Climate transition plans under the spotlight

In the most recent AGM season, corporate climate transitions were thrust into the media spotlight when Woodside Energy’s shareholders rejected the company’s Climate Transition Action Plan. The advisory vote’s defeat raised the important – and timely – question: What makes for a 'credible' company transition?

In a record defeat, 58.4 percent of Woodside Energy shareholders voted against the company’s Climate Transition Action Plan (CTAP) and 2023 Progress Report, which the board voluntarily submitted to a non-binding shareholder vote at the 24 April AGM. The plan commits the company to reducing scope 1 and 2 emissions by 15 per cent by 2025 and 30 per cent by 2030, and to an ‘aspiration’ of net zero by 2050 or sooner.

While not the only large emitter to put a Climate Transition Action Plan to a vote – the boards of BHP, Rio Tinto, AGL Energy and Origin Energy, among others, have also chosen to do this – Woodside’s is the first to be rejected by shareholders.

In a statement following the meeting, Woodside said the vote "sent a strong message to the Board and the Executive Leadership Team that we needed to significantly improve our engagement with shareholders and reflect shareholder feedback in the CTAP."

What makes a transition plan credible?

Stakeholder engagement is central to global guidance for developing a ‘credible’ corporate transition.

The Climate Leaders Coalition, a group of over 50 cross-sectoral Australian corporate CEOs, explains that a credible company transition to net zero emissions is facilitated by a Climate Transition Action Plan. In this plan, the company sets out its strategy for transitioning its business model, including processes and operations, to meet its stated climate commitments within a specified timeframe.

The Glasgow Financial Alliance for Net Zero, a global coalition of financial institutions, says a credible plan should support global ambitions to reach net zero by 2050 and be "science-based and include credible interim targets and implementation tactics." Initiatives, such as Science Based Targets (SBTi), can provide companies with defined pathways to reduce emissions in line with the Paris Agreement goals.

In lieu of a global standard, the UK’s Transition Plan Taskforce (TPT) is an influential body providing guidance on corporate climate transitions. Announced at COP26 in Glasgow, the TPT has spent the past few years creating what it calls a 'gold standard' in transition plans. (The Co-Head of the TPT Secretariat, Dr Ben Caldecott will speak at the upcoming Climate Governance Forum 2024).

The TPT Disclosure Framework is relevant for companies and their stakeholders, including regulators, and is based on three principles. The first, ‘ambition,’ involves companies establishing the foundations of their transition plans. Stakeholder engagement is central to the next two principles: ‘action’ includes the engagement strategy, which encompasses the value chain, industry, government, and civil society; and ‘accountability’ covers metrics and targets for engagement.

Last month, the TPT expanded the framework to include a suite of sector-specific transition plan resources for businesses to unlock transition finance for net zero. These are provided for seven sectors: asset managers, asset owners, banks, electric utilities and power generators, food and beverage, metals and mining, and oil and gas.

It recommends that companies in these high-risk sectors take a strategic and 'rounded’ approach to transition planning that considers three interrelated channels:

• Decarbonising the entity;
• Responding to the entity’s climate-related risks and opportunities; and
• Contributing to an economy-wide transition.

With this approach, the TPT says companies can avoid a strategy of ‘paper decarbonisation,’ where actions taken to green the balance sheet do not necessarily contribute to decarbonising the economy – a criticism sometimes leveled at CTAPs by stakeholders.

Rationale for transition plans

Increasingly, advice to companies is that Climate Transition Action Plans are no longer a ‘nice to have’ but rather, an important marker of an organisation’s strategic commitment to decarbonisation and evidence of its resilience and profitability in a net-zero economy.

Regulators and standards setters across the globe are moving to require companies to disclose detailed reports on their greenhouse gas emissions and their associated business risks. The goal is for the market to use this information for capital allocation purposes, such that investors will re-allocate capital away from those with not sufficiently ambitious or evidence-based transition plans, and towards those that are.

The Investor Group on Climate Change, whose members have over $30 trillion in asset investments, says companies will need to provide investors with credible transition plans if they "wish to retain and attract quality, long-term capital."

In Australia, the Government recently introduced the Climate Reporting Bill which seeks to mandate climate disclosures from 1 January 2025 starting with the largest companies, financial institutions and emitters. Mandatory climate reporting is intended to increase the quality and usefulness of climate disclosure to enable investors to make more informed capital allocation decisions.

