The value of transition planning

Companies’ climate transition plans are now regularly put to the vote during annual shareholder meetings, but the complexity of these plans can make them difficult to assess. Owen Tutt and Will Farrell explain what investors should be looking for.

Shareholder votes on company climate transition plans are now a key feature of the AGM season in major markets, but the ‘say-on-climate’ is still in its infancy. As a consequence, it is complex for investors to analyse a company’s climate risks and opportunities. To tackle this challenge, EOS has developed a framework to enable all investors to appraise transition plans as efficiently and effectively as possible.

For companies in emission-intensive sectors, decarbonisation to net zero will require a fundamental business transformation on an accelerated timeline. Even less exposed sectors will see changes in customers, suppliers, regulation and other stakeholders as the economy transforms around them. Therefore, the first principle is that a transition plan – the blueprint for achieving and responding to this change – must be strategic and inseparable from the wider business strategy.

But if investors are to make use of a company’s transition plan to evaluate, challenge, and ultimately price the risks and opportunities, it must be credible. So the second principle is that there must be sufficient detail and clarity on near-term objectives, timelines, and capital and resource allocation to inform the investment case.

However, clarity does not mean certainty. Unfortunately, there is a trade-off between setting the necessary ambitious targets and articulating a strategy for executing this that is rooted in established economics and adopted public policy. Achieving net zero will require the private and public sectors to go beyond the tried and tested. Therefore, principle three is the need for a transition plan to be bold in aligning with the Paris Agreement, while remaining commercial.

Finally, for a transition plan to fulfil the above requirements, delivering long-term value and reduced emissions, it must concisely articulate more about progress against the plan rather than just process implementation – principle four.

Read the full article in our Q2 2024 Public Engagement Report.