Why Do Companies Need Climate Transition Plans?

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CEO and Co-Founder of CDP, the non-profit which runs the world’s environmental disclosure system


We all know that the threat of climate change is with us today—and growing. 2021 was a record year for extreme heat, with nearly a quarter of the world’s population experiencing unprecedented high temperatures and over 400 weather stations worldwide documenting their all-time highest temperature.

If we are to mitigate the most devastating impacts of climate change, the science is clear. We need to halve carbon emissions by 2030 and reach a net-zero economy by 2050 at the latest. That means emissions need to reduce by 7% per annum out to 2030—and companies have a fundamental role to play.

As the CEO of CDP, a not-for-profit that runs the global environmental disclosure system, I have been greatly encouraged to see the increase in worldwide support for climate disclosure, net-zero targets and climate transition plans. At COP26, the U.K. government announced a new requirement for asset managers, regulated asset owners and listed companies to publish their climate transition plans by 2023. This is the type of regulation we need to advance climate action and expect to see more countries adopting. Companies across the world must get ahead of regulation now or run the risk of being left behind.

As well as mounting pressure to create climate transition plans, companies are also subject to increasing scrutiny regarding their goals and targets and the credibility of meeting those.

What can companies do?

Climate transition plans are time-bound action plans that clearly outline how a company will achieve its strategy to pivot existing assets and its entire business model toward a trajectory that aligns with the requirements of climate science. These plans are vital as they demonstrate to investors and other stakeholders that companies have developed a strategy that ensures their business models remain relevant and profitable as the economy transitions to net zero.

Keep plans credible.

In 2021, over 4,000 companies reported through CDP that they had developed a climate transition plan. However, a large majority of these are not in the public domain and will not be science-based or effectively tracked to be truly accountable. At CDP, we believe the fundamental elements of a credible climate transition plan include targets, financial planning, defined governance mechanisms, value chain engagement and alignment of public policy engagement with its climate strategy.

Translating climate targets into financial planning is essential as shareholders increasingly expect investment plans to align with developing standards such as the EU taxonomy for sustainable activities. Our research shows that consistent and transparent reporting needs to improve, with just 12 of 100 oil and gas companies disclosing planned low-carbon investment to 2024.

The credibility of climate transition plans is crucial for companies as it is strongly linked to litigation risks. In a watershed decision in May 2021, Dutch courts ruled that Shell’s climate transition plan was insufficiently “concrete” and ordered the company to cut its value chain emissions by 45%. We are also seeing an upward trend of companies disclosing increased risks linked to exposure to litigation, with 198 companies in 2021 disclosing potential substantive litigation risks through CDP—a sharp rise from 95 in 2018. We expect this number to increase dramatically over the coming years as companies improve their climate risk management and reporting processes.

This is where robust tools and methodologies that assess climate transition plans come in. For example, the Assessing low-Carbon Transition (ACT) initiative, founded by ADEME and CDP, provides an independent assessment and rating of climate transition plans.

So far, many corporate transition plans are not of the quality required. Recent research based on ACT ratings found that the top emitting companies in the oil, gas, automotive and electric utility industries are missing vital elements in their climate transition plans. For example, just three out of 50 major electric utilities companies have emissions targets that are ambitious enough for this sector to reach net zero by 2035 in advanced economies and 2040 in other nations.

Ensure plans are accountable.

Delivering on emissions targets also requires clear accountability mechanisms. Companies should have strong executive oversight of climate transition plans, with executive expertise on climate change essential to effectively steer strategy.

In the automotive sector, most companies (86% of the 30 companies assessed by the World Benchmarking Alliance) have board-level oversight of climate plans, indicating that decarbonization is of prime importance in the sector. However, only around 10% of these have climate change or low-carbon expertise identified at the board level.

Accountability can also be greatly strengthened by putting climate transition plans to a shareholder vote, as suggested by initiatives such as Say On Climate. Former Bank of England Governor Mark Carney showed support for this type of accountability mechanism, arguing that, in the same way, investors are involved in pay discussions, involving investors in climate strategies “would establish a critical link between responsibility, accountability and sustainability.”

As we progress further into this critical decade of climate action, the need for credible climate transition plans has never been greater. It is only through robust, science-based and publicly monitored climate transition plans that we can hope to advance towards a green economy and limit global heating to 1.5°C. The time for action is now.

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