Credible firm-level transition plans need credible national actions
Firm-level transition plans are driven by climate risk management as well as net-zero targets.
There has been a steady increase in the number of climate-related corporate commitments to align business models with the Paris Agreement. While many of these commitments are not backed by clear action plans, transition plans detailing how these goals would be achieved are becoming more common (Axelsson et al., 2023). This trend is backed by increasing mandates to disclose key climate performance indicators, for instance in the United States (US), the European Union, Brazil, or India, with around 56% of the global GDP covered by climate-related disclosure mandates (Jonson, 2022). However, corporate climate disclosure remains limited both in terms of coverage of disclosing entities and of comprehensiveness and quality of the disclosed information (Bolton et al., 2021; John Armour et al., 2022; Net Zero Tracker, 2023).
Disclosure frameworks detailing what should be included in these plans can get quite complex.
The guidelines from the Taskforce on Climate-related Financial Disclosures (TCFD) and the Transition Plan Taskforce (TPT) Framework require setting emissions reduction targets, adopting aligned technology pathways backed by investment planning, and management of internal as well as external stakeholders, etc. (Transition Plan Taskforce, 2023). While the key components of a transition plan are similar across companies, sector-specific action items and disclosure can be required to make these plans credible (Kampmann et al., 2023; Luis Resendiz & Shrimali, 2023; Rose et al., 2023; Zhou & Shrimali, 2023).
The need to assess whether companies will deliver on their commitments has led to the development of a plethora of assessment methodologies, often sector-specific, evaluating the credibility of transition plans, such as the Assessing Low Carbon Transition Initiative (ACT, 2021), or the Transition Pathway Initiative (TPI). An OECD survey has identified several elements of credible firm-level transition plans such as transparency, regular reporting, third-party verification, accountability mechanisms, alignment with government goals and sectoral pathways/strategies (OECD, 2022).
A key prerequisite for corporate transition plans to be credible is country-level actions.
This piece focuses on the interconnection of firm-level transition plans and national transition plans and policies. National transition plans have similar components to firm-level transition plans as they also include emissions reduction targets, Nationally Determined Contributions (NDC), or financial planning to support the development of low-carbon technologies. These elements will in turn impact firm-level plans through several channels.
A first transmission mechanism is that a country’s ambition can influence corporate ambitions.
For instance, the emissions reduction target of PEMEX, the state-owned national Mexican oil company, is directly derived from the country’s NDC (PEMEX, 2023). States can act as referees and prioritize between sectors, imposing different paces of decarbonization for each sector. For instance, Mexico’s initial commitment to reduce its Greenhouse Gas emissions reduction by 22.0% by 2030 was translated into the Mexican General Law on Climate Change as an obligation for the oil and gas sector to reduce its emissions by 14% by 2030 compared with 2013.
Further, one of the salient features of the Paris Agreement is to revise country-level pledges upwards periodically. In line with the country-level ambition, firm-level transition plans also need to be reviewed and revised regularly, and their level of ambition and action would then be ratcheted up based on the country-level ambition. Country- and company-level climate ambitions could reinforce each other (Eskander, 2024). In the Mexican case, Mexico committed to reducing its GHG emissions by 35% by 2030 and may increase this to up to 40.0% GHG reduction subject to further global agreements; however, this has not been translated into a more ambitious emission reduction target in the oil and gas sector yet.
In each sector, public action can support (or hinder) the transition.
This can include price mechanisms, such as emissions trading systems taxing emissive activities or subsidies supporting low-carbon activities, or by introducing norms such as green taxonomies, or by directly regulating activities for instance through clean energy mandates, energy efficiency standards, or bans of polluting activities.
Besides, many net-zero technologies are not available at a commercial scale yet (International Energy Agency, 2022a), and countries can play a role in fostering innovation and Research & Development (R&D) in low-carbon technologies (Kampmann et al., 2023; Rissman et al., 2020). The state can also support demand for green products through public procurement.
Using a carrot-and-stick approach, the overall policy package should need to incentivize firms which take bold climate action and penalize the ones which don’t. The recent Inflation Reduction Act in the United States and the European Green Deal in the European Union are a case in point.
Industrial roadmaps can provide visibility regarding sectoral and technology pathways.
These are key documents to help companies design credible transition plans and to foster collaboration between companies and the state as well as within the industry. This is particularly relevant for sectors where most near-zero emissions technologies do not exist yet and where actors rely heavily on investments outside their value chain such as the steel sector.
Roadmaps such as the “Technology Roadmap for Transition Finance in Iron and Steel Sector” from the Japanese Ministry of Economy, Trade and Industry provide actors with valuable information on Japan’s plan to shift its highly emissive steelmaking asset base to low carbon production routes. Clear timelines on the expected development of each technology, backed by concrete pilot programs and financial planning, help steelmakers to better manage risk and make long-term plans.
A company’s decarbonization will often rely on evolutions outside of its sector and core activities.
