Introduction:
In a previous blog we looked at the best tools to assess specific ambition elements of a company’s decarbonization target(s).
This blog builds on that analysis to take a wider lense at an overall transition strategy a company has and how do we best assess the credibility of such a strategy.
Whilst there are many aspects of transitioning to a low carbon economy and net zero, the key focus is on decarbonization. Hence this is also our focus and the emphasis of this following article below…
Key Market References:
1. ICMA Climate Transition Finance Handbook
There are four key elements to these recommendations, this is instrument agnostic and can be used to support any type of labelled or thematic bond/loan.
- Issuer’s climate transition strategy and governance (specific governance structure, responsible parties, detailed strategy);
- Business model environmental materiality (this is rather obvious, however, is climate material to the company, business model and future prospects);
- Climate transition strategy to be ‘science-based’ including targets and pathways (similar to the tools we explained in our earlier blog ie. Best tools in the shed to asses transition decarbonization); and,
- Implementation transparency (mainly around opex, capex and transparency of reporting)
There are an increasing number of examples of this incorporated by external reviewers into second party opinions for Transition focused issuances and loans; such as Air Liquide, Seaspan, Volaris, and Newmont.
2. Climate Bond Initiative:
- As we can see below the CBI approach shares a number of characteristics as ICMA’s guidance.
- Particularly in terms of governance, reporting, transparency, and being science aligned.
- Additionally, guidance is provided on short and medium term targets, plus previous CBI guidance on not using offsets or avoided emissions to count towards targets.
3. Climate Alliance 100:
- The CA 100 is a great initiative that benchmarks a number of companies.
- We like the simplicity of the key items they focus on which is a good template to what good looks like for a transition strategy and at least the minimum items a company should have.
- This approach also specifically mentions TCFD as the pre-eminent framework for more detailed climate disclosures which also includes the important aspect of scenario analysis
- Net-zero GHG Emissions by 2050 (or sooner) ambition
- Long-term (2036-2050) GHG reduction targets
- Medium-term (2026-2035) GHG reduction targets
- Short-term (up to 2025) GHG reduction targets
- Decarbonization strategy
- Capital allocation alignment
- Climate policy engagement
- Climate governance
- Just Transition (not assessed for 2021)
- TCFD disclosure
4. Climate Disclosure Project:
- A number of the aspects for this approach are mirrored in the other frameworks and approaches that we have reviewed briefly.
- Governance, Reporting, Clear Targets and commitments, aspects impact on broader society and short/medium term focus.
Future Developments:
Whilst a number of cornerstone aspects are similar across the above-mentioned frameworks such as short medium long term strategy, governance, transparency and deeper reporting, there are elements which will need to be evolved further ongoing forward:
- Will we see elements of just transition and how companies are preparing their workforces for changes in their business and any impacted communities and stakeholders (other social dimensions)?
- The other twin in the climate change emergency is biodiversity and we would expect much more scrutiny and expectation that this aspect of dependence, impact and interlinks across a company’s strategy and business model to be incorporated into strategies going forward.
- Given several transition technologies are not yet economic and nascent scrutiny on R&D will be key, and also much more visibility into risks and unknows on transition strategy.
- Furthermore, scenario analysis should also grow as this is also a key part of TCFD and a well- rounded strategy
In Conclusion…
As ambition and expectation grows, transition strategies will need to be more multi-dimensional, beyond just decarbonization, people focused, and much deeper in implementation and also risk + opportunities.
As the market develops, we expect more tools on what good looks like and guidance on how we can use these as a yardstick to benchmark a company on its transition strategy. This will help drive the transition ambition to much higher and greater levels.
