Put your money where your mouth is. That’s the candid message from global regulators to businesses at the COP27 summit in Egypt last week.
Recognizing the lack of net-zero targets for most companies, new report from UN and UK Transition Planning Task Force (TPT) calls on companies to support net-zero targets with robust climate transition plans. Importantly, the proposal encourages companies to provide details of capital expenditures and investments to implement the plan. Elsewhere, the SEC’s proposed climate change disclosure rule includes a similar focus on climate transition planning and capital allocation.
Businesses should pay attention to these trends. The UN’s new report is expected to form the foundation for many UN-compliant net-zero frameworks, including Race to Zero, which involves nearly 9,000 companies and investors worldwide. Similarly, the draft TPT will form the basis for regulation on climate transition planning.
But as details crystallize, regulators say their plans for the transition to climate change, even those with added details on capital allocation expenditures, will help drive real-world decarbonisation. You have to ask yourself if that’s enough to drive the substantial change in real-world behavior you want.
Commitments to climate change not supported by strategic plans
FCLTGlobal’s research highlights the complexity of the situation. An analysis of the climate change pledges and plans of the world’s 100 largest publicly traded companies found that 84 companies have set firm commitments, including net-zero targets. However, looking at his communications with investors in the exact same company, three themes emerge.
- Corporate climate ambitions are not supported by corporate financial plansOf the 100 companies evaluated, only 13 provide details of capital allocations to support climate priorities.Only 29 companies have identified financial targets that incorporate climate change considerations
- Corporate approach to climate change is decoupled from core strategyDespite making a pledge to make climate change an organizational priority, only 10 companies reflect this priority in their strategic plan presentations and financial disclosures. Over 90 companies provide detailed climate change disclosures in his ESG reports, but only 27 companies mention climate change in their strategic plan presentations.
- Points 1 and 2 are interconnectedMost companies are unable to provide financial and operational details on these pledges, as their commitment to climate change is not yet recognized as material to value creation and thus not reflected in corporate strategy. not. It is this combination of factors that led to the cacophony highlighted in FCLTGlobal’s report.
Regulation must address root causes of omission
Given this, regulation on climate transition planning needs to address both the manifestations and root causes of climate change inaction and cover both climate-related capital allocation and strategic integration. If changes are made to capital allocation that are not guaranteed by corporate strategy, these may be offset or reversed in the future by carbon-intensive “business as usual” activities in another part of the company. there is a risk that it will be insignificant. Fragmented planning also increases the risk of climate change reports not meaningfully reflecting actual corporate strategy.
Instead of focusing on climate transition plans in silos, regulators would be better off focusing on large companies’ strategic plans to answer the final question. This requires asking how climate change will affect all aspects of a company’s long-term strategic planning.
- How will climate change affect the company’s corporate purpose?
- How will climate change affect key growth drivers for companies, the competitive landscape, and management’s view of the market?
- How will climate change affect your company’s operational and financial goals and key performance indicators?
- How will climate change affect the company’s capital allocation plans?
- How will climate change affect a company’s risk of not meeting its operational and financial goals?
- Is your business structured to integrate climate change into strategic planning at all levels?
Regulators have a significant opportunity to orient companies toward real-world decarbonisation. Decarbonization strategies that are in line with long-term value creation and therefore in the companies’ own best interests are most likely to drive real-world change.
Veena Ramani is Research Director at FCLTGlobal.