About the Author: Veena ramani is research director at FCLGlobal, a non-profit organization that develops research and tools to encourage business and long-term investment.
The past few weeks have been marked by a drumbeat of new climate commitments. Announcements regarding the launch of the Alliance of Net Zero Financial Services Providers and the Net zero investment advisers initiative follows a year of announcements of companies and investors by committing to achieve “net zero” or targets to reduce their greenhouse gas emissions to zero within a defined time frame. While we are still waiting for governments to act, capital market players appear to be making mutually reinforcing commitments to jumpstart the transition to that net zero future.
At first glance, these commitments pave the way for capital to be deployed on a large scale to decarbonize the global economy. However, the reality turned out to be more complicated.
As companies declare climate commitments, reactions to those commitments have been muted — and sometimes even negative. Part of the reason for this disconnect is that many corporate climate commitments have not been matched with crucial details on how they will reshape business strategies, capital allocation, and business plans. long-term value creation. In other words, companies have told us they plan to do business differently, but they still haven’t told us how.
Before allocating their own capital, investors first need details of how companies plan to make money and spend money in a future where carbon emissions are limited. It is a critical part of planning for a business climate transition, or more simply, business plans to stay resilient over the long term. Without this level of detail, investors are skeptical.
New research from FCLTGlobal suggests the skepticism is well deserved. We assessed the climate change commitments of the 100 largest publicly traded companies in the world and found that 81 set net zero or other climate commitments. But as we dug deeper, a clear divide emerged between corporate rhetoric about climate commitments and the way the same companies communicated their business plans and financial performance to investors. Among the companies that make climate commitments:
Only 17 companies even mentioned their climate change commitments in investor presentations of their strategic plans. Only five provided a substantive discussion of how their long-term value creation plan integrated their climate ambitions.
Only 18 companies made reference to their climate commitments in their latest financial information to investors. Most noted climate commitments at a minimum, for example including a stand-alone climate change bullet or slide as part of investor presentations. Only two companies provided meaningful details on how their climate commitments are being implemented, for example through business goals and KPIs.
Sixty-six companies have mentioned climate change in their annual reports. But 42 of them did not provide forward-looking details on integrating climate into business strategy. Only 11 companies have linked the company’s climate change ambitions to broader climate transition plans in significant detail.
A small number of companies reflect their climate change ambitions in their strategic plans and communications with investors. NextEra’s strategic plan outlines the company’s climate change ambitions as the foundation of its growth strategy, and includes details of planned investments in renewable energy and storage. Presentation of Shell’s quarterly results to investors presents objectives for the development of its electric vehicle recharging activity and the conquest of the clean energy market share as part of the implementation of its “energy transition” strategy. Unilever’s latest annual report contextualizes the company’s efforts on climate change in a detailed financial analysis of the impacts on the main agricultural products on which the company depends. However, these remain the exception rather than the rule.
Net zero and other climate commitments signal that a company intends to take climate change seriously. However, good intentions alone are not enough. Companies should frame their climate commitments within a solid transition strategy, providing details on the impact of their climate ambitions on how their businesses are run and how they invest their capital. It is these transition strategies, not just climate commitments, that will give investors confidence that a business is ready to succeed in a world in transition and pave the way for real progress.
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