Red flags to look out for in corporate transition plans

Transition plans could become a tool of large-scale greenwashing without coherent requirements, Reclaim Finance has stated.

In its report, Corporate Climate Transition Plans: What To Look For, the organisation said there are many diverse frameworks around transition planning at a global level but trying to understand the different requirements has left companies scratching their heads, according to Paul Schreiber, senior policy adviser at Reclaim Finance.

“Lots of people are trying to figure out what they should be looking at in transition plans,” he said.

Schreiber added transition plans have been integrated into reporting, due diligence and prudential rules and this shows the European Union intends to rely on them to reach climate goals and mitigate related risks.

“But so far it has failed to standardise its content and set up any enforcement mechanism. This means companies can adopt purely ‘cosmetic’ transition plans that mask corporate climate inaction, yet still comply with EU regulations.

“Clear rules on the adoption and implementation of credible transition plans are urgently needed,” he added.

In the report, Reclaim Finance compiled essential recommendations for transition plans based on a critical review of 26 prominent transition plan frameworks and also dedicated a section to ‘minimum assessment criteria to avoid a big new greenwashing trend’ – this lists five red flags that indicate a transition plan is likely insufficient. Following this are steps companies can take to ensure plans are fit for purpose. The steps correspond to the topics in the red flags, offering details of how to avoid the omissions.

Here, ESG Clarity summarises:

Decarbonisation target

The NGO highlighted potential gaps in decarbonisation targets such as carbon offsets being used in intermediate targets or accounting for a disproportionate share of long-term targets.

Transition plans not setting their sights on absolute emissions reductions, and using emissions intensity reduction targets instead, are also cause for concern.

In terms of the timeline, investors should worry if there are no short-term or intermediary targets being set. And, the report found, they should be wary of a “dangerous baseline” which Reclaim Finance stated is a target where the climate scenario is not a 1.5°C low/no overshot scenario with a limited level of negative emissions. The base year not being recent and representative is another red flag.

And finally, when it comes to decarbonisation targets, the major issues are:

Targets are not consistent with halving emissions by 2030

Targets not aiming to reduce emissions by at least 90% by the defined carbon neutrality date

Decarbonisation strategy

Looking at a company’s strategy for decarbonising, Reclaim Finance said red flags to look out for included there being no action plan at all, or one not linked to expected quantitative emissions reductions.

If there are no financial targets to increase investment in climate solutions or reduce investment in high-carbon activities, this should be taken as a warning, as should a lack of any definition for climate solutions.

Companies’ plans should cover locked-in emissions and it is remiss to fail to disclose plans to manage greenhouse gas- or energy-intensive assets and products. Meanwhile, the NGO also set out red flags specifically around the phase-out of fossil fuels for companies where that is relevant.

Engagement strategy

Lobbying activities could be misaligned with climate goals if representative bodies are not included in a company’s review of its advocacy activities, the paper stated. Other indicators for poor engagement are an engagement strategy that does not cover key stakeholders across the value chain, no disclosure around how engagement outcomes contribute to climate targets and no escalation process being defined.

Reporting and governance

Where there are no annual reports on transition plan progress and the company does not disclose in an open and public format, Reclaim Finance said this is a warning sign reporting and governance are not up to scratch. Responsibility and oversight of the implementation of the plan should sit at board level and remuneration should incentivise implementation of the plan, Reclaim Finance stated.

If there is no review process set or commitment to integrate major new scientific findings, the group said the plan could be substandard.

Biodiversity and just transition

Activities that are harmful to the environment and nature must be considered in a transition plan. To that end, the paper stated, a red flag to watch for is a company not committing to stop contributing to deforestation and peatland loss by 2025, and to ecosystem conversion by 2030 at the latest.

Finally, investors should be wary if there is no explanation of how a transition plan is compatible with a just transition and if there are no KPIs to assess this. They should look for plans which collect input from workers and affected communities.

Enforcing transition plans

As climate commitments and transition plans come forward, so do cases of companies backtracking on them. In its Voting Matters 2023 report, ShareAction noted with the example of Shell which announced plans to grow its natural gas business one month after its transition plan was approved by shareholders.

Schreiber said these kind of outcomes could be avoided if the implementation of plans was enforced.

“We need standardised contents of transition plans and we also need some type of enforcement mechanism to ensure that they’re actually carried out and put in place by the companies.

“Because you can have a good transition plan on paper, which is not something I’ve seen so far, but you can have one and you can just not implement it,” he said.