Increase Policy Engagement on Transition, Investors Told
Transition Pathway Initiative warns against deprioritising EMDE investments due to perceived lack of sustainability disclosure.
Investors need to take greater account of the role of regulation and policy in the climate transition, according to the authors of a recent report benchmarking the readiness of the world’s largest companies.
The third ‘State of Transition’ report from the Transition Pathway Initiative (TPI) Centre – part of the London School of Economics’ (LSE) Grantham Research Institute on Climate Change and the Environment – analysed the carbon performance of 409 large firms and the management quality progress of more than 1,000 of the world’s highest-emitting public companies, collectively worth around US$39 trillion.
The research suggested investors should develop an improved understanding of the feasibility of companies’ supporting plans and governance when assessing their transition strategies. It emphasised that this should include consideration of country-level operational factors such as national policies and corporate governance norms.
“Investors shouldn’t just be looking at the individual assets they hold, and how particular companies are responding,” David Russell, Chair of TPI, told ESG Investor. “Climate change is a systemic risk and requires a systemic response, which pushes investors to start thinking about how they engage with policymakers to ensure the appropriate policies are in place to drive corporate transition.
“A policy focus on addressing systemic risks like climate change is critical if long-term investors – both asset owners and asset managers – are to see the issue addressed,” he added. “You can’t get there by just engaging with companies, it’s got to be a policy-level focus as well.”
Simon Dietz, Research Director at the TPI Centre and Professor of Environmental Policy, Department of Geography, at LSE, noted that there was a “symbiosis” between public policy and corporate action, and that it is difficult for corporates to implement change “if there is a vacuum of public policy”.
Regulatory roll-out
Government action plays a critical role in reducing and reporting climate risks in the private sector, as well as directing the net zero transition in key industry sectors. Many jurisdictions globally have adopted the recommendations of the Task Force on Climate-related Financial Disclosures, with more working on the integration of the climate and sustainability standards of the International Sustainability Standards Board.
The EU has been considering making transition plans mandatory, and earlier this month its research arm recommended the development of a framework to help firms, investors and regulators evaluate corporate climate transition plans.
Scientists at the European Commission’s Joint Research Centre released a report considering where business operations and assets are located when deciding whether its transition plan is credible. This included some initial recommendations for assessing whether decarbonisation goals are realistic when seen in their geographical context.
The EU’s advisory body on corporate reporting, the European Financial Reporting Advisory Group, is also expected to issue a consultation on transition plans under the European Sustainability Reporting Standards next month.
“More regulation is needed. Having a level playing field for disclosure is helpful, so that companies in individual countries or regional markets like the EU are disclosing similar data sets, whether that’s on targets or transition planning or any other ESG related data,” said Russell. “Investors need to be able to compare what companies are doing in different markets and more guidance or regulation requiring reporting on this critical matter is sensible.
“There needs to be regulation and standardisation of the provision of information by companies to financial markets, as well as a strong traditional climate regulation framework in place.”
In parallel, government policy is shaping the pace and scale of the transition away from fossil fuels in key sectors, including heavy industry, vehicle manufacture, power generation and the agri-food sector. As the TPI Centre report notes, these policies are critical to decarbonisation journeys of firms in these sectors.
High emitting firms can face severe challenges in failing to effectively transition, as was recently illustrated by the loss of 2,500 jobs will go at the Port Talbot steelworks in South Wales, despite steel being one of the most aligned sectors long-term and a £500 million (US$656.3 million) taxpayer-backed deal for the plant.
Impact on EMDEs
According to the TPI Centre, the sectors most aligned with keeping climate change to 1.5°C or below 2°C are diversified mining (50%), steel (46%) and electricity (41%), while food producers (8%) and oil and gas companies (6%) were the least aligned.
While the report highlighted the share of companies with long-term emissions targets aligned with 1.5°C has increased from 7% in 2020 to 30%, 70% still lack such targets for 2050. It also noted the credibility of firms’ long-term climate ambitions is “unclear”, with many lacking intermediate targets or clarity over essential elements of their climate strategies.
“Early action is really important in achieving alignment with the Paris Agreement,” said Russell. “It’s positive to have the long-term targets, but [the report] highlights to investors that there needs to be work on encouraging companies to put in place short- and medium-term targets, so that they’re moving now, rather than pushing all actions back to 2030, 2040, or 2050. There’s a gap between what needs to happen now and what the targets are.”
Regionally, European (66%), Australasian (64%) and Japanese (56%) companies’ climate targets have the highest alignment with 1.5°C or below 2°C in 2050. In China, 82% firms are either not aligned or lack suitable disclosure of relevant information, as is the case for 70% of firms headquartered in other Asian countries.
“Companies headquartered in industrialised countries tend to perform better on our metrics than companies headquartered in emerging markets and developing economies (EMDEs),” said Dietz. “The concern is that if investors use the [report’s] data without giving consideration to this issue, then they could potentially be withdrawing capital that these countries desperately need to make the transition.”
To explore the regulatory drivers of this relationship, the report overlayed TPI company data with the new Assessing Sovereign Climate-Related Opportunities and Risks (ASCOR) tool, which currently covers 25 countries.
“In the report, we provide some initial suggestions for how investors can think in a more nuanced way about companies headquartered in EMDEs, including potentially thinking about specific indicators that such companies could be exempted on,” said Dietz. “That is not a trivial step, however. It needs to be thought through carefully, because a lot of the indicators are really meaningful.”
Over the coming months, the TPI Centre plans to expand and deepen its offering, as well as heighten connections between its various ongoing projects. This includes doubling the number of companies it provides management quality data to more than 2,000, as well as steadily increasing the carbon performance data set to approximately 550 firms.
It is also due to release a report on banks’ alignment of financing activities with the goals of the Paris Agreement, including an update of the data set on banks increasing the number of banks covered from 26 to 38. An updated ASCOR report will be launched before the end of the year, expanding its country coverage to 70.
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