Ambition and ambivalence: the story of corporate transition plans

No one ever said that decarbonisation would be simple, let alone easy. Perhaps then, being generous, we should give credit to any company which has committed to publish a climate transition plan. However, while it is a commendable start, our analysis shows there is a vast disparity between those pressing ahead with best practice, and those pushing ambivalent, vague plans into the public realm.

We found that only 40 percent of our sample of high emitting companies both disclose their decarbonisation measures and quantify their contribution to emissions targets. This highlights a challenge for investors reliant on these transition plans for building or decarbonising their portfolio.

Talk is cheap

For the sake of clarity: what do we mean by quantification and why does it matter?

Our sample of 319 companies focused on large-cap, high-emitting companies with a public emission reduction target with a relevant report available. In this respect, it is a fair interpretation that these are companies that are already taking greater responsibility than their peers who have not done the same.

However, for an investor looking at these plans, good intentions and high ambitions are not enough: transition plans must also be credible. So, while 80 percent of our sample companies provide detail of the various decarbonisation levers they intend to deploy, less than 40 percent actually attach hard numbers to these measures and detail how much they will contribute to headline emissions reductions targets, or have done so to date. Without these numbers, how is an investor to determine whether the plan is credible?

Talk is cheap, and companies need to move beyond vague, ambivalent ambitions to quantified plans.

An optimistic baseline

It’s also worth noting that this figure of 40 percent could be an optimistic baseline. We used a large language model (LLM) AI tool to parse transition plans for identifiable quantification metrics. We did not qualitatively analyse these metrics nor did we differentiate between the various emission scopes. However, it was observed that the measures primarily related to Scope 1 and 2 emissions, for which targets were more frequently formulated than for Scope 3.

Therefore, it is feasible that the proportion of companies in the sample providing truly high-quality quantification of their decarbonisation measures is lower than 40 percent. This paints the red flag for investors an even deeper shade of scarlet.

Distinguishing between decarbonisation measures

Our analysis also looked at what types of decarbonisation measures companies were committing to. In particular, we paid attention to whether plans were reliant on the use of carbon credits and negative emissions technologies.

Both of these approaches have valid applications, but are also weighed down by controversies. Critics of carbon credits have argued that their quality and effectiveness is often low, and that companies may use them to divert attention from their own operational carbon emissions. These voices were amplified recently when the Science Based Targets Initiative (SBTI) publicly considered allowing carbon credits as an instrument for achieving targets, having previously resoundingly rejected the idea.

On negative emissions technologies such as carbon capture and storage (CCS) and reforestation, critics also point to the fact that projects are often still in the early stages of development or have not been proven at scale. It follows that the real-world impact of these approaches may be overstated and that, once again, these measures may be obscuring inadequate attempts to reduce actual operational emissions.

According to our analysis, 22 percent of companies reported using carbon credits and 38 percent employed negative emissions technologies. Encouragingly, this represents a minority on both fronts. Nonetheless, the figures are still high enough to sound a word of warning to investors.

Pockets of best practice

The overall takeaway of our analysis is that many corporate transition plans are therefore falling short of their ambitions – either in the selection of decarbonisation measures they employ, or their failure to properly quantify them.

However, it’s important to note that there were identifiable pockets of best – or at least better – practice. For example, while overall only 40 percent of high emitting companies included clear quantification, this figure rose to 48 percent in Europe, and 67 percent in Japan. This chimes with the prevailing narrative that these regions are leaders on the climate transition – however, it should be noted that the use of carbon offsetting was higher in Asia versus the average at 32 percent and was particularly high in Japan.

There are also notable differences between sectors. For instance, while just 38 percent of companies overall were using negative emissions technologies, this jumped to over 70 percent in both the oil & gas and steel sectors.

Should these sectors be judged as equivalent then? Not necessarily. While it can be reasonably assumed that the willingness for genuine decarbonisation is relatively low in the oil & gas sector, and that CCS is used to legitimise the existing business model, the scenario is different for steel. In this sector, breakthrough technologies (such as green hydrogen or electric arc furnace steelmaking) are in early stages of development or remain prohibitively expensive for now. Therefore, CCS could be seen as an important and possibly justified alternative for emissions avoidance. This interpretation is given weight by the fact that 24 percent of oil & gas companies (below average) and 46 percent of steel companies (above average) both disclosed measures and quantified their impact.

A word to the wise

Investors are increasingly focused on analysing corporate climate transition plans due to their expected impact on long-term financial performance and sustainability. They will be pleased to see that the controversial use of carbon credits and negative emission technologies to achieve emission targets does not seem to be widespread practice among many high-emitting companies.

However, our analysis does show that, due to reliance on these approaches, the associated risk of greenwashing may be higher for companies in certain regions and sectors. This is exacerbated by the fact that a minority of plans couple description of decarbonisation measures with quantifiable analysis of their contributions.

Of course, any investor worth their salt will take an unquantified transition plan with a pinch of the same, but our analysis serves as a reminder that the quality of corporate transition plans still lags behind what investors require.

More information can be found in the full report: Credible climate transition plans: Credible climate transition plans: Insights from an AI-driven analysis of corporate disclosures, June 2024