’s participation in the Climate Action 100+’s (CA100+) benchmarking process.  

Launched in March 2021, the CA100+ Net Zero Company Benchmark assesses the performance of focus companies against the initiative’s three high-level goals: emissions reduction, governance and disclosure. Data and insights for landmark new benchmark provided by TPI as part of its partnership with CA100+.  

The next round of company assessments against the Net Zero Company Benchmark 2.0 – released in June – are due to be released in the September-October.  

“TPI has already broadened its coverage to encompass around 600 companies within high-emitting sectors, with further ambitions to expand this coverage from hundreds of companies to a substantial 10,000 companies on a global or international benchmark,” says Russell, adding that the overarching goal is to maximise coverage without compromising the quality of the assessment. 

Another area of focus for TPI will be credit, explains Russell, noting that fixed income holds significant importance for asset owners and investment managers. 

“Credit considerations are vital as they involve interactions with companies that may or may not be taking steps toward transitioning,” he says, adding that understanding how this intersects with credit portfolios is “crucial”. 

Consequently, TPI will be looking into private markets in the future to assess how major private companies are progressing in their transition efforts.  

Further, TPI plans to expand sector coverage. Currently, TPI covers ten sectors, but this will be extended in the near future to encompass sectors including food, chemicals, coal mining, among others. Further, the TPI’s second banking report was recently published, indicating a continued commitment to the assessment of the financial sector’s transition efforts. 

TPI also serves as the academic partner for the Assessing Sovereign Climate-related Opportunities and Risks (ASCOR) initiative which involves partnerships between asset owners, asset managers, data providers, and TPI, led by the Church of England Pensions Board.  

As part of that partnership, says Russell, conducts research to establish a benchmark for how countries are transitioning. This benchmarking process is essential for investors, especially asset owners which have significant sovereign debt holdings, as it enables them to incorporate climate transition analysis into their investment strategies, spanning sovereign debt, equity, and credit allocations. 

In March, the Transition Pathway Initiative Global Climate Transition Centre (TPI Centre) appointed Carmen Nuzzo as its new Executive Director. The TPI Centre is part of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics (LSE), and was established in June 2022 before formally launching in October 2022. 

The asset owner-led initiative is supported by 131 asset owners, asset managers, and service providers which represent more than US$50 trillion in combined AUM. It provides open data and analysis on corporations’ and sovereigns’ management and governance of their carbon emissions, as well as their carbon emissions pathways. 

Data for data’s sake 

According to Big Four consultancy firm EY, the ESG data market is growing in size, scale, sophistication and maturity, with investor demand a key catalyst for this trend, alongside a broadening of coverage beyond climate to address other environmental and social-related issues. 

Further, the introduction of the new Taskforce on Nature-related Financial Disclosures (TNFD) framework, which is set to be released next week, is likely to spur the availability of data and help investors to set nature positive targets. 

“We are witnessing a significant increase in disclosure and the availability of information from companies,” says Russell. “However, it’s essential to recognise that mere disclosure for the sake of disclosure is not particularly useful.” 

For Russell, the data and information collected must serve a purpose and be effectively utilised. 

“While it is crucial to encourage companies and countries, both in emerging and developed markets, to disclose more about their transition efforts, it is equally essential to ensure that this disclosed information is put to use,” he says. 

This responsibility falls on investors, asset managers, and policymakers, he says, adding that this should not be viewed as an additional cost for businesses or investors but rather as an opportunity to integrate this information into their decision-making processes and activities.  

“This approach will demonstrate to companies that there is a tangible benefit to publishing this information because investors are not only taking it into account but actively using it,” he says, adding that the “ultimate goal” is to drive real-world change within companies.  

“The focus is not solely on collecting data; it is about addressing climate change and facilitating the transition toward a low-carbon future that aligns with our collective goals.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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