Three questions to ask about companies net-zero transitions

COP26 saw laudable commitments but short-term progress is few and far between

Since 1990, just 100 global companies were responsible for 71% of the world’s greenhouse gas emissions, according to data from CDP. Last November, more than 1,000 companies collectively worth some $23trn set emissions-reduction goals that line up with the Paris Agreement.

Additionally, $130trn in assets under management are committed to net zero by 2050 under the Global Financial Alliance for Net Zero.

While we can point to laudable commitments, examples of short-term progress on emissions are few and far between. Many companies are starting to take the transition seriously, with several firms pledging to achieve net-zero emissions by 2050, but most companies globally, particularly in emerging markets, do not have a clear plan on how they’re going to get to net zero by 2050.

Therefore, it is our role as shareholders to encourage, measure and engage the high emitters in our portfolio on their transition, to go on the journey of transition alongside them, with special focus on emerging markets.

To do this, we have developed a framework that scores companies’ transition plans on three key principles across nine elements of transition.

Is the transition plan ambitious enough?

This is not just about the 2050 target, but about the quality of the emissions disclosure, and the targets and milestones set along the way. A sufficiently ambitious plan can be achieved via one of three routes. The first – and the simplest – is if the company manages to reduce emissions by the infamous 7% a year required. Unfortunately, for most companies this linear recommendation is a pipe dream, particularly if they are in emerging markets and in high-emitting industries.

The second route is whether the pathway set by the company is broadly aligned with the country’s decarbonisation pathway in which it is based, provided the country’s pathway is broadly 1.5-degrees aligned.

The third route is one in which modifications will need to be made for hard-to-abate sectors such as cement. We are starting to see sectoral pathways being developed, which would be considered to be 1.5-degrees compliant. The reality is some sectors require significant technological developments to achieve net zero by 2050, and others will need to pivot their business models entirely to be considered as 1.5-degrees aligned.   

Is the transition plan credible?

Does the company have a time-bound, clearly financeable, and just transition strategy? When it comes to strategy, the devil is in the detail. Indicators of a credible strategy include:

  • if the plan is based on existing low-carbon technology rather than new, unproven technologies;
  • if the company is not relying on divestment of high-emitting assets or carbon offsets to decarbonise; and
  • if the company has planned to generate significant revenue from low-carbon products and services.

In addition to strategy, financial planning and allocation to transition is critical to consider. The capital expenditure requirements, the impact on revenues and expenditures of this plan, and whether the company can afford it are all indicative of how seriously the company is taking transition and of the potential for transition success. Very few companies have fully budgeted for their transition or have clear sight as to the profitability of it.

Finally, the credibility of a plan hinges on the inclusivity of it, and how it addresses and supports justice for workers and communities who will be impacted by the transition. If ‘just transition’ is included in the strategy in a meaningful way, the likelihood of the plan to garner broad support to ensure successful implementation is greater. A credible plan is considerate of those most vulnerable and ultimately should contribute to building resilient, thriving, and healthy communities.

Is the plan implementable and measurable?

What are the governance structures, levels of stakeholder engagement, and metrics of progress that signify whether a plan is implementable, or not?

Engagement and lobbying alignment signify alignment of the company plan with the broader environment in which the company is embedded. If a company has 1.5-degree Paris-aligned lobbying positions and their direct lobbying activities align with stated values, this gives comfort that what the company says and what the company does lines up.

Good governance structures, with clear oversight of transition-related strategy at board level is a good indicator that the transition plan has full company-level buy-in, ensuring transparency and accountability.

Indicators of progress are the final element of measurement. Carbon reduction, of course, is the key metric of success. But carbon is not the only consideration, especially in the early years of transition. Rather, we look for tangible signs of progress, including:

  • investment in transition-related capacity building;
  • new partnerships and acquisitions that enable the company to transition; and
  • a growing share of green revenues generated by the company.

If companies can satisfy us on these three principles, we would consider their transition plans strong and appropriate. If they can show progress over time on elements that currently are not satisfactory, that too indicates success. For the bulk of companies, the development and implementation of aligned transition plans will take years.  For some sectors, it might never happen.