An orderly transition to a low-greenhouse gas and climate-resilient economy demands robust transition planning led by effective and courageous climate leadership by boards.
An orderly transition to a low-greenhouse gas and climate-resilient economy demands robust transition planning led by effective and courageous climate leadership by boards. This was one of the central messages at a November 2023 Chapter Zero UK event hosted and co-partnered by WTW.
If boards don't take action fast enough now, it will be much more damaging later.
"Plans beyond pledges" brought together policymakers, corporate and investor experts to offer practical insights for boards to deliver their vital role in stewarding the transition to net zero. The below summarises key insights on the role of boards, as well as perspectives from corporates and investors.
The board's role
- The transition delivery timeframe is urgent – 2030 is only 50 board meetings away.
- A rapid acceleration of action is needed to meet targets and build resilience – boards must maintain momentum and not allow any quests for perfection to block progress.
- Despite delivery headwinds and geopolitical and economic issues, if boards don't take action fast enough now, it will be much more damaging later.
- Transition planning can be a transformational business opportunity. The board's role is one of stewardship, mitigating risks and preserving value over the long term, while potentially eschewing shorter-term gains and enshrining transition as business as usual. Transition planning is about future-proofing organisations.
- Culture is a powerful transitional tool that should be set from the top and embedded throughout the organisation through effective and courageous climate leadership, bearing in mind how, 'Culture eats strategy for breakfast.'
48%
of boards currently do not have the skills and expertise to provide oversight of climate risks
To uphold their stewardship role and govern effectively through net zero transition, many boards and directors require new skills and continuous capacity building. The 2023 WTW-NASDAQ Board Survey revealed roughly half of respondents (48%) reported their boards currently do not have the skills and expertise to provide oversight of climate risks and opportunities.
Key perspectives for corporates
- There's a pressing need to move from targets to strategy.
- The transition to net zero and climate (and nature) resilience is an increasingly nebulous and daunting challenge that entails many corporates fundamentally transforming how they operate. The Transition Plan Taskforce's (TPT) framework provides clarity around what is expected and how to build a credible transition plan.
- Corporates approaching transition planning with a compliance mindset are not likely to be successful. Rather than looking at transition planning in isolation – and as solely a sustainability function issue – organisations should integrate transition planning into business strategy.
Organisations should integrate transition planning into business strategy.
- Make climate a strategic issue to address the challenge of driving capital allocation to the appropriate projects.
- Corporates are recognising the need to incorporate transition planning into financial planning, while also appreciating the challenges this brings.
- Effective value chain engagement is a critical aspect of transition planning – actors across the economy each need to understand their role in economy-wide decarbonisation and use levers within their sphere of influence to support others across the value chain. The TPT advocates this whole-of-economy approach.
- There is a commercial case for the transition and it's important to both understand and explain this in the context of your business and stakeholders.
- Securing the ongoing buy-in of investors and lenders is key as corporates develop and iterate transition plans. Central to this drive is transparency, realism, robust transition analytics and clear assumptions.
Robust climate transition analytics are key to assessing different business model and value chain changes through a financial impact lens. This can enable integration of the transition plan into financial planning and clear articulation of the assumptions and external factors on which transition plans depend. Climate transition analytics are also a key tool for asset managers and owners for assessing risk across their portfolios and informing their engagement strategies.
Key perspectives for investors
- Many investors have long-term partnerships with investee companies, bringing long-term climate risk management and transition planning to the fore.
- Investors want to see robust transition plans as a standard feature of corporate governance.
- Some investors are using a dashboard of metrics for portfolios beyond simply carbon, including forward-looking financial metrics that also quantify transition and physical risks. Portfolio management and sustainable investment decisions will therefore be heavily informed by transition plans. A transition plan is a company's opportunity to put forward a business case for why it's a good long-term investment.
- Investors have a responsibility to engage meaningfully with companies on their transition plans (not to simply divest), to steward action and hold corporates to account on transition plans.
- While business leaders will drive transformative change, they cannot deliver this without investors to channel capital where it is most needed, hence why credible and consistent transition plans are required globally.
Credible and consistent transition plans are required globally.
- While the government needs to issue clear policy guidance and investment roadmaps, it is the shared responsibility corporates and investors to lobby for the policy developments they need to deliver their transition plans.
Read more on the shortcomings of a pure focus on GHG emissions in Emissions Impossible: Quantifying financial risks associated with the net zero transition, a 2023 report written by WTW in partnership with Institute of International Finance (IIF).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.