While the legislation does not specifically require companies to set climate targets or transition plans, it does require disclosure of details of targets and transition plans where these exist, increasing transparency of target-setting practices and making both laggards ad leaders more obvious. In practice, it is likely that many of the mandatory disclosures would be housed in a corporate transition plan.

What is the current state of play?

Guidance for corporate climate transitions is still being developed, with the Commonwealth Treasury receiving funding in this month’s budget to develop best practice over the coming years.

Outside the largest companies/emitters, it remains relatively rare for companies to produce and publish transition plans. However, recent reports show that organisations are beginning to grapple with the challenges of executing their climate strategies.

An August 2023 Australian Council of Superannuation Investors (ACSI) report found while 61 per cent of the ASX200 made net zero commitments in 2023, 14 per cent of these commitments lacked supporting interim (short and medium) targets and that scope 3 climate targets remain rare, with only 22 per cent of the ASX200 setting a scope 3 target.

AICD’s Climate Governance Study 2024, prepared with Pollination, found around one in four (23 per cent) boards have a climate target and a transition plan, but a larger group (42 per cent) of directors are on boards with no plans to develop a long-term climate or net-zero target and transition plan. Listed entities (43 per cent) are the most likely to have a long-term climate target and transition plan, with government (27 per cent), unlisted entities (25 per cent), and NFPs (10 per cent) representing a smaller likelihood.

Investment research group Morningstar analysed global investor use of ‘say-on-climate’ votes and found the messages they were seeking to send to companies regarding climate plans were ‘confused’ and increasingly divergent.

Head of Policy at AICD Christian Gergis GAICD said organisations were having to grapple with diverse stakeholder perspectives, including from investors.

“While most major institutional investors have committed to decarbonisation in their portfolio, they do not represent the entire shareholder pool nor are their views uniform,” he said.

“Although some investors are increasingly advocating for faster corporate transitions, there are others telling boards not to walk away from currently profitable business lines that remain carbon-intensive and not to ‘sacrifice’ short or even medium-term returns. Investors themselves are facing pressure from parts of civil society to champion decarbonisation.”

As a result of mandatory climate reporting’s focus on value-chain reporting and the requirement to disclose scope 3 emissions, Australian banks are beginning to require transition plans from the highest-emitting customers from 2025. For example, in its 2023 report the Commonwealth Bank requires certain customers to have a transition plan that includes scope 1, 2 and 3 emissions and a time-bound decarbonisation plan aligned to the 2-degree goal of the Paris Agreement – which the bank will engage a third party to assess.

“Based on feedback from members, we know directors are becoming more cautious in setting ambitious climate goals for fear of attracting greenwashing accusations,” said Mr Gergis.

“Mindful of legal and reputational risks, boards are being drawn to climate goals which they feel very confident in achieving rather than aspirational, stretch goals that may not be met or rely on future developments external to companies – triggering investor, regulator or stakeholder criticism".

He said this was particularly the case for interim targets which are highly dependent on factors such as technology, future policy settings and sectoral and supply chain transitions.

“The move to mandatory reporting should hopefully address some of these challenges by providing a clearer, more consistent baseline of information rather than the current voluntary and varied state.”

No clear consensus on appropriate reliance on technologies and offsets

There is debate, even among experts, as to the extent to which organisations should rely on carbon offsets and emerging technology (such as carbon capture and storage or hydrogen) to meet their climate targets. For instance:

• There was a staff backlash against the SBTi decision in April 2024, to allow reliance on carbon offsets in meeting scope 3 climate targets, notwithstanding the challenges entities face in controlling behavior and emissions outside their organisation.
• The Australasian Centre for Corporate Responsibility (ACCR)’s Federal Court proceedings against Santos go to the reasonableness of the company’s reliance on carbon capture and storage technology to meet its net zero targets (and how it disclosed this).
• The International Energy Agency estimates 35 per cent of the emissions reduction needed to reach net zero by 2050 will be sourced from technologies at either the demonstration or prototype stage, that is, not yet available on the market.

The Australian Government has committed to undertake a detailed assessment of options to address data challenges by the end of 2024 as part of its Sustainable Finance Strategy.

An area of ongoing focus

Transition planning is an area of ongoing focus for AICD’s Climate Governance Initiative Australia, with work underway to develop more detailed guidance for directors.

The development and execution of transition plans will be a major focus of the AICD’s Climate Governance Forum 2024 on 23 August in Sydney, with the opportunity for Q&A with directors and transition experts.