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Sustainable Investing

Can You Make Sense of a Company’s Climate Transition Plan? Here’s How.

Your guide to finding documents, checking climate targets, and recognizing those pesky carbon offsets.

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Do you want to invest in companies that have robust plans for addressing climate change, but you don’t know where to start?

Here are some things to keep in mind when attempting to understand and assess a company’s plan to address the long-term physical, economic, and societal changes caused by global warming. Increasing pressure from stakeholders has caused firms to seek to set goals to reduce their emissions, many to virtually zero by 2050 or sooner. Companies with strong climate transition plans and programs aligned to the global goal of limiting warming to 1.5 degrees Celsius are best equipped to navigate these shifts, mitigate risks, and take advantage of opportunities.

What Is a Climate Transition Plan?

According to the CDP, the nonprofit advocating for standardized disclosures about climate-change risks, a climate transition plan is an action plan that clearly outlines how an organization will change its existing assets, operations, and business model to limit global warming to 1.5 degrees Celsius. Ideally, a firm’s climate transition plan will have time limits and specific goals and be actionable. Currently, companies have a great degree of flexibility in shaping their climate transition plans, relying on guidance from organizations like the Science Based Targets initiative, Task Force on Climate-Related Financial Disclosures, or industry-specific climate or net-zero alliances. Existing plans may vary in detail and quality, limiting the ability of investors to assess their credibility.

How Can We Start Evaluating a Company Climate Transition Plan?

The first challenge can be finding the documents in the first place. Sometimes they’re clearly labeled as a “climate transition plan,” but sometimes they’re embedded within TCFD reports or other disclosures under a different name. I have the most success by looking at a company’s corporate sustainability digital site, where you can find all kinds of sustainability reports, policies, and disclosures.

Next, it’s time to evaluate the emissions-reduction goal the company has set.

  • Does it have a science-based target? Targets are considered “science-based” if they are aligned to the goals of the Paris Agreement—limiting global warming to 1.5 degrees Celsius above preindustrial levels. This typically means that the company commits to reducing its greenhouse gas emissions by 45% by 2030 and reaching net zero by 2050. If the firm’s transition plan is accredited by the Science Based Targets initiative, even better, but not all companies will seek accreditation.
  • How far does the firm’s decarbonization target go? Does it relate only to its scope 1 and 2 emissions, which encompass direct emissions from its own buildings or indirect emissions from activities like purchasing electricity? Or does it include scope 3 emissions, which are indirect emissions from up and down its chain of operations, such as business travel? If the firm does not deem scope 3 emissions material to its carbon footprint, does it have a compelling reason why, and does it still seek other ways to manage it? Managing scope 3 emissions is difficult, but doing so increases the reach and impact of a firm’s climate commitments.
  • What is the company’s approach to carbon offsetting? Carbon offsetting is an action, such as planting trees, taken by an emitter to compensate for its emissions, used to reduce all or a portion of its carbon footprint. Carbon offsetting can be used to compensate for some emissions a company cannot eliminate from its operations. However, offsetting strategies are frequently criticized as greenwashing, or deceiving the public about a company’s commitment or actual impact on the environment. So, it’s important to understand what a company’s offsetting strategy is and how much it relies on it.

Finally, think critically about the language and information in companies’ transition plans and other climate disclosures. Does the firm use clear messaging around time-bound goals and actionable steps? Does it include both quantitative and qualitative metrics and targets and disclose decision-useful information? Does the firm demonstrate realistic and frank assessments of risk and opportunity?

If you’re interested in learning more about published guidance on transition-planning, a good place to start would be the U.K. HM Treasury Transition Plan Taskforce Disclosure Framework, which aimed to develop a sector-neutral framework for best practice transition plan disclosures, alongside implementation guidance and sector guidance. Alternatively, the Glasgow Financial Alliance for Net Zero has delivered guidance that builds on and consolidates across relevant existing transition plan guidance from a range of technical bodies.

A Look at Two Companies and Their Climate Transition Plans

Let’s walk through the climate transition planning of two large, high-performing companies. I selected these from a list of firms that were assigned a 4- or 5-star Morningstar Rating and a wide or narrow Morningstar Economic Moat Rating, as of Nov. 1, 2023.

AT&T

AT&T is the third-largest U.S. wireless carrier. It has an easily accessible sustainability reporting site, and I found its Climate Strategy & Transition Plan linked within its 2022 Sustainability Summary. AT&T has set a science-based target for its scope 1 and 2 emissions to be carbon-neutral by 2035. For scope 3 emissions, while there is no explicit decarbonization target from AT&T, it seeks to engage with suppliers to set their own scope 1 and 2 science-based targets. AT&T’s transition plan includes a brief note on offsets, stating that it will “invest in high-quality carbon offsets.” There are a few more details in a 2023 update to the transition plan, where it states it is “committed to pursuing only the most credible offsets and will be transparent in our approach.” There is also a brief note on AT&T’s large-scale renewable energy projects used to offset its greenhouse gas emissions. Overall, I find that AT&T uses clear messaging around time-bound goals, gives updates on its progress toward goals, and makes a business case for its climate commitments by stating “climate change also presents an opportunity for those who will be part of the solution.”

Taiwan Semiconductor Manufacturing

TSMC is the world’s largest dedicated chip foundry, with almost a 60% market share. TSMC’s climate transition strategy is embedded within its TCFD report, found on its sustainability reports and documents site, where it commits to reaching net-zero emissions by 2050 for all scope emissions and states its involvement with RE100, a global corporate initiative bringing together businesses committed to 100% renewable electricity. It contains extensive details on the company’s climate change governance and management framework and forward-looking plans. The company uses offsets as part of its strategy to reach net zero “for Scope 1 and 2 emissions in all overseas production locations.” The climate transition strategy provides a clear description of the company’s approach, major strategies, and progress in responding to climate change and uses clear visuals to communicate on oftentimes complex data.

What Tools Are Available for Investors Looking Into Climate Transition Plans?

If scouring the sites of individual companies doesn’t sound appealing to you, you can use Morningstar Sustainalytics’ Low Carbon Transition Ratings to understand companies’ risks and express sustainability preferences in the meantime. The Low Carbon Transition Ratings provide investors with a forward-looking science-based assessment of a company’s current alignment to a net-zero pathway that limits global warming to 1.5 degrees Celsius. They include two components: a company’s exposure to specific carbon risks and opportunities and its management of those risks.

Climate transition planning is relatively new to firms, and all firms have room to improve. As Morningstar’s Adam Fleck mentioned in his article, firms with competitive advantages may have financial wherewithal to better manage carbon risks and provide appropriate disclosure. But you can expect an increase in the specificity, quantity, and quality of climate transition plans, especially as more guidance emerges from standard-setting or regulatory bodies.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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