What’s the Story?

Last week CDP reported that only 0.4% of companies had a credible climate transition plan in line with global climate goals to 2050.

This is based on 18,606 companies reporting under the CDP climate category for 2022. Only 81 companies had a time bound, clear, detailed transition plan to halve GHG emissions by 2030, with net zero delivered by 2050, and on a glide-path to meet the global 1.5°c goal.

Put another way 99.6% of reporting CDP companies do not have such a plan. And that ignores thousands of companies not reporting voluntarily to CDP which, almost certainly, have worse profiles than those who do.

But the report also flags the 35% of companies expecting to develop a climate transition plan within two years, an up-jump from the 21% of those reporting the same thing in 2021.

There are also reports that Shell is being sued by Client Earth, with support from some institutional investors. The claim is that the Shell transition plan does not protect shareholder value adequately. Significantly, the directors are co-joined in the action.

The Transition Plan Taskforce has also recently set out gold standard guidance as to how companies should set about climate transition planning. The "Ambition, Action and Accountability" categories make good reading.

Why Does it Matter?

Companies must have a credible and practical climate transition plan. Boards that believe that company climate action is to benefit the world generally, are deeply misguided. Failure on climate will become a major source of corporate insolvency for decades to come, as markets change and the asset base erodes we shall see many forms of stranded asset.

The global Fossil Fuel Economy will change to the net zero economy. That is inevitable, the only points of debate are how quickly that happens, and if it happens smoothly or in disorderly, tectonic, chunks of economic crisis (which is more probable).

The company transition plan must be robust to navigate these potentially choppy waters and that will need vision, money and talent. All combined and changing over time.

For capital expenditure, the NPV climate CAP-X evaluation should recognise that the non-invest case does not mean cash flows continue from business as usual uninterrupted. To think about how that works, companies might read across to their TCFD scenario analysis. If this sound a bit complicated, all to the good, as awareness is awakened.

The huge extent of change represented by the global transition will reach deeply into the field of human capital as well. Not only will job content change, but so too will reporting lines, pay structures and the focus of incentives.

The short question “why does it matter?” needs a long answer, but each company must frame their answer in light of their own business profile.

Newspoint View

Executive incentives should deliver the corporate aims in order to deliver the outcomes set by shareholders and other stakeholders.

While ESG, including climate, are now commonly seen within incentive plan metrics, their weight and behaviour impacts are tiny.

Maybe this is unsurprising. The 21% of 2021 CDP reporting companies expecting to set a detailed transition plan within two years, only 0.4% have done so 12 months later. That casts a shadow of doubt on the now 35% of 2022 CDP reporting companies expressing the same intention.

Nonetheless, TCFD climate reporting on a mandatory basis for many companies has made a strong dent in corporate awareness. What is needed now is action.

The high CDP standard of transition plan might be a stretch too far for many companies currently. Many transition plans exist which are worthy; but fall short of the full global alignment test.

That said, climate corporate action seems to be back stacked. The upshot may increasingly mean a global disorderly transition to Net Zero, which would be bad news.

Disorderly transition to net zero will cause enormous economic disruption, on an unpredictable timescale. Past deep recessions may be minor in comparison. Only companies with strong balance sheet will survive. Insurance will be exorbitant or impossible for many, and attracting top talent to manage out the company situation will be hard to attract and retain.

Companies will increasing put a "Say on Climate" to a shareholder vote. In 2021 the AGM vote on climate saw Unilever receive near universal support, while tellingly, the Shell vote on the same thing saw significant minority dissent.

Job one on climate is for companies to set their transition plan. Tinkering with their CO2e profile is worthy but not the whole job.

Executive incentives must be linked to developing the climate transition plan, and to delivering the milestone achievements thereafter. This is now needed urgently for many companies and will likely be welcomed both by shareholders and executives alike.

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