For instance, while improving energy efficiency or cutting consumption can help reduce Scope 2 emissions, another key factor is the decarbonisation of the electricity grid. Companies’ transition plans might assume future access to green hydrogen or Carbon, Capture, and Storage (CCS) without planning to directly develop these solutions, making the achievement of their transition plans rely on external factors outside of their operational control. These will require significant infrastructure development and cooperation between industries, both regarding the development of these solutions and the allocation of their end-use, where the state can play an important role (Kampmann et al., 2023). Achieving a climate transition demands the collective transition of all real economy sectors, with the government acting as the conductor, harmonizing and supporting this endeavour.
Companies might even plan to transition faster than the environment or sector where they operate, which should be encouraged. For instance, JSW Steel, a leading Indian steel production company, plans to reduce the CO2 emission intensity of its crude steel production in India to less than 1.95 tCO2/ton by 2030 while the current decarbonisation projection adopted by the Indian Ministry of Steel is of 2.2–2.4 tCO2/ton for the Blast Furnace-Basic Oxygen Furnace production route and 2.6–2.7 tCO2/ton for other routes. However, these companies should back their ambition with an even more robust and detailed transition plan to ensure that their strategy is credible and feasible as they might face additional constraints.
Policies targeted toward the workforce and the population can also impact firm-level transition plans.
Shifting away from fossil fuel industries will have significant socioeconomic consequences, with entire sectors needing to wind down their activities. States can also play a role in supporting the phase-out of highly emissive corporate assets, for instance by protecting their population from the associated economic downfalls to ensure a just transition. Supporting education systems which raise awareness on climate change issues and ensuring that curriculums integrate training specific to low-carbon activities will also indirectly impact corporate transition plans as it will allow companies to access a more skilled workforce.
A country-specific assessment of firm-level transition plans is necessary.
First, it enables a more realistic assessment of how a firm-level plan fits in its environment, especially regarding the technology pathways that are available to a company. Second, conducting a geographically specific assessment enables us to better account for regional aspects such as resource availability or ongoing and future physical climate impacts which will vary across regions. Finally, it accounts for the fact that countries have differentiated responsibilities to decarbonize given the stark differences in current and historical emissions levels of developed and developing economies (Beusch et al., 2022; Hickel, 2020). As a result, countries and therefore companies will decarbonize at different paces, pursuing different technology mixes and this should be accounted for in the assessment of their transition plans.
This requires companies’ transition plan to be assessed along country-specific benchmarks.
Specifically, regarding emissions pathways, and sectoral and technology pathways. Designing such benchmarks is challenging as they must account for multiple aspects such as fairness and ability and ambition to decarbonize, while ensuring that the global trajectory is aligned with the Paris Agreement. Organizations such as the International Energy Agency (IEA), Mission Possible Partnership, or Climate Works Centre provide valuable information by trying to model country-level emissions, technologies and investment pathways which can then be used as possible benchmarks (ClimateWorks Centre, 2020; International Energy Agency, 2022b; Mission Possible Partnership, 2022).
Assessment of firms’ transition plans requires assessing national commitments and transition plans.
While 150 nations have made net zero commitments, covering about 91% of global emissions, only 15 have backed these goals with detailed plans (Net Zero Tracker, 2023). On the corporate side, only 1.3% of the companies covered by the Net Zero Tracker had published a detailed plan to reach net zero. Given the intricate relationship between national and firm-level transition plans, the lack of transition plans on both ends raises concerns about the credibility of corporate and national commitments.
Monitoring and assessing climate commitments and national transition plans is crucial.
Monitoring progress ensures that countries are on track with their emissions pathways and that their proposed actions will deliver on their climate goals. Entities such as the Climate Change Committee in the United Kingdom (UK) can assess whether the country is likely to meet its short-medium and long-term targets and point out policy gaps. Their latest report shows decreasing confidence that the UK will meet its 2030 target as key pillars of the country’s decarbonization strategy are not backed by robust plans such as industrial electrification or resource efficiency (Climate Change Committee, 2022). Independent organizations such as Climate Action Tracker also provide valuable information on the current state of national actions, though further work is needed to fully understand the impact of each policy and public action as well as their interactions and interdependencies.
Finally, legal frameworks and civil society engagement are key elements to hold countries accountable.
As shown by the United Kingdom’s High Court ruling that the government’s net zero strategy does not meet the government’s obligations under the UK Climate Change Act. This followed similar rulings in France and the Netherlands, with climate NGOs initiating the legal sequence in the three cases. Such mechanisms can help to stay on track with a net zero pathway despite the still much-needed detailed national transition plans.
About the Authors
Dr. Gireesh Shrimali is the head of Transition Finance Research at the Oxford Sustainable Finance Group, Smith School of Enterprise and Environment, University of Oxford.
Dr. Abhinav Jindal is Senior Faculty, Power Management Institute as well as Deputy General Manager at NTPC Limited.
Adrien Rose is a research assistant part of the Transition Finance Research at the Oxford Sustainable Finance Group, Smith School of Enterprise and Environment, University of Oxford.
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