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The path to net-zero will require stronger climate action plans

Latest update from investor-backed Transition Pathways Initiative reveals number of 'credible' net zero targets have doubled over the past year, but warns the majority of high-carbon companies are yet to establish climate plans in line with global climate goals

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Net-zero corporate pledges may have increased substantially in quality and quantity over the past year, but the majority of the world's most polluting companies are yet to publish credible decarbonization plans that can deliver a net-zero emission economy within the next 30 years.

That is the stark warning from the investor-backed Transition Pathway Initiative (TPI) in its State of Transition 2021 report, published this week, which reveals that just 17 percent of major companies in the energy, industrials and materials, transport and consumer goods and services sectors have business plans aligned with a warming pathway that would cap temperature rises this century to 2 degrees Celsius or below.

The scorecard, which analyzed the climate plans of 401 firms collectively responsible for 16 percent of global market value, reveals a sharp rise in the number of credible corporate net-zero targets, calculating the number of firms with "genuine" net-zero commitments has doubled from 14 to 35 within the past year.

While these gains are not insignificant and provide further evidence of how climate considerations have permeated even the most polluting segments of the global economy over the last 12 months, the report's conclusions also hammer home that corporate climate leaders remain hugely outnumbered by laggards amongst their peer group. The findings suggest many high-carbon industries remain underprepared for the transition ahead, with the majority of the world's most polluting companies yet to formally set out how they will reform their operations and activities to decarbonize in line with global climate goals.

The majority of the world's most polluting companies yet to formally set out how they will reform their operations and activities to decarbonize in line with global climate goals.

The report, compiled for the TPI by the Grantham Research Institute on Climate Change and the Environment and the London School of Economics, ranks companies on the "management quality" of their climate plans — based on a number of indicators related to company governance — and on how corporate emissions pathways are tracking against global climate goals. On the latter point, it found 47 percent of companies on its scorecard were not aligned with any of Paris Agreement benchmarks — not even the first round of national climate plans pledged by countries and key U.N. agencies in 2015 that are broadly seen as insufficient to steer a 2 degrees Celsius scenario. Moreover, 16 percent of the companies analyzed did not provide suitable disclosure to enable an assessment.

TPI chair and chief responsible investment officer at the Church of England Pensions Board Andrew Matthews emphasized that companies needed to dramatically step up their decarbonization efforts if they wanted to avert climate catastrophe, attract new investment, and appease existing investors committed to cleaning up their portfolios.

"As we enter the 'decade of transition' having only 17 percent of companies with credible net-zero commitments is not enough," he said. "As investors, we need to work with companies to ensure that they are aligned with a pathway to keep global warming at 1.5C."

The report advises investors to approach corporate net-zero commitments with caution, noting most corporate climate plans remain weak and ineffective because they ignore major buckets of material emissions. Oil and gas company emission reduction targets, for instance, typically ignore third-party energy sales and only sometimes includes emissions generated by their fossil fuel products, whereas climate goals from auto manufacturers generally neglect emissions generated by vehicles, it states. "In short, a net-zero target does not necessarily mean that a company's material emissions reach net-zero," the report states. "Investors should pay close attention to target coverage."

Overall the report warns none of the 16 sectors investigated in the report have been decarbonizing at the rate required to achieve credible net-zero 2050 targets. Even the electric utilities sector — which has delivered the fastest emissions reduction of all the sectors surveyed — will fail to deliver their 2050 targets at current rates, the report states. And it states that "management quality" scores have stagnated since the 2020 edition of the report, signaling that companies have established climate policies but are yet to adopt strategic governance and management practices that will enable and push forward plans.

Companies around the world are facing growing pressure from investors to divest from high-carbon assets and put their business models on a more sustainable pathway. The Net Zero Asset Managers Initiative estimates more than a third of the world's assets under management are tied to net-zero portfolio pledges, and the "Net Zero Investment Framework" published last month by a major coalition of global investors aims to standardize what a net-zero investment portfolio looks like and how it can be achieved.

It is clear that many laggards identified by the TPI's report will need to clean up their act if they are to continue to curry favor with large portions of the investment community. It is a reality further underlined by this week's news that more than 310 businesses and investment firms have signed an open letter calling for the White House to set a new target to cut greenhouse gas emissions to "at least" 50 percent below 2005 levels by 2030.

Matthews said the new "State of Transition 2021" report would help equity and debt investors differentiate between companies with credible plans and those without. "These are companies with long-term climate commitments accompanied by clear milestones that don't kick tough decisions into the long grass, and a comprehensive scope that covers all material emissions in a firm's supply chain," he said, noting that progress to date remained concentrated to a "limited leadership group."

As we enter the 'decade of transition' having only 17% of companies with credible net-zero commitments is not enough.

Eva Cairns, senior ESG investment analyst of climate change at Aberdeen Standard Investments, stressed that the report would inform the asset manager's research and stewardship activities. "Investing in credible, ambitious transition leaders is critical on the path to net-zero," she said. "The 2021 TPI State of Transition report provides extremely valuable input to investors as it helps identify transition leaders and laggards in a robust manner."

While many findings in the TPI's scorecard highlight the still immense scale of the decarbonization challenges, the doubling in the number of companies setting genuine net-zero targets is truly a major achievement and one that is testament to the significant culture shift seen across the global economy over the last 12 months.

While the report does suggest many of the world's most polluting sectors are yet to seriously set out how they can credibly reduce their exposure to climate and transition risk, we may be witnessing the last gasp of the perilous school of thought that saw too many top business leaders ignore escalating climate risks. The past year has demonstrated how fast businesses can adapt and adjust their operations and business models, and growing investor pressure is likely to push firms to revamp their climate commitments over the coming months and years in order to put them on a more sustainable pathway. 

Moreover, this week's report adds to a wave of resources published in recent months by major investors geared at scoring, comparing, and streamlining corporate climate action as players across the private sector move from ambition into delivery, such as the IIGCC's Net Zero Investment Framework and a benchmark of corporate climate action by investor-led group Climate Action 100+.

As investors and companies move from ambition to delivery of climate action during this critical decade armed with this growing library of resources, it is clear there will be less room for maneuver for climate laggards who wish to hide behind weak net-zero commitments or sketchy climate plans.

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