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Sector-neutral transition plan guidance helps investors and companies get from ‘A to Zero’

Sector-neutral transition plan guidance helps investors and companies get from ‘A to Zero’

This guidance simplifies the definition of a credible transition plan into five components, applicable to all companies, and is designed to support investors in their assessments and engagement conversations.

Assessing the credibility of company net zero climate commitments has become vital for investors transitioning their portfolios to net zero.

This requirement is only increasing as more investors commit to aligning their portfolios with the Paris Agreement, consistent with the obligation to deliver sustainable returns for clients and beneficiaries.

For the majority who have set a net zero commitment the Net Zero Investment Framework (NZIF) is their main source of guidance. NZIF encourages portfolio decarbonisation by emissions reductions associated with assets held and this transition plan guidance is designed to complement it.

It’s applicable across sectors, for companies of all sizes and types.

Read Investor Expectations of Corporate Transition Plans: From A to Zero

Defining a transition plan

Focused on decarbonisation, the guidance explains that a credible transition plan is a document “that sets out how a company intends to navigate the transition to a low carbon economy, capturing all relevant disclosures.” This includes comprehensive, Paris-aligned emissions targets, as well as clarity on how it intends to deliver them.

Reaching net zero requires many parties to take action. Just as investors depend on their assets to reach their net zero targets, most companies themselves cannot achieve net zero alone. With that in mind, the guidance recommends that any plan acknowledges this by also setting out the key interdependencies within its specific sectors.

In recent years investors have had guidance from several parties in this area and expectations have become increasingly complex. This document aims to simplify a potentially long list of requirements into five core components focused on the priority of the transition – reducing emissions.

The first three components outline what a company could consider to address this challenge:

  1. Comprehensive, aligned emissions targets
  2. A credible strategy to deliver those targets
  3. Demonstrable engagement commitments to support the achievement of targets

A credible transition plan should start with a commitment to reduce emissions, the guidance states. It demonstrates to the public, investors, and other stakeholders that a company has identified its transition risks and their financial implications, and has plans to address them.

This is followed by the “how” – a credible strategy to deliver those targets. Arguably the most complicated component to define and evaluate, the guidance offers extensive detail on sub-components which will help investors to test transition plan credibility.

The third component addresses the need for the vast majority of companies to engage in the ecosystem outside of their direct control to reduce Scope 3 emissions.

The remaining two components outline what more a company could disclose. These have particular relevance to investors seeking to address their contribution to climate solutions, consistent with NZIF’s target-setting and investor transition plan methodology.

  1. The contribution to climate solutions
  2. Supporting emissions and accounting disclosure

Climate solutions are defined as “low-carbon technologies, infrastructure and other elements which contribute to or enable emissions reductions”. Both investors and climate experts view accelerating funding towards these channels as vital to achieving economy-wide emissions reductions.

The final component reiterates the need for data – an ongoing pain point. More and better-quality emissions and accounting disclosures help investors to calculate their overall portfolio emissions and corresponding transition risk.

Guidance in action

Recently, 107 companies received letters from investors outlining their expectations of a credible transition plan as part of a new IIGCC initiative, the Net Zero Engagement Initiative.

The sector-neutral guidance underpins these requests. Delivered alongside the letters, it sets out the rationale behind them and outlines how companies can meet them.

It has also informed much of the second phase of Climate Action 100+, the world’s largest investor-led engagement initiative on climate change, which IIGCC co-convenes. Enhanced corporate disclosure and the implementation of corporate transition plans are core pillars of this new iteration.

By aligning expectations of asset level assessments with investor frameworks, we aim to help ensure a smooth exchange of data and capital between companies and investors to accelerate the transition to net zero.

If you’d like to take part in our Investor-led working groups, including on reporting and corporate engagement, why not speak to our investor relations manager today to find out more about becoming part of IIGCC’s network.