A Credible Plan In Five Steps
Decarbonisation is a business imperative for companies looking to remain competitive in the long term. As such, organisations must develop a clear understanding of their current carbon footprint and devise strategies for reducing and ultimately eliminating their emissions. According to the Science Based Targets initiative (SBTi) this ‘climate transition process’ has set over 1,600 companies on a 30-year journey to Net Zero.1
PLANET TRACKER’S TRANSITION PLAN DISCLOSURE ASSESSMENT TEMPLATE
Planet Tracker, has developed a disclosure assessment template which can be used by investors and lenders to determine the credibility of a company’s climate transition plan. This template synthesises key elements of existing frameworks, which includes the CDP Climate Transition Plan2, Carbon Tracker’s Company Profile Methodology, McKinsey Sustainability’s “Solving the net-zero equation“, MSCI’s Climate and Net-Zero Solutions, PRI’s Pathways to Net-zero, and the TCFD’s Recommendations, among others.
A climate transition plan is a time-bound action plan that details an organisation’s strategy for aligning its assets, operations, and value chain with the latest and most ambitious climate science recommendations, while aiming to be profitable in a Net Zero carbon economy.
Based on Planet Tracker’s analysis of these key elements, we recommend that investors check a company’s climate transition plan to see if it provides information for the following five sections – company overview, climate alignment, policy & governance, risk assessment, and strategic analysis – to provide a credible summary of the company’s decarbonisation strategy.
1. COMPANY OVERVIEW
This section should establish the company’s main industry and segments, as well as its geographic exposure. This is crucial as climate transition impacts will vary across asset classes, sectors, and geographies. Therefore, it is essential for the company to identify its main sources of revenue, the location of its assets and suppliers, the natural commodities it is exposed to, and their origin. This information will aid the company and investors in understanding its vulnerabilities and opportunities, and the subsequent financial impact of the climate challenge.
2. CLIMATE ALIGNMENT
The climate transition plan should include a breakdown of the company’s greenhouse gas (GHG) emissions, both operational (Scope 1 and 2) and value-chain (Scope 3), to provide a clear understanding of the company’s current and past emissions profile and the main sources of emissions. These emissions should be reported in absolute kilo-tonnes of CO2 equivalents (KTCO2e) under Scopes 1, 2, and 3 as defined by the Greenhouse Gas Protocol and presented in tabular form to highlight the link between the company’s operating segments, key commodity dependencies, and GhG emissions. Lastly, to ensure the quality of emissions disclosures, they should be reviewed by an external third-party.
Trends and Targets
Starting with a baseline year, ideally updated every 3 years and at least every 5 years, and using the historical data presented in the emissions inventory section, the company should assess its emissions trend and present its success on a yearly basis. This is consistent with the SBTi recommendation3 and the recently published TPT guidance.4 Lastly, a comparison between historical trends and the latest science-based targets should inform the company’s subsequent policy and investment decisions with regard to its climate targets.
If a company operates through a series of different business segments (e.g., Food and Beverages, Personal Care, and Home Care), including a Scope 1, 2 and 3 breakdown per business segment could be highly relevant in informing subsequent mitigation actions. Therefore, we recommend that such a breakdown should be disclosed, when relevant.
3. POLICY AND GOVERNANCE
Engagement and Influence
The company should provide a detailed analysis of its policies to close or maintain the gap between its emissions trends and the science-based targets. Specifically, this section should present the company’s engagement with suppliers, customers, and policymakers (i.e., lobbying5) over the last three years on a comparable basis (i.e., include a list of changes in the engagement plan to adjust its strategies with its targets based on their evolution).
This section should demonstrate that the organisation has board-level oversight of the climate transition plan and that defined governance mechanisms are in place to ensure the delivery of the plan’s targets. A proportion of management’s remuneration should be linked to transition ambitions, and the climate transition plan should be overseen by an independent committee answering to the board as well as an internal sustainability team formed by key executives.
4. RISK ASSESSMENT
Risks and Opportunities
A climate transition plan should present the company’s exposure to climate-related risks and opportunities, relating to Climate Change and Climate Transition.
The main drivers of change when it comes to Climate Change are Physical Impact Drivers. These should demonstrate the exposure of business activities to nature-related risks, including average temperature changes (productivity risk), water security (commodities risk), and extreme weather events (assets and income risks). The company should quantify the potential impact on earnings (by looking at supplier countries and commodities cost changes, asset location hazards, or both).
The main drivers of change when it comes to Climate Transition are External Policy Drivers and Market Drivers. The first one should quantify the potential exposure to carbon pricing and other regulations. It should also quantify the company’s current ability to absorb theoretical future carbon prices including the potential earnings at risk from carbon pricing, based on its emissions trend. For comparison purposes, EBIT relative metrics should be employed. Market Drivers will include the latest technological developments, changes in consumer behaviour and demand, and industry financing terms.
This section should describe the measures and provisions made by the company to avoid, adapt to, or mitigate the negative financial impact resulting from Climate Change and Transition i.e. the risks relating to carbon pricing, physical value at risk, and market impact.
5. STRATEGIC ANALYSIS
As part of its net-zero strategy, an organisation should provide a detailed, time-bound financial plan. To evaluate the effectiveness of the company’s policy and governance strategy and risk management actions in achieving science-based targets, this section should illustrate the correlation between emissions reduction and the corresponding investments made to achieve said reduction. These investments should be broken down by mitigation action and validated by a third party (either directly or indirectly, such as through the use of abatement curves).
Having presented the company’s alignment with climate goals, its policy and governance strategy, its climate change and transition risks, and its financial plans for transition, this section should provide a comprehensive evaluation of the company’s progress towards its targets. Any gaps in the plan should be identified and addressed. This section should offer a clear and concise summary of the company’s overall climate transition plan.
A credible climate transition plan is a must-have for businesses wishing to successfully navigate the transition to a Net Zero world and is a key requirement for financial institutions that are assessing the companies they fund as part of their own Net Zero plans. We recommend to both, companies and financial institutions, to start using simple but concise disclosure templates like the one described in this note.
Please download and use the Planet Tracker Net Zero Transition Plan Disclosure Guidance Template for consumer goods companies.
REFERENCES AND NOTES
2 The CDP Climate Transition Plan includes the synthesis of frameworks such as: Assessing Low Carbon Transition (ACT), Climate Action 100+ (CA100+), Say on Climate initiative [CIFF], Oxford Martin Principles for Climate-Conscious Investment, Alliance for Corporate Transparency, Australasian Centre for Corporate Responsibility (ACCR) and The International Capital Market Association (ICMA), among others.
3 SBTi: “The SBTi recommends that companies publicly report a company-wide GHG emissions inventory
and progress against published targets on an annual basis. At a minimum, targets should be
reassessed every five years. Furthermore, to ensure consistent performance tracking over time,
targets must be recalculated to reflect any significant changes that would compromise the target’s
relevance and consistency.”
4 TPT: “[W]e recommend that entities update the standalone transition plan periodically, either when there are significant changes to the plan or, at the latest, every three years. In the interim years progress against the plan and all other content in the plan that is deemed to be material to investors should be reported on an annual basis.”
5 As exposed on https://lobbymap.org/