The increasing contribution of the private sector to today’s national economies is an irreversible trend. It is no surprise that the private sector is also the largest source of carbon emissions. Hence, led by large corporations, the private sector must play its due role towards achieving net-zero targets through climate action.
Although several corporations, especially large ones in developed countries, have declared net-zero emission targets by 2050, many have not yet disclosed a detailed transition plan for achieving the target. It is well noted that this may entail substantial transformation of the corporation, including the need to tweak its vision, strategic plans, capital allocation and repositioning its R&D towards low-carbon technologies.
Firming Up Transition Plans
Net-zero announcements without credible strategic execution plans are meaningless. The opportunity and challenge for a corporation is to bridge the gap between a net-zero goal and a credible transition plan to achieve that goal. Corporations relying solely on carbon-offset purchases and carbon-capture solutions, while completely ignoring investments in relevant net-zero technologies, are bound to raise suspicion among stakeholders.
A credible transition plan outlines how a company intends to translate its net-zero goals into actionable and time-bound steps. This includes demonstrating commitment from the executive board and top leadership, declaring long-term strategic decarbonisation plans and adhering to short to medium-term milestones in the journey to net-zero.
A recalibration in its business model (if required), financial planning and business operations can send the right messages to the markets. This can attract support in terms of partnerships, technical collaborations and transition financing from climate-conscious institutional financiers and retail investors.
Such plans serve the board and top leadership of the corporations and act as a tool for external stakeholders to monitor, assess and track progress. The company that fails to convince its stakeholders, primarily investors, of its net-zero transition plan will not get the necessary support. As investors comprehensively analyse their investee companies’ net-zero transition plans, a lack of credible plans will catch their attention.
The key pillars of a credible transition plan are robust internal governance and strategic foresight. Conducting a realistic scenario analysis backed by meticulous financial planning can help build resilience in the organisation. Proactive risk management based on industry-specific metrics can help corporates seize decarbonisation opportunities by advancing low-carbon value chains, engaging in policy formulation, development of taxonomy/standards and ensuring verified emissions accounting for sustainable, impactful operations globally.
Quantitative, detailed and time-bound reports about the achievement of interim emission targets in line with or exceeding national net-zero goals can boost investor confidence and build a reputation. Corporate leaders should also demonstrate agility, responsiveness and rapidly escalating ambitions based on evolving market dynamics.
Crossing the Capital Chasm
While conventional sectors like energy, manufacturing and transportation are proactively pushing the envelope to pivot towards cleaner operations due to favourable economics and commitment to net-zero targets, they are also exposed to the raw and unforgiving market competition globally. Not all geographies are following aggressive decarbonisation pathways. Hence, one wrong move can blow-up their growth projections.
Additionally, they need to find avenues to financing the transformation, upfront. Traditional green-finance instruments, tailored for ‘born green’ projects, often cannot accommodate the calibrated, nuanced, long-term decarbonisation pathways of hard-to abate and asset-intensive sectors like cement and refining.
Here, transition finance can carve out a niche. It can emerge as a versatile bridge that guides such industries and their value chains across the capital chasm. It can mop-up the large yet flexible capital investments quintessential to progressively reduce carbon emissions and rewire traditional processes of such sectors. For corporate leaders, diving head-first into the realm of transition finance is a skill whose time has come. Leveraging transition finance can soon fortify into a core capability of enterprises to future-proof themselves. It allows the financial sector to actively participate in the industry’s journey to net-zero.
For transition-finance instruments to be a success, a fragmented global landscape of definitions and disclosures must be fixed. As nations and institutions draw up customised net-zero pathways based on their socio-economic and environmental circumstances, a lack of consistency, and in some cases, divergence in taxonomies and reporting standards creates friction in capital flows.
This is completely avoidable, especially in the context of hard-to-abate sectors and developing economies. This absence of interoperability fuels confusion and disenchantment, repelling investors' keenness to discern credible transition plans from mere "greenwashing". It is time for large economies and emitters (in absolute terms) like China, the US and India to firm up national-transition taxonomies in sync with global standards on a priority basis.
This can break the vicious cycle of inaction and underinvestment, while infusing new vigour and growth opportunities for their youth. The UK's Transition Plan Taskforce offers a good starting point for all. Governments, multilateral agencies and chief executives should put in place a standardised transition reporting framework that can make regulations predictable, nudge central banks to provide incentives and attract investors across the depth and breadth of capital markets.
(Thakur is an alumnus of IIT Bombay, IIM Ahmedabad and a CIMO Scholar and Jena is a sustainable finance specialist at IEEFA and adviser at Climate and Sustainability Initiative